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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.”

 


Gross Domestic Problem: Don’t Shoot the Measurement

by Brian Czech

BrianCzechA battle is brewing on the outskirts of the general public. A rising tide of quixotic activists is trying to overthrow a time-tested American institution. Like the Battle in Seattle, where the IMF was put on public trial, this new struggle will get a lot of attention, but the institution will remain.

The “institution” in this case is a metric: GDP, or Gross Domestic Product. But GDP isn’t any old metric, like widgets assembled or the price of potatoes. GDP is thoroughly institutionalized at the center of our domestic policy arena. When fiscal and monetary policies are crafted, each is judged according to the likely effects on GDP. If something will increase GDP, it must be good and will likely be adopted. GDP growth is the king of policy goals.

The central logic of pursuing GDP growth is “a rising tide lifts all boats.” As long as GDP continues to grow, it is mathematically possible to have more jobs and increase the amount of GDP available per person. In other words, the “standard of living” can increase with GDP.

The rising tide logic made perfect sense during most of the 20th century, when there was a lot of open water and plenty of boat-building material. But such is not the case in the 21st century. Growing the GDP entails population growth or growth in consumption per person; usually both. Trying to grow the GDP these days causes as many problems as it solves. Biodiversity loss, climate change, and pollution are some of the obvious ones. Noise, congestion, and stress are too. It doesn’t look like GDP growth increases the standard of living after all, unless your idea of living standards is particularly anal.

Keystone Protest

GDP measures environmental impact and the size of our economy, not its health. Photo Credit: Stephen Melkisethian

A more nuanced problem is that GDP growth is addictive, kind of like NFL football or World Cup soccer. It has societies and governments all over the world scrambling like hamsters to keep “the score” from shrinking. Crazy things are done in the name of GDP growth: huge rivers are dammed, Keystone pipelines are built, Supreme Courts kick people out of their homes. (Remember Kelo vs. New London?) A society hell-bent on GDP growth is like a junkie doing whatever nasty thing it takes for the next high, rather than doing the right thing for himself and his family.

Yet the realization is gradually spreading that GDP growth can’t continue forever. This reality is causing societal angst and discomfort. For many, especially in the economics profession and business world, the response is denial. “The world can, in effect, get along without resources” is how Robert Solow, the Nobel prize-winning economist, put it.

But among those with their feet firmly on the ground, seeing the limits to growth materialize, the responses aren’t always prudent either. One such response has been to shoot the measurer, or to be more metaphorically accurate, to shoot the measurement of GDP. The politics of this makes for some exceptionally strange bedfellows. From tree-hugging Earth Firsters to staid Austrian-school economists to think tanks funded by the Rockefeller Brothers fund, performing an exorcism of GDP from the spirit of our political economy is all the rage.

The motives of the GDP antagonists differ wildly, reminiscent of the NRA joining the ACLU to fend off the NSA. Pro-growth, free-market economists don’t like government getting any credit for anything, and GDP calculations include government spending, so GDP must be an evil spirit. On the other end of the spectrum, no-growth proponents who see the government as a force to defeat the pro-growth capitalists (and economists) think… something quite odd. They think that, if we refuse to even acknowledge GDP, we’re less likely to be obsessed with its growth, and we can focus more on healthier goals such as better education and healthcare.

It’s shoddy logic at best. It’s akin to an alcoholic thinking, “If I don’t count those beers I drink, I’m not as likely to drink so many. Then I can focus more on my book-learning and health.”

Shall we have a toast? Let’s drink to not counting those beers!

No, the fact is that the alcoholic needs to count those beers more than ever. The diabetic needs to monitor that blood sugar. The obese patient needs to monitor that scale. You get the picture: As our economy exceeds the capacity of the planet to sustain us and future generations, we need to monitor the size of our economy more closely than ever. And there is no better measurement of the size of our economy than GDP.

Due to the fundamental structure of the economy, the size of the economy – as measured by GDP – is a perfectly valid indicator of environmental impact. Agricultural and extractive sectors form the base, which must expand to support the growth of manufacturing and service sectors – yes even the “information economy.” This structure, which is the closest thing in economics to an inescapable law of physics, gives us the “trophic theory of money,” which says that the level of expenditure (GDP, in other words) is proportionate to environmental impact including such tangibles as biodiversity loss, climate change, and pollution in the aggregate.

Those who think technological progress can somehow decouple GDP growth from environmental impact haven’t thought hard enough about the relationship between technological progress and the GDP growth that was based on pre-existing levels of technology. The two go hand in hand, which again in the 20th century was a fine thing. The two going hand in hand in the 21st century tells us nothing except that technological progress cannot reconcile the conflict between economic growth and environmental protection.

So let’s not shoot the measurer or the measurement. Let our friends in the Bureau of Economic Analysis calculate GDP as consistently as they’ve done for over 80 years. They perform a valuable service, and GDP is an invaluable metric. Instead of shooting it, let’s help to ensure the appropriate attitude toward ever-growing GDP: that is, a growing sense of alarm and a concomitant determination to stabilize the size of this economic ship before it sinks as surely as the Titanic.