In the July-August issue of Sierra Magazine was an essay called The Common Good, a broadside against the market system and the field of economics generally. It didn't sit well with Jason Scorse, Assistant Professor of International Policy Studies at the Monterey Institute of International Studies. He wrote an article in response and sent it to Sierra; they passed on it. (Read the background in this post on the Environmental Economics blog.) I offered to run an abbreviated version of the essay. Part one follows; I'll publish the second half tomorrow.
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Economics is largely the study of incentives, resource distribution, and how institutional arrangements affect behaviors and outcomes -- and therefore, economics is largely the study of trade-offs. Above all, economics is based on simple principles of how people generally act in the real world, not necessarily how we would like them to act.
Let us begin with the primary problem surrounding open-access resources. Open-access resources are those for which there are no clear and enforceable property rights and to which it is very difficult to limit access. The world's ocean fisheries and much of the world's largest forests are prime examples. Unless there is some type of agreement by the parties who access the resources to better manage and preserve them, rational individuals acting in their own self-interest will exploit them (catching fish or cutting down trees) until the resources are exhausted. In this way they obtain all the benefits from their efforts while the costs (the ultimate degradation of the resources) are dispersed among the entire population. When large numbers of parties are involved and the geographic area is large, cooperative management is unlikely to occur. This basic logic underlies why 90% of the world's ocean fisheries have either collapsed or are near collapse, and why the Amazon rainforest continues to be cut down at unprecedented rates.
So what are the solutions?
There is a role for government intervention in these circumstances to help assign and enforce property rights so that environmental preservation can be achieved. For example, systems of property rights in fisheries that limit the fish catch at scientifically-determined levels and insure long-term profits for fishermen assigned shares to these rights. This has been done with some success in New Zealand, Iceland, Australia, and Canada. Property rights to forest resources can also create incentives for forest owners to better manage their forests, since they will be able to reap the rewards from any investments in conservation. Some environmentalists like to point out that common ownership regimes that predated market-based economies are also legitimate ways to manage environmental resources. While this is true, all of these arrangements involve "in" and "out" groups, and punishment for violation of the rules is often severe (sometimes even death). Many of these more "traditional" regimes also typically break down under population pressures or with the advent of modern technology; therefore, at best, they are imperfect and temporary solutions.
The issues surrounding forestry resources are particularly complex and deserve to be examined in more detail. Although some of the most extreme forms of clear-cutting in the U.S. occur in the National Forests (where logging is heavily subsidized and therefore the market is not functioning efficiently), clear-cutting also occurs on private lands with clear property rights. Although forest land has numerous benefits to society (the provision of fresh air, beauty, recreation, biodiversity, watershed protection, and intrinsic value), timber companies are likely to ignore these when thinking about how to earn the most profit.
How do we get the market to recognize these values and take them into account? One option is to develop forestry regulations that mandate certain types of practices, e.g., no logging in riparian zones, limits on the size of clear-cuts, no cutting in areas with endangered species, etc. Another is to make some estimate of the environmental costs of logging and apply a tax on timber production so that timber companies internalize these costs in their decisions (which too will result in lower levels of logging). Another option is to focus on the consumer side and create markets for sustainable timber products (the Forest Stewardship Council is doing just this). Yet another is for those who value the environmental benefits of forests to purchase the land from the timber companies. A dramatic example of such a transaction was the City of New York's decision to purchase the watershed for the city's drinking supply in upstate New York in 1997 (property rights don't always have to be privately owned). City officials realized that instead of building a new water purification plant, the city could save money by protecting the watershed from development, because the forest acts as a natural water purifier.
What these solutions have in common is that they are based on clear and enforceable property rights. In the absence of such rights attempts to promote environmental values will often be hindered, because long-term solutions require legally identifiable parties that can both derive benefits from ownership and suffer repercussions for violation of ownership rules. To put it another way: Markets and property rights are two sides of the same coin, since parties can't rightfully trade what is not theirs.
Comments
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David Roberts Posted 3:32 am
07 Nov 2005
www.grist.org
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Bart Anderson Posted 6:50 am
07 Nov 2005
The important truth is that we need to understand the Commons, what Scorse calls "open access resources."
The key issue, which Scorse ignores, is Who Makes the Rules. For example, in a US dominated by business interests, who would trust govenment to police the actions of corporations? We have seen how it works in the governance of the broadcast spectrum -- corruption, influence-peddling, monopolization by large corporations. Why would it be any different for fish stocks?
A fruitful path, which Scorse dismisses, is common ownership regimes. He calls them "imperfect and temporary solutions." But let us remember these solutions were the rule for tens of thousands of years. The modern market, with its record of resource depletion, has only been around for about 200 years. I'd submit that older cultures may have more to teach us than mainstream economics.
