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A Not-So-Nobel Prize for Growth Economists

William Nordhaus shaping vulnerable minds in his Yale classroom – Oct. 8, 2018.  (Photo credit: Yale/ ©Mara Lavitt)

by Brian Czech

How ironic for the Washington Post to opine “Earth may have no tomorrow” and, two pages later, offer up the mini-bios of William Nordhaus and Paul Romer, described as Nobel Prize winners.

Without more rigorous news coverage, few indeed will know that Nordhaus and Romer are epitomes of neoclassical economics, that 20th century occupation isolated from the realities of natural science. Nordhaus and Romer may deserve their prizes for economic modeling, but each gets an F in advanced sustainability.

Nordhaus won his prize (actually the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”— not the Nobel Prize per se) for his mastery of mathematical modeling. He applied his skills to carbon taxes for lowering greenhouse gas emissions. All along he prescribed economic growth – the key driver in greenhouse gas emissions—as the way to afford such taxes!

In 1991 Nordhaus uttered one of the most iconic sentences in the history of unsustainability: “Agriculture, the part of the economy that is sensitive to climate change, accounts for just 3% of national output. That means that there is no way to get a very large effect on the US economy” (Science, September 14, 1991, p. 1206).  Think about that. He must have set a graveyard’s worth of classical economists (Adam Smith, David Ricardo, John Stuart Mill…) to rolling. They’d be rolling in laughter if the folly of Nordhaus wasn’t so dangerous.

No follow-up should be needed to expose the ludicrous nature of Nordhaus’s statement, but just in case: Agriculture is the very foundation of the economy. No agriculture, no anything else. Think about it. Any hit on agriculture—whether from climate change, bad luck, or stupid policies—has a magnified effect on the entire, integrated economy. Nordhaus’s “3%” statement was a classic case of ivory-tower cluelessness.

Too many trees for seeing the forest?

Romer, meanwhile, deserves some credit for his elegant theory of “endogenous technological change,” which took the work of Robert Solow (the father of economic growth theory) to the next level by describing in nuanced detail how R&D leads to technological progress. That said, there has never been a bigger forest missed for so many trees. For him, all that mattered was capital and labor; he said nothing about land, natural resources, or the environment.

Some readers may recall Julian Simon, the ultimate Pollyanna who claimed in the 1980s (and I paraphrase after thoroughly reviewing his 813 page Ultimate Resource II during my post-doc studies), “Sure, there are environmental problems caused by growth, but the more people we have, the more brains we have to solve the problems. Therefore, the more people we have the better, without limit forever.” Romer’s work amounted to a highly nuanced repetition of Simon’s self-christened “grand theory.”

Romer said in a nutshell: We have capital and labor. Part of the labor force is devoted to research and development (R&D). As limits arise, we get over them with more R&D. So we need ever more people, with ever more devoted to R&D, to keep raising the bar for GDP.

For Romer, it was as if ideas alone could overcome water shortages, biodiversity loss, mineral depletion, soil erosion, pollution, and climate change. As if ideas could be perpetually borne out of human minds struggling in a degrading environment, a warming climate, and an imperiled agricultural base (not to mention a crowded, noisy, and stressed out society). Romer was like a cook thinking up recipes with no idea where the ingredients would come from.

A generation and then some of economists and business students have been led to the exceedingly dangerous myth that there is no limit to either population or economic growth. Nordhaus and Romer have done as much as anyone to lead them into such a fallacy. Yet politicians and publics heed their advice, while the media regurgitates their fallacious notions.

Does Earth have “no tomorrow,” as the Washington Post wondered? One thing is for sure: Any hope for a happy tomorrow on Earth means rejecting the neoclassical economics of today. Even when such economics wins the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.”

 


George Will, Doomsday, and the
  Straw-Man Sighting

by Brian Czech

A funny thing happened on the way to this column. Right when I was ready to accuse Washington Post columnist George Will of building another straw man to tear apart, one of Will’s straw men appeared! It’s as if Will himself cued it up, as I’ll describe in a bit.

