Editor’s Note: This is part II of a series. If you haven’t already, read Part I first.
Considering the Latin root of the word, "forensics" is about bringing something before the forum the public perhaps should know about. And certainly, exploring the question where influential beliefs about the climate come from seems quite relevant.
These days, all the world is talking about all sorts of things that were before secrets of the U.S. government but which have recently been revealed to the public — and occasionally these are quite dirty secrets too it seems. One should, however, not be misled into thinking that all those things actually were ‘secrets’. Concerning, in particular, the very important question over why our present-day collective resource management is so catastrophically bad, there are more tangible, and more immediate answers than the lofty "there is something wrong with us as a species" statement. Indeed, there are answers that are not secret at all, yet mostly unknown to the public.
What are the most evident problems with our resource management? It is not as if we utilized critical (especially: mined) resources in a disorganized way — far from it. And, as finding and exploiting such resources is done in a highly organized and systematic fashion, there evidently must be people claiming to be experts in this field. (The reason why I write "claiming to be" is that a discrepancy between actual and claimed insight might explain a lot about our problems.)
What are the present, dominant attitudes towards non-renewable resources? Well, they are widely regarded as being ‘scarce goods’ (amongst other things, of course). And the majority of economists would regard economics as being all about the allocation of scarce goods, hence consider themselves experts on resource management issues. The very notion of ‘scarce goods’ already raises a profound question: would such a concept even exist if we all subscribed to the idea that there is an optimal level of resource utilization beyond which personal happiness suffers? Or, is it rather related to an implicit tenet of faith of the church of unlimited wants? Ah, subtle details.
As the prevailing economic belief system is indeed responsible for the allocation of the majority of today’s energetic, mineral and biological resources as used by mankind, it makes sense to take a closer look at the ideas — intellectual gears and pulleys — that shaped 20th century economic science. A word of caution may be in order here — despite this self-classification, economics might not in fact be a ‘science’; a number of people have raised quite thought-provoking arguments against regarding economics as a science. But rather than delving into this issue deeper here, we should perhaps for now contend ourselves with the observation that the discipline of economics certainly is prone to being led astray by misguided ideologies — the failed command economy of the Eastern bloc surely bears witness to that.
Now, there certainly are countless other intellectual activities that have difficulties with persistent funny ideas. What sets economics apart from most of them, however, is its impact. On that, it might be quite safe to say that pretty much all our collective decisions that involve major commitments of effort (sometimes expressed in monetary terms) will be very strongly influenced (and often decided) by economic analysis.
Keeping in mind that the present situation that is so very dangerous in a number of different ways was very likely brought about by mismanagement (rather than chance), it may be useful to instead ask a much narrower question: Can we find crucially influential examples that give us an idea where and why economic science got it so very wrong? Now, whenever someone from outside the economic profession starts such an inspection, this generates sort of a standard response from numerous economists along the lines of "how dare non-experts criticize the work of experts". This is very wrong for a number of reasons, the most obvious one being that any discipline that as a matter of principle does not accept any such feedback from other disciplines with which there is an overlap (physicists also model complex systems, for example) degrades itself into a clique of self-proclaimed experts.
Let us take a closer look at a specific and fairly remarkable piece of scientific work from the economic profession which — as far as I can see — is nowhere near having received as much public attention as it should. When I first looked into this, I often could not believe my eyes — and I hope I will manage to make clear why in the rest of this article.
The aforementioned piece of work is a widely cited book on an economic issue (resource management related) that hardly could be more important; the author is a famous professor of economics who also co-authored one of the most important college textbooks (over four million copies sold) on economics with a Nobel Laureate that boasts in the preface to one of the later editions to have brought down the Soviet Union. I am talking about Professor William Nordhaus’ 1994 book Managing the Global Commons: The Economics of Climate Change . As Google Scholar shows, this piece of work is quite famous in academic circles: by the end of 2010, it had received more than 1200 scientific citations. In 2005, it received the "Publication of Enduring Quality" award by the Association of Environmental and Resource Economists (AERE) .
