The following is a reply to a post by Michael Tobis entitled “Should economics rule?


Should Economics Rule?

Well, I take it that Michael means to suggest that someone out there — in this case, me — would contend that economic analysis should dictate climate policy. I do not hold that opinion. For a brief defense of my position, see my post on the matter at the Cato Institute website. By the way, even a lot of scientists held in high esteem by the Grist crowd would have little complaint with my argument that scientists are in no position as scientists to dictate public policy. See, for instance, these comments by Prof. Mike Hulme, founding director of the Tyndall Centre for Climate Change Research.

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“Is one a Marxist or even a Stalinist for pointing out that economists are not, themselves, necessarily right about everything?”

I don’t know quite what that means. No one among us — no matter what their academic training — is “right” about everything … so far as I know. The consensus beliefs within any academic discipline are unlikely to represent the last and final truth on every subject within that field, given the limitations of human knowledge. So I agree with Michael but am not aware of anyone serious who would not.

“Economists, meanwhile, claim to have the key to rationality.”

I don’t know of a single economist who claims that their discipline is intrinsically more “rational” than any other. I don’t even know what that would mean exactly. A more crisply stated proposition is that many (most?) economists think of themselves as empiricists. They distrust disciplines that do not empirically test their hypotheses in any meaningful way. Likewise, they distrust arguments that cannot be tested and disproved (which means that the argument in question is actually religious in nature). In that regard, they are much like scientists and think of themselves in the same way.

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An important (albeit minority) exception is the so-called Austrian school of economics, which contends that economic cause and effect is so difficult to isolate that the empiricism embraced by most modern-day economists is a practical fantasy. The Chicago school of economics (the bastion of what most people are referring to when they refer to “neo-classical economics”) would beg to differ. And in case you are curious, there are both “Austrians” and “Chicago-ites” here at Cato.

“Their claim is based in their own definition of their field, which is about ‘how people collectively make decisions’, but they proceed very quickly from there to the marketplace via a number of dubious assumptions.”

Not so. Most economists would define their field as the study of human action. Individual human action is as relevant to economics as collective human action. Now, economists has traditionally concentrated on human action in the realm of commercial interests, but there is a growing field of economics that examines human action outside of the commercial realm. For instance, Nobel prizes have been handed out to economists who specialize in the study of human action in public settings (the so-called “public choice” school of economics).

“The marketplace is real enough, and the fact that it affects the decisions we make is inescapable, but that doesn’t prove a claim that economics is uniquely placed to resolve our differences.”

First, let’s make clear what this thing called “the marketplace” actually is. “The marketplace” is simply jargon for that theoretical realm where people voluntarily exchange goods and services. Sure, voluntary exchanges between A and B might under certain circumstances affect the decisions of C, but more to the point, it’s the place where many of our individual decisions to act are carried out. Hence, to be against something called “the market” is to be against the voluntary exchange of goods and services. I doubt that’s what most people mean when they rail against “the marketplace,” which means a bit more precision is necessary before I can figure out exactly what complaints are being made.

Now, what does it mean to say that “economics is [or is not] uniquely placed to resolve our differences”? Beats me. The field of economics is not primarily charged with “resolving our differences.” It simply represents the study of human action and some (but of course, not all) human action is about resolving differences. Some economists volunteer to lend a helping hand when it comes to human conflict. Others are content to simply explain the conflict without any attempt at proposing remedies (think Steven Levitt’s Freakonomics).

“A claim in more desperate need of challenging I cannot imagine — yet on it goes, essentially unchallenged in circles of power.”

If by this Michael means that people who study human action are in no position to assist in an undertaking that might reduce the friction between people who are pursuing different and contradictory ends, then I could not disagree more. Economists have offered a large inventory of ideas that would allow people to pursue their own ends without doing undue harm to others. I suspect, however, that Michael does not mean precisely that, but what he means is unclear to me.

“A crucial problem is the idea that the purpose of our society is to maximize ‘growth.'”

I was unaware that society had a purpose, much less that its purpose was to maximize growth. All “society” is is the aggregation of a certain subset of people. A certain subset of people in the United States is engaged in the activity of maximizing revenue. Other subsets are engaged in other interests, other activities, and the pursuit of other ends. Economists, by they way, refer to this activity as “maximizing utility.” And to complicate matters, most of us are involved in different societies that simultaneously pursue different ends. Aggregating those millions upon millions of distinct “societies” into something called “our society” is analytically so problematic that it probably isn’t worth the effort.

