Does economics have anything to say
about global warming?

Recently I've been arguing against the economists' take on the recent Stern Report on global warming. (A B C). This argument is part of my larger effort to come to grips with economics. My approach to this is external: rather than becoming an economist and working from the inside, I take an ecological or natural-history approach and observe the profession of economics as it functions in its own environment (i.e., the whole human and natural world).

I have not been a terribly sympathetic observer of this science. As a non-economist consumer of economics and a subject of economics (which we all are, via the Federal Reserve Board and the Council of Economic Advisers), I am not always happy with what I find, and I have matched the economists' mantra ("Learn to think like an economist!") with a counter mantra: "Sometimes you need to learn not to think like an economist."

This has been a learning process. Since I'm not an economist, I make frequent mistakes about the inner workings of economics, and try to correct them as I go along. Many economists object to the very idea that a non-economist might criticize economics as a whole, but every science has an inside and an outside, and it's legitimate to talk about the outside. Furthermore, economics is both a policy science and a formalized empirical science. The formalized empirical science proceeds by a process of abstraction and stipulation, and some of the stipulations (or assumptions) are counter-intuitive or even false. Even if you don't agree with Keen (Chapter 7, Debunking Economics) that these assumptions are genuinely problematic and not at all benign, you still must agree that when economics is used as a guide to policy in the real world, the things defined and abstracted out must be reintroduced. The outside or environment of economics is the unabstracted, unstipulated real world, and that's my own non-professional, generalist vantage point.¹

The three links above point to recent discussions of the economics of global warming (specifically the Stern Report). In general, our obligation to the future is conceptualized as a moral relationship between the present generation and future generations, and the argument is mostly about how the needs of future generations should be weighted when we decide what sacrifices the present generation should make. Many refinements have been proposed in the course of the discussion, but the basic idea has been that some form of discounting should be used, the way an investor discounts at x% per year in order to choose between a $10,000 profit a year from now and a $50,000 profit ten years from now. If the rate of discounting is positive, our valuation of future utilities asymptotically approaches zero; if the discounting is zero, a future utilities are held to have the same value to us as a present utilities; if it is negative, then we will regard future utilities as more important than present utilities. With a large positive discount rate, the future eventually becomes irrelevant to us, whereas with a high negative discount rate, people of the present should make almost infinite sacrifices for the sake of the future. But as far as I know, all actual proposals were for a positive discount rate, with the future becoming a matter of indifference somewhere between 100 years from now and 400 years from now.²

So far, I am not at all impressed with the economists' contribution to this debate, and if there's a problem with the way economists think about the environment, that's a very bad thing, since economists institutionally have a weight in policy circles far greater than that of anyone knowledgeable about global warming or related environmental issues. It's also a bit surprising. Economists often present themselves as the only real scientists in social science, so one would expect that the application of the powerful tools of economics to the question of global warming would lead not only to a better understanding of the issue, but to a much better understanding of the issue. My conclusion is that the reason why it hasn't done so so far, but rather has done quite the opposite, is that the economists' tools are not appropriate to the purpose.

Below I have expanded the question beyond global warming to what I think is the most I think is the most important long-term environmental issue -- the viability of agriculture. Agriculture depends not only on a favorable climate, but also on supplies of topsoil, clean air, and clean fresh water, and I will be considering them all together.³

First, time scale is the biggest problem I see with the economic approaches. Garrett Hardin has observed that for an economist, a decade is long-term, whereas for an environmentalist, a century is short-term. The discount rates proposed so far reduce our concern for the future to almost nothing within the course of one to four centuries, whereas serious thinking about the environment thinks in terms of millennia and even longer periods. Even the effects of what we have done already won't be fully known for many decades, so the nearest future cutoff point which economists have proposed for our present concern may actually be reached even before we will have known the whole range of effects of things we're doing now.

Second, the environmental obligation is described in terms of the moral obligation of one group of individuals (the entire present generation) toward several later groups of individuals (succeeding generations), with the suggestion that our discounted moral obligation will be successively less as the generations grow more distant. This is fine if your goal is to reduce the obligation eventually to nothing, but if not, some other formulation should be used. The present generation's obligation is not to one specific generation or to several of them considered one at a time, but to all succeeding generations collectively. Rather than puzzling about our obligation to generations 3...7...11..., and so on, it makes more sense just to say that each generation N has an obligation to generation N+1, and that generation N has a responsibility not only for the immediate environmental inheritance of generation N+1, but also for the ability of generation N+1 to fulfill its own obligation to generation N+2. This way, there is no vanishing point, but you will also not have to talk about the obligation of any generation to generations hundreds or thousands of years in its future.⁴

Third, I think that framing environmental ethics in the context of comparisons of groups of individuals and their utilities and their ethical utilities (the utility they get from believing that they are behaving rightly, I suppose) is the wrong way to go in another sense. In some ultimate sense, human utility might govern environmental ethics, but to me it seems mistaken to require that environmental policy be anchored in the utilities and ethical obligations of the presently-existing generation. Furthermore, those who claim that it is inhuman to give an intrinsic value to the environment, independent of present human utilities, often seem also to be the ones who most strongly prefer present human utilities to future human utilities. This kind of humanist presentism really makes environmental thinking impossible, if only because of the differences in time scales.