The complete treatise is fairly elaborate — about 200 pages — and on the fringes of the main discussion briefly touches a number of topics that would be well worth being addressed in a proper summary (for example the long term effect of deadweight costs due to carbon tax in relation to other taxes). Here, in this article, I do not intend to go into any such detail but instead want to focus on two questions: (a) why is this particular work relevant, and (b) what indications are there that the public would be well advised to take a closer look at it? Once this is identified as highly relevant but generally overlooked, a more detailed analysis of its content can follow in a separate article.
What is this book about? Well, evidently — climate change. Its specific role is that it seems to have been the first text that tried to come up with a quantitative (computer) model that was built to study — basically — the question:
Given that CO2 emissions from economic activity cause environmental damage which feeds back on our economic activities, how would one evaluate strategies to manage these emissions with respect to their impact on overall well-being, as measured by a certain utility function?
The mathematically inclined may benefit from knowing that the quantitative model essentially is a set of 13 coupled ordinary differential equations with 25 parameters and a handful of exogenous variables. These equations fuse four building blocks into a quantitative economic model that allows study of climate change related policy decisions. The four building blocks are: (1) A model of the greenhouse gas emissions produced by the effort to improve social well-being through economic activity, (2) A very strongly simplified model of the carbon cycle that tries to predict atmospheric greenhouse gas concentrations from emissions in the previous decades, (3) A model of climate sensitivity — basically: "what CO2 concentration gives how much warming?", and (4) a model of climate change induced economic damage.
The book is divided into three parts. The first part consists of chapters 1-4 and introduces the author’s coupled economy-climate model which he named "DICE". Chapter 1 is a brief introduction, chapter 2 gives a short summary of the structure of the final model and provides a fairly conventional quantitative macroeconomic model, chapter 3 discusses modeling of both the carbon cycle and climate. Chapter 4 completes the construction by introducing the model for economic impact of climate change. The second part consists of just one chapter (chapter 5) titled "Analysis of Policies to Slow Global Warming". Part three of the book finally deals with risk and uncertainty in climate change policy, which will not be discussed (but briefly touched twice) in the subsequent exposition.
In itself, such a framework that links four sub-models at first may not seem too unreasonable. Of course, one might raise objections on very general grounds considering, say, equating more economic activity with more social well-being or expressing damage in markedly anthropocentric economic terms. But let us be benevolent towards the author in that respect and accept this general "economic activity creates well-being and emissions, but emissions damage well-being" methodology for now in order to see what he has to say.
One might think that the assessment of work like this would mostly depend on the way the CO2/warming relation is modeled. Amazingly, this seems not to be the case. The reason for this lies in the subsequent step — the way economic damage due to climate change is modeled, which in turn is linked to the assumptions used to model the relation between economic activity and societal well-being. Of course, any model must make numerous simplifying assumptions in order to become tractable, and it is precisely whether these assumptions do manage to capture the most relevant aspects of the system or not that determines its usefulness. Some of Nordhaus’ assumptions are quite widely used in economics — and for those that at the same time seem highly questionable, this should be all the more reason for worry.
One key assumption (p. 8 middle) is:
The model contains both a traditional economic sector and a novel climate sector. (…) The [traditional] global economy is assumed to produce a composite commodity. It is not necessary that countries actually be identical. Rather, the goods produced must be perfect substitutes and the production functions must be identical except for multiplicative differences in productivity.
(The "composite commodity" is a fictitious model construct introduced by the economist John Hicks describing a collection of goods whose relative prices do not vary. A similarly coarse description of the biosphere’s role in a climate model would be to treat it as aggregate "living stuff" that acts simply by inhaling and exhaling both oxygen and CO2 only.)
