New fiddle tune: Leaving Fort Worden

Another fiddle tune in honour of, er, Fiddle Tunes.

The title says it all: I wrote this one last year on the Sunday that everybody was packing up and taking their tunes and memories home. I had two amazing weeks ahead in Seattle, which inspired Sleepless In Seattle. Now I’m at the Gooikoorts festival, which is also nice, but not half as overwhelming as Fiddle Tunes.

Like Sleepless, this is supposed to be a mazurka. Now a number of people told me that Sleepless is definitely not a mazurka but a waltz. Perhaps we’re having different mazurkas in mind here: I meant to write both tunes as mazurkas in the French/Belgian/pan-European bal folk tradition. These mazurkas are played in a somewhat dotted style, with the 1st, 3rd, and 5th eigth notes slightly longer than the 2nd, 4th, and 6th (which is why some people tend to write them in a 9/8 measure, but that is wrong – it’s not a slip jig or polska). The emphasis is on the 1st and 3rd count and the tune (and dance) should have a somewhat dreamy, romantic feel to it. See here for an example.

Anyway, here goes:

Leaving Fort Worden

And here is the abc:

X:1
T:Leaving Fort Worden
M:3/4
K:A
L:1/8
e (3 efg |: a3 bag | f<d2 df<a | e2 d2 c2 | B3 BAB |
 c<e2 edc |1 B3 BAB | c3 A c<e | B3 e (3 efg :|2 B3 EG<B | (A6 | A3) AGA ||
|: B3 BAB | c3 cBc | d2 e2 f<a | e3 edc |1 d2 e2 (3 fed | e2 d2 c2 |
| (B6 | B3) AGA :|2 d2 c2 B2 | A3 EG<B | (A6 | A6) ||


Still miss that place. Someday I’ll visit it again.

Doughnut Economics (8): Be agnostic about growth

Kate Raworth’s seventh “Way to Think Like a 21st-Century Economist” is to replace the idea that economies should keep growing forever by one that strives for economies that make people thrive regardless of whether economies grow or not.

My issue with degrowth

Let me put one thing straight first: barring interstellar travel I do think there is a maximum size to an economy. Economies grow for all kinds of reasons: more people, more use of energy, be it renewable or not, more use of material inputs, more ideas on how to do more with less. All, I believe, are finite resources – and that includes ideas. So the only way to grow forever would be some kind of asymptotic growth, which is not what any side of the growth debate has in mind. I’ve said a lot more about this in an earlier post.

Nevertheless I have never liked the degrowth movement. Some of their ideas are fairly traditional environmental-economic fare: taxing environmental pollution, for example. Others, such as imposing a maximum to anyone’s income, seem overly intrusive to me. I agree with Jeroen van den Bergh, one of the few mainstream environmental economists engaged in serious debate with degrowthers, that degrowth puts the cart before the horse. If environmental pollution and resource depletion are the problem, then focus your policy on environmental pollution and resource depletion. Putting a brake on growth to stop pollution is like stopping your car when you’re in the wrong lane of the highway: you’re not going in the wrong direction anymore but you’re not getting home either. So much easier to change lane! Moreover, history shows plenty of examples of stagnating or shrinking economies with devastating pollution – apparently degrowth is not the panacea its proponents make it out to be. And on the short term it might not even be necessary: within sound ecological limits there may still be plenty of room for growth, at least for the foreseeable future, driven by great ideas or scale economies.

So I’m happy to see that like Jeroen van den Bergh, Kate Raworth takes the agnostic view: degrowth is not the answer, but neither is growth. We need sensible limits on pollution and resource use, and if we can create more welfare by making more efficient use of the space we have within those limits, fine!

Are economists growth addicts?

Most macroeconomics textbooks deal with what growth is, how it works, and surely every environmental economics textbook discusses how growth may be related to environmental pollution. Interestingly, however, I have not come across any economics textbook that clearly explains why we actually need growth. I asked some of my colleagues at Wageningen University, but the responses did not get much further than “I guess people do not like stagnation”, “people always want more.” Is that the best we can tell our students? Moreover, wouldn’t a little satisfaction make us happier?

