The guys at Environmental Economics replied to my post on economics and climate here and here. Read if you like. I would protest that "the extreme position by some environmentalists that economics is evil" has nothing to do with me or what I wrote, and that if there is some war between Environmentalism As Such and Economics As Such I want nothing to do with it, but ... feh.
I just want to make one final point, somewhat abstracted from the details of this oh-so-illuminating back and forth. In the course of decrying the pointlessness of a battle between greens and economists, Ryan Avent defends me from Tim Haab’s charge that I’m an idiot:
Roberts is very smart on these issues and has a very sophisticated, and for the most part correct (in my view), outlook on carbon pricing.
First, thanks!
Now, not to look a gift horse in the mouth, but note the evidence offered that I’m not an economic philistine: I respect carbon pricing. I don’t want to make too much of a passing comment, but this strikes me as endemic to these debates: the notion that when it comes to environment and energy issues, "economics" means "market-based policy" means "pricing."
This seems like a weirdly constrained use of economics to me—reflective of the narrow range of economics visible in America’s public conversation—and it’s made for a weirdly constrained debate. Economists themselves aren’t necessarily guilty—see here—but it’s true of many people arriving newly to climate/energy policy debates. They discover that Economic Science says one thing and fuzzy headed advocates say something else, so of course they want to be Sensible and side with Economic Science (don’t want to get patouli on you!). Thus you get a weird kind of zealotry around pricing from people who know very little about the specifics of environmental history or regulation or technology, whereby they wildly overstate the potential of pricing and proclaim confidently that Economic Science has discredited the alternatives. (*cough*carbon tax advocates*cough)
Seems to me, though, economic thinking could go both more micro and more macro than carbon pricing.
In micro terms, pricing is a crucial piece of good climate policy; it serves as a backstop to the other pieces. But bottom-up studies of energy/climate challenges and past experience show that it’s only a piece. There are numerous challenges that will scarcely be touched by pricing: perverse utility regulations; the paucity of green infrastructure (grid, transit, etc.); misaligned incentives and poorly structured markets for efficiency; land use regulations; forestry and ag issues; adaptation in the developing world; etc. And of course, as Gar has argued, command and control regulations have worked well many times in the past, with benefits that conventional economics underestimates again and again (with no apparent diminution of confidence).
So it seems to me Kevin Drum (in the course of an excellent introductory article on cap-and-trade) has the right idea:
[Cap-and-trade] might be the backbone of any effective long-term carbon reduction policy, but it’s not the only tool we need. Or even necessarily the best. If you want to improve vehicle mileage, for example, raising federal fuel-efficiency standards is "much cheaper for consumers than raising the price of gas," she says. Michael O’Hare, a public-policy professor at UC-Berkeley, emphasizes the need for the government to take a more active role than just setting carbon prices. Sure, higher energy prices might motivate people to change their behavior. "But," he points out, "even if I want to take the tram, I can’t do it if there’s no tram."
In other words, command and control will remain absolutely necessary. As will taxes. Even with a well-designed cap-and-trade plan in place, we’ll need tougher efficiency standards, higher fuel taxes, more sensible land-use policies, green research programs, and plenty more.
Anyway, when getting in the policy weeds on this stuff it helps to understand technology, innovation, politics, existing market barriers, existing regulations, and the history of environmental policy. Econ textbooks aren’t enough.
In macro terms, it seems like the concept of pricing externalities is so attractive to (some) economists because it’s a way of fitting environmental protection into the reigning free market economic paradigm with comparatively little disruption. It’s basic neoclassical economics with previously excluded commodities included in markets. And that’s great—I have a great deal of respect for neclassical economics, probably more than most readers here. But we are on the cusp of catastrophe here, and it would be nice a wider range of economic voices were heard. This is from Wikipedia’s bit on ecological economics:
Resource and neoclassical economics focus primarily on the efficient allocation of resources, and less on two other fundamental economic problems which are central to ecological economics: distribution (equity) and the scale of the economy relative to the ecosystems upon which it is reliant.[25] Ecological Economics also makes a clear distinction between growth (quantitative) and development (qualitative improvement of the quality of life) while arguing that neoclassical economics confuses the two.