Meanwhile don’t get me wrong. Will isn’t right about a lot. He has long been loose with the facts on environmental issues, denying the causes and effects of resource scarcity, pollution, and climate change. His vision of perpetual economic growth is neoclassical naiveté. He displayed it again with “Calls for doomsday remain unheeded.”

Will stubbornly remains a fawning fan of the late perpetual growther Julian Simon. No one likes to criticize the deceased, and Will counts on this and other social conventions to protect himself from critique. (Recently he hid behind society’s respect for Native American tribes to shoot at federal government clean-air efforts.) But it’s not a fair tactic, I’m not falling for it, and Simon was no saint anyway. Simon’s culminating book (The Ultimate Resource 2) was the shoddiest semblance of “scholarship” I’ve ever seen, as I described at length in Shoveling Fuel for a Runaway Train. For Will to stick with Simon after all this time is a red flag over the teeny terrain of his scientific credentials.

Will has even been sucked into the junk-science vortex of Bjorn Lomborg, Simon’s disciple and darling of pro-growth propagandists like the Competitive Enterprise Institute. Will thinks “potential U.S. gas resources have doubled in the last six years,” as if even potential (not just economic) gas resources change with technology! No stranger to bad facts, Will says, “One of [Paul] Ehrlich’s advisers, John Holdren, is President Barack Obama’s science adviser.” In reality it was the other way around: Ehrlich was Holdren’s adviser. In other words Will uses a mistaken claim to unleash a twice-removed, guilt-by-association attack, all in one sentence!

Despite the fact that Will has the combined credibility of Barry Bonds and BP Oil on environmental and sustainability affairs, there are reasons for empathizing with him at times. In fact, one reason plopped in my inbox this morning! The sender, a sustainability activist, first quoted from a website of the Center for the Advancement of the Steady State Economy, “The CASSE position calls for a desirable solution — a steady state economy with stabilized population and consumption — beginning in the wealthiest nations and not with extremist tactics.” Then he went on to complain:

“Unfortunately, there is no ‘desirable solution’ — I wish there were… Industrialism is by its very nature a temporary phenomenon; in the process of perpetuating it we consume the natural resources — primarily finite, non-replenishing, and increasingly scarce NNRs — that enable it. Unfortunately the chickens are coming home to roost now — instead of 1,000 years from now — and there’s nothing that we as a species can or will do about it, except suffer the inevitable consequences.”

So when George Will talks pejoratively about “calls for doomsday,” he’s got that one legitimate point, at least. For someone (a sustainability activist no less) to claim there is no desirable solution to the problem of uneconomic growth is defeatist at best, and patently false besides. Just because a solution — such as a steady state economy running at optimal size — is difficult to achieve does not mean it is out of the question or undesirable. What we should all agree on is that perpetual growth is out of the question, and then strive for the best alternative, handling the growing pains (or in this case, the de-growing pains) along the way.

Next, to paint “industrialism” with such a broad brush that it cannot be sustained, period, is another target on the straw man’s back. We should expect Mr. Will to hit that bulls-eye every time. First of all, de-industrializing is no panacea; it’s easy to envision an unsustainable, non-industrial economy hell-bent on growth. More to the point, who is to say we cannot sustain some industrial capital and production, especially with the use of renewable resources (picture a sawmill running on hydropower), for such a very long time that no one would consider it unsustainable. The problem is perpetual growth — always expanding the capital base and trying to produce more — regardless of the mechanical means by which that growth occurs.

And then, to top it off with, “there’s nothing that we as a species can or will do about it, except suffer the inevitable consequences,” almost makes me wonder who is farther from the truth: Will or the sustainability activist. After all, the activist is either not doing anything “about it” after all, or considers himself too exceptional to be part of the human species. But I don’t, and CASSE doesn’t. We are trying to do something about it. That is, we’re advancing the steady state economy — a desirable solution — instead of sitting on our doomed derrières while lamenting the forces of “industrialism.”

I never thought I’d agree with George Will on a matter of sustainability, but I’ll admit one thing: The caricatures he constructs are not always comprised of straw. Doomsday straw does exist but, unfortunately, some sustainability activists wear it too well.