Two general criticisms of Scorse's economics:
Scorse presents economics as if markets were a revealed truth, and his job is to preach it to the barbarians. In fact, there are multiple schools of economics, with different views on the roles of markets. There are Keynsians, Eco-Economists and Marxists, none of which enter into his discussion. I would welcome an analysis with a grounding in economics. Unfortunately what Scorse gives us is a one-sided view, which is neither scientific nor objective.
Scorse is incorrect when he says, "economics is based on simple principles of how people generally act in the real world, not necessarily how we would like them to act." Mainstream US economics, particularly as it is practiced in academia, largely involves abstract models based on overly simple assumptions about human behavior. These assumptions have been criticized from outside the field; recent academic work has shown the shortcomings of these assumptions -- people do NOT act in economically rational ways.
Despite my criticisms, I do think that market economics has a place in a broader set of solutions:
A government that is more democratic; not dominated by large corporate interests.
A de-emphasis of purely economic values. Religion, spirituality and tradition have been powerful motivators in the past.
Getting outside the current ideology of markets, consumerism and US nationalism. Foreign travel and reading history are antidotes to our present sleepwaking.
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Bart Anderson Posted 9:46 am
07 Nov 2005
The question I have is, does Jason want to be a cheerleader for capitalism or an objective analyst?
One really can't have it both ways.
He inveighs against people who don't understand economics, but I would reply that he does not understand the critique of his brand of economics.
The Sierra Club magazine, by the way, is not the place one would expect to get such a critique.
I guess I object to people waving the flag of "economics as science," and complaining about the ignorance of other people, when in fact their economics is more often propaganda and unexamined assumptions rather than analysis. A theology for the modern age rather than science.
It would be possible to have a serious intellectual discussion about this. Market economics does have many important things to say, within certain parameters. But we've got to get beyond this dogmatism.
For example, JS, can you understand why people would understand your economics and still disagree? Could you put their arguments into words? One of the first steps in having an intellectual engagement is to understand the other's point of view.
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cian Posted 9:44 pm
07 Nov 2005
Except neoclassical economics does not do this. It is built upon a mythical concept, the rational man. We know from extensive research in cognitive psychology that people do not behave rationally - and more so we know how they behave and why (we also have a pretty good understanding of group psychology as well - which again, well you get the picture). Mainstream economics is ignorant of these things. It has pretensions to being a science, but does not act scientifically. Many of its theories have never been proved, and have barely been examined using any kind of real world data. Many of its analytical techniques are outdated and inadequate. Many economists use mathematics to obscure arguments that do not need making with maths, to give them the pretence of objectivity. Economists are not in a position to lecture anyone.
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John Whitehead Posted 11:50 pm
07 Nov 2005
Economists think that people behave rationally. This means that as the benefits of any activity increase (decrease) the pursuit of the activity will increase (decrease). And, as the costs of any activity increase (decrease) the pursuit of the activity will decrease (increase).
We do try to test these propositions scientifically, at least as scientifically as you can do so outside of the laboratory and with data from real people. For example, environmental economists have tested demand theory for the past 50+ years by examining the relationship between distance traveled to recreation sites (e.g., fishing holes, scenic wonders) and the number of trips. As it turns out, the number of trips declines with increasing distance (i.e., travel cost). The demand curve slopes downward. Bingo! Those outdoor recreationists are rational (at least in the way that we define rationality). The "mythical" ration (wo)man? Nope. The real life rational (wo)man.
It is true that recent advances integrating social psychology and economics (i.e., behavioral economics) has uncovered a bunch of instances where people are not so rational. It seems to me, and others, that this economic behavior is very insightful but not the norm. It explains the anomolies but neoclassical economics still explains the core of economic behavior.
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Tim Haab Posted 3:21 am
08 Nov 2005
Behavioral anomalies are not new to economists and are not ignored in our models. Why else would economists recognize behavioral psychologists with the Nobel Prize in Economics? Kahneman's Nobel prize was not for recent work that may someday influence economists, but for work that has entered the mainstream of economic thinking and has proven fundamental in understanding human economic behavior. His award was "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty"
Statements like this--
Mainstream economics is ignorant of these things. It has pretensions to being a science, but does not act scientifically. Many of its theories have never been proved, and have barely been examined using any kind of real world data. Many of its analytical techniques are outdated and inadequate. Many economists use mathematics to obscure arguments that do not need making with maths, to give them the pretence of objectivity.
--are based on an understanding of economic reasoning from 50 years ago. Mainstream economics is fully congnizant of these 'things.' Yes I believe people do behave rationally in most situations. Not from dogmatic adherence to a philosophy but based on observation, analysis and hypothesis testing.
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cian Posted 4:31 am
08 Nov 2005
"Experienced players in market settings behave in accordance with neoclassical assumptions."