Now, if I argue that the economists on Obama’s team are a bad influence on climate policy because they—like their neoclassical brethren—pay too little attention to equity relative to efficiency, or too little attention to resource limits, or too much attention to GDP relative to wellbeing, I’m not saying “economics is evil.” That’s just a way of marginalizing and caricaturing criticism. I’m saying that the way economics is typically done in U.S. policy circles has endemic flaws and shortcomings that tend to weaken environmental policy. I’d like better economics, please.
With that semi-focused rambling I hope to leave behind the generic subject of economics and turn more to specific critiques. The two of you still reading can breathe a sigh of relief.
John McCain’s troubles are the world’s troubles
Comments
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hapa Posted 4:55 am
02 Mar 2009
basically: the "prices" people just had their asses handed to them by their self-regulating heroes of valuation and many are now trying to argue alternately that this is not the apocalypse or that FDR accomplished nothing.
what i'm going to call the "promises" side of the fight -- economists who hold that contracts, obligations, public rules and spending, and other "fetters" are where a lot of the rubber hits the road -- are coming up shocked at the intensity (and ignorance, from their POV) of the fight, as colleagues and so-called experts caution against government as last resort when other players are flat and gasping -- and some even come to the vigorous defense of the hoover administration.
"green jobs are bogus" seems to come from the "prices" side -- declaring that economic activity for which there is no "natural" demand must come at the expense of other activity even when there is a transition underway or there's a huge underutilization --or both, uncomfortably for us.
environmentalism is actually the blood enemy of "prices" economics. what greens defend are those parts of the planetary economy for which there is no substitute -- creatures and systems that are irreplaceable and priceless. AFAICT this bugs the hell out the "prices" people because the only thing worse than a fetter is something you can't bribe to get out of your way but like i've been saying maybe too much lately, no matter how much you pay a bunch of polar bears, they're not going to live and breed wild in the tropics.
that kind of location and condition specificity dominates life on earth. we are the only meaningful exception and we take that to be way more meaningful than it deserves.
there's also a lack of equivalence. the risks of allowing fools to melt the world with feverish discount assumptions are orders of magnitude larger than the opportunity costs of growing vegetables in a former parking lot. there is no fear that we will outlive major economic activity. but we already see the effects of ecological negligence and of the learned ignorance of let's say half the economists in the world.
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Pompey Road Posted 6:57 am
02 Mar 2009
It was a battle within the major U.S. Banks between the old commercial domestic lending school who had come up through the ranks and the economist who come out of the major colleges. I have a quote from one who restructured and went with the most modern organizational models, was one of the first to implement computers into banking, fought for years to take the bank international and had great success when he did. He had six critical areas he wanted to address when he finally become CEO and had the chance to implement the changes he had fought for years. One with only my prior knowledge of the man blew my mind. I never pictured this man even though his family were noted philanthropist and he enhanced the foundation to be more than a conservative "price" economist.
One critical area he hoped to improve on was of course International Expansion. This did not include becoming a lender bank or an investment bank under the modern definition of the term, initially. It was the same commercial type deposit lending bank that serviced large corporations as well as main street, "the funding" as they had been for years, only now international. It was not until they become the international lender or investment bank did his sixth critical area of improvement or involvement suffer.
For brevity I will skip the other 4 of his objectives or critical areas to address and go straight to his sixth. David Rockefeller in an address to the Financial Executives Institute on the subject of the "Urban Crisis" told them what we faced as businessmen was not a single problem: "Rather it is kind of a witches brew' blended from all the major ills of our country - inadequate education system, hard core unemployment, hazardous pollution of natural resources, antiquated transportation, shameful housing, insufficient and ineffective public facilities, lack of equal opportunity for all, and a highly dangerous lack of communication between old and young, black and white. All these are problems that cry out for immediate action."
