Sunday, January 2, 2011

Green Economics: Excerpts from New Book

By Robin Hahnel

Saturday  January 1 2011

Unfortunately, there is no grand synthesis for analyzing economics and the environment. There are useful insights from mainstream economics when its theories are properly interpreted, and ecological economics and several other heterodox schools of economic thought provide important ideas as well. However, every theoretical framework for analyzing the relations between our economic activities and the natural environment remains incomplete and flawed. As a result, there is no single place to turn for someone seeking to understand what is necessary to protect the environment in ways that are effective and fair. Green Economics does not pretend to provide the grand synthesis that, unfortunately, still lies beyond our reach. However, those who struggle to protect the environment can ill afford to wait for a grand synthesis. Green Economics gathers together useful insights available from many sources and dispels debilitating myths independent of origin….

The three brief sections that follow in this introduction offer a glimpse of where mainstream economics can be helpful, where mainstream economics can be misleading, and where heterodox ideas can provide important insights but also create unnecessary confusion.

What If 250 Years Ago . . .

. . . Americans had put a price on carbon?.... Significant mispricing, combined with path dependency goes a long way toward explaining why “king coal” won out over solar power in the United States, leading us in 2007 to produce 48.5 percent of our electricity by burning coal but only .015 percent from solar thermal and photovoltaic sources.

When You Ask the Wrong Question . . .

. . . you get the wrong answer…. This is why mainstream environmental economic modelers can erroneously conclude that taking strong measures now to avert climate change is not “cost-effective,” while climate scientists warn us correctly that failure to reduce greenhouse gas emissions immediately and dramatically would be tomfoolery. When people feel safe and secure, it makes sense to weigh the costs and benefits of doing a little more or less of something. And if some outcomes are unlikely to occur, it makes good sense to ignore these improbable outcomes provided their consequences do not dwarf those of more probable outcomes. In effect, this is what mainstream economic climate modelers do when they estimate the benefits of avoiding the effects of only mild to moderate climate change, which is most likely, discount those benefits since they will occur many decades in the future, and then conclude that the discounted benefits do not warrant the cost of significant emissions reductions in the present.
They have answered the wrong question. They have ignored the main fact, which is that absent any serious response we run an unacceptable risk of inducing cataclysmic climate change, and until we are safe we can ill afford to be weighing pros and cons of tolerating a little more or less mild climate change. Climate scientists have answered the right question, which is: “How much do we have to reduce emissions now to reduce the risk of cataclysmic climate change to an acceptable level so we can feel reasonably safe?”

Growth of What?

Economists have long worshipped at the altar of economic growth. If economists had a motto, it would likely be “A rising tide raises all boats.” Not long ago a dissident group of ecological economists issued a blunt challenge to this conventional wisdom: “Infinite growth on a finite planet is impossible.” It was a showstopper, although the cast in the mainstream economics show paid it little attention…. Ecological economists have done a great service by issuing their bold challenge. However, it is important to ask “growth of what” when considering this issue. Much time has been wasted because people have been talking past each other and talking about the growth of very different things. What ecological economists call throughput and insist correctly cannot continue to grow is not the same as the gross domestic product that mainstream economists talk about growing. In the shouting match that has ensued, important issues that we need to explore have been pushed into the background.

Excerpts From Chapter 1:

Something Happened On The Way To The Twenty-First Century

Mainstream economic theory is based on a paradigm that dates back to the eighteenth century, and critics argue that is part of the problem. The world was a very different place when a Scottish moral philosopher wandered the grounds of the University of Glasgow in absent-minded reverie, thinking thoughts that would launch a new economic discipline called “political economy.” When Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, there were less than 800 million people roaming the earth….

No wonder Adam Smith believed the value of goods and services was determined entirely by the amount of labor it took to produce them and never integrated the opportunity costs of using natural resources into his explanation of prices. No wonder it never dawned on Adam Smith that there might be effects on people other than buyers and sellers of producing and consuming the goods they bartered over in market exchanges. In a largely empty world, neither resource exhaustion nor effects on external parties were likely to be top concerns for creative minds trying to unravel the important economic conundrums of their day….