So what do economists believe? Are they such growth fetishists as Kate Raworth claims? Interestingly, Jeroen van den Bergh, together with Stefan Drews, has also looked into this question. The answer is mixed, but it by and large vindicates Raworth. In a survey among 814 respondents who have ever published on the relation between the environment and economic growth, economists appeared more likely than others to argue that continued economic growth is essential to improve people’s life situation; less likely to argue that economic growth always harms the environment; and less likely to argue that a good life is possible without economic growth. The variation around the means was huge, however, so the differences for these statements were not statistically significant. Other tests in the paper, however, suggest that economists are significantly more optimistic about the prospects for economic growth than environmental scientists. The most striking difference, however, is between environmental economists and those labelling themselves ecological economists. That should not be surprising to anyone who knows these fields. By and large, environmental economists are usually economists who happen to work on environmental issues, whereas ecological eonomists are more likely to be ecologists or environmental scientists who are interested in the relation between the economy and the environment. There are exceptions, but this is roughly the difference and it explains why ecological economists tend to be more pessimistic about growth, and more activist than environmental economists, many of whom like to believe they are doing value-free science.

Why grow?

Raworth discusses three reasons why we are, as she says, addicted to growth. I find the political and social reasons she mentions most convincing and interesting. Economic growth enables politicians to dodge a couple of tricky problems. If poverty is a problem in your country, but taxing the rich would quickly put you out of power in the next election or coup, economic growth is a welcome way to alleviate poverty without raising taxes. As much of economic growth comes from capital accumulation, which in and of itself needs hands and minds to build those machines and factories, growth keeps a lot more people occupied than stagnation. In other words, the lump of labour is not necessarily a fallacy in a stagnant economy.

Our social addiction to growth is more philosophical and comes close to what my colleagues said: people are never satisfied. Raworth rightly argues that this desire is not necessarily universal as some cultures appreciate sufficiency rather than insatiability. Again I am wary of the top-down policy interventions she proposes, like limits on advertising. As somebody with serious leanings towards Buddhist thought and practice I agree that this insatiability is a form of spiritual poverty. A core Buddhist premise is that happiness is not achieved by satisfying our wants, but by being less attached to our wants – a view confirmed by modern psychology. But to turn that view into policy means telling people how to live their individual lives to an extent we only see in theocracies. Better to set clear ecological limits and within those limits let people decide for themselves.

Preparing for landing

The most interesting question is addressed at the end. I would have expected that even mainstream economists would eventually pick it up, but so far I have not even seen the degrowth literature address it. If an economy stops growing, be it gradually or suddenly, be it by design, disaster, or depletion, how do we manage the slow-down? The usual response is to get the economy growing again, but let’s just for the sake of argument assume that we know it will not. How do we organise such a stagnant economy? How do we allow the poor a bigger cake if the whole pie will never get bigger? How do we allow people the pride and integration in society that comes with having an honourable job if it is more efficient to let a few people work overtime and have the rest sit on their hands? Rather than address these tricky questions it is a lot easier to dodge them and argue for growth.

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  • Doughnut Economics (9): What makes a good economist?

 

Doughnut Economics (7): Understand before you design

The sixth of Kate Raworth’s “Seven Ways to Think Like a 21-st Century Economist” is a green version of the fifth: forget the idea that economies must become dirty before they can become clean, and start designing ways to clean them up now.

What we are talking about here is a pattern in the data that is similar to Kuznets’s curve: as economies develop, environmental problems such as air quality and biodiversity decline increase, until they decline again. Again the question is whether this is a mere pattern in the data or there are fundamental mechanisms at work that justify labelling this as a ‘law’, and whether such a law, if it exists, should inspire policy recommendations. For the original Kuznets curve I explained that as far as I know, the pattern came before the purported ‘law’ (which few economists claim to be a fundamental law anyway), and that many of the policies that Raworth claims are inspired by the Kuznets curve actually aim to clear the mountains of debt that the respective countries (Greece and Argentina, for example) had accumulated. So I wasn’t so convinced her accusations stuck; with the environmental Kuznets, however, she has a point.

The mechanisms that economists commonly suggest to explain the environmental Kuznets are indeed a comfortable argument for policy makers and politicians to favour economic growth: as the argument goes, people need to get richer before they can start caring about the environment. Part of the explanation for the inverted U in environmental data is that people consider some of these environmental qualities a luxury that people can only afford once they have secured their livelihood. Indeed, as Prakash in her example illustrates, many poor countries, or rather their policy makers, argue that they are too poor to care about the environment: only when they have secured their own livelihoods they can start caring about elephants.