Concern for the present poor often is presented as part of this argument. In general I am sympathetic to the idea that the biggest sacrifices should be made by the wealthiest, but I don't think that we should guarantee that the poor of the world must be entirely exempt from the impact of environmental measures. Often this issue is a red herring, with people normally unconcerned about the global poor bringing them up according to convenience -- the American Way of Life is usually what is really being protected. Furthermore, when "The Developing World" is spoken of, often what is effectively meant is the middle class (and above) of the poor nations, with the poor still left out. (I will argue below that environmental degradation is comparable to loss of capital. Economists in general are pretty tough-minded in insisting that capital resources should not be diverted to the relief of present misery. They seemingly should be willing to make that argument with regard to the preservation of "natural capital", which I will argue below is what the environment really is).

Fourth, thinking in abstract financial terms tends to obscure what's important in climate change. The income and utility of people today is compared with the income and utility of people in the future, seemingly in terms of consumption tradeoffs between the two generational groups. There's an apparent assumption that what's at stake is relatively small, and several authors make the explicit assumption that people of the future will be much richer than the people of today. It is claimed, for example, people with a per capita income of $10,000 a year are being asked to sacrifice $1,000 a year so that people a century later will have an annual per capita income of $20,000 instead of $18,000 -- in other words, that the poor are being asked to sacrifice for the sake of the rich.

This begs the question. These are not independent factors: the ill effects of climate change and other environmental degradation might be large enough to bring continued economic progress to an end. And while it is true that a look at the last several centuries shows steady economic progress, the environmental time scale is in millennia. On the longer scale, in history we do see cases of long-term rise-and-decline (of whole civilizations or large regions) clearly caused by environmental degradation, so talk about the possibility of collapse is not necessarily Chicken-Little hysteria. Such things really have happened. (Allow me to register my bemusement at the way otherwise hardheaded, meticulous thinkers like economists have been allowing themselves to slip blithely-optimistic predictions of continuous economic progress into their arguments.)

Fifth (part of the above but important enough to be independent): some economic factors are much more important than others, regardless of their status or book value in today's economy. Regardless of the percentage of the world economy represented by agriculture, if actual agricultural production (in physical units) is cut in half, the result will be catastrophic. Taking agriculture as 30% of the world economy for sake of argument, if the physical agricultural product were cut in half you would not have 85% of the world economy left, but much less than that. (Furthermore, within the remaining shrunken economy, agriculture would represent considerably more than 30%). Food is not a commodity like other commodities -- it's an irreplaceable essential, and agriculture is the only practical way to produce it.⁵

This leads to the crucial point: from an agricultural point of view, topsoil, clean fresh water, clean air, and a livable climate are not substitutable or replaceable. Furthermore, if any of these is destroyed or degraded, recovery is slow and difficult. Regardless of their book value under today's prices (and air still isn't even a traded commodity), these factors have a critical importance which is obscured in abstract discussions of the relative incomes of different generations. Perhaps the main mistake is in the simple assumption that the costs of climate change, etc., will be manageably small, but I think that part of the reason for the error lies in thinking primarily in financial and consumption terms, and failing to realize what the specific physical consequences of climate change would actually be. Potatoes and beans are an insignificant factor in the world economy, but if we were to run out of potatoes and beans we'd have an enormous problem on our hands.⁶

Sixth, expanding on the above, the debate I have seen so far seems to have been entirely dominated by economists. While economic factors should be taken into consideration, the economic discussion should be guided by a full awareness of what is said about the concrete physical processes involved by agronomists, climatologists, hydrologists, and economic geographers. Perhaps under some circumstances there might be no real objection to a segregated discussion of the economic and financial consequences of global warming and similar issues, but in the present world such segregation is toxic. In the councils of government, there is no representative of the sciences of actual physical reality whose influence is within an order of magnitude of that of either the Chairman of the Federal Reserve Board or the head of the Council of Economic Advisers. Because of the disproportionate power of economists in today's world, they have a responsibility not to act as specialists, but to actively educate themselves in the findings of the less-favored sciences and help bring them into the policy debate. (It does seem, incidentally, that an excessively-high proportion of global warming skeptics are economists).

Seventh, as I've said, most economists have tended to underestimate the degree of risk coming from climate change and environmental degradation. They seem to be unaware of even the possibility of permanent economic decline resulting from environmental damage, even though there have been actual cases. To the extent that they seem aware of the volatile, "long tail" aspect of climate change, they seem to use it to argue that we have no idea what will happen 400 years from now and shouldn't even think about that -- it has been argued that we might get hit by an asteroid a meteor in the meantime. Since environmental thinking needs to talk about time periods of longer than 400 years in order to do its work, this amounts to a suggestion that we ignore environmental considerations almost entirely. (I might add that the fact that we can't predict tomorrow's weather doesn't necessarily mean that we can't know anything about the climate 400 years from now; there are different ways of studying the different time scales.)