He took the helm in 1969 and it is amazing how the same problems are still prevalent and an impediment to the financial institutions now just as they were back then, to anybody enlightened enough to see it. Of course banking philosophy changes with new administrations and market conditions as well as governmental philosophy's that change with each successive administration. The new international bank's that also become investment banks that reverted back to "price" economics had no formula for social responsibility. Especially after the deregulation orgy that begin under Reagan loosed the greed is good and trickle down theory on the world economy.
I feel there is a place for government involvement in the economy setting the rules of the road and then actually monitoring the situation. I can point to the economy today and probably get an amen or two.
I believe as David Rockefeller did that hazardous pollution of natural resources should be of concern to both the corporate and in my view the government also. Off the original point a little but continuing on with Hapa's line of thought it may be a point of interest.
We are once again having to deal with the same problems almost 40 years later.
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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Sean Casten Posted 8:00 am
02 Mar 2009
No barriers to entry and exit. Good ideas can come into the market (e.g., you can quickly start a company and sell stuff). Bad ideas quickly leave (e.g., if you sell bad stuff, you will go to the poor house)
Price transparency. If you say the price is $5, I can compare that to the guy offering the same thing for $6 and draw conclusions.
No single entity can control price. Self-evident.
This isn't some airy fairy theory - it is the bedrock upon which classical, neo-classical and every other flavor of economics rests. Take away those conditions, and you cannot stipulate that the evidence of an economic transaction must equal social good. But here's the rub: virtually no markets meet those conditions. If your business is capital intensive, you have a massive barrier to entry. (Even if the steel I make is really shitty, you are unlikely to compete against me unless you have a couple billion spare dollars lying around to build a better mill.) Ditto for anyone with a patent. Good businesses work hard to obscure, rather than clarify their prices. (Think ATM fees, or trying to compare mutual funds.) And many businesses are dominated by a few large actors who can independently control price.
That doesn't make them bad, of course. (As I've written before, one of the habits of profit-seeking businesses is to make their market less competitive. There isn't a person in the world who truly enjoys fully disclosing their cost structure and competing on price alone, after all.) But it does mean that the mathematical premises on which economics rests is far from robust, at least when it comes to explaining how real - as opposed to theoretical - markets work. Many economic PhD thesis (not to mention a few Nobels) have been earned by those who either "proved" that disconnect (yet again) or else explained why it's good anyway. Example: Apple has a huge competitive advantage in it's iPod, both in their patents, iTunes software and marketing. Good or bad for the customer? Discuss.
OK fine - all very interesting. And is simply a long-winded way of repeating David's point. Saying that prices - or the existence of buyers and sellers - create social benefit through the invisible hand is like saying that childhood mortality creates more robust species through evolution. Good (hell, even average) economists know this. But it is often missed by journalism and public discussion that believes itself to be Economically Informed.
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Sean Casten Posted 8:00 am
02 Mar 2009
Any takers?
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Bart Anderson Posted 8:06 am
02 Mar 2009
I think it's important to draw a distinction between the technical study of markets and public policy in the real world.
The principles of market behavior are an abstraction from the real world. Although these insights can be very helpful, they are often misused.
I would criticize neo-classical economics in two ways:
For logical flaws. Their model ignores factors such as political influence and environmental degradation.
For making outrageous claims about the universality and objectivity of their school.
I've found it difficult to have meaningful discussions with many economists - they have a dogmatic attachment to their doctrine and a lack of curiosity about other points of view.
In contrast, I'm very interested in what business people and investors have to say. They are less dogmatic and more attuned to reality.
In any case, neo-classical economists have more to worry about than criticism from environmentalists. Something about a world-wide financial meltdown ...
Bart
Energy Bulletin
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Jon Rynn Posted 8:55 am
02 Mar 2009
In the same way, is it really necessary to pay such close attention to economists? I know that policy makers listen to them, but maybe we should simply be arguing that they shouldn't be, and for the same reason -- economists, for the most part, come from a conservative direction, because after all that is the main moral of their story: government intervention leads to less than optimal outcomes.