It is important to realise here that what we refer to so easily as “environmental quality” actually covers a lot of different variables, such as concentration of unpleasant odours, population sizes of rare species, concentration of toxic substances, all the way up to global temperatures running amok and enhancing the destructive power of hurricanes and whatnot. Compare these variables to Maslow’s pyramid: some environmental variables are of direct importance to our immediate physiological needs, such as clean drinking water; others are of more indirect but nevertheless no less importance, such as a stable climate; yet others are important for more higher-order needs, such as the sense of awe that we experience when we encounter a wild giraffe or a sperm whale, or the intense wonder and fascination when we listen to the melodic conversations of songbirds. Lumping this multitude of needs together, and pretending they are all equally essential for human life, is disingenuous. Like people worry about food and shelter before they start caring about self-realisation, it is understandable that developing countries consider poverty alleviation a more urgent matter than nature conservation. People such as Prakash might even consider Raworth’s argument colonial: there are many places in the world where nature conservation is considered a white man’s hobby. Take Skukuza, Kruger Park’s biggest camp, the name of which purportedly reflects locals’ bitterness at having lost their ancestral lands for the establishment of the park.

These subtleties, however, also mean that the environmental Kuznets curve may only show up for environmental variables that can be considered luxury goods. Moreover, Raworth makes the very valid point that rich countries may have cleaner air, but also bigger global footprints: instead of reducing their environmental impact they export it to countries that are willing to trade their air quality for income. That is their choice, a libertarian might argue, but it still gives the misleading impression that one can outgrow pollution.

Creative with green designs

I find Raworth’s recommendations unconvincing, however. “Economics is not about discovering laws: it is essentially a question of design.” I cannot begin to express how wrong this is: how can you design changes to a system if you don’t understand that system in the first place? Like Raworth, I also cringe at economists’ referring to mechanisms in an economy as “laws”. People are no Higgs Bosons: their behaviour is much more difficult to understand and predict. But that does not mean that their behaviour is completely unpredictable – if it were, Raworth’s beloved design would be pointless. What’s more, history has given us plenty of examples showing the danger of designing economic systems without understanding at least a bit of human behaviour and their interactions with institutions and each other.

This problem is pervasive in many of her recommendations. Companies should be generous, Raworth argues, giving back to the living systems on which they depend. That is a laudable goal, but those companies still have employees, and their families, with stomachs to fill. Yes, I complained in an earlier post that economists’ motto “get the prices right” treats people like incentive robots, but you can also understand this motto as making sure that companies that respect environmental boundaries at least do not go bankrupt for doing so. The same can be said for her recommendations on the cyclical economy: if recycling does not pay, markets have a way of weeding out companies that ‘overdo’ it unless governments fix the prices that companies face. Ditto for what she says about finance. The root of the problem is that the environment is a shared resource, so that individuals who cause pollution share the costs with all other users while reaping all the benefits for themselves.

There is a caveat here, however, and I wish Raworth would have considered it more closely. I just said that I don’t think people are the incentive robots that some economists seem to think they are. People are driven by considerations of morals and social norms as much as by cold economic incentives. If they weren’t there would be a lot more litter on the streets than there is already – luckily a lot of people still have the decency to use a waste bin. It’s just that under some circumstances, the economic incentives win. I don’t know whether this has been tested in the field much (this may be such a study), but it seems natural to expect that competition is a big factor here. Especially under very fierce competition, as in financial markets, companies will have limited room to act morally, and prices reign supreme. Does that mean that a little monopoly allows company owners the slack to follow their moral instincts? That would be one of those questions we would need to answer before we start designing any economic system.

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Doughnut Economics (6): Be explicit about distributive justice

The fifth of Kate Raworth’s “Seven Ways to Think Like a 21-st Century Economist” is to forget the idea that economies must become highly unequal before they can truly spread wealth, and to start designing ways to spread that wealth now.

The central theme of the chapter is what economists call the Kuznets curve. Economist Simon Kuznets found a pattern in macroeconomic data that suggested that as they grow, many economies go through a phase where inequality rises only to fall later on. Raworth criticizes how the concept has been interpreted and used by economists.

I am no macroeconomist, and therefore I’m not overly familiar with this topic, but I have always understood that to Simon Kuznets (a statistician as well as an economist), this pattern he found was no more than that: a pattern in the data for which an explanation was needed. According to Raworth, however, economists have taken the Kuznets curve to be more than a pattern: rather, they turned it into an economic law of nature as well as a policy prescription. I would not go that far. The sheer volume of literature on the Kuznets curve suggests that many economists are trying to identify the mechanisms behind this pattern, rather than treat it as a law unto itself. She especially overstates her case when she suggests that belief in some sort of Kuznets law inspired institutions such as the IMF to impose austerity upon debt-ridden countries such as Greece and Argentina. In order for these countries to grow, the IMF is said to believe, this ‘Kuznets law’ demands that they must first go through some magical cleansing procedure that involves much economic pain and inequality. As far as I’ve understood it (but I admit I’m going out on a limb here), the austerity measures recommended to, or imposed on, Greece and Argentina were necessary to pay off these countries’ mountains of debt. And yes, paying off such amounts of debt means going through the pain of repaying it before you’re free of it. That has little to do with Kuznetsian magic, but everything with accounting.