It has been pretty well established that, as a result of technological advances, during recent centuries man's impact on the environment has multiplied manyfold. This would seem to imply that we can no longer take the climate and the environment for granted, but must be attentive to the ways we're affecting them and, if necessarily, take steps to remedy, limit or compensate for the increased impact we've been having on the environment. Some economists seem to be using our uncertainty about the future as an excuse for indifference about it, rather than as a powerful incentive to learn as much as we can as quickly as possible. (Just as some otherwise-rigorous economists are quite happy to assume continuous economic progress on the basis of casual seat-of-the-pants observations, some optimistic can-do economists are quite willing to give up entirely on understanding the environmental future.)

Conclusions

I have been attempting to estimate the value of economics as a tool for understanding environmental issues. So far, I am not impressed. The short time frame of economics, the treatment of the economy in financial terms in abstraction from the physical realities, the optimistic minimization of the probable size of environmental disruptions, and the definition of the problem primarily in terms of comparisons between the utilities of specific generational groups of individuals (implicitly favoring the present generation), all weigh against giving economics, in its present state, a primary role in the environmental debate.

Rather than comparing intergenerational utilities with the help of discounting, it makes more sense to think of a finite and mostly non-renewable stock of natural capital to be passed down from each generation to the succeeding generation. While transmission without any reduction at all is impossible (even granted that there is some possibility of renewal -- by reforestation, for example), the complete, undiscounted transmission of natural capital should be the standard against which actual generational transfers are measured. There need be no discounting toward some future time of vanishing indifference, and there need be no calculation of long-term environmental results at all -- for each generation long-term results can be folded into next-generation results.

I object most to economists' apparent worry that too much effort might be expended on environmental protection. My own belief is that the clear and present danger is that too little effort will be expended. To a large extent this disagreement is a function of different estimates of the magnitude of the problem.

Economics was not developed for the purpose of analyzing the economic effects of long-term environmental trends, or for the purpose of dealing with questions of intergenerational equity, and I would say that it still needs lots of work before it will be able to handle those questions. At the same time, probably some economist somewhere has already said most of the things I've said, so I expect to be accused of reinventing the wheel in this piece (to the extent that I'm not accused of being a Luddite ignoramus). Economists' recent efforts to find ways of dealing with the long-term environment should be commended, but in many respects these efforts go against the spirit of their science, and everything they say should be examined very critically. For the moment, it remains important to learn not to think like an economist.
 

NOTES

1. Why is what I'm doing more legitimate than what a flat-earther or a creationist does? Primarily because there isn't the same kind of consensus in economics that there is in astronomy or evolutionary biology. There are a large number of fully-credentialed professional economists who sharply criticize the general direction of the field (examples here). Dissident and maverick economists are often thrown in my face to prove that economics is really OK after all,since the truth is probably in there somewhere along with everything else, but I am primarily talking about the field as a whole as it functions in American life.

2. One critic said that my original criticisms showed that I did not understand discounting, since I didn't allow for the possibility of a zero or negative discount rate. I would still ask whether it is useful to use discounting analysis at all if "zero discounting" is what's being proposed. As far as I know, no one has ever really proposed negative discounting.

3. In my opinion energy, forest cover, and fisheries are second-string economic issues; minerals are third-string. In his debate with Julian Simon, Paul Ehrlich made a big mistake by talking as much as he did about mineral supplies.

4. The idea of generational obligation, and the idea that there can be a (non-exchange) obligation of living people to people who don't even exist, both mark an enormous stretching of economic concepts. Whether economic thinking is still useful in this kind of context is uncertain to me. (I might add that discounting normally applies to the deferral, or not, of gratification by a single individual who might or might not be willing to wait for a larger gratification. Since the present generation will never feel the gratifications of succeeding generations, waiting is not really a factor here. Talking about future generations has already moved the argument away from traditional economics.

Our responsibility should be to the continued existence and relative prosperity of the human race indefinitely into the future, not just to some carefully-delimited group of generations in the near future. With positive discounting you never reach zero, but the quantity becomes negligible at some point. The fact that we can't know the future beyond a certain threshold doesn't mean we shouldn't be concerned beyond that threshold. We don't need to add discounting-indifference to uncertainty. The real limitations in our knowledge and in our powers shouldn't be used as a reason to formalize indifference to distant generations.

5. It strikes me that this is a version of the diamond-water paradox: abundant necessities are cheap, scarce luxuries are expensive. If necessities become scarce, the whole economy will be violently transformed. I suspect, but am not sure, that this also has something to do with Joan Robinson's questions about capital -- the distinction between abstract financial capital and actual physical productive resources.

6. A lot of economists' excess optimism about the future comes from undue confidence in the possibilities of substitution (e.g. aluminum for copper) and of technological change. Technological change might even make energy worries a thing of the past, but I doubt that synthetic substitutes will ever be found for agriculturally-grown food, water, air, and topsoil, or that climate will ever become either controllable or a matter of indifference. In any case, we should not plan on the basis of technological changes making topsoil, for example, obsolete. I many respects this is the crux of my argument.

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I am emersonj at gmail dot com.

Original materials copyright John J Emerson

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