Robert Nadeau
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The causes of the environmental crisis may be hugely complex, but the most effective way to deal with it in economic terms seems rather obvious. We must use our best scientific understanding of how environmental problems can be resolved as the basis for implementing scientifically viable economic policies and solutions. If this could be accomplished within the framework of the economic theory that we now use to coordinate economic activities in the global market system—neoclassical economics—there would be no cause for concern. But as this discussion will demonstrate, there is a large problem here that should be cause for great concern: Neoclassical economic theory is predicated on unscientific assumptions that massively frustrate or effectively undermine efforts to implement scientifically viable economic policies and solutions.
These assumptions were first articulated by 18th-century moral philosophers (Adam Smith, Thomas Malthus and David Ricardo) who embraced a new understanding of God known as deism that resulted from attempts to understand the metaphysical implications of Newtonian physics. Because this physics assumes that the laws of gravity completely determine the future state of physical systems, the deists concluded that the universe does not require, or even permit, active intervention by God after the first moment of creation. They then imaged God as a clock maker and the universe as a clockwork regulated and maintained after its creation by physical laws. (1)
Smith, Malthus and Ricardo believed that the clock maker created a second set of laws to govern the workings of the clockwork—the natural laws of economics. Smith imaged the collective action of the forces associated with these laws as an "invisible hand," and this construct became the central legitimating principle in mainstream economic theory. Smith claimed that the invisible hand is analogous to the invisible force that causes a pendulum to oscillate around its center and move toward equilibrium or a liquid to flow between connecting chambers and find its own level. Given that Smith's invisible hand has no physical content and is an emblem for something postulated but completely unproved and unknown, why did he believe that it actually exists? The answer is that Smith was a deist and his belief in the existence of the invisible hand was an article of faith.
The Origins of Neoclassical Economic Theory
In economics textbooks, the 19th-century creators of the economic theory now used by mainstream economists (Stanley Jevons, Leon Walras, Maria Edgeworth and Vilfredo Pareto) are credited with transforming the study of economics into a rigorously mathematical scientific discipline. There are, however, no mentions in these textbooks, or in all but a few books on the history of economic thought, of a rather salient fact: The progenitors of neoclassical economics, all of whom were trained as engineers, developed their theories by substituting economic variables derived from classical economics for physical variables in the equations of a soon-to-be outmoded mid–19th century theory in physics. (2)
The physics that the economists used as the template for their theories was developed from the 1840s to the 1860s. During this period, physicists responded to the inability of Newtonian mechanics to account for the phenomena of heat, light and electricity with a profusion of hypotheses about matter and forces. In 1847 Hermann-Ludwig Ferdinand von Helmholtz, one of the best known and most widely respected physicists at this time, posited the existence of a field of energy that could unify these phenomena. This proposal served as a catalyst for a movement called "energetics" in which physicists attempted to explain very diverse physical phenomena in terms of a vaguely defined protean field of energy that fills all space.
The strategy used by the creators of neoclassical economics was as simple as it was absurd—the economists copied the physics equations and changed the names of the variables. In the resulting mathematical formalism, utility becomes synonymous with the amorphous field of energy described in the equations taken from the physics, and the sum of utility and expenditure, like the sum of potential and kinetic energy in the physical equations, is conserved. Forces associated with the field of utility (or, in physics, energy) allegedly determine prices, and spatial coordinates correspond with quantities of goods. Because the physical system described in the equations of the theory in physics is closed, the economists were obliged to assume that the market system described in their theory is also closed. And because the sum of energy in the equations that describe the physical system is conserved, the economists were also obliged to assume that the sum of utility in a market system is also conserved.
In the mathematical formalism that resulted from these substitutions, economic actors allegedly operate within a field of force identified, in both figurative and literal terms, with energy. The natural laws of economics are assumed to operate within this field and to legislate over the decisions made by the economic actors. Because utility–energy in this mathematical formalism is conserved, the creators of neoclassical economic theory concluded that production and consumption are physically neutral processes that do not alter the sum of utility. And this conclusion became the basis for the claim that capital circulates in a closed loop from production and consumption and that the value of any good, commodity or service can only be determined by decisions made by economic actors. The creators of neoclassical economic theory also failed to realize or chose to ignore the fact that market systems are not closed and the conservation principle is quite meaningless in any real economic process. Nevertheless, these assumptions are now used to legitimate the existence of the invisible hand in its current form in the neoclassical economic paradigm—constrained maximization in general equilibrium theory.
Several well-known mid–19th century scientists told the economists that there was no basis for substituting economic variables for physical variables in the equations of the theory in physics. But the economists did not appreciate how devastating this criticism was and proceeded to claim that they had transformed the study of economics into a scientific discipline comparable to physics. In what is surely one of the strangest chapters in the history of Western thought, the origins of neoclassical economics were forgotten, the claim that neoclassical economic theory is scientific was almost universally accepted, and subsequent generations of economists disguised the existence of the unscientific axiomatic assumptions in this theory under an increasingly complex maze of mathematical formalism.