Two Schools and the Path to the Steady State

by Eric Zencey

All of economics is divided into two schools:  steady state theory and infinite planet theory.  They can’t both be right.  You’d think the choice between them would be obvious, but infinite planet theory still holds sway in classrooms and in the halls of power where policy is made.   Last month, though, brought a significant development:   the manager of a major hedge fund registered a carefully reasoned dissent from infinite planet theory.  And in doing so, Jeremy Grantham offered a glimpse of how and why steady state economic theory will ultimately come to prevail.

Grantham is the head of GMO LLC, a hedge fund with $100 billion under management. His latest letter to his investors was headlined “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”—a title that calls to mind the urgent warnings raised by steady-staters as far back as the 1970s.  Those warnings were dismissed by most economists as Chicken-Little fears that could safely be ignored—and the western industrial world proceeded to do just that.  Infinite planet theorists pointed to the work of Julian Simon, who argued that human ingenuity is The Ultimate Resource (as he put it in the title of a book). Since technology, a human invention, is a factor of production, and since human capacity for invention is infinite, there can be no resource limits to economic growth.  Infinity times anything is infinity, right?

You can get to that conclusion only if you ignore the laws of thermodynamics. However inventive humans have been or may yet prove to be, they’ll never invent a way around the first and second law.  You can’t make something from nothing and you can’t make nothing from something (the first law).  You can’t push a car backwards and fill the gas tank (the second).  Together these laws rule out perpetual motion, schemes in which energy is created out of nothing or recycled and used again.

In steady state theory, the economy is seen as a thermodynamic machine, drawing in matter and energy, processing them with more energy, and excreting a high entropy wake.  The economy thus has two ecological footprints:  one on the uptake and one on the discharge side.  Since both footprints land outside the abstract world of theory and in the physical reality of a finite planet, neither can increase forever.

Economists might have put these truths into practice decades ago.  Had they done so, they would have been in good company.  Physics had its thermodynamic revolution in the person of Albert Einstein, whose path from Newton to relativity began with thermodynamics, as he played out the un-mechanical implications of the second law.  (Mechanical motion is reversible; energy use is not.)  Biology was transformed in the 1920s and 1930s, as biologists saw that evolution is driven by competition for energy, which structures and maintains ecosystems—food webs—in which sunlight becomes green plant then herbivore, carnivore, detritivore.

Why, then, has the thermodynamic revolution in economics been postponed? The question will intrigue historians of the future, who will wonder at the profligacy of our culture and our cavalier disregard for ecological limit.

Part of the answer is the bet that Julian Simon made in 1980 with population activist Paul Ehrlich.  Simon maneuvered Ehrlich into wagering on the future price of any group of resources that Ehrlich cared to pick:  if Simon’s theory was right, he claimed, the prices would be lower within ten years.  Simon won.

His victory was widely taken as proof of his infinite planet theory, despite the obvious flaw in it.  The market price of any commodity is a human construct, the result of market supply and demand, not an indicator of scarcity in any absolute sense.  From a limited stock of a finite resource—oil, say—we can choose to extract the resource at a greater or lesser rate.  If the rate at which we pump oil out of the ground exceeds the rate at which demand for oil increases, the market price will fall.  This doesn’t prove that oil is plentiful, let alone infinite.  It doesn’t prove that we’ve invented our way around the laws of thermodynamics.  It merely proves that we’ve extracted oil fast enough to keep its market price from rising.

Grantham goes head-to-head with Simonism not on these theoretical grounds but with solid empirical evidence:  commodity prices are rising and aren’t likely ever to come down again.  Volatility in prices can be assessed by looking at change in terms of standard deviations from the mean:  how big, exactly, are the swings, as measured against average variability over time?  Sharp increases in the prices of significant commodities since 2002 fall well outside the standard deviation; for iron ore, the rise has been 4.9 times the standard deviation, a result that (Grantham tells us) has a one in 2.2 million chance of being “normal” variation.  More likely, it signals a new and different reality.  For coal, copper, corn, silver, sorghum, palladium, rubber, etc., the odds aren’t as long, but still pretty sizable:  one to 48,000, one to 17,000, one to fourteen- and nine- and four thousand.  This basic, deep-seated trend lies beneath the statistical noise—price spikes and troughs, including those created by speculation and subsequent “market corrections.”