Distribution, equality, income

Raworth’s recommendations in this chapter are a mix of fairly classical redistribution policies (land taxes, for example) and a few more radical ideas, the latter of which I find unconvincing. Complementary currencies have been around for some 20-30 years and although they may have been helpful for some communities, I don’t see how they would transform our current monetary system for the better. As far as blockchain currencies such as Bitcoin have not been overhyped, they have in any case proven a boon for tax evaders, ransomware-designers, and other cybercriminals.

Neither do I share her expectations from open source as a viable alternative for intellectual property rights. Open source works very well for software, which is easy to distribute and has a host of tech-savvy users who are willing to develop and share an extension that they happen to find useful. However, you cannot expect the same model to work for innovations that require much heavier and riskier investments in research and testing, such as pharmaceuticals.

A more general concern, however, is that she may be making the same mistake as the economists that she criticizes: oversimplifying distributional concerns. First, we should not conflate inequality and poverty. An unequal society is not necessarily poor in the absolute sense: it could be that everybody earns enough to make a decent living and a few people are very, very rich. Likewise, a society can be very equal and poor at the same time. These issues are more complicated than simply about redistribution of income. Would you rather be poor amongst other poor people, or earn a modest living while everybody around you is very rich? And is income all that matters in this regard, or do other considerations matter at least as much, such as access to healthy food and clean water, the ability to take part in society, or the freedom to make your own decisions? The literature on economic justice provides many sensible and interesting ways of looking at these questions. I have been reading a lot lately on the capability approach, which emphasises the agency that people have over their own lives. I find it an appealing approach to economic justice. But, admittedly, our economics education pays too little attention to the wide variety of ideas and philosophies of economic justice. Besides utilitarianism (maximise the total amount of happiness in society) we should also introduce students to the ideas of thinkers such as John Rawls, Robert Nozick, Amartya Sen, and Martha Nussbaum.

Oh, and I take issue with the word “design” in the title, but that is better addressed in the next blog post.

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Doughnut Economics (5): Understand emergent behaviour. Oh, and what externalities are

The fourth of Kate Raworth’s “Seven Ways to Think Like a 21st-Century Economist” is to replace the old, rather Newtonian model of economics by one that treats the economy as a complex adaptive system. There is a lot in this chapter I can agree with, but my enthusiasm is rather dampened by her embrace of the Suzuki Fallacy that in economics, “externality” means “irrelevant”.

Economists’ role model: nineteenth-century physics

In this chapter Raworth makes a rather convincing case that the efforts of nineteenth-century economists like Walras and Jevons to make economics the physics of the social sciences still linger in ways that are less than pretty. Before I read Doughnut Economics it had already struck me how articles in top economics journals seem to try to emulate theoretical physics with their complicated lemmas and formal proofs, and I often cite Jagdish Bhagwati’s joke that nice economists reincarnate as physicists whereas nasty economists reincarnate as sociologists. Rather ironically, Raworth cites Friedrich Hayek, the original neoliberal, as a prominent critic of the emulation of physics. Hayek features more than once in this chapter, and I can’t help wondering whether Raworth might have credited him more if only she had overcome her aversion to his neoliberal legacy to seriously consider his ideas. But I’m getting ahead of the story here.

In a sense, her criticism of this Newtonian economics falls in the same trap as the Newtonians themselves. General equilibrium is the wrong model, she says. Its assumptions are too stringent, too unrealistic, and in any case the Sonnenschein-Mantel-Debreu theorem has shown that in a system with multiple agents and multiple interdependent markets there is no such thing as a single equilibrium. I had to google for the theorem (hey, I never said I’m a expert) but I’m not so worried by it. Both the Newtonians and Raworth appear to be looking for the right model of an economy, like phycisists are still looking for the right model to explain such things as mass and gravity. But in economics, as in any science dealing with very complicated systems, all models are wrong, and so is the general equilibrium model. So “wrong or right?” is the wrong question.

Unlike physicists and, apparently, some economists, scientists in such fields as ecology, meteorology, and climate science aren’t bothered with finding the ‘right’ model: they know their models are gross simplifications of reality. Few ecologists would waste much time proving theorems of their models, or pretend that those models are accurate representations of reality. But like the computable general equilibrium models used by applied economists, their models help understand complex systems, and evaluate policy. As George Box said, all models are wrong but some are useful.

