Thursday, 3 April 2008

burying the lede

Scientific American, ever a bastion for good history of science and balanced coverage of social science, has it in for economics.
The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.
Nadeau criticizes economic theory for two deadly sins: stealing methods from physics and then not updating methods when the physics changed. The first is on the right track, the second is simply absurd.

Nadeau's criticism of neoclassical economics should be as follows: The physical calculus introduced to economics because of familiarity carries with it ontological implications that do not hold for economic systems. Economists failed to learn this lesson and improve the calculus, and as a result economics remains unable to deal appropriately with environmental problems.

In fact, Nadeau runs his argument almost completely off a cliff. He pollutes his account with distracting tidbits about how the "old" physical theory has since been updated--in physics. What happened in physics is irrelevant to his argument: it might have been the case that the calculus of the old physical theory was the correct basis for economics. It isn't, and that should be the focus of his criticism.

A few of Nadeau's specific criticisms of neoclassical economic theory are worthwhile. For example, under such a theory, "the market system is a closed circular flow between production and consumption, with no inlets or outlets." This seems not to be true, and altering the calculus to allow for inlets and outlets might, as Nadeau suggests, better allow for the inclusion of natural resources within economics.

In the end, Nadeau gets it about right:

If the environmental crisis did not exist, the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory—the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale.

Why not lead with that?

1 comment:

Anonymous said...

First I should point out another thing that seems like economists borrowing from physicists their use of the term Langrangian.

As to the problems economics has with environmental issues, it depends what you take to be the contents of economics, but I basically agree with your critique of the Scientific American article.

I think an illustrative example is in order. Consider the problem of solid waste (aka garbage). If instead of having a government subsidized trash pick-up (plus recycling and compost in some jurisdictions), you had to pay to have someone pick up garbage what would the outcome be. In real life many people would just illegally dump their garbage on other people or in the backwoods or whatever (and so get a free ride while incurring a cost for the rest of us). However in the magic of economics land we could imagine that dumping laws were perfectly enforced. In which case everyone would have to pay enough to get rid of their garbage to pay all the costs of disposing of it (getting rid of toxins and so on). In this case people would now have an incentive to avoid throwing stuff out in the first place or selling what was recyclable and so on. So the normal economic model that advocates listening to markets works, on the condition you can ensure enough people play by the rules.

This is actually true in more mundane circumstances. Even if we are talking about how sock makers match the price and supply of socks to the demand for socks among people who wear socks, the market only achieves a good solution when enough people actually buy their socks rather than stealing them for example.

Proper environmental programs, regulations and levies could create the necessary constraints to make the economy sustainable within a classic economic framework “market solution” if those regulations and so on could be effectively implemented. Beyond enforcement, one problem is our limited ability to measure the cost of environmental degradation (how much damage will pollutant x actually do). The other problem is how much do we value things say like a species of spotted owls, how much will we give up to save them. Also, people have a nasty habit of preferring present gain to future gain, but this is actually something that following the edicts of economics would militate against.

I think our problems measuring environmental costs, enforcing environmental regulations, valuing the natural environment individually and collectively and our tendency to short term thinking are greater problems for environmentally sustainable human life than economic theory.