Economics as pathology
I’m technically on vacation, but the wife and kids are watching Chicken Little up in the hotel room right now, so I’m going to sneak in here for a quick post.
Ted Gayer — senior fellow and co-director of the Economic Studies program at the Brookings Institution — has an article in Forbes today, ostensibly about coming EPA CO2 regulations, but really about the existence of cost-effective CO2 reductions. He doesn’t believe they exist:
… Krugman oversells the [emission reduction] affordability claim by linking to a widely cited report by McKinsey & Company. The main point of the McKinsey study is provided in their Exhibit B, which illustrates a rather peculiar finding that there are a significant number of pollution abatement options that can be achieved at “negative cost.” This finding violates the basic principles of economics. If firms (or consumers) could reduce emissions at negative cost, then they would do so. To say otherwise is to say that they are willingly or ignorantly passing up profits.
This is, about as bluntly as I’ve ever seen it stated, the core of neoliberal economics and the reason that economics has had a mostly deleterious effect on the policy discussion around energy and climate change.
Consider what follows from Gayer’s premise:
• McKinsey is one of the most respected consulting firms in the world; they make their clients lots of money. Nobody has done more to study efficiency technologies and deployment than McKinsey researchers. Yet their entire body of work, spanning over a decade and thousands of pages, is negated by a “basic principle of economics.” (Why didn’t they think of that?! If only someone at McKinsey had taken Economics 101.)
• Companies like Dow Chemical and BP that have made hundreds of billions of dollars by investing in efficiency are unique, like snowflakes. None of their competitors could make money through similar investments. If they could, they would, but they’re not, so they can’t! QED.
• Carbon intensity — CO2 emissions per unit of GDP — varies widely across states and countries. Again, this is because every state and country is unique like a snowflake. There’s nothing those with high carbon intensity could learn from those with low carbon intensity. Every state and country has the carbon intensity that perfectly rational investment yields, because if there were cost-effective opportunities to lower carbon intensity that hadn’t been exploited, that would be irrational, and people are rational, so there aren’t any. QED.
• The burgeoning field of behavioral economics, which studies the way humans actually behave in the field, is based on a mistake. What’s the point of studying? We already know they behave rationally. That’s a “basic principle of economics.” The rash of recent books showing ostensibly irrational behavior on the part of consumers and business executives — Predictably Irrational, Nudge, Sway, Blind Spots, The Myth of the Rational Market, etc.– is full of mistakes. The behavior they discuss isn’t irrational, because people did it, and people are rational, so the behavior is rational. QED.
• Not only are people rational, but energy markets are too. There are no market barriers or failures that might obscure or discourage profitable efficiency investments. This paper from the folks at Resources for the Future, which reviews “the range of market barriers, market failures, and behavioral failures that have been cited in the energy efficiency context,” is nothing but a parade of errors, each one refuted by “basic principles of economics.”
• All the businesses that prosper by helping others save energy (and thus money) are … chimera, I guess. You can’t help people do things they’re already doing!
I could go on, but I’m on vacation, dammit. Suffice to say, Gayer’s premise that businesses exploit all profitable investments would only be plausible to someone who’s never been in the business world. And sure enough, a glance at his background reveals that he has been working in academia, government, or think tanks his entire professional life — rarefied environments where the “basic principles” of Economics 101 can be sheltered from the complicating exigencies of the real world.
The point is not just to pick on one stupid article. Gayer’s formulation is particularly clownish, but in more subtle forms it is absolutely ubiquitous in climate policy discussions. It is the core reason why reductions in greenhouse gases are always framed as a burden and an expense — after all, if they could be reduced profitably, they already would be, right?
Who you gonna believe, basic economic principles or yer lyin’ eyes?