To economists, such an assumption may not seem too outlandish, as they are used to making them all the time. Whether this is justifiable is a matter of context. In this case, however, we must take note that there is a built-in implicit assumption that the price ratio between very essential and very inessential products (a sack of rice and an electronic sudoku generator toy) does not vary strongly enough to have a noticeable impact on the system. Vice versa, this means that if the price of an essential and an inessential good are the same, and prices reflect the effort needed to produce them (as prices are assumed to do), then the effort to produce one more inessential item could equally have been used to produce one more of the essential items. So, Nordhaus’ model models economic activity as producing some diffuse ‘stuff’ — it hence can be described by just a number measuring ‘stuff productivity’.
One profound consequence of making this assumption is that the model automatically becomes blind for any conceptual difference between very essential things — food — and other economic products. If one goes that way, what does this then mean for modeling economic damage due to climate change? Chapter two in Nordhaus’ book is dedicated to a preliminary overview that gives the formula (formula 2.10) "Damage : Economic output = 0.00144 * [Temperature change in Celsius]^2". He notes that (p. 18 bottom):
The empirical estimate of the parameters of that impact equation will be given in chapter 4. The finding there is that the effect of a 3 degrees Celsius rise in average temperature is projected to be a 1.33 percent decline in world [economic] output.
So, if the world economy grew by 2% per year, say, that would mean that three degrees warming from climate change would set us back in terms of economic productivity by less than one year. This aspect shows up in chapter 5, where a number of climate change policy options are analyzed comparatively. The author writes (page 92 bottom):
Figure 5.5 shows the trajectory if real consumption in five of the cases. The noteworthy feature of this figure is that, even though there are differences among the cases studied here, the overall economic growth projected over the coming years swamps the projected impacts of climate change or of the policies to offset climate change. In these scenarios, future generations may be worse off as a result of climate change, but they are still likely to be better off than current generations. I was reminded of Tom Schelling’s remark a few years ago that the difference between a climate-change and a no-climate-change scenario would be thinner than the line drawn by a number 2 pencil used to draw the curves. Thanks to the improved resolution of computerized graphics, we can now barely spot the difference!
Evidently, the way economic damage as a function of temperature increase is modeled does play a very important role for what conclusions one will arrive at using the model. Given the expected changes that would come with a three degrees rise in world average temperature, the idea that this would have less than 2% impact on world economic output seems well worth looking into. How does one then arrive at such an estimate? The answer is given in chapter 4, "Energy, Emissions, and the Economic Impact of Climate Change". Given its central importance, and the very nature of the ideas presented in here, it seems highly appropriate to quote the entire introduction:
Estimates of the Impact of Climate Change
This chapter continues the detailed derivation of the equations of the DICE model, focusing primarily on the economic linkages. Perhaps the most controversial aspect of an economic analysis of climate change involves the estimates of the impact of climate change. What are the likely economic impacts of projected climate changes over the next century? To begin with, we should recognize that in the long march of economic development, technology has increasingly insulated humans and economic activity from the vagaries of climate. Two centuries ago, work and recreation were dictated by the cycles of daylight, the seasons, and the agricultural growing season.
Today, thanks to modern technology, humans live and thrive in virtually every climate on earth. For the bulk of economic activity, variables like wages, unionization, labor-force skills, and political factors swamp climatic considerations. When a manufacturing firm decides between investing in Hong Kong and Moscow, climate will probably not even be on the list of factors considered. Moreover, the process of economic development and technological change tend progressively to reduce climate sensitivity as the share of agriculture in output and employment declines and as capital-intensive space heating and cooling, enclosed shopping malls, artificial snow, and accurate weather or hurricane forecasting reduce the vulnerability of economic activity to weather.
