I keep asking myself these questions—and I hold a PhD that says I should know the answers!
When public policy is guided by economic analysis, the environment is under threat, and the economy is in a hole, not knowing the answer to these questions creates a big problem.
Unfortunately there is no one "economics," not in the sense that there is a mathematics (2+2 does = 4, and does not = 5), or physics, or biology, or ...
Two examples of the weakness of economic analysis have hit me over the head recently. One is a matter of interest to environmentalists. But the other offers wonderful insight into the "logical processes" of mainstream economists, so I’ll start there. (Note those quotes—please.)
On December 17, The New York Times ran “Finding Good News in Falling Prices,” which discussed "sticky wages"—the observed fact that wages overall do not seem to fall in recessions. Quoting the piece:
Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.
Traditional economic theory doesn’t do a good job of explaining this.
The last sentence is entrancing—or, perhaps, terrifying. Why can’t traditional theory explain this observation about wages during recession? Let’s start with the supposed fact itself. Just ask yourself whether you ever heard of union "give-backs" when companies were in trouble. (Today’s Washington Post carried a piece about the auto bailout and workers’ pay and job cuts with the headline UAW’s “Sacrifices Look to Some Like Surrender.”) Obviously the "fact" is not always true—and many of the basic assumptions of economics includes similar falsehoods.
Ignore that for a moment (if you can). Now, consider the claim of economics to be an empirically-based, scientific discipline. How good is a theory that does not explain something as fundamental as what people get paid over time, or that cannot determine how different combinations of the characteristics of employer and workplaces and the state of the national economy determine wage trends?
Hey, wages are paid—we can observe the funds involved. What about clear air, clean water, a stable climate, or just a nice view? We don’t buy those in a market, the way workers’ time is bought in labor markets. So how can economics price those environmental phenomena if it can’t even explain and predict wages? There is something lacking in the "traditional theory" and we cannot simply trust its findings.
I’ll be addressing that theory, some of its weaknesses, and some alternatives in future posts, but let’s get back to the environment—or rather, to the terrestrial ecology in which we live.
That’s not unnecessary repetition. Not in light of the comment I got a while back from a professor of "environmental economics" in response to my praise for some material in an academic journal called Ecological Economics.
She loudly exclaimed, "They’re the enemy!"
If those publishing ecological economics are the enemies of those claiming to be environmental economists, then we do not have one "economics." Something serious is afoot.
And you wondered why you couldn’t understand economics? You thought it was your problem. But what if the problem lies in the economics?
Don’t worry if two analyses don’t seem to be consistent. Accept that they are not, and look for the assumptions that lead them in different directions.
(The devil is not in the details, but in the assumptions ... but finding those devils requires digging into the details.)
When we make policy decisions without looking at which economics is guiding us, we have a problem. We make inconsistent decisions, we make foolish decisions, and, perhaps worst, we defer decisions because the results confuse us so much we can’t decide which way to turn.
So, please join me in some explorations of the logic of economics, and the assumptions of different schools of economists, in my posts here at Grist. I’ll try to generate something useful at least once a week.
In the meanwhile, if you have the appetite—and the stomach—for it, you can do your own exploring at ClimateChangeEcon.net, starting for now with some "Legislators’ Tools" I assembled to help state legislators cut through assumptions underlying some of the economics they have to read.
Top 25 reasons to give a damn about climate change
Feed the world sustainably by 2050? Yes, we can!
Comments
View as Flat
Delay And Deny Posted 4:34 am
22 Dec 2008
Wow, this is a first for Grist.
A scientist (albeit, an economist) who admits that our most sophisticated analyses often leave out critical factors or may be using the wrong viewpoint.
Wait. Weren't those climate models based a lot in the math that originated in economics.
But that means...
"This is the essence of science...you ask an impertinent question and you're on your way to a pertinent answer." -- Fox Mulder, S1E4, "Conduit"
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Bart Anderson Posted 4:52 am
22 Dec 2008
For what it's worth, I think we are headed towards greater government intervention. At the moment, it looks like Socialism for the Rich. Hopefully we can turn the ship towards social democracy, in the European tradition.
The slogan of "a Green New Deal" is a good starting point.
But to make this transition, we need some fresh thinking about economics. Hopefully your posts will provide that.