Based on this analysis, and on a review of energy use that reaches back to when wood was our primary fuel, Grantham concludes that we have entered a new era:  we are on the cusp of what he calls The Great Paradigm Shift, “one of the giant inflection points in economic history”—the moment, he warns, that lies at “the beginning of the end for the heroic growth spurt in population and wealth caused by…the Hydrocarbon Revolution.”

You don’t find too many economists, let alone market analysts, reaching back to look at energy use before the era of coal.  In the infinite planet neoclassical model, anything before James Watt is quaint and distant, and everything before Adam Smith is simply darkness.  It’s true enough that steam-driven factories, embodying the division of labor that Smith celebrated, were game changers, leading to phenomenal economic growth; but you can’t see the scope of the game, or even begin to see that it has an end, unless you put those inventions into an historical and geophysical perspective that reaches back before Watt and Smith.

That’s why the Industrial Revolution is more properly called the Hydrocarbon Revolution.  In focusing on the machinery, “Industrial Revolution” leads us to think that the engine of economic growth was human invention—and thus leads to the mistaken idea that more and better invention will let us increase productivity forever.  “Hydrocarbon Revolution” makes clear that the modern economic miracle has thermodynamic roots.  Economic history changed when we began systematically to exploit a new stock of energy, the stored fossil sunlight of coal and oil, with its historically unprecedented rate of energy return on energy invested (EROI)—as high as 100:1 for oil in the early part of the twentieth century.  “Hydrocarbon Revolution” reflects the reality that the enormous productivity gains of the machine age are rooted in that very favorable EROI.  It also implicitly includes the warning that the modern economic miracle must end when this stock of thermodynamically cheap energy is used up.

The essence of steady-state thinking is that we have to shape our economy to operate on a finite planet, within a stable, sustainable budget of matter-and-energy throughput.  That throughput has to be sized so that the economy’s two footprints fit into the available ecological shoes.  Grantham has noticed that one of the shoes is pinching, and he’s begun to articulate the reasons why, to an audience highly motivated to listen.  If they heed his warning— “From now on, price pressure and shortages of resources will be a permanent feature of our lives”—the considerable engine of self-interest will be hitched to the adoption of steady state economic theory.

If practitioners adopt steady-state principles, the economists who theorize about them can’t remain far behind.

Upton Sinclair once observed, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”  In the past that logic has worked against the spread of steady-state thinking.  Now the logic has turned:  if you want to make money, you’d better acknowledge reality, including the reality that on a finite planet there are limits to growth.  To those of us concerned about the fate of a civilization that’s outgrown its ecological niche, this is a welcome development.

Make It Forty-Four Shades of Green

BrianCzechLast month in “Forty Shades of… Less Brown?,” I described the principle of increasing marginal brownness. This principle establishes that the process of economic growth invariably entails an environmental “browning,” even though some growth regimes are less brown than others. The idea is to use the brown portion of the color spectrum in framing discussions of economic growth. Otherwise it is too easy to fall for the seductive and dangerous rhetoric of “green growth.”

Don’t let the title of this week’s column fool you. I haven’t been drinking the Green Kool-Aid. This week we’re using the green portion of the spectrum, alright, but in a surprisingly different context.

You may recall that I concluded last month’s column with a stunning observation from the Eastern Economic Association conference in Philadelphia. Despite the stereotype we have of economists as wild-eyed growth-at-all-costers, pumping their fists for perpetually increasing GDP, something new was afoot in Philly. In fact, the overwhelming majority of economists I spoke with agreed wholeheartedly that there is a fundamental conflict between economic growth and environmental protection. They acknowledged limits to growth and even concurred that wealthy nations, at least, should adopt the goal of a steady state economy!

“Proove it,” you said? I offered to do just that.

Proving it is easy, thanks to the CASSE position on economic growth. The CASSE position states precisely that there is “a fundamental conflict between economic growth and environmental protection.” It also states that a steady state economy “has become a more appropriate goal in large, wealthy economies.” Forty-four conferees signed the CASSE position right there in Philadelphia. So there’s your proof!