So if conservatives can be ignored, why not neoclassical economists? And why not just listen to ecological economists?
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hapa Posted 11:23 am
02 Mar 2009
because their stuff needs to be promoted. it needs to reach the bigger conversation. the fight about depression economics is a family squabble celebrating its diamond anniversary while the house burns down.
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Adam Stein Posted 11:35 am
02 Mar 2009
This is an excellent recipe for both (further) marginalizing environmentalists and also crafting worse environmental policy.
and for the same reason -- economists, for the most part, come from a conservative direction,
Just as a matter of sociology, this is flatly false. Like members of just about any other academic discipline, economists individually tend to be left of center. It's weird how progressives tend to lionize Paul Krugman without ever assimilating the fact that he is, through and through, an economist, not some lonely renegade throwing stones from outside the academy.
because after all that is the main moral of their story: government intervention leads to less than optimal outcomes.
I'm pretty sure Robert Stavins just posted a few thousand words at Grist directly rebutting this notion.
www.terrapass.com/blog
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Pompey Road Posted 11:36 am
02 Mar 2009
Or Nancy's medium forgot to tell him it was on fire!
Deregulation! How do you like it now?
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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Pompey Road Posted 1:09 pm
02 Mar 2009
I don't know if something form the early 20th century is relevant anymore, especially theories before the invention of the multinational institutions and risky finiancial instruments not yet 20 years old.
Theories that were old and tired way before mark to market accounting can't explain anything on the economic side of anything anymore. That includes future environmental economic implications. I don't know how they thought the SEC could keep up with them when the large finiancial intitutions that applied mark to market to derivative positions could not keep up with them.
Ironic now mark to market is in the government regs and causing some large problems. Since regulation oversight was so lax as to let the accounting practice apply to derivatives. What, late 80's or early 90's now we will have to deregulate to get the practice killed, what economist on both sides are calling for.
How do you price or value anything until they figure out just what economic model we are following. If anybody can catagorize it for sure post.
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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Bart Anderson Posted 1:28 pm
02 Mar 2009
I don't think the problem is economics as a discipline. It is the dogmatic neo-classical economics that has monopolized the field over the last 30 years.
Many of us (correctly) feel an instinctive distrust which is not always easy to translate into words.
If one cares to go into the subject, there are multiple attacks on neo-classical economics by other economists and social scientists. (For a good popular bookon the history of economics, see "The Worldly Philosophers" by Robert Heilbroner).
I find it hard to agree with Adam Stein when he implies that by listening to neo-classical economics we will have better environmental policy.
Their record of failures is unprecedented. Only when Vladimir Putin sent them packing was Russia able to get control of its energy resources and achieve some prosperity. The Asian tigers pointedly ignored their advice and became economic powerhouses.
The financial instruments now at the center of the economic collapse are the brainchildren of neo-classical thinkers.
And with this record, we should trust them on the environment?
I think we are in the midst of an intellectual paradigm shift, re-discovering the importance of government intervention. So, let's not do away with economics, but -- as David Roberts said -- let's have BETTER economics.
Bart
Energy Bulletin
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Jon Rynn Posted 2:27 pm
02 Mar 2009
Yes, Krugman and several other economists, such as Roubini and James Galbraith, make very good arguments. Krugman has been a bulwark against the conservatives, which I completely applaud him for. But he does tend toward the conservative side when the topic is not far right-wing policy. Galbraith is the only one, to my knowledge, who has dared to bring up the idea that government planning can be an important and good thing; that's an "outside the box" idea.
I wish that some of the "better" neoclassical economists would try, like Herman Daly seems to be doing, to fundamentally rethink how to explain economic phenomena, because what with climate change, peak oil and coal, failing agriculture, and the need for a manufacturing base in this country, we're going to have to think way outside the box. Remember, the last time there was a depression, the neoclassical economists did try some innovation; and this time we need even more.
Environmentalists, and any progressive movement, is constantly in danger of "marginalizing" themselves, but it is only through innovations of ideas, that at first seem marginal, that we can get past the kind of long-term, global crises that we are up against now.