BTW, for economics wonks, we posted a piece about the economics of oil prices.
http://energybulletin.net/node/47523
Basically the idea is that oil prices are difficult/impossible to predict.
Prices ARE NOT a good guide for planning an energy transition. While the long-term trend may be upward, the path will probably be marked by sudden dramatic drops, such as we have recently experienced.
Low prices means that people don't want to invest in oil development or renewables. The resulting energy shortage will ensure price spikes when demand rebounds.
Bart
Energy Bulletin
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vakibs Posted 5:24 am
22 Dec 2008
Lots of critical questions in economics are related to computability and NP-computability (key concepts which are still under investigation in computer science). So we will definitely see a strong debate between different economic theories for several decades to come.
I also would like to draw people's attention to the philosophy of Jaques Fresco who believes that money is not actually necessary to kickstart an industrial growth process. All we need is energy and technical expertise, which usually are sufficient even during a recession. He cites the examples of war-time mobilization, which was done even during periods of depression.
We can very well run into an energy crunch, if we don't stop relying on fossil fuels. But, in my opinion, any efforts to obtain more energy (be it solar or wind or nuclear or negawatts/efficiency) will always be profitable monetarily. There will never be any losses in this business. Which makes me wonder if energy is the true underlying currency in the market-place !
Let's think in terms of eco-dollars.
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Colin Wright Posted 5:24 am
22 Dec 2008
That's because they have been raised solely within the neoclassical approach to economics, which has dominated the academic discipline of economics since the mid-1970s. They have been trained to uncritically believe in models of the economy based on the fantasies of hyper-rational individuals (who can predict the future), markets that are always in equilibrium, and a world in which money is simply a veil over barter. They don't listen to professional economists like myself and James who reject this entire philosophy. By and large, they don't even acknowledge that we exist.
Also there a great video link to James Galbraith on the same question at Yahoo! Finance.
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Jon Rynn Posted 5:29 am
22 Dec 2008
Bart was once good enough to republish an article I wrote called "The economy is an ecosystem" in which I went into greater detail on this, but basically, if you have a mechanistic, gas-like system that the neoclassical economists have set up, their models work. But the economy is more like an ecosystem, and so ecological ways of thinking are more appropriate.
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Jon Rynn Posted 5:52 am
22 Dec 2008
So I think people are going to have to come up with something different. Galbraith, Herman Daly, Jared Bernstein, Alice Amsden, those sorts of folks should try to put something together.
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amazingdrx Posted 6:22 am
22 Dec 2008
That is meddling with "free" markets says our opponents. Government incompetence and corruption will doom it to fail.
Marx had another good observation about capitalism, besides the periodic war thing, namely that the other facets of a society develop from the root, the economic root. Morality, art, religion all are built on top of the basic economic reality.
So why not design the economics around the value system for a change. It's progressive.
For the right, 'free' market economic theory is religion. You are where you fit in the economic pecking order, corporate poultry so to speak.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Tom Philpott Posted 6:45 am
22 Dec 2008
Victual Reality
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anotherID Posted 7:37 am
22 Dec 2008
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racc Posted 8:49 am
22 Dec 2008
Instead, we need to create a vision of what we want the future to be like that is unconstrained by attempts to predict human behaviour. However, there are constraints on the future such as resources and energy that need to be acknowledged.
Pretending economics is a science will only lead to problems. It should be consider a tool that we use to reach our goals not something that defines what is possible or not possible.
We need to create a story of how we can create the future we want then put it into action.
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rogerkb Posted 9:36 am
22 Dec 2008
If you and your family were living on an island and supporting yourselves on a limited resource base which existed within a few kilometers of your home then, the logic of `more manufacturing is better' would be rapidly exposed as being completely faulty. If you built a thirty room mansion and found that your forest of fuel trees was disappearing as you attempted to keep it warm in the winter, you soon make a decision to downsize your dwelling.
Unfortunately, the solution of voluntary simplicity which is so obvious in the hypothetical case of the island dwellers cannot be thought of in our modern advanced economies. We need to create an economic system which is oriented toward long term human welfare rather than towards short term sales volumes. But just a few hours of thinking about how such a change of focus can be accomplished makes it obvious that radical political and social changes are required. Pollution taxes and renewable energy subsidies are not going to do the job. Since being dismissed as a left wing idiot in economics and political discussions is not pleasant, most people choose some safer, but fundamentally ineffective position relative to `green reforms'. Most discussions of ecological or green economics appear to me to be discussions about how to get the specks out of one's right eye while ignoring the log that is jammed in to one's left eye.