I'm not sure what this means. Certainly the claim that people in markets, or markets in the aggregate, behave rationally seems implausible based upon observation. But most professionals are trained in neoclassical assumptions - so if that is all you mean?
"Yes I believe people do behave rationally in most situations. Not from dogmatic adherence to a philosophy but based on observation, analysis and hypothesis testing."
The problem with this statement is that its meaningless. Rational is a term that needs defining. One could define in a circular fashion (and I've seen defences of the rationality of financial markets that do this). One could say that people act in a way that best serves their own interest, but who judges that, what do we measure, what do we include? It is possible to keep moving the goal posts until almost anything can be judged as rational. Its rational that I give to charity because it makes me feel better about myself. Its rational that I don't get the best deal on electricity prices because I lack the time to go through the pricing arrangements. Well yes - but it doesn't really narrow down how I will behave in any given situation, does it. Also there is the problem of adhoc rationalisation, where anything can be justified after the event.
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cian Posted 4:51 am
08 Nov 2005
Well acceptance of one's discipline's ignorance would be a good thing in any discipline, not just economics. However I'm not arguing over who understands the most about human behaviour, instead I'm arguing economists are not interested in human behaviour. Neoclassical economics is based upon axioms about human behaviour which are (largely) untested by economists. I'm aware that recently cognitive psychologists have started to do work in this area and this is beginning to make an impact. But economists for the most part do not study human behaviour in the way that other social scientists do - either through long term observation (ethnography, say), or experimentation. The kind of work that some economists should be doing (details analysis of the behaviour/relationships/etc of people in companies. Cross comparative studies of markets) - is done by sociologists, or anthropologists (and much of it contradicts the cosy theories of economists) and economists seem largely ignorant of it.
"Economists think that people behave rationally. This means that as the benefits of any activity increase (decrease) the pursuit of the activity will increase (decrease). And, as the costs of any activity increase (decrease) the pursuit of the activity will decrease (increase)."
This is one of those statements that only works in the abstract. What's a benefit? Is my benefit the same as yours? What's a cost? does the cost mean the same to me?
And then there are the problems with the concept of rational decision making. Am I judging the cost rationally (given our cognitive biases, quite possibly not). Where does emotion enter into this (answer - its a significant factor in decision making). Prior experience (we rely heavily on heuristics, to make rapid decisions)? What criteria am I using to judge (is it right? Is it the same as other people's?). Now you may be able to average all these things out, but you can't assume that.
Now granted, in some situations people will be able to make rational decisions (and most people will make similar decisions). The distance/recreation site would appear to be one - though its also a largely uninteresting one, being fairly trivial. Demand for other items is hardly so simple, or linear.
"It seems to me, and others, that this economic behavior is very insightful but not the norm. It explains the anomolies but neoclassical economics still explains the core of economic behavior."
i don't know about the integratory work (I know the work of a couple of people, because they're psychologists), but cognitive pscyhological work suggests the inverse I'm afraid.
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David Roberts Posted 5:09 am
08 Nov 2005
I guess the neoclassical economist's answer is to say that people behave rationally in the absence of distorting features of particular markets, but it seems to me that life just is distorting features. There is never a situation governed purely by rationality.
I don't know how strongly neoclassical economics is wedded to this theory of rational behavior, but it strikes me intuitively as obviously wrong.
www.grist.org
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Bart Anderson Posted 5:18 am
08 Nov 2005
Fine, and within this domain, mainstream US economics is valid and helpful.
The problem comes when economists venture outside that domain, and make unwarranted claims to authority.
It's important to keep in mind that the neo-classical models are abstractions, and that real world situations come with a history and power relations.
The reason I say that neo-classical economics is a theology is that its proponents consistently ignore its limitations and use it to promote specific political programs.
My experience in the worlds of the corporation and investing is that economic rationality is only one part of what motivates people. Ego, status and tradition are some of the powerful non-economic motivators.
Advertisers know this, and cater to those non-economic impulses. The billions of dollars spent on advertising shows that non-economic factors are not just a minor anomaly.
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cian Posted 5:51 am
08 Nov 2005
The other problem with neoclassical economics, is that it lacks the tools to model complex ecologies (unlike ecology, ironically). This is not a criticism of economics as an entire field. Merely one narrow interpretation of it.
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jdhlax Posted 7:52 pm
08 Nov 2005
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odograph Posted 12:17 am
09 Nov 2005
Look at the incredible difficulty humans have managing ocean fisheries. We have seen fisheries depleted time and again, and despite our experiments in alternate economics, keep on doing it.
How hard is it to stop fishing? Or perhaps "why" is it hard to stop fishing?
I think the "why" could probably be explained by some behavioral economics (our idea that a fisherman deserves a reward?), but I'm not sure that economics are going to finesse a solution.
We probably need to stop fishing, at least in some large ocean reserves.
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