By the time this book is printed, roughly 7 billion people will be crowding into the same space occupied by only 800 million in Adam Smith’s day. The world is different today. It is now more full than empty, and one would think the underlying presumptions that make up the gestalt that informs our economic paradigm would reflect this difference. But as ecological economists point out, modern-day economics, to its detriment, remains largely an empty-world economics as our colleagues in the mainstream continue to operate under the influence of a paradigm pioneered well over 200 years ago….

Full-World Economics: Limits to Growth

Publication of a study titled Limits to Growth commissioned by the influential Club of Rome think tank in 1972 marked a turning point in popular thinking, but not in thinking inside the mainstream of the economics profession…. Mainstream growth theory continued to ignore any constraints imposed by nonrenewable natural resources, as well as resources that were renewable but only at rates that were often lower than the rates at which the world’s economies were exploiting them…..

Ecological economists point to an additional problem caused by wastes based on their full-worldview. Just as a full-world paradigm sensitizes researchers to ways in which the natural environment is overtaxed as a source of resources as inputs into economic activities, it also draws attention to limits on the capacity of the biosphere to serve as a sink to absorb and store wastes that are outputs of economic activities in relatively harmless ways. In effect, the Club of Rome report suggested that humans were on a trajectory to die of starvation as they exhausted needed environmental resources. Thirty years later, many environmentalists began to worry that people might asphyxiate themselves first as they exhaust even faster the capacity of the biosphere to act as their sink.

Ecological economists introduced a useful concept they call throughput to reorient thinking about how the natural environment limits growth as both a source of natural resources and as a sink for wastes. Throughput is defined as physical matter of one kind or another that enters the economic system and physical matter that exits the economic system as waste of some kind. As ecological economists point out, since physical stocks of different categories of natural resources are finite, and the capacity of the biosphere and upper atmosphere to absorb physical wastes of different kinds is also finite, economic throughput cannot grow infinitely….

Full-World Economics: Externalities Are the Rule, Not the Exception

There is a second important consequence of changing from an empty-world to a full-world mind-set. Not only are people more likely to bump into the limits of the physical world when there are more of them, people are also more likely to bump into each other when we are 7 billion than when we were only 800 million. Changing from an empty to a full-world economic paradigm reverses an assumption that is crucial to every major conclusion and economic theorem about markets and market systems.

An externality is defined as an effect on any party other than the buyer or seller when a good or service is produced, exchanged, and consumed. In an empty world it is more reasonable to presume—as a general operating principle, or default option—that externalities are the exception, not the rule…. Externalities were not taken seriously until popular concern over pollution—which economic theory defines as a negative externality—led to the rise of the modern environmental movement in the 1970s, when the world was much fuller. Yet mainstream economic theory continues to operate under the implicit assumption that external effects are insignificant in all but a few markets, despite compelling reasons to believe otherwise….

Ecosystem Complexity

The biological world turns out to be more of a mystery than many people once assumed…. We are now smart enough to know that eliminating one species in an ecosystem may well unleash a chain of effects reaching many other species that appeared to be far removed. But this new knowledge often makes us less, not more, certain of what to predict. Even when biologists successfully unravel one long causal chain with many surprising links, it only heightens awareness of how many other long causal chains must also be out there about which we remain clueless. We are now smart enough to know that ecosystems can have tipping points where the effects of applying pressure of one kind or another suddenly change dramatically. 
But knowing tipping points exist without knowing how to pinpoint where they are only makes us feel less certain about our ability to predict outcomes. We are now smart enough to know that even if an ecological system were deterministic with no random elements, if it is a chaotic, complex dynamic system, outcomes can be surprisingly sensitive to small variations in initial conditions, making long-run predictions impossible. And of course random elements are numerous and greatly magnify our ability to predict outcomes. Again, knowing more only makes us less certain about predicting the effects of human interactions on ecosystems. In sum, in the field of biological systems much new knowledge has been humbling for any who were paying attention. As we will see, long causal chains, tipping points, and butterfly effects are all phrases that should strike fear into the heart of anyone trying to apply cost-benefit analysis to the environment.

" Green Economics: Confronting the Ecological Crisis" by Robin Hahnel is available from M.E. Sharpe.

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