Externalities – oh puh-lease!

There it is, on page 143:

At the same time, drop the economist’s beloved notion of ‘externalities’, those incidental effects felt by people who were not involved in the transactions that produced them – like toxic effluent that affects communities living downstream of a river-polluting factory, or the exhaust fumes inhaled by cyclists biking through city traffic. Such negative externalities, remarks the ecological economist Herman Daly, are those things that ‘we classify as “external” costs for no better reason than because we have made no provision for them in our economic theories’. […] Far from remaining a peripheral concern ‘outside’ of economic activity, addressing these effects is of critical concern for creating an economy that enables us all to thrive.

Her characterisation of externalities as “effects felt by people who were not involved in the transactions that produced them” is fairly accurate, but the suggestion that economists ignore them because there is “no provision for them in our economic theories” or that “externality” means “not in the economy” is nonsense of a degree that makes one understand why so many economists dismiss the entire book. How can Raworth get this so spectacularly wrong?

And yes, I’m being defensive here. That is because my field, environmental economics, studies hardly anything else than externalities. Externalities are central to environmental economics, because they are market failures that can do a lot of real harm. There is a lot you can say about the behavioural model underlying the concept of market failure, including externalities. It treats people as incentive robots who cannot change their attitude and just blindly follow whatever impulses the market gives them. It has become a common excuse (among economics majors, especially) to act selfishly: sorry, you gave me the wrong incentives! But the idea that economists call environmental pollution an externality because they prefer to ignore it is the number one nonsensical canard popular among lazy thinkers who prefer to attack a caricature of economics rather than the actual thing. And it’s a shame she is perpetuating this myth, because it puts off a lot of people who otherwise may have learned about her more sensible ideas.

Complexity, emergence, and two liberal thinkers

In a sense, the chapter’s title (Get savvy with systems) is misleading: any economic model is a representation of a system. Raworth’s alternative is no different in this respect, and as I argue above, she falls into the same old trap of presenting her model as the final accurate representation of economic systems.

But there is an interesting difference between the two approaches. Mainstream economic models usually have only one equilibrium and one optimum (the two of which might not be the same – that is one way of understanding market failure). This property is based on how their costs and benefits depend on production levels. Marginal costs increase: in other words, the sacrifice needed to attain the next thing gets bigger with how many things we already have. Meanwhile, marginal benefits decrease: the more things we already have, the less we appreciate the next thing. Naturally, there comes a point where we have so many things that the costs of the next thing equal its benefits – voila, nous avons a market equilibrium.

Economists do acknowledge that things do not always work this way. Some technologies have network externalities: the more people are on Facebook, the more friends a new Facebook user can connect with through his newly opened account. This is probably one of the reasons why the Dutch company Hyves eventually stopped its network and switched to online games. Paul Krugman won his Nobel Memorial Prize for his contribution to a theory of international trade based largely on economies of scale: by specialising in a particular product, countries can make it at lower costs than would be possible if they had broadened their portfolio. Both network externalities and scale economies have the property that even if external conditions are the same, different starting conditions or even sheer coincidence can give very different outcomes (although I doubt Hyves would ever have beaten Facebook).

Ecologists have known for a long time that ecosystems can have such path-dependency. Ecosystems can also suddenly flip from one state to another. Shallow lakes, for example, usually have either clear water with much submerged vegetation and high densities of predatory species such as pike, or very turbid water with limited vegetation and a high density of bottom-feeding species such as bream. Like with scale economies, positive feedbacks drive this property: turbid water favours bream, which by its feeding behaviour maintains turbidity.

Ecologists have taken this idea much further, however. Rather than systems with a handful of equilibria, which can be described by a handful of equations, many ecosystems are best described as assemblages of a large number of individual agents, each with simple decision rules, but whose joint behaviour can produce highly complex outcomes. Such outcomes are difficult to predict from the properties of the individuals and emerge from the system when we just let it run its course.

The models that describe such complex adaptive systems, usually called agent-based or individual-based models, are not used as often in economics as in ecology. Ironically, to find emergent behaviour in economic thinking we need to look at two economic thinkers who have been most criticised by Kate Raworth and others. Adam Smith’s invisible hand was a metaphor to describe how a form of order emerges from a seemingly chaotic process. Friedrich Hayek described similar processes in his writings. Interestingly, however, I see few of these insights translated into quantitative models. Every now and again you come across agent-based models in the economics literature, but they are certainly no mainstream economic tools. I suspect the problem with such models is that it is difficult to distil generalisable insights from them, while that is precisely what most academic economists are looking for. And to understand why they do so we need to go back to economists’  tendency to take physics as a role model.