There are a number of quite ‘interesting’ ideas in this introduction. The ‘Hong Kong vs Moscow’ example above is just one example of a quite serious fallacy: in both places, people have settled because water is available. It would be much appropriate here to compare Hong Kong to, say, Garama, former capital of the Garamantes, now little more than a few ruins in Libya, as the ancient Garamantes exploited all their fossil water resources, which ultimately led to a collapse of their civilization. Also, the idea that air conditioning which runs on ‘capital’ would save the day seems fairly funny. But, the really important issue concerns the role of agriculture. As we have seen, economic activity is modeled to produce some undifferentiated ‘stuff’ that increases our well-being, and ‘food’ just contributes to that ‘stuff’ through the monetary value of the total output of the agricultural sector. Now, the share of ‘stuff’ that is food is fairly small in monetary terms, and most of the other ‘stuff’ is modeled as by and large unaffected by climate change. With farming contributing — in Nordhaus’ model — 61 billion US$ to GNP and ‘other’ activities contributing just over 2200 billion US$ through processes that are assumed to be not overly sensitive to climate in any way, it is clear that even massive damage to agriculture would never appear as a reason for concern, if only looking at the numbers produced by this model.
Now, if climate change led to a dramatic crash in food production, with all the consequences one may vividly imagine, this model would by design not give any warning, for the simple reason that it assumes most of our economic activities to be unaffected by climate. The prospect of rising food prices due to food shortages causing people to use their money to buy food instead of funny gadgets isn’t entertained. On page 51 (top), Nordhaus writes about this:
For simplicity, we assume that there is no impact of different policies or of climate change on relative prices, so impacts can simply be summed across different sectors.
Here, "different sectors" means the value of goods and services produced by agriculture as well as non-agricultural activities. Let me repeat this: the one reason that is given for building a model that is blind towards the economic effect of sharply rising food prices due to shortages is that this would make the model less simple.
People not trained in mathematical methods are easily bamboozled by the seemingly impressive mathematical rigor of what looks like quantitative methods in economic analysis. Quite often, though, these are little more than smoke and mirrors used to distract one from the underlying modeling assumptions, which are often as perversely misguided as it is in this case.
But the fun does not stop here. As economic development progresses, agriculture’s share, as a percentage of world output, declines, making us — according to the model — seemingly more resilient. This is not just an artifact gone unnoticed by Nordhaus. Instead, he writes (page 53):
The lower bound of the impact [of 3 degrees warming] is 0.72 percent of output for landlocked states with no agriculture.
This is his assumed climate sensitivity coefficient for non-agricultural, non-coastal economic activity. Indeed, when he contemplates the effect of a changing composition of the world economy over the 21st century, with agriculture’s share declining, he writes (page 56):
On the one hand, agriculture’s share of output is shrinking in most countries, which leads to a decline in vulnerability.
…and then continues to discuss the phenomenon that countries with high coastal vulnerability presently have fastest economic growth, which — according to this model — offsets this decline in global vulnerability due to fewer cents in the world dollar coming from agriculture.
If all this were not already bad enough, there are further funny examples of modeling ‘insights’ that can be traced directly back to fairly absurd assumptions. At the end of chapter 5, "Analysis of Policies to Slow Global Warming", he writes (on page 96):
This study has examined seven different approaches to GHG control: no controls, economic optimization, geo-engineering, stabilization of emissions and climate, and a 10-year delay in undertaking climate-change policies. Among these seven, the rank order from a pure economic point of view given current information is geo-engineering, economic optimum, (…) The advantage of geo-engineering over other policies is enormous, although this result assumes the existence of an economical and environmentally benign geoengineering option.
Let us look into this assumption that is tucked away into the final half-sentence somewhat closer. If geo-engineering is found to be so great from an economist’s perspective, it certainly matters what sort of geo-engineering was analyzed within this model. On that, Nordhaus writes in a footnote on page 81:
The U.S. National Academy of Sciences report describes a number of options that provide the theoretical capability of unlimited offsets to the radiative effects of GHGs at a cost of less than $1 per ton of carbon (see NAS 1992, chap. 28). If these prove feasible and environmentally acceptable, the cost of offsetting all global GHG emissions today would fall from approximately $1400 billion per year according to the estimates underlying the DICE model to around $8 billion per year. Given the very small nature of the costs, we have treated geoengineering as costless.
