Archive for November 25th, 2010

Economics in 2036

I tried to avoid block-quoting in my last post, which was intended as more of an essay. Here are some follow-up points on the question of where and how economics can go.

Nassim Taleb, whose black swans I mentioned minutes ago, has a post with some predictions about our world in 2036. I think that he and I may think alike on how to approach the environment:

Science will produce smaller and smaller gains in the non-linear domain, in spite of the enormous resources it will consume; instead it will start focusing on what it cannot—and should not—do. Finally, what is now called academic economics will be treated with the same disrespect that rigorous (and practical) minds currently have for Derrida-style post-modernist verbiage.

Of course, Taleb doesn’t offer much of a vision for economics and science going forward, because that wasn’t in the scope of his post. Now, my last post certainly offered one vision for what a different economics can look like, but is limited by the scope of my own knowledge and understanding. Julie Nelson, on the other hand, is an accomplished economist and has a great open comment to the NSF on next-generational research challenges. You should read the whole thing, as she gets at many of the points I made in my previous post, but elaborates on them better than I ever could. Here’s are some of her best sentences:

There is, however, another solution, which involves recognizing the inescapable intertwining of fact and value, while continuing the systematic search for reliable knowledge. Amartya Sen has called this “transpositional” objectivity.  This (in fact more exacting) standard of objectivity requires that the viewpoints and values underlying the analysis be brought out into the open and subjected to scrutiny…

Re-evaluating the role of ethics in economics challenges assumptions that are deep-seated in the mainstream of U.S. economics. Accordingly, improving economic analysis of climate change will require a multi-pronged effort…The rising generation, given their energy and larger stake in the outcomes of  climate change policy, should be a key part of this transformation…

As Nelson points out, shifts like this one require funding bodies like NSF to embrace a new vision for economics. If more economists like Nelson speak up and NSF pays heed, economics in 2036 will look a lot more like an economics of Stewardship, and today’s academic economics will indeed look simply arachaic.

P.S. I wrote my entire last post without mention of the Catholic Social Tradition in stewardship. It would be an understatement to say it’s greatly informed my thinking of these issues. The best starting point on that topic is JPII’s Sollicitudo rei socialis. The USCCB’s pastoral letter is also helpful on these issues.

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I apologize for my light and sporadic posting recently. I transitioned jobs on Monday, and right now is the first chance I’ve had to sit back and think, relaxing in my old bedroom at the Krafft (suburban) homestead.

It’s always nice to have a chance to gather with family, reunite with old friends, and give thanks. The symbology of Thanksgiving, though, gives one pause- it’s mainly full of myriad ways in which we as people have become masters of our domain, breeding and slaughtering domesticated turkeys, conjuring something known simply as “stuffing”- yes, we’ve mastered the art of celebrating our abundance. Now, don’t jump off the boat here- this isn’t some environmentalist rant. Ok, it kind of is.

I thank Mark Thoma for linking to a blog I haven’t seen before, the Ecological Headstand. Its most recent post reexamines the idea of our economy and our ecological footprint. Reading it this morning flipped my mental approach to this day of abundance. Rather than taking for granted the gifts that the lucky among us reap from the Earth, I think it’s important to examine our attitudes towards this abundance, and how our economics of abundance reflects this attitude.

In the interest of evading nuance, I think there are essentially two approaches economics can take to the environment- an economics of Mastery, and an economics of stewardship. The economics of Mastery is best exemplified with standard cost-benefit analysis, measuring the costs without respect to externality and distribution, and the benefits without respect to hidden damages and long-run scarcity. It’s curious that at introduction, most present economics as a study of scarcity, because when it comes to our environment and natural resources, our typical economics of Mastery seems to presume nearly boundless abundance. Any abundance, of course, can be overcome by our mastery of the environment- there will always be a better fertilizer, a new fuel cell, by which we can circumvent natural limits- until, of course, we simply can’t.

What, then, is an economics of Stewardship? I’d make three main points, all borrowed from previous posts on other thinkers. The Headstand post I linked earlier, which inspired this post, makes the key first point- we cannot double count environmental destruction. That is to say, if we destroy the environment in time period 1 and ignore that loss, we can’t simply add again to GDP in time period 2 when we pay for the recovery (and we will pay). So, an economics of Stewardship will make every effort to measure and incorporate costs of depletion and destruction. Of course, we will struggle to accurately assess natural value streams, so an economics of Stewardship will recognize the limits of its methodology, and treating the environment as an equal to the economy, give it the benefit of the doubt.

The second issue is how we weight benefits and costs over time. Economists of mastery argue for higher discount rates, pegged near real GDP growth or real return on capital. They show that if you do otherwise, set it too low, then we will end up with a paradox of greater environmental value in time period 50 or 60 than GDP. This is ok, because remember, it’s GDP that’s flawed and can’t internalize the environment. Low discount rates are an embrace of stewardship because they recognize that others in the future are to benefit equally from abundance as us in the present. Worry not that they might be richer, smarter, or stronger- natural abundance is still the inheritance of all.

Third and finally, an economics of Stewardship embraces the uncertainty in the natural world. Black swans can exist in the environment, and they are not limited to possible effects of anthropogenic global warming. There are unknown unknowns here. An attitude of uncertainty is a key break from the economics of Mastery, which mainly traffics in knowns, and occasionally in known unknowns. Humble stewardship, though, recognizes that abundance is fragile and complex, and events can occur that are outside the bounds of our current scientific knowledge.

It’s easy to become complacent about what we have and what we are used to. Mainstream economics claims to be about scarcity, but is really about mastery. A humble attitude toward our environment must inevitably lead to a new economics, in which we methodologically embrace our roles as stewards, simultaneously parts and guardians of the abundance around us. I hope you’ll join me in taking part in humble thanks on this wonderful day, and examining your role as a steward, and not a master.

Happy Thanksgiving.

Update: I reflect a bit on some others’ thoughts on the future of economics in my next post. Consider it the substantive compliment to this more emotive essay.

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