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Doughnut Economics (4): Beware Nietzsche’s abyss

The third of Raworth’s “Seven Ways to Think like a 21st-century Economist” is to replace the robotic view of human behaviour that is so ubiquitous in neoclassical economics by a richer picture that acknowledges the important role of social norms and moral considerations.

Behavioural economics

That Homo economicus is a poor model of human behaviour is, at least nowadays, widely acknowledged in economics. The Nobel Memorial Prizes for the likes of Daniel Kahneman, Vernon Smith, and Richard Thaler demonstrate this – in fact, if you want to keep up with the latest fads in economic research, behavioural experiments are a pretty good bet, and you’d better hurry because the field is getting crowded! Raworth also cites a wide range of behavioural-economic research to make her point, so the chapter reads like an overview of current behavioural-economic insights, rather than a fundamental critique of the profession.

Of course that still leaves the question how much of this has penetrated economics education. I can’t speak for economics education in general, but at least I know that the economics programmes at Wageningen University (where I work) and Tilburg University pay attention to behavioural economics as well as the neoclassical model.

The tail wags the dog

She also makes two pieces of criticism, however, that deserve attention. The first is the warning that not only do we shape theories, the theories also shape us, as economics students turn out to be more willing to cut moral corners for personal gain, and this effect becomes clearer as students progress further in their programme. This insight, that our theories and insights shape our object of study in more direct ways than is possible in biophysical systems, is quite common in the social sciences but gets little attention in economics. To quote Nietzsche, when you gaze into the abyss, the abyss gazes back into you.

The second criticism is not made explicit but you can read it between the lines: whereas Raworth tries to design a conceptual framework of human behaviour that covers all possible factors (price incentives, preferences, social norms, psychological factors), economics tends to view the social and behavioural factors as deviations from the standard model, where the standard model needs tweaking in order to capture those factors as well. These are two very different approaches to understanding a complex system: one tries to capture all the factors at once, and the other starts with a highly simplified version that is then extended to include more and more complications. I believe both approaches have merit and can coexist.

Nudge all you like, but don’t depend on it

So what should policy makers do with this richer picture of human knowledge? Raworth dismisses the economists’ kneejerk response to resource misallocations that all that policy-makers need to do is to “get the prices right”, because price incentives have all kinds of nasty side-effects that have to do with motivation crowding: if you do good because it is good, you lose that intrinsic motivation once you get paid to do good. And I share her aversion to the tendency to reduce people to incentive robots.

Alas, I find her alternative less convincing. If we want to change people’s behaviour, Raworth argues, we need to mobilise the power of nudges (subtle changes in information that work on an unconscious rather than conscious level), networks, and social norms. While I agree that we need a richer model of human behaviour to guide our policies, I think she dismisses the price mechanism too easily, and relies too much on psychological nudges and social norms.

My main objection to this is Hayek’s insight that a price is not only an incentive – it is also a piece of information. If it costs me €10 to produce something, I will not charge less than €10 for it. This is a signal to others that the costs of producing it is at least €10 (after all, I might try to charge more). This is important information in their decision to either purchase the good, produce it themselves, or seek an alternative. If there are many competitors around, I will not be able to charge too much either, so that what I charge would be close to the production costs, including the opportunity costs of my time. That is a powerful information mechanism that you will not find in nudges, norms, or whatever motivation you want to mobilise other than a price mechanism.

On the scale of an entire economy this role of prices as information is essential to steer the allocation of goods, because it is the only way to transfer such information efficiently. Sure, it has nasty side-effects so we should be careful not to apply it everywhere – I’m sure there are situations where we would better rely on nudges, networks, social norms, and whatnot. And I agree that there are many examples around where we have trusted too much in price mechanisms (or other quantified indicators of value or success, such as, ehm, citation indices and course evaluation scores), and allowed fierce competition to erode social norms and a general sense of humanity, or moderation, in how we deal with each other. But accepting nudges to run an economy is just as fanciful.

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My two cents on the pulse ban

As I am writing this the European Parliament, the European Council, and the European Commission are still discussing a ban on pulse fishing. Dutch fishers have invested millions of euros in this technology, assuming they would be able to use it for many years to come. And judging by the scientific results so far, they had every reason to do so: pulse trawls have lower fuel use, lower CO2 emissions, less penetration of the sea floor, lower bycatch of plaice than traditional beam trawls. So no wonder they are angry and frustrated at the prospect of a ban.

