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Archive for April 29th, 2010

I’ve written a lot here about climate change and environmental economics, trying to point out weaknesses and blind spots in the cap and trade approach. Before I digress, then, let me say that I think getting ACES passed through the Senate would be a step in the right direction. Just like health care reform, I’m aware of the political limitations, disappointed in the state of the discourse, but realizing that right now, something better isn’t possible (unless, of course, the EPA shows it’s willing to get the job done without Congress- then, that would be preferable).

Today, though, 5 environmental groups said that the Senate bill simply isn’t good enough- it’s a step in the wrong direction. Let’s not over-interpret this. Tuesday, 31 environmental groups came out in favor, as the article notes. Nevertheless, I think opposition to the bill from the “left” demonstrates tensions between environmental groups and economists, and I find myself quite sympathetic to the environmentalists. Environmental Economics argues that these tensions should be set aside, that environmental economists are on their side:

Writers like David Roberts and Bill McKibben, who routinely characterize mainstream economics as somehow antithetical to environmental concerns, are inadvertently spreading the exact narrative that the Right wants everybody to buy into…The overwhelming majority of mainstream economists favor stronger environmental regulation on many fronts, especially climate change…The public needs to know that most of the leading minds in economics come down squarely in favor of strong climate change legislation, as well as efforts to improve water quality, clean air, and biodiversity protection.

I don’t disagree with much of what he says, but I think that the author ignores the root causes. Before I get into that, I’d like to highlight Frank Ackerman’s post at RWER about underestimating the social cost of carbon:

So far, the administration’s interagency working group that has been studying the SCC has come up with a range of values, with a “central” estimate of $21 per ton of CO2 in 2010, or roughly 20 cents per gallon of gasoline. Over time, the SCC would rise, but only to $45 per ton (in 2007 dollars) by 2050…

But this doesn’t need to be the last word. In fact, it absolutely shouldn’t be, because the analysis that led to that number is based on deeply flawed economics, omissions, and poor value judgments…

For starters, it relies on an overly narrow review of climate economics, relying on a handpicked set of models — FUND, PAGE, and DICE — that happen to produce very low SCC estimates. All three models have serious problems…

We also found that the working group was aggressive in “discounting” the value of future costs, considering rates of 2.5 to 5 percent per year that trivialize future damages…

A last and very serious concern is that the SCC calculations don’t take into account the small but hugely important risk of catastrophic climate damage…

There are too many open questions in the SCC calculation to recommend a precise alternate value based on the information now available; there is a need for more extensive research, examining the full range of available studies of climate damages and costs, and analyzing assumptions about the risks and magnitudes of potential climate catastrophes. In the United Kingdom, where carbon pricing and cost calculations have a longer, better-researched history, the latest estimate is a range of $41 to $124 per ton of CO2, with a central case of $83.

I don’t think Ackerman’s concerns can be easily explained away, and I’m willing to duke it out in the comments over each assertion. The upshot of his assertion is that there is a lot of play in these models for a number of parameters. Sure, we could take the three issues (climate model, discounting, and fat tails) and produce a 3-D table of SCCs under every permutation. We could even take the middle estimate in each parameter, get our number, and go home- it would probably end up a lot higher than $21/ton. However, that still wouldn’t get to the heart of it.

The problem is that economists, as the go-to people on this issue lately, are being asked to make “value judgments,” as Ackerman rightly puts it, on these 3 issues. And they are value judgments- I’ll argue that one too. Economists should not be deciding what the future is worth, what the value of a catastrophe is, or the relative value of a life across countries. So, even if most environmental economists got in the game because they love the environment, they’ve been corrupted by the play in these parameters, and the ease with which their assumptions can generate a nice number (I’m not trivializing their models, which were undoubtedly the fruits of hard labor of thought). They can assume whatever to generate the number that “looks” right, i.e. gets something done and is politically feasible.

But that’s not the role of economists. The role of economists is to allow the debate to center where the center actually is. By making choices they shouldn’t be allowed to make, they force environmentalists to compromise twice: once to get the number that “looks right,” and then once again when the politicians bear their claws and create a neverending set of loopholes. I suppose having written all of this, and working up quite an angry sweat, I’m something of an environmentalist. I don’t have any beef with environmental economists for the work they do- rather, it’s their place in the system, and how their work gets used, that I tend to oppose. It’s the system, man. It’s unfortunate, but that’s why environmentalists don’t trust economists.

