Many critics of economists contend that because people aren't rational, economics has little predictive power. This is wrong for two reasons. First, people act relatively rational in many (if not most) circumstances; second, the deviations from rationality are predictable. As one of my professors at Berkeley used to say, it's not enough to say that people don't always act like perfect utility maximizers; the question is whether they do on average, and when they don't, what directions they take. It turns out that irrationality is not at all random, as claimed by some.
What does this mean for environmentalists?
A lot. Dealing with climate change and other major environmental issues will require major changes in behavior, and this is where behavioral economics comes in. There is an interesting piece in today's NYT on ways to get people to change their energy use; pay special attention to the "Further Reading" section near the top. And Monday on NPR, there was an hour-length program on behavioral economics entitled "Predictably Irrational," which offered a nice introduction to the field of behavioral economics.
Educate yourself and enjoy.
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Comments
View as Flat
LPS Posted 11:11 am
25 Mar 2008
For example, you appear to be rational, but are poorly informed (even though you think you are). Does that make your opinions or behavior irrational?
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sunsetbeachguy Posted 1:38 pm
25 Mar 2008
These were self-evident economic events and yet the number of economists that warned of these gross misallocations of society's resources number in the single digits.
Paraphrasing Dean Baker, why are there so few competent economists?
http://www.prospect.org/csnc/blogs/beat_the_press_archive ...
Sunsetbeachguy
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Jason D Scorse Posted 3:08 pm
25 Mar 2008
I teach environmental economics and blog at http://www.voicesofreason.info.
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Sean Casten Posted 10:52 pm
25 Mar 2008
And yet we in the environmental community - and the anti-environmental community, to be fair - rely heavily on econometric models that are still, at core, founded in neo-classical theory. Skip Laitner of ACEEE has spent years bemoaning the fact that all economic projection models use by the EPA make a simplifying assumption of "full employment", which is not a measure of labor, but of capital utilitization. In essence, it means that all capital is optimally allocated, and hence any policies that strand capital or change the dispatch of the existing capital fleet must have a cost. This isn't remotely true - but without that simplifying assumption, you can't put much mathematical rigor around economics. And so we get in huge debates about whether GHG policy will cause GDP growth to slow by 0.5% or increase by 0.7% by the year 2030 instead of confessing that economics is really not very useful as a predictive tool, except in the very long term, and then only directionally. (And of course, as Keynes said, "in the long term, we're all dead".)
Where it is useful is in those short-term recommendations as in Predictably Irrational, like make people have to opt-out, instead of opt-in to 401k programs. But I remain quite dubious that economics has the predictive ability to answer the questions that politics demands on the big questions of our day - and continually frustrated by a profession that in my opinion, has never been fully open about the fallibility of it's crystal balls.
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anotherID Posted 2:01 am
26 Mar 2008
Economics is fundamentally flawed and the approach to saying the nascent behavioral economics discipline can be structured to affect people's behavior is laughable.
Why don't we ask psychologists who are experts in people's behavior have a richer body of research and ostensibly are more accurate.
Why are there so few competent economists?
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bw Posted 2:17 am
26 Mar 2008
Unfortunately it seems that even behavioral economics neglects to address overarching problem with the traditional economic philosophies that still drive our world culture's destructive activity on this planet: the requirement that everything be monetized.
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PJD Posted 2:36 am
26 Mar 2008
In both systems there are chaotic local and/or short term phenomena. One can try to deal with them in analysis, but just as prediction of localized weather is a very different problem than predicting long term climate, so too is predicting short term market moves a very different problem than predicting long term macro-economics.
As for not issuing warnings... I think the problem is more often that no one listens. I remember reading a rather long article in The Economist probably at least two years ago about the growing trade in complex credit derivatives. Some economists were quoted stating strong concerns about the lack of understanding of the systemic risks and the inherent opacity of how the system was developing. Others rightly pointed out that it was spreading risk, which "could" be a good thing. Now we've learned both sides were accurate, the risk was spread, but unfortunately with the lack of regulation typical of a less than fully competent administration the shared risks were allowed to pile up until the entire system was in danger of collapsing from massive ripples generated from a point source.
The primary difference between the two systems is that while people are rightly reluctant to task climate scientists with altering the system (Geoengineering), we demand of our economists that they precisely control the system they study. The latter being complicated by the fact that today's global economy has made the control system far more of a distributed one than it has been in past generations.
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Jason D Scorse Posted 4:12 am
27 Mar 2008
PJD- I wish you would write something for this site because you have a very accurate and reasonable take on things. Economists are kind of like the U.S.- they are the superpower that everyone is going to hate no matter what- if they don't get things right they are blamed and if they ignore things they are blamed. Sometimes the criticism is warranted but more often than not it's simply non-constructive and people don't offer alternatives.
Sean- Here's a few questions for you that perhaps you can address in a future post:
What are your major issues with economic analysis? You mentioned a couple above but give us the full list. Do the really invalidate most of classical economics?
What alternatives are there to economic analysis for approaching the environmental problems you are interested in? Do they have greater predictive power?
Is your ideal solution to modify economics or to scrap it for something else?
J.S.
I teach environmental economics and blog at http://www.voicesofreason.info.
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