Only a few conferees that I spoke with declined to sign the CASSE position, at least for the time being. Even these few may lend their good names at some point. None were openly opposed to it, either, and it is not uncommon for a prominent scholar (the type I sought) or public figure to ponder the significance of a statement for some time prior to signing it. But for EEA leaders past and present (such as Ingrid Rima and Steven Pressman, respectively), the CASSE position contained little to even hesitate about.

So what’s going on here? What happened to our stereotype of the professional economist as denying limits to growth, based on simplistic notions of perpetual technological progress? After all, that stereotype is not without a basis in fact. Examples abound, and one of my personal favorites (in a sense) was the wackiness of one Robert Bradley: “Natural resources originate from the mind, not the ground, and therefore are not depletable.” This, while receiving the Julian Simon Award from the Cato Institute! (Simon is another story altogether, which I covered in Chapter 4 of Shoveling Fuel for a Runaway Train). The stereotype was not only well-deserved but proudly flaunted during decades of neoclassical nuttiness.

Therein lies a key word: “neoclassical.” This is the brand of economics most responsible for our stereotype. Neoclassical economics is exemplified and promulgated by the Chicago School, and it’s increasingly credited with a variety of crisis-causing shortcomings. A short list of neoclassical icons would include Frank Knight, Milton Friedman, and Alan Greenspan. Let it be quickly said that these are (or were) no dummies, but neither should they have been expected to know everything, or even something, about ecological affairs and long-run economic sustainability. And these are (or were) the cream of the neoclassical crop.

As a matter of lingo, at least in the U.S., the neoclassical brethren have recently been labeled “freshwater” economists by themselves and by journalists, indicating the prominence of Chicago and some other inland schools as bastions of neoclassical thought. This is probably a welcome development for many neoclassicals who would gladly trade the stigma of “neoclassical” for the cleanly sound of “freshwater.”

Our stereotype of the GDP Growthman, then, should have always been attributed primarily to neoclassical economists, not economists at large. The problem for sustainability is that the neoclassicals comprise a large and influential portion of economists, especially those appointed to government posts and those running the Federal Reserve System. That shouldn’t be a surprise, when you think about the influence of Big Money in government and academia. The historical linkage of Big Money and neoclassical economics is described in Mason Gaffney’s Corruption of Economics, among others.

But our focus is these other, non-neoclassical economists, so prominent at the EEA conference. Who are they? To start with, there are the Keynesians, neo-Ricardians, Austrians, Sraffians, Marxists, and Georgists (some of my personal favorites). There are also the “saltwater” economists who tend to synthesize neoclassical and Keynesian thought. There are numerous subdivisions among these broad categories, too, such as “red” Marxists, “green” Marxists, and even Marxists who conclude, like Marx did, that “I am no Marxist.” The point is that many, and perhaps a large majority, of these economists would reject the neoclassical notion of unlimited growth, if given the chance.

Of course, we also have ecological economics, for which limits to growth is the starting point and top priority for analysis and policy reform. The fact that there is a limit to economic growth is not an “assumption” in ecological economics, but a scientifically sound and nuanced conclusion, and other topics in ecological economics must square therewith. I hesitate to list ecological economics among these other schools of thought, though. Ecological economics doesn’t yet have the historical cachet or the strength in numbers, certainly not of the Keynesians, Marxists, or neoclassicals. Nor does it have a strong presence in the policy arena, yet.

Perhaps more importantly, unlike these other traditions in economics, ecological economics is as much ecology as economics. It is sometimes described as a “transdiscipline,” transcending even an “interdisciplinary” approach of combining environmental and economic concerns. Ecological economics is not just about applying another twist from the social sciences to economic affairs. Rather, it is about basing the social science of economics on a solid foundation of natural sciences, especially physics and ecology. At this point in history, with a crowded planet replete with climate change and a burgeoning list of endangered species, falling over like canaries in the coalmine, ecological economics should become a presence in conventional economic affairs.