This misalliance between economic thought and a 19th-century physical theory explains why the neoclassical economic paradigm is predicated on the following unscientific assumptions:
- Market systems exist in a domain of reality separate and distinct from other domains.
- Capital circulates in these systems in a closed circular flow between production and consumption with no inlets or outlets.
- The lawful dynamics of closed-market systems legislate over the behavior of economic actors, and the actors obey fixed decision-making rules.
- The dynamics that operate within closed market systems, if they are not interfered with by the external or exogenous agencies such as government, will necessarily result in the growth and expansion of these systems.
- Market forces will resolve environmental problems via price mechanisms, along with more efficient technologies and production processes.
- The resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or rely on other resources.
- The environmental costs of economic activities can only be determined by pricing mechanisms that operate within closed market systems.
- There are no biological or physical limits to the growth and expansion of market systems.
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18 Comments
Add CommentLet me see; we will call this new entity Environmental Theocracy (God, for short). And we will all submit to God for the greater good!
Reply | Report Abuse | Link to thisIn response to srchuck, obviously there are some who don't plan to submit to such an EnvironGod, but to serve as his high priests. Prof. Nadeau might be one such individual, while the rest of us, in our hundreds of millions, can safely plan to give up on our hopes and dreams of a better life. But, hey, it's for the greater good, so it's got to be worth it!
Reply | Report Abuse | Link to thisRe comments 2,3 - but isn't free market capitalism also supposed to be for the greater good? Are you rejecting that as well? (Yes, this is more of a pun than an argument; I don't have time to argue just now.)
Reply | Report Abuse | Link to thisThe true explanation is far simpler than those offered by any current economic or environmental theory. The graph of the human population precisely follows that of an animal in plague mode. According to the current decline in our rate of growth, our population will peak between 2025 and 2035 and then collapse at a rate that mirrors our growth rate. This pattern is underwritten by the nature of genetic material, the chemistry of the biosphere, and the laws of thermodynamics. Culture and environment are just two sides of the same thermodynamic coin. We are but one of 20100 million extant species and do not differ from the others in any fundamental respect. In other words, our anthropocentric assumption that we are special hinges on a bet that has odds of at least 20-million-to-one stacked against it. Such astronomical odds might seduce the odd deranged gambler, but no respectable scientist should fall for it. ( Hydrogen: Humanitys Maker and Breaker & www.regmorrison.id.au)
Reply | Report Abuse | Link to thisRobert:
Reply | Report Abuse | Link to thisI'm very surprised this article doesn't mention
Charles Hall, Vaclav Smil, or Robert Ayres+Benjamin Warr, since they have been offering compelling theories for years.
I just established a Yahoo Group to discuss the issues raised by Professor Nadeau's splendid piece! http://tech.groups.yahoo.com/group/econEnvironment
Reply | Report Abuse | Link to thisLet's discuss it!
Thanks for this shocking expose'. I had no idea that mainstream economics was such intellectual garbage. It is appalling that mainstream economics is still taught in colleges and universities.
Reply | Report Abuse | Link to thisProfessor Nadeau has delivered a very precise inditement accompanied by a forgiving invitation to work for the most noble of reasons; the huge cooperative effort required to save all life from certain impending catastrophe.
Reply | Report Abuse | Link to thisSo where do we start? Promote gargantuan energy schemes like cap and trade? Develop huge imaginary power plants that sequester their exhaust? Work on international agreements that will constrain nations and corporations designed to grow faster and faster forever on a finite planet?
No. Instead look for a basic somewhere that has worked, is working and suggests a direction for improvement. Notice that the price of energy and food is not rising so much as the value of the dollar is falling. Compare european agreements for budgetary restraint with the value of the euro and the dollar. Realize that economists who defend deficit spending are defending the art of borrowing from children and thus helping undermine halting steps toward harnessing the intellectual feedback loop we call democracy.
Budgetary balance is one small step toward proper alignment of intelligence with the other natural forces springing from the big bang. Big solutions are diversions from the small steps that lead toward justice for life trampled in the rush to grow faster and faster forever on a finite planet.
And then? Use the current accounting system with money units based on calories.
And? It is too hazy out there for one person to see clearly, my guess is that bright young minds will eventually find a way to incorporate disruptions caused by pollution into an accounting system which will be a free market used by responsible citizens who automatically clean up after themselves in order to avoid cost accounting which includes environmental and social costs of doing business.
Splendid, does it help when power goes down?