Of course if one hopes to have any influence on economic policy in the short term one has to use language that the keepers of the asylum can understand, and the only understanding of economic `health' which exists for the vast majority of the population is growth in total sales volumes. Stimulating such growth via wind and solar energy installation, grid strengthening, improved building insulation, etc. is undoubtedly better than pushing offshore drilling, biofuels, or coal to liquids. However, when we are hoping that all of these newly employed people are going to take their newly earned dollars and go out into the shopping malls and keep buying HDTVs, MP3 players, fancy kitchen appliances, etc. in order to keep the overall economy `healthy' (and this eventuality is what you desire if you want your 401K funds rise in value) then the stimulus is not really `green' after all.
Unfortunately, all of the signs point towards a complete inability to think outside the standard economic paradigm even among the majority of self-avowed greens. Only when hindsight allows to us to realize that the boom/bust cycles initiated by fossil fuel depletion are really part of a long downward trend from which traditional Keynesian stimulation cannot possible save us, will there be any opportunity for fundamentally new modes of economic thinking to gain political ground.
Roger Brown
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Peter B. Meyer Posted 11:17 am
22 Dec 2008
It's also a distortion of what people really want and need: we want some satisfaction and gratification in our lives, not just THINGS. We want psychological satisfaction from those goods - those things that are sold. If we focus on that, then we can consider the issue of how to provide similar satisfactions without those goods.
Preaching voluntary simplicity in a consumption-obsessed society is bound to fail politically. So the question is how to shift towards lower consumption and other sources of satisfaction.
(Let me add here that SOME increased sales can contribute to reduced consumption and energy use: think about increased spending on insulation and energy efficiency of buildings, and on rehabilitating structures. Short term increased sales in this case can produce longer term sales reductions.)
I am afraid that, in pursuing a purist posture, Mr. Brown is falling into the same trap as the purist economists who believe "the market" can solve everything: ignoring the many social and the psychological factors shaping the behaviors described as "economic."
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Spectrumist Posted 11:18 am
22 Dec 2008
Excepting perhaps that last sentence; I would posit that a new regime of mandatory simplicity is about to be imposed worldwide by the current bust. Each day of increasing global fiscal and social distress makes me more concerned that the time for fundamental change based on wise hindsight is right now. Still, the powerful entrenched interests hold sway.
Roger and me and the powers-that-be all recognize that a new economic paradigm is about to emerge for the lower and middle classes of the OECD nations. Of course TPTB can't admit this publicly. Whether a global economic collapse will provide the political impetus for a global economic policy mode change remains to be seen, but the early signs are not promising.
I'm not sure we will have the luxury of looking back upon a number of boom/bust cycles. I think this could be the bust that sets the stage for a lowering of the boom from which it will take a decade or two to recover.
What this outcome would mean for the environment is unclear to me, but I know from 15 years traveling the world as an environmental engineer that as wealth diminishes so does environmental protection. Any new steady-state economic modality will have to reconcile environmental externalities to prevent an ongoing downward spiral of environmental degradation. How capital will be created and directed towards environmental protection in an extended steady-state or contracting economic environment is a tremendous challenge for all to ponder.
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Jon Rynn Posted 11:46 am
22 Dec 2008
If everybody had a comfortable "lifestyle" -= whatever that means -- then everybody would be gainfully employed producing the goods and services for this massive, global middle class. There would still be profits, they just wouldn't be going up.
There could still be nonresource-using growth -- mostly in information, educational, entertainment type industries. There can sometimes be a problem with capital goods industries when growth halts, but if there is a dependable amount of machinery and capital goods needed in the long-term, then there is no reason capital goods would necessarily bring on recessions.
So it's more a question of, can we bring the whole planet up to a particular standard of living that is sustainable?