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amazingdrx Posted 2:42 pm
02 Mar 2009
environmentalism is actually the blood enemy of "prices" economics. what greens defend are those parts of the planetary economy for which there is no substitute -- creatures and systems that are irreplaceable and priceless. AFAICT this bugs the hell out the "prices" people because the only thing worse than a fetter is something you can't bribe to get out of your way
Thus the multifarious schemes to sell the atmosphere via carbon permits, and oceans, and of course minerals and land, and people themselves with globalized job outsourcing. Once it can all be traded, their perfect world will emerge, casino planet, where betting on the price of everything can keep them endlessly entertained and contented.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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hapa Posted 3:36 pm
02 Mar 2009
frankly instead of watching this thing roll us i think it would be better to get out and embrace what may be the portugalish existence of our mid-term future.
portugal is a nice place. the people are depressed, maybe, that's what i'm told. but think. instead of treating this as a series of giant nasty REFUSALS by GOD to be NICE to us, to let us win a little longer because we're cute, INSTEAD, we could treat it as a blackout. release the tension of too many hours of work on crappy projects.
think of it as an opportunity to redecorate and sing with our whole badness.
(MNCs: sell them for scrap. CDSs: shred 'em. even though they're assets. because they're stupid assets.)
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amazingdrx Posted 11:07 pm
02 Mar 2009
If counterfieters print money we don't honor it, whoever gets stuck with it suffers. International banks and their customers are the ones who accepted the bad paper.
The Reagan corpor-right deregulation crowd is talking about Obama borrowing for a new welfare state. They claim that investors around the world won't finance that. So the alternative is to start up the electronic printing presses and monetize the debt. That was going to happen anyway, sooner or later.
So what if it is sooner? Bite the bullet, write off the counterfiet "assets" and build our economy back up with the liquidity we need.
International investors need the US to recover, so the rest of the world recovers, and their asse(t)s are saved.
The wing nuts fighting the budget at all costs need to look at exactly what currency is and is not. It is not gold coins, that arguably have value in themselves, it is not actual paper bills that only have value based on human agreement, that only accounts for a tiny fraction of our currencies.
The currencies of our world are mainly electronic. The supply is controlled by various central banks and governments, sharing the power and responsibility of maintaining confidence in those currencies.
What would happen if we had the same amount of dollars circulating now as we had in 1800? Would one dollar buy what a 1000 e-dollars buys now? Maybe, the fact is that without a big enough money supply all the people who need currency would not have it and economic progress would be killed off.
The conquistadors' stolen gold provided currency for Europe and helped create the merchant class, a liberating process that moved it out of the feudal age. Genocide in the new world helped creat revolution in the old world.
When the fed and treasury print e-money to get us past this crisis it will create a bubble in the money supply, but as in the past that bubble will be absorbed as recovery expands real wealth. Jobs and goods and services and real estate assets. More people getting better off around the world using the dollar as currency creates demand that soaks up the bubble in the supply of dollars.
This crisis too shall pass, when people stop watching what the manipulated "free" markets and their shills are blathering on about. They just don't matter to the real economy. Put the worst in prison and confiscate their assets and the rest will start behaving a little better.
That's the way to solve this, run the e-money printing presses to maintain liquidity, carefully and thoughtfully, and restore confidence by holding the theives on wall street accountable.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Pompey Road Posted 12:17 am
03 Mar 2009
They need to have some public hearings on this, some people need to go to jail.
A lot of pain and misery out there on account of the counterfeiters.
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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amazingdrx Posted 2:57 am
03 Mar 2009
Hedge funds hold their cash and manipulate them into the upper crust, once that bonanza of insider cheating is ended they will be out of luck in the big casino capitalist roulette wheel.
Without a fixed game, their "genuis" hedge fund managers will be exposed for the Madoffs they really are. Conmen and crooks with no idea how to make money in real free market trading. Warren buffet got where he is by hard work and talent, not cheating. How are they going to compete with investment managers like him without the deregulation scamming? They can't and they won't.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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