What Michael means to say, I suspect, is that “the purpose of our government and of our economic institutions is to maximize growth.” That may be an accurate description of the status quo, but I don’t believe it’s true. If the purpose of our society is to maximize growth, for instance, how does one explain the war in Iraq, which does not by any stretch of the imagination “maximize [economic] growth.”

For what it is worth, I do not believe — nor do most of my colleagues at the Cato Institute believe — that the purpose of government ought to be the maximization of economic growth. We believe that the purpose of government is to secure individual rights and to protect liberty. Likewise, we believe that the purpose of economic institutions is to allow people to freely exchange their private goods and services in whatever manner they like.

“Is infinite growth of some meaningful quantity possible in a finite space? No scientist is inclined to think so, but economists habitually make this claim without bothering to defend it with anything but, ‘I’m, an economist and I say so’, or perhaps more thoughtfully, ‘hey, it’s worked until now’.”

Strictly speaking, no economist would contend that “infinite growth of some meaningful quantity [is] possible in a finite space.” If nothing else, infinite means forever, and someday, the universe will likely either collapse upon us or thin out to such an extent that life will cease to exist. So no, infinite [human economic] growth not possible. Michael probably meant something else by this, but to know whether an economist would agree or disagree with Michael’s proposition requires us to be a bit more precise about what time period we’re looking at and what our definition of “finite space” might be.

“Such ideas were good approximations in the past. Once the finite nature of our world comes into play they become very bad approximations. You know, the gods of Easter Island smiled on its people ‘until now’ for a long time, until they didn’t.”

The widely held belief that the people of Easter Island were devastated by a natural resource crash induced by economic institutions that did not recognize the natural limits to economic growth has recently been shown to be thoroughly incorrect. For instance, see this study from Prof. Terry Hunt, published this year in the Journal of Archeological Science.

“The presumption of growth is so pervasive that great swaths of economic theory simply fail to make any sense if a negative growth rate occurs. What, for instance, does a negative discount rate portend?”

The interesting thing about human history is that, for most of it, economic growth did not occur in any meaningful sense. For over millennia, life expectancy, real wealth, and almost every useful metric of human wellbeing changed nary at all. Then along came the industrial revolution and everything changed radically.

Michael’s contention that economic theory cannot make sense of negative growth rates is to contend that economists can’t make sense of recessions or depressions. That is demonstrably not true. Making sense of the 1932 depression is what won Milton Friedman a Nobel Prize, to pick just one example off the top of my head. Nor are economists at a loss to explain no-growth periods of long durations. Adam Smith’s The Wealth of Nations was written before the Industrial Revolution took off. The book was all about wealth creation; why it occurred and why it didn’t. He had no trouble “making sense” of the latter.

Finally, it’s no trick to understand the implications of a negative discount rate. On a personal level, it means that you value goods and services in the future more than you value them at present. Few people really embrace negative discount rates, however, which is why they are not a matter of great interest to economists. It would imply, for instance, that you should save every penny you make once your most vital needs related to food, shelter, and personal activities are met. I don’t know of anyone who has ever lived in that manner.

“Perhaps it’s because much of the theory breaks down under economic decline that the presumption of growth pervades everything economists do. Even the Stern report, which is based on enough understanding of our circumstances to see that unconstrained carbon emissions are to be avoided, has to torture economics a bit to come up with the result.”

I agree with your take on the Stern Report.

“More striking, though, Stern speaks of the consequences of failure in terms of ‘slowed growth’ and not of actual, you know, catastrophe. Well, the cockroaches and jellyfish won’t consider it a period of absolute decline, I guess …”

Depends how you define “catastrophe.” You are correct, though, that even the Stern Report finds that consequences of climate change will not have near the impact on society that many people here at Grist probably fear.

