One does not have to a scientist to realize that these assumptions make no sense at all in scientific terms. In these terms, markets are open systems that exist in embedded and interactive relationship with environmental systems. Natural resources are clearly exhaustible, and our over-reliance on some of these resources, particularly fossil fuels, could soon result in irreversible large-scale changes in the global climate system. The natural environment is not separate from economic processes, and wastes and pollutants from these processes are already at levels that threaten the stability and sustainability of virtually all environmental subsystems. Last but not least, the limits to the growth of the global economy in biophysical terms are real and inescapable, and the assumption that market systems can perpetually expand and consume more scarce and nonrenewable natural resources is utterly false. (3)
A Green Thumb on the Invisible Hand
When mainstream economists are confronted with the charge that there is no basis in neoclassical economic theory for realistically assessing the environmental costs of economic activities and internalizing these costs in pricing systems, they typically deny that this is the case by appealing to the work done by environmental economists. This orthodox approach to resolving environmental problems is taught in universities and practiced in government agencies and development banks, and the solutions are almost invariably embedded in the mathematical formalism of general equilibrium theory.
When environmental economists calculate the environmental costs of economic activities, they assume that the relative price of each bundle of an environmental good, service, or amenity reveals the "real marginal values" of the consumer. The creators of neoclassical economics conceived of the construct of marginal values after substituting utility for energy in the equations borrowed from the theory in physics. In the resulting formalism, a marginal value essentially represents how much more a consumer is willing to pay to acquire incrementally larger amounts of a good, service or commodity. Note what the writers of a textbook on environmental economics have to say about the dynamics of this process:
"The power of a perfectly functioning market rests in its decentralized process of decision making and exchange; no omnipotent planner is needed to allocate resources. Rather, prices ration resources to those that value them the most and, in doing so, individuals are swept along by Adam Smith's invisible hand to achieve what is best for society as a collective. Optimal private decisions based on mutually advantageous exchange lead to optimal social outcomes." (4)
In environmental economics, the presumption that optimal private decisions "based on mutually advantageous exchange" lead to optimal social outcomes for the state of the environment is a primary article of faith. The environmental economists also assume that the mechanisms of the market system will resolve environmental problems when "prices are right." The right price in neoclassical economic theory is a function of the prices that economic actors have paid, or are willing to pay, to realize some marginal benefits of environmental goods and services.
Environmental economists often use cost-benefit analyses to place a value on environmental externalities, or environmental goods and services that are "external" to market systems in the sense that they are presumed to exist outside of the closed market system. The problem that these accounting procedures are intended to resolve is that "real marginal values" can only be determined by dynamics that operate within closed market systems. Given that the vast majority of the damage done to the natural environment by economic activities cannot be valued in these terms, environmental economists have developed indirect methods designed to estimate the "use-value" of these resources. (5)
For example, contingent valuation methods are used to assess the economic value of recreation, scenic beauty, air quality, water quality, species preservation, bequests to future generations and other nonmarket environmental resources. The methods are intended to assess the willingness-to-pay function of economic actors who would prefer to preserve natural environments (preservation or existence values), maintain the option of using natural resources (option values), and bequeath natural resources to future generations (bequest values). (6) Most contingent valuation surveys seek to determine the maximal amount that individuals are willing to pay for an increase in the quality of an environmental resource and the minimal amount they are willing to accept as compensation to forgo this increase.
For the sake of argument, let us assume that contingent valuation studies are capable of revealing maximal social outcomes of environmental policy decisions. Are we then to believe, as one such study showed, that reduction in chemical contaminants in drinking water was not important in economic terms because the value of a statistical life associated with a reduction in risk of death in 30 years was only $181,000? (7) Is $26 a measure of the real marginal costs of pollution because this is the average price that a household is willing to pay annually for a 10 percent improvement of visibility in eastern U.S. cities? (8) Is the value of a whooping crane the $22-per-year average that one set of households was willing to pay to preserve this species (9) and that of the bald eagle the $11-per-year average that another set of households would spend to preserve this apparently less valuable species? (10)
Mainstream Economics and International Treaties
One reason why the international community has not been successful in forging agreements that could resolve the environmental crisis is that countries involved in the process of negotiating these agreements routinely invoke the legal principle of state sovereignty to protect their economic interests. There is, however, another major reason why these agreements have not been effective. The economic interests that the representatives of nation-states are seeking to protect are based on unscientific assumptions about the dynamics of market systems in neoclassical economic theory. Another related problem is that these assumptions are embedded in the mathematical theories that serve as the basis for making cost-benefit analyses and the results of these analyses almost invariably indicate that the costs of implementing scientifically viable economic policies and solutions are greater than the benefits. The unfortunate result is that the scientifically viable economic policies and solutions are typically nothing more than distant memories when the terms of a final agreement are approved.