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I’ve found a number of the comments on my post about utility maximization to be helpful and clarifying, and I’m convinced as ever that we need to throw it out. I’m mainly focusing here on posts that either confirm or deny my assertion that it should be thrown out, and leaving out the certainly relevant and helpful comments on why economists rely on it/what it implies.

First, Tom Hickey wrote:

the subliminal worldview of most people is not internally consistent, because it is not consciously constructed or intentional arrived at. A lot of people don’t pursue goals that they would if they had different norms, for example.As a result, most people are conflicted much of the time. They control their “base nature” through the imposition of value-structures, religious and moral codes, ethical standards, and positive, for example, and this is an internal conflict that manifests in decision-making. Some of these decisions are economic choices that are not necessarily utility maximizing in the rather simplistic way that many economists consider, e.g., pursuit of self-interest.

Kevin disagreed with both Tom and me:

On the other hand, assuming someone doesn’t maximize over preferences seems very, very strange. Surely we are guided by passions, but we are not machines. To the extent that we have what philosophers call “human agency”, then we are attempting to do what we think is best for us. That simple idea turns out to be a very powerful paradigm of the world…

 Social science is too complicated to know *exactly* why something happened. As such, our models will, by definition, be wrong sometimes. A better criteria for models is whether they are useful!

And later:

Note further that max u does not require people to do what’s “in their best interest”: as an economist, I don’t even know what term could mean. I only care that they have some preferences and maximize over them, harmfully or beneficially.

Even if you find that restriction too strong, max u may still be salvaged to the extent that most economic models only care that people act “as if” they maximize utility…I think it’s madness to say that humans aren’t purposeful. It is very, very easy to get people to react to incentives

David Youndberg jumped in:

I’m surprised you say “it’s hard to argue that individuals are maximizing anything.” People are maximizing things all the time! They buy more during sales…

Does this risk being tautological? Perhaps, but if you want to expand the number of things economics explains, that’s a natural danger.

My reply:

This fallacy, that humans are so purposeful, is what is woefully misguided. This may be a cheap shot, but I think the main reason it persists is because people who are attracted to economics tend to act so “purposefully” themselves…

I meant to say, they aren’t consistently maximizing anything, at least not in a measurable way…The tradeoff of simplicity for a tractable model is not a worthwhile one when the model turns out to do an awful job of predicting how the economy actually works. Yet economists cling to it…

I was too strong when I said humans aren’t purposeful. I meant they are not consistently purposeful. They also consider a host of changing norms and ideals that cannot be modeled. These things can neither be measured (at least right now) nor assumed away.

Finally, I think Sandwichman really brings it to the table. His comment is the sort of thing I would like to write if I understood these things much better:

The gestalt theory of figure and ground is apt here. What counts as figure and what counts as ground is a cognitive choice the mind makes based on subjective experience. Maximizing utility is something that only occurs after we’ve identified what we think the figure is. The illustration of Rubin’s vase demonstrates what happens when the information is ambiguous and could be read either way. It’s also a simplification in that the ambiguity is only two-way. There can also be multi-layered ambiguity. This is what people mean when they talk about uncertainty.

Kevin presents a very articulate defense of utility maximization that sidesteps the fundamental nature of uncertainty. It’s not a matter of satisficing meeting the criteria of maximization, it’s a matter of not knowing and not being capable of knowing what one’s preferences are. The problem with neoclassical economics is that economists have picked some trivial examples of consumer preference and generalized from them. It seems intuitive if you’re talking about preferences between, say, beans and brocolli. The whole preference ordering game works there only because… it doesn’t really matter. For all intents and purposes it’s “reversable”.

On big ticket items, though (things like career, life partner, domicile), the distinction between figure and ground is fundamentally uncertain. Economists have swept that huge difficulty under the rug by treating these as a “normal goods” the preferences for which can be modeled by generalizing from trivial and totally dissimilar examples of commodity preferences. Even the choice between war and peace can be trivialized to choosing between guns and butter.

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