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rogerkb Posted 12:32 pm
22 Dec 2008
I agree absolutely. When I talk about the destructiveness of the growth paradigm I am referring to the desire for composite growth of the overall economy, which is the holy grail of conventional economic thinking. Clearly we need growth in some sectors of the economy such as renewable energy, energy efficient buildings, energy efficient/nutrient recycling methods of food production etc. But achieving growth in these sectors that are important for long term sustainability would be far easier if we were willing to accept contraction in the wasteful parts of the economy. Furthermore, as you point out growth in these sectors would level out as we reach long term equilibrium.
I am afraid that, in pursuing a purist posture, Mr. Brown is falling into the same trap as the purist economists who believe "the market" can solve everything: ignoring the many social and the psychological factors shaping the behaviors described as "economic."
I do not use the expression "voluntary simplicity" in a purist, moralist sense. I use it in the narrow technical sense of "less resource consumption". I do not believe that less resource consumption will take place unless we form an conscious intention to bring it about, hence the world "voluntary". Can we consume less resources and at the same time live more psychologically satisfying lives? I certainly like to think so. Can we package this lower consumption, more psychologically satisfying lifestyle so that it looks larger dollar incomes? I personally doubt it. If you have a scheme for accomplishing this feat please give the details. You are certainly right that that such a scheme would be easier to sell than negative economic growth. However, my personal feeling is that we need to separate intellectual, artistic, and personal development from purely economic definitions of success. It is the fusing together of these things that has got us into the mess that we are in in the first place.
Roger Brown
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CASSE Posted 12:26 am
23 Dec 2008
http://www.steadystate.org/files/Copy_of_Ecological_Econo ...
During the first class our students learn the difference between ecological economics and environmental economics. In a nutshell, environmental economics is neoclassical economics applied to environmental issues, while ecological economics is ecology as applied to economics. Of course both of these endeavors are evolving, especially environmental economics as the shortcomings of neoclassical economics become more apparent by the day.
I also remind students that, in the classical period, what we now call "ecology" was referred to as the economy of nature. Production, allocation of resources, niche establishment, competitive exclusion... economic principles applied to all species. Of course the monetary sector with all the financial hocus-pocus is something that distinguishes the human economy. (And what a dubious distinction it's become!)
Shifting gears from academics to action, feel free to join the 2,100 signatories (including many ecological and environmental economists) of the CASSE position on economic growth:
http://www.steadystate.org/CASSEPositionOnEG.html
Brian Czech, Ph.D., President
Center for the Advancement of the Steady State Economy
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314159265 Posted 1:04 am
23 Dec 2008
When N. Wiener, K. Ito (who died last month), etc. created stochastic analysis there was no "Main Theorem of Asset Pricing". And the Malliavin calculus was not invented to calculate greeks.
Heck, mathy-economist tinkerers dare call "Ito lemma" what actually is the Fundamental Theorem of Ito Calculus... No wonder they lost control.
Mars J. Pictor Florifulgurator, Western Bavarian Forest.
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Peter B. Meyer Posted 9:17 pm
24 Dec 2008
Now I understand Roger Brown's argument far better, and I appreciate the clarifications.
My main objective is generating the needed change in the economic practices of the US -- and the rest of the global economy -- to constrain the already inevitable climate changes we have already wrought.
When I see/hear terms like "voluntary simplicity" I see/hear language that appears threatening to the very people I want to motivate to act in the ways they must if my objective is to be attainable. (They don't believe the "voluntary" term, having spent their lives "choosing" - in a voluntary sense? - to be employed in order to acquire goods that they have been taught to pursue in order to have satisfying lives. They associate "simplicity" with pre-industrial societies, or, worse yet, with the worst images of poor third word conditions they see on TV.)
Catch phrases have one meaning in a subculture (or discipline - Economese is NOT English) and possibly very different ones in another. We need to use language carefully, recognizing that the people with whom we need to communicate to get the change we need may misunderstand us.
Let's just talk about "satisfying lives" of "satisfying lifestyles," not "voluntary simplicity." We can legitimately ask about satisfactions -- and they'll be low. People put in a lot of time to get that toy (boat, car, gadget) and then discover their work pobligations do not let them have the time they need to enjoy their new possession ... it is opten a source of DISsatisfaction, not satisfaction ... we build on that, we ensure those contradictions are recognized, and then we can offer lifestyle alternatives, and other means of getting the satisfactions that today are mostly pursued through acquisition of goods. (Since that pursuit is so often unsatisfactory or unsuccessful, an alternative might be welcomed...)