In other words, Nordhaus finally arrives at the conclusion that geoengineering is the top choice, a marvelous approach to solve all our problems after some pages of discussing simulations, starting from the assumption that it costs us nothing, does not damage the environment, and can be applied to offset not just part, but all our emissions. He gives a few examples of possible geo-engineering measures that have been discussed in the 90s, such as "stimulating absorption of carbon in the oceans", but the key point is that he has no useful suggestion to offer about how to actually do it. We still have to find the wonder method he is dreaming of as his best choice. Now, if he had suggested praying to the tooth fairy to take away all that excess carbon dioxide, I’m sure we’d immediately label him as completely insane. But, is there actually any functional difference to his perspective on geo-engineering?
One scary observation is that numerous other academic economists who have also published work (they call it ‘research’) on climate change by and large use methods of analysis and arrive at conclusions that match Nordhaus’s. In order to substantiate this claim, let us take a quick detour and briefly have a look at Samuel Fankhauser’s book "Valuing climate change: the economics of the greenhouse". On page 20, Fankhauser writes:
In a similar attempt, Scheraga et al (1993) have used the Jorgenson and Wilcoxen (1990) general equilibrium model to estimate the macroeconomic effects of climate change for the US. The study is limited to three types of impacts: a change in agricultural yields, a change in energy demand, and an increase in the sea level. Estimates are based on a rather pessimistic 2xCO2 scenario of 5.1 degrees Celsius warming, assumed to occur gradually between now and the year 2060. The study illustrates how the structure of an economy may adjust to climate change by moving away from agriculture and consumption-related activities towards investment and capital-related industries. The increase in public expenditures on sea level rise protection, that is an increase in government purchases from the construction sector, leads to a redirection of spending away from consumption towards investment. At the same time higher prices for agriculture-based products such as food and tobacco lead to a fall in the demand for these goods. Overall, GNP in the year 2060 is 0.8 per cent lower than the base case without warming. In comparison, agriculture, sea level rise and energy account for about 0.2 per cent to 0.6 per cent of GNP in the enumerative studies, although assuming only about half as much warming (see Table 2.1).
Hard to believe anyone could write something like that? Dear reader, please go check yourself — this page of Fankhauser’s book is available online via Google Books here.
So, we are not taking about an isolated case of an economic crank with dangerously absurd ideas, but about what seems to be a massive systemic problem within economics. Given that those obviously absurd modeling assumptions seem to be shared by many of our influential ‘scientific’ economists, I’m curious to ask "what are the aspects they’re actually in disagreement about?" One of these evidently is finding the appropriate effective discount rate. On that, back to Nordhaus, we find reasoning such as (page 117):
High Economic Growth
An alternative assumption is to inquire whether good economic news is bad environmental news. Many analysts believe that the major culprit in causing ecological damage is the process of economic growth. In this scenario, we ask about the impact of continuation of economic growth at the pace that occurred in the 1965-90 period. In the base case, we assume a slow decline in economic growth (with a halving of the rate of productivity growth every 70 years); for the high-growth case, we assume instead that there is no decline in productivity growth.
The impact on economic activity is, of course, spectacular. In the base case, we assume that per capita consumption plateaus at around $12000. In the high-growth case, by contrast, per capita consumption grows to $451000 in 25 decades. Good news for people, some would say, but bad news for Planet Earth and non-human beings.
The impact on greenhouse policies today are basically nil as is shown in table 6.5. (…) The reason for this result is that the model is always balancing the needs and opportunities of present and future. Higher levels of economic growth result in much more potential emissions and damaging climate change in the future; but it also leaves the future much wealthier and therefore more able to invest in slowing climate change. As a result, looking further out, the high-growth run sets future optimal control and tax rates much higher than the base case as wealthier future generations commit more of their higher income to mitigation efforts, although even with those higher mitigation efforts future generations are still much better off than the present or than they would be without the higher productivity growth. The ethical logic of this result is that the present generation should not be penalized for a productivity windfall to future generations.