Most likely it will come to pass. There are plenty of articles on how The Netherlands have lost the battle for the hearts and minds of other EU member states, such as this article in a Dutch newspaper, or this paper by my colleagues at Wageningen University (paywall – sorry!). By and large the experts seem to agree that the Dutch government dramatically overplayed its hand, and that a more careful introduction of the technology may have been more effective in the long run. I can’t judge this but I have two reflections.

Don’t people ever listen?

First, the scientists working on the effects of pulse trawling are also frustrated, and it’s a frustration I also sense with respect to other societal debates. By and large, the scientific consensus is that pulse trawling is most likely better than its alternative, beam trawling:

  • “No injuries were found in fish exposed to the electrical pulses.” (Soetaert et al., 2018, North American Journal of Fisheries Management)
  • “Exposure of Sole embryos at 2 d postfertilization and larvae at 11 d posthatching to pulsed DC used to catch brown shrimp did not result in a lower survival 8 d after exposure. Additionally, no differences in yolk sac resorption and morphometric length measurements of the notochord, muscle, eye, and head were observed in the developing larvae.” (Desender et al., 2018, North American Journal of Fisheries Management)
  • “Compared to tickler-chain beam trawlers, pulse trawlers showed relatively higher discard survival under fishing conditions pertinent to these studies.” (van der Reijden et al., 2017, ICES Journal of Marine Science)
  • “These results indicate that, under the laboratory circumstances as adopted in this study, the small-spotted catshark are still able to detect the bioelectrical field of a prey following exposure to [pulsed direct current] used in pulse trawls.” (Desender et al., 2017, Journal of Experimental Marine Biology and Ecology)
  • “These data reveal the absence of irreversible lesions in sole as a direct consequence of exposure to electric pulses administered in the laboratory, while in cod, more research is needed to assess cod’s vulnerability for spinal injuries when exposed to the cramp pulses.” (Soetaert et al., 2016, Fisheries Research)
  • “Electrode diameter and pulse amplitude showed a positive correlation with the intensity of the fish’s reaction. However, the present experiments confirmed that cod also show variable vulnerability, with injury rates ranging from 0% to 70% after (almost) identical exposures near the electrode.” (Soetaert et al., 2016, Marine and Coastal Fisheries)
  • “In conclusion, under the circumstances as adopted in this study, the electrical field seemed to have only limited immediate impact on the exposed animals.” (Desender et al., 2016, Fisheries Research)
  • “Some of the large cod (n = 260) developed haemorrhages and fractures in the spine, and haemal and neural arches in the tail part of the body. The probability of injuries increased with field strength and decreased when frequency was increased from 100 to 180 Hz. None of the small cod (n = 132) were injured and all survived. The field strength at the lateral boundaries of the trawl was too low to inflict injuries in cod.” (de Haan et al., 2016, ICES Journal of Marine Science)
  • “The evidence presented here suggests that the electrified trawls are superior to conventional trawls regarding different aspects, including ecological impact on the North Sea (less bottom impact), management of commercial fishing stocks (less discards) and carbon footprint (reduction of fuel consumption).” (Soetaert et al., 2015, Fish and Fisheries)
  • “The pulse trawls had fewer fish discards […]. The pulse fishing technique resulted in a lower fuel consumption (37-49%), and consequently in spite of lower landings net revenues were higher. A downside of using pulse trawls is the possible spinal damage of marketable cod (Gadus morhua L.), but because total cod landings by beam trawls are low (4-5%), the implication will likely be limited.” (van Marlen et al., 2014, Fisheries Research)

So to summarise:

  • Cod may indeed be affected more severely by pulse trawls than by beam trawls;
  • For other species the effects appear negligible;
  • There are clear benefits in lower fuel use, greenhouse gas emissions, selectivity, and sea floor penetration.

Basically it’s a trade-off between a possible (but possibly limited) damage to cod versus higher fuel use, greenhouse gas emissions, and damage to shellfish and other benthic life. These scientific findings have led ICES to conclude that “pulse trawling has fewer environmental and ecological effects than beam trawls.

The response by BLOOM, the NGO at the forefront of this crusade against pulse trawling, to ICES’s advice?

twitter.com Bloom_FR status 1002253942108061698

Note that all studies I just cited appeared in peer-reviewed scientific journals. Add to this that ICES is more or less to North Atlantic fisheries research what the IPCC is to climate research, and you see the similarities. How often do climate scientists get to hear they’re only in it for the money? How often do pseudosceptics ignore the vast body of scientific evidence that climate change is happening, that much of it is driven by man-made emissions, and that this is a huge problem? Really, there is not much difference between climate deniers (I’m sorry, I mean to say deniers of the vast current scientific consensus that climate change is happening, anthropogenic, and problematic) and the folks at BLOOM.