We share an objective, but I am concerned about how pur language can undermine our ability to get others to join us in the actions that move us towards that goal.
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spaceshaper Posted 1:56 am
25 Dec 2008
The true meaning of life is to plant trees, under whose shade you do not expect to sit.
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Jon Rynn Posted 4:21 am
25 Dec 2008
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Bart Anderson Posted 6:51 am
25 Dec 2008
The term "voluntary simplicity" has been around for decades, and the concept has been around for centuries.
Ironically, the term was originally chosen as a more accurate, less threatening term than terms like "poverty" or "asceticism."
If you think that different terms will appeal to the audiences you are trying to reach, please use them. When I'm talking to people, I typically don't use the term and instead talk in specifics. In closing, I might say something like, "If you're interested, look up the 'Voluntary simplicity' movement."
However, the real problem is not in the particular term that is used -- the real problem is the reality of consumerism. Our environments is saturated with messages pressuring us to consume. Inevitably, an anti-consumerist message will encounter opposition.
Identifying oneself with a movement such as Voluntary Simplicity can give people the strength to resist.
Some people object to the religious undertones of Voluntary Simplicity, but I think this is a strength.
It is empowering to realize that one is not a passive victim - that one can make a moral choice.
Bart
Energy Bulletin
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JMG Posted 7:48 am
25 Dec 2008
http://is.gd/dubr
The 5% Project
Let's live on the planet as if we intend to stay.
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Jon Rynn Posted 9:25 am
25 Dec 2008
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davidzet Posted 1:42 am
27 Dec 2008
I consider my self post-autistic and DO see that many economists dress up their opinions as mathematical or econometric "proofs," but I do NOT agree that economics has nothing consistent to say.
Economists all agree on the Law of Demand; they all agree that incentives matter; they all agree that negative externalities should be taxed and that property rights can affect their impacts; etc.
I read Czech's book years ago and took his message to heart. Unfortunately for us, the "growth cult" is stronger among politicians than economists, and SOME economists hand politicians ready-made arguments for the "end of growth = collapse of civilization". Those of a more thoughtful bent know that growth per se is not relevant. More here: http://aguanomics.com/2008/12/sustainable-economies.html
I could go on...
I am happy to see Mr. Meyer discussing this topic (and I often do report on economic confusion/bias/uselessness at my blog), but I also want to caution readers that they should not throw out the baby with the bathwater.
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rogerkb Posted 10:21 am
27 Dec 2008
I am a little late with this reply, so I don't know if you will get around to reading it, but here are a few additional comments. I believe that people's resistance to the term "voluntary simplicity" is based on the (correct) perception that a radical paradigm change is implied by this expression. My belief is that a radical paradigm change is, in fact, required, and proposals for maintaining human welfare in the long term which stay within the comfort zone of people who have not woken up from the cultural indoctrination of the world's dominant religion ( the competitive accumulation of wealth as the foundation of human welfare) are ultimately going to be ineffective. Therefore I am not disturbed by the fact that many people are presently uncomfortable with the term "voluntary simplicity".
I should point by the way, that in my view, "voluntary simplicity" does not simply mean individuals and families making decisions to consume less resources. It means structural changes to our economic and social institutions which strongly drive high consumption lifestyles. As long as future security for individuals and families involves "storing up" economic value, the desire for growth in total consumption will continue to drive our economy. In modern complex economies "savings" do not represent physical caches of wealth in that same sense as a squirrel's cache of nuts. When someone retires at sixty-five and lives for another twenty years, they do not go on eating, drinking, and staying warm at night because there are guarded warehouses full of food, clothing, and fuel dedicated to their exclusive future use. They eat, drink, and stay warm at night because men and women get out bed every day and produce economic output. One person's savings is another person's consumption. When consumer confidence is high and people are buying lots of toys, our 401K funds and pension funds are happy. This method of pursuing future security by consuming lots of resources in the present is fundamentally insane. I do not see how this insanity can be cured with the context of nuclear families pursuing "satisfactory lifestyles" in an atomized fashion.
If we are going to effectively maintain human welfare in the long term then purely economic activity needs to be about cooperatively providing for essential physical needs with a minimum consumption of resources, and personal life satisfaction should not be exclusively (or primarily) bound to economic success.
Roger Brown
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