For instance, the A1F1 scenario of society through 2085 employed by the IPCC is akin to the “nightmare scenario” from an environmentalist’s standpoint. That is, it assumes for the sake of analysis that a “business as usual” world (that is, one in which climate change occurs but government does little about it) will yield breakneck economic growth, rapid technological change, and extremely high fossil fuel use. As a consequence, CO2 concentrations in 2085 will be at 810 parts per million, global temperatures will have risen by 4 degrees C, and sea levels will have increased by 34 centimeters. Yet even so, computer runs based on work from Dr. Martin Parry, the lead author of the most recent IPCC Working Group on climate change impacts (that is, Working Group II), find that even under this scenario:

  • the global population at risk from hunger will decline from 15-17% in 1990 to 1.7% in 2085;
  • the global population at risk from water stress will decline from 26% to 21%;
  • the global population at risk from coastal flooding will change from 0.2% to somewhere between 0.1% – 0.6%;
  • the amount of land necessary to meet future agricultural demand will decline by more than half;
  • net GDP per capita in developing countries will grow from $875 to $43,000, while net GDP per capita in developed countries will grow from $14,500 to $69,500; and
  • total human mortality from hunger, malaria, and coastal flooding will decline from 4.4 million to 2.3 million.

That ought to be good news, but alas — many seem inclined to shoot the messenger.

“The whole growth thing becomes a toxic addiction. The only path to a soft landing is down; we in the overheated economies need to learn not just to cope with decline but to celebrate it. We need not just an ideology but a formal theory that can not only cope with reduced per capita impact but can target it.”

As the above analyses suggest, a net decline in wealth or personal well-being is not by any means inevitable if the IPCC is correct about the future. Regardless, if the environmental movement were to enthusiastically embrace an ideology of decline, it would become irrelevant to American politics rather quickly, which is why I don’t believe such an agenda will ever surface from politically meaningful parties — regardless of its merit.

“Decline isn’t bad news in an airplane. Decline is about reaching your destination. Perhaps there is some level of economic activity beyond which life gets worse? Perhaps in some countries we have already passed that point? Could the time where we’d all be better off with a gradual decline have arrived?

This sentiment was once quite popular. A significant chunk of The Wealth of Nations was spent arguing against the widespread belief at the time — held then primarily by social and economic elites in England — that improvements in per capita income among the lower classes was a bad thing.

“How much attention should we pay to the folks who say we should keep climbing, that there’s no way we can run out of fuel, that we’ll think of something?”

Ask the authors of the Club of Rome reports. Or Dennis and Donnella Meadows. Or Paul Ehrlich. They — and many, many others — spent much of their careers arguing that scarcity would soon doom economic growth, even going so far as projecting actual dates for decline events. They have been proven wrong time and time again and have actually lost concrete bets with those holding the opposite opinion. Now, that’s not to say that past will always prove to be prologue (that is, the boy who cried “wolf!” was eventually correct in the parable), but it is to say that anyone who does not treat “Book of Revelation” predictions about the future lest we stop our sinning ways with some degree of skepticism has been living under an ideological rock.

“I think the soft landing is still within our grasp. The longer we treat the people who call themselves economists as a priesthood above criticism rather than as a human subculture with serious dysfunctions, the bumpier the best landing we can achieve gets.”

No one should treat anyone as above criticism — or beyond critical examination. The contention that economists represent a human subculture with serious dysfunctions, however, begs for elaboration.

“Climate change is just a symptom, though an increasingly salient one. I suggest that the core problem lies in our collective failure to consider what human decency means and to use that understanding to manage what money means. We don’t have to listen to people who get that backwards.”

I translate Michael’s contention this way: “Human decency means doing something about global warming. Human decency demands that we hold little regard for personal wealth. Don’t listen to anyone who fails to embrace the above.” Well, as my post at the Cato website notes, I agree with Michael that economists armed with cost-benefit calculations cannot and should not dictate public policy. But I reject the idea that morality dictates greenhouse gas emission controls given our current state of knowledge. If you take the literature regarding the impact of climate change on human beings seriously, then you can make a very strong argument that more people are harmed than helped by significant greenhouse gas emission controls and that “human decency” dictates resisting the “act now” agenda.

In short, appeals to morality will not take you as far as you might think in this debate. I suspect that most people on both sides of this discussion are reasonably moral and ethical people. We simply disagree about the facts at hand and have different values about subjective matters where no right or wrong answer exists. Black and white morality plays are of course more comforting for many, but so is a belief in Santa Claus.

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