And these are not the only examples where science and reason loses against emotions, fake news, and conspiracy theories. Australian green NGOs convinced the government to revoke the license of the Margiris trawler, even though CSIRO found its concessions respected ecological limits. Scientists time and again found no detrimental effects of genetic modification, but opponents pay no attention or refer to studies that have been done so poorly they had to be retracted. And don’t get me started on vaccination.

Perhaps we’re not speaking the right language?

This brings me to the second lesson: all too often scientists expect facts to speak for themselves. It may work like that for us (or so we think, wrongfully), but there is a big bad world out there where there is emotion, cherry-picking, motivated reasoning, political cynicism, and other monsters that will tear that illusion to shreds. Whether we like it or not, facts are not enough if we want our research to have the impact it deserves. Scientists, especially natural scientists (but probably also economists), need to learn that explaining your research is not enough: we must also consider how our findings are being used and interpreted in the wider political and societal debate, and we might need to involve different societal actors in the research in a much earlier stage to build trust and to understand the concerns and loyalties that determine people’s support for, or opposition to a policy.

These two, for me, are the main lessons from this sorry saga.

Doughnut economics (3): Choose your big picture

The second of Kate Raworth’s “Seven Ways to Think Like a 21st-Century Economist” is to “See the Big Picture”, but which big picture should we be seeing? In the years just after the Second World War, economist Paul Samuelson wrote one of the first textbooks in economics, where he presented the economy as a system where labour, capital, goods, and services flowed between households and businesses. Raworth argues that this model leaves out important components of the economy, such as the environment and household labour. Even worse, this limited model has been the essential model of the economy ever since Samuelson drew it, and economists keep ignoring household labour, the environment, and common pool resources. So Raworth argues we should replace Samuelson’s model with a modern one that also includes households and commons, and better reflects the embeddedness of the economy in the global ecosystem.

We all simplify

Whichever side you are on, Raworth or Samuelson, what both are essentially doing is to make a very complicated thing a bit more understandable by simplifying it. We have this incredibly complex system – millions or even billions of individuals of varying age, gender, culture, education, and so on, each making tens or hundreds of decisions every day on what to eat, where to invest, whether or not to switch to other fishing gear, another crop variety, another job, and interacting with each other and their natural environment. With his model, Samuelson aimed to capture the essence of this system in a simple graph, or a storyline if you wish.

Simplification is not unique to economics. It is also common in ecology and population biology: the Gordon-Schaefer model, for example, is a highly abstract representation of the more complex process of how organisms reproduce, but it works for the purposes for which it is designed. Such a simplification is bound to leave out parts that may be important for some questions or situations. What exactly is important enough to be included depends on which problem you are solving. It is to some extent also a matter of judgment, and, admittedly, your political ideas, preferences, and personal morals may consciously or unconsciously have an influence on such choices.

In explaining Samuelson’s model Raworth’s narrative goes more or less like this. Paul Samuelson intended his model not to be a simplified model developed for a particular purpose or problem, but as an accurate and unchanging representation of the economy. Behind this effort was a secret plot by the Mont Pelerin Society to propagate the neoliberal belief that markets are infallible and should be left alone. Ever since, economists have bought into the neoliberal scam and ignored market failures, common property, household labour, and the environment.

The problem with conspiracy theories, however, is that no matter how plausible or nonsensical they are, they are also uniquely difficult to debunk. So instead of betraying my neoliberal paymasters, let me focus on the other allegations: that modern economists treat Samuelson’s diagram as some sort of complete and unchanging model of the economy, and therefore ignore such factors as households and the environment.

The model depends on the question asked

Bear in mind that many sciences respond to questions and concerns of policy makers and society as a whole. This applies particularly to the social sciences, and even more so to economics. Samuelson and Phillips developed their models in an age when the 1930s economic crisis was still in everybody’s memory and economies were being rebuilt after being laid to waste in a devastating world war (which, in a sense, had its roots partly in that same economic crisis). Therefore, Samuelson’s model (read: his simplification of an immensely more complicated system) reflected the concerns of the time: how to rebuild the world economy, especially that of Europe and Japan, and how to avoid future crises like the one that might very well have put Hitler and Mussolini in power? The issues that Raworth proposes to include in her model were of no concern in those days – yet. People knew Arthur Pigou’s 1920s work on external costs, but for the rest environmental concerns were on hardly anybody’s mind