This explains why the United Nations Framework Convention on Climate Change (1992) failed to protect the climate system, why the Convention on Biological Diversity (1992) did not even begun to reduce losses in biodiversity, and why the U.N. Convention to Combat Desertification (1994) did not slow, much less reverse, this process. The U.N. Convention on the Law of the Sea (1982) and a host of other international agreements intended to reduce ocean pollution, prevent overfishing and protect endangered species failed to meet any of these objectives. Nonbinding principles that would promote more sustainable management of forests were agreed to at the U.N.'s Earth Summit (1992) but negotiations broke down prior to the point where a general framework convention could be articulated. A U.N. Convention on the Non-Navigable Uses of International Watercourses has been negotiated, but it has not gone into effect because some sovereign nation-states perceived this agreement as a threat to their economic interests. (11)
Scientific evidence may play a supportive and enabling role in some negotiations, but only as a minimum condition for serious consideration of an environmental issue. But what is not widely known is that these agreements made a mockery of the scientifically based solutions. In the vast majority of negotiations on a great range of issues, such as commercial whaling, hazardous waste trade, loss of biodiversity, conditions in the Antarctic, and ocean dumping of radioactive waste, the scientific evidence was not given serious consideration. When this evidence was perceived as a direct threat to the perceived economic interests of particular nation-states, it was either systematically ignored or explicitly rejected by the representatives of these states. (12)
Recent Developments in Mainstream Economic Theory
A fair number of economists over the past two decades, including such luminaries as Kenneth J. Arrow, have expressed doubts about the efficacy of neoclassical economic theory. However, the most direct challenges to axiomatic assumptions in this theory have been made by the game theorists. For example, these theorists have challenged the assumption that economic actors are supremely rational, obey fixed decision-making rules and are incapable of making bad decisions. In conventional neoclassical economic theory, the natural laws of economics allegedly determine the optimal outcome of an economic process and economic actors are devoid of all distinctly human characteristics. This theory also assumes that the realm of the economy is stable and unchanging and that economic actors are supremely rational entities who do not talk back. In opening the box of human subjectivity, the game theorists have been obliged to posit an increasing number of ad hoc variables to account for the decision-making of individual economic actors. And this explains why the history of game theory is marked by a continual regression into the staggering complexities of language and culture. As the economist R. Sugden puts it:
"There was a time, not long ago, when the foundations of rational-choice theory appeared firm, and when the job of the economic theorist seemed to be one of drawing out the often complex implications of a fairly simple and uncontroversial system of axioms. But it is increasingly becoming clear that these foundations are less secure than we thought, and that they need to be examined and perhaps rebuilt. Economic theorists may have to become as much philosophers as mathematicians." (13)
These criticisms and revisions of assumptions in neoclassical economic theory do not mean, however, that mainstream economists are in the process of developing a new theory predicated on a different set of assumptions. Virtually all of the advanced theoretical work in this discipline is premised on the assumptions that market systems are closed, self-correcting and self-sustaining. And the primary impulse in these theories is to disclose the hidden dynamics that move market systems toward optimal states of equilibria with the use of increasingly more sophisticated mathematical techniques.
The Two-Culture Problem
In my view the greatest obstacle to implementing scientifically viable economic solutions for global warming and other menacing environmental problems is not the claim that neoclassical economic theory is scientific. It is the two-culture problem famously described by British physicist and novelist C. P Snow in 1959. Snow was concerned that the single intellectual culture that existed prior to World War II was splitting into two cultures with social scientists on one side of the divide and scientists on the other. As it turned out, the two-culture problem was not resolved; each culture's members became increasingly isolated from the other's, and the divide eventually became a yawning chasm.
The schism between the two cultures of mainstream economists and environmental scientists is painfully apparent in the institutional frameworks and processes we now use to develop and implement economic solutions for environmental problems. The members of these cultures perform very different tasks and have virtually no contact with each other. This problem is further complicated by the fact that the language used on one side of the divide is virtually incomprehensible to those on the other, and the cultural differences are large. These differences range from alternate worldviews to disparate research methodologies and rules for gathering evidence.
The most expedient way to deal with this two-culture problem is also the most efficient way to begin the process of developing an environmentally responsible economic theory. The solution is to create institutional frameworks and processes for developing scientifically viable economic policies and solutions for environmental problems that require mainstream economists and environmental scientists to work closely together during every stage of the process. This idea is not as radical as it may first appear and there has already been some movement in this direction.
After Nicolas Stern, an internationally known development economist and former chief economist at the World Bank, was asked by the British government to prepare a report on the economics of climate change, he did something that no other mainstream economist with a similar reputation had ever done. He crossed over the divide and took an extended course on the science of global warming from environmental scientists at the Hadley Center in London. The 700-page report that resulted from this collaboration contained the first realistic assessment of the costs of reducing global emissions of greenhouse gases to levels where the most disastrous consequences of global warming are unlikely to occur.
But in order to make this assessment, Stern and the other economists who worked on the report were obliged to use methodologies that violate foundational assumptions in neoclassical economic theory. In a lecture that Stern gave to a group of economists a few months before the "Stern Review on the Economics of Climate Change" was released on October 30, 2006, (14) he explained why it was necessary to violate these assumptions. Stern began this lecture with a brief overview of the science of global warming with particular emphasis on the fact that the interactions between human and environmental systems are nonlinear and cannot be represented or described in the linear equations used by mainstream economists.
Stern then explained why global warming is not "a standard externality" problem and must be viewed as "international collective action problem." He also explained why the methodologies used by mainstream economists to evaluate the costs of economic activities are incapable of realistically assessing these costs. During the course of this lecture, Stern repeatedly told his fellow economists that any viable economic solutions for the problem of global warming must be predicated on our best scientific understanding of how this problem can be resolved. Equally remarkable, he also said that the resolution of this problem will require the very active involvement of governments and that the ethical dimensions of this problems extend well beyond the framework of any economic theory. (15)
If we do manage to create the institutional frameworks and processes required to develop an environmentally responsible economic theory, many mainstream economists and environmental scientists may be reluctant to cross over the two-culture divide and work on this project. But this resistance could be overcome if they realized that this is a once-in-all-human-lifetimes opportunity. The opportunity is to protect the lives of the 6.6 billion members of the extended human family and the future existence of their descendents by resolving the crisis in the global environment. If the opportunity to work on this project is understood in these terms, perhaps mainstream economists and environmental scientists will realize that there is no other work they could possibly do in their lifetimes that serves a greater good or answers to a higher calling.
Robert Nadeau is a professor at George Mason University. His most recently published books are The Wealth of Nature (Columbia University Press, 2003) and The Environmental Endgame (Rutgers University Press, 2006).
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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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