That brings us back to the EEA. Unlike the American Economic Association, historically dominated by neoclassical economists, the EEA is known for its openness to the various schools of thought. Economists of all ilks, including neoclassicals but not excluding the others, assemble at the annual conference. In Philadelphia, for example, Gregory Mankiw gave the presidential address, marking his exit as the figurehead of the EEA and making way for the presidency of Duncan Foley.

Foley is a free-ranging, highly respected economics professor with a remarkably diverse approach that defies categorization. Meanwhile, Mankiw is squarely in the neoclassical hall of fame. A leading author of neoclassical textbooks, Mankiw served as the Chairman of the President’s Council of Economic Advisors under George W. Bush. Yet, when I talked with him about the CASSE position on economic growth, even he seemed curious and willing to consider the merits. This may reflect the saltwater in his intellectual veins. It might reflect a healthy dose of common sense, too. Perhaps this neoclassical icon will be a CASSE signatory at some point.

Although the neoclassical stereotype has a basis in fact, some benefit of the doubt should be allocated to the neoclassical forebears. After all, the Knights, Friedmans, and Greenspans of the neoclassical world cut their macroeconomic teeth in an age dramatically different from ours. Even conservation heroes such as Rachel Carson and Aldo Leopold, mid-century contemporaries with the neoclassical icons, weren’t talking clearly about limits to economic growth. You can almost read about it between the lines (especially the last lines of Leopold), but explicitly describing the conflict between economic growth and environmental protection is only a recent development, even among the ecological professions. Furthermore, it’s slow going there, too. One organization, the Ecological Society of America, is still sipping the “sustainable growth” Kool-Aid (sickening a considerable share of members in the oxymoronic process).

The point is that neoclassical economists should not get all the blame for promulgating economic growth beyond the optimum, also known as “uneconomic growth.” The fact is, many of them may be undertaking a paradigm shift and may soon shed the stereotype they inherited. Mankiw, for example, didn’t get where he is by being oblivious to world affairs or unable to adapt. If a scholar and leader of his ability had received his education in the ecological sciences along with economics, he conceivably could have been a steady state economist on par with Herman Daly. The CASSE blog might be called The Daly News and Mankiw Views. Furthermore, to the extent that Mankiw and other prominent figures in neoclassical economics are noting the world around them, and are “shocked” (as Greenspan allowed) in retrospect by the shortcomings of neoclassical economics, it isn’t too late for them to part with their perpetual-growth past.

While talking with Mankiw in Philadelphia, I noted the stark contrast with the conversation I’d had with Robert Lucas (the Chicago School growth theorist) after his presidential address, for the American Economic Association. I asked Lucas if he thought there was a limit to economic growth, and he automatically replied, “No, that’s what technological progress is for.” It was as if I had tapped his knee with a rubber hammer, and his perpetual-growth kick was instantaneous. This may not be entirely a matter of his freshwater, neoclassical lineage, though. It’s been 8 years since I questioned Lucas, and a lot of economic and ecological crises have probably shaken the faith of neoclassicals in the intervening years. Certainly a lot of faith in the neoclassical school has been shaken, which presumably would engender some re-inspection of neoclassical theory.

If Lucas is impervious to critique, or too stubborn to re-inspect his neoclassical paradigm, and fails to apply his renowned calculus to growth limits, he will forfeit what could otherwise be a grand finale of applied and important mathematics. Instead, he will be a last bastion of an unsustainable, stereotypical, 20th century neoclassical mistake. Other economists that have thought their way through the perpetual-growth nonsense, identifying the key ecological principles with due diligence, will take his place in the annals of economic thought.

That brings us back to the EEA conference and the conclusion of this week’s Daly News. The professional economists, professors, and students populating the EEA were fun, smart, and even inspirational to be with. In turn, many of them were inspired by the CASSE mission, with forty-four of them signing the CASSE position on economic growth. That included Georgists, Keynesians, Marxists… even some neoclassicals of a “kinder, gentler” sort for the 21st century. So it is a pleasure, a fond memory, indeed an honor, to conclude by celebrating the fine, forward-thinking members of the EEA. Although the right color to use in economic growth discussions is brown, a good way to describe the EEA economists is with forty shades – actually, make that forty-four shades – of green!