It is worthwile to ponder the final sentence a bit. Basically, the claim is that future generations will be richer, and hence generally should pay more to deal with environmental damage. This idea arises again in chapter 6, in the section "The Role of Discounting", where we read (on page 123):
Society may well feel that it is appropriate for later, richer generations to pay a larger fraction of GHG control costs, just as high-income people pay a larger fraction of their income in income taxes. We might then discount future costs if average living standards were improving — a phenomenon we call growth discounting.
Note that Nordhaus did not make a claim about whether the "high growth scenario" in any way would or could be realistic. Maybe he is assuming that it might happen given some marvelous breakthrough e.g. in energy technology. His explanation is mainly to defend the idea that economic growth is a very good thing and we should not question it due to climate change concerns, for higher growth may well cause higher damage, but leave us all much richer to deal with it. Incidentally — how about the prospect of a resource shortage induced major economic crash? Well, the same author also has published work with the intention to debunk that idea, such as in his article "Lethal Model 2". And again, one also finds in that article that the conclusion is based on a number of similarly strange assumptions.
The limited discussion of Nordhaus’s work presented here has omitted many claims and ideas that might also be well worth taking a closer look at. Coming back to the original objectives to (a) show why is this particular work relevant, and (b) indicate why the general public would be well advised to independently scrutinize what is going on here, how were these addressed?
On (a), we note that we have seen the work of other influential economists to use pretty much equivalent reasoning, so we are not dealing with a strongly confined phenomenon. On (b), I leave it to the reader to make up their mind about this. If, given the examples presented in this article, you think that more people should know about these things, appropriate action would be to both circulate this article as well as check its key claims about the content of Nordhaus’s book by paying the library a visit.
Let us conclude with some sanity in the form of the words of another economist, now half a century old. This is what Fritz Schumacher of appropriate technology fame had to say in his article "Technology with a Human Face" :
I think we can already see the conflict of attitudes which will decide our future. On the one side, I see people who think they can cope with our threefold crisis by the methods current, only more so; I call them the people of the forward stampede. On the other side, there are people in search of a new life-style, who seek to return to certain basic truths about man and his world; I call them home-comers. Let us admit that the people of the forward stampede, like the devil, have all the best tunes, or at least the most popular and familiar tunes. You cannot stand still, they say; standing still means going down; you must go forward; there is nothing wrong with modern technology except that it is as yet incomplete; let us complete it. Dr. Sicco Mansholt, one of the most prominent chiefs of the European Economic Community, may be quoted as a typical representative of this group. “More, further, quicker, richer,” he says “are the watchwords of present-day society.” And he thinks we must help people to adapt “for there is no alternative.” This is the authentic voice of the forward stampede, which talks in much the same tone as Dostoyevsky’s Grand Inquisitor: “Why have you come to hinder us?” They point to the population explosion and to the possibilities of world hunger. Surely we must take our flight forward and not be fainthearted. If people start protesting and revolting, we shall have to have more police and have them better equipped. If there is trouble with the environment, we shall need more stringent laws against pollution, and faster economic growth to pay for anti-pollution measures. If there are problems about natural resources, we shall turn to synthetics; if there are problems about fossil fuels, we shall move from slow reactors to fast breeders and from fission to fusion. There are no insoluble problems. The slogans of the people of the forward stampede burst into the newspaper headlines every day with the message “a breakthrough a day keeps the crisis at bay.”
And what about the other side? This is made up of people who are deeply convinced that technological development has taken a wrong turn and needs to be redirected. The term "home-comer" has, of course, a religious connotation. For it takes a good deal of courage to say "no" to the fashions and fascinations of the age and to question the presuppositions of a civilisation which appears destined to conquer the whole world.
- See https://scholar.google.com/scholar?cluster=7204088871401003455 and Amazon