Reply | Report Abuse | Link to thisShip clearly sinking, out of control, scarcity or peaking of everything and leaders bombing. How to protect your family from canibals, that will be the challenge next decade after our succesfull collective suicide by consumption.
One big civil world war is what it is. Wake up and seek shelter in nature which will teach us live prof lives.
Good luck. JCWhitefang
It is a shame that this article has been published by Scientific American. Professor Nadeau is not an economist, not a mathematician, nor even a economics historian. Publishing this article gives a very bad image of Scientific American. Only some one without the slightest knowledge of basic mathematics might think that it is possible to substitute variables in some equation and hope to get any meaningful relation out of it!! How was this article ever published?? Some of the best minds of the 20th century (including many brilliant mathematicians) have worked in economic science. Does anyone seriously believe that they are all so, so, so stupid?? that they have just spent decades substituting variables without thinking?? This is a shame for Scientific American!!!!
Reply | Report Abuse | Link to thisProfessor Nadeau's analysis is much needed, particularly for a new generation of economics students and economic thinkers who have a chance to get it right this time. It is a shame there are readers who think it is a shame for Sci Am to publish such an enlightening piece. Professor Nadeau's article is EXACTLY what I expect from a quality publication like Scientific American, and one of the reasons I read this magazine. I don't know what people who criticize Dr. Nadeau's points are afraid of -- who doesn't want full cost accounting? Who doesn't want to have all the cards on the table when making decisions? Only people who have something to hide or are afraid to face reality would want to continue burying externalities or using flawed models. We need articles like this to improve the art and science of economics. Thanks for putting things in perspective, Dr. Nadeau!
Reply | Report Abuse | Link to this--
Edited by innoventor at 05/29/2008 3:35 AM
Maria Edgeworth was a novelist, and the aunt of Francis Ysidro Edgeworth, who was an economist.
Reply | Report Abuse | Link to thisIt is not an "article of faith" that the market delivers the social optimum. It is a theorem -- the First Welfare Theorem, in fact. It is therefore well understood under which conditions this is true or not, and generally acknowledged that these are strict assumptions.
Stern (2006) was not the first economist to look into the science of climate change. That was Nordhaus (1977). Nor was Stern (2006) the first economist who "cooked the books" for political ends. That was Hohmeyer (with Gaertner, 1992). Stern (2006) was merely the first climate economist who had the disposal of the impressive spin apparatus of the Blair-Brown government.
“The natural environment is not separate from economic processes”: so, what was first-an egg or a bird?
Reply | Report Abuse | Link to thisMore on money-energy (with no excessive modesty) is being provided in “Time: the economics application” by M. Kerjman, Proceedings, IMACS World Congress, Berlin-97,
http://sab1.sscc.ru/Imacs_97/imacs_97/contents.htm p.745, vIII.
M. Kerjman
Uh, yeah--that's the point. These "great minds" were not stupid, they just had a pre-analytic vision of how the world operated--one that, with more knowledge, we now know is not true. There is, essentially, an entire discipline of stalwarts still claiming the earth is flat. And this has been common knowledge to the researchers who actually study these phenomenon for a long time; the real debates got started in 1971 with Nicholas Georgescu-Roegen. The fact is, Scientific American is 40 years behind the curve.
Reply | Report Abuse | Link to thisThank you for offering us an article which assumes we have both minds and attention spans.
Reply | Report Abuse | Link to thisFrank W. Heatherington
Thank you for treating your readers as if we had minds and attention span.
Reply | Report Abuse | Link to thisRe: the comment of FBlasques above, I learned in school that the value of an equation is that it works for variables. If it does not, you are dealing in arithmetic.
Below are links to other related commentary and resources on this topic.
Reply | Report Abuse | Link to this-- Philip Bogdonoff
Charles Hall et al., The Need to Reintegrate the Natural Sciences with Economics
http://www.eroei.com/pdf/Need_to_reintegrate.pdf
Biophysical Economics
http://web.mac.com/biophysicalecon/iWeb/Site/Welcome.html
Charlie Hall's web page at SUNY/ESF:
http://www.esf.edu/EFB/hall/
Kurt Cobb: Faith-based economics: Peak oil and the "Cornucopians"
http://resourceinsights.blogspot.com/2004/11/faith-based-economics-peak-oil-and.html
Post-Autistic Economics Network
http://www.paecon.net/
And to understand how energy is the key input to any economy, esp. a "growth" economy, see:
Charles Hall et al., Chapter 5 - Peak Oil, EROI, Investments and the Economy in an Uncertain Future
http://web.mac.com/biophysicalecon/iWeb/Site/Downloads_files/20080905145802141_000.pdf
re 14 & 10, I'd say "shame on scientific Americans"! I thought the evil usurers had better control of our mass media than this. (Note none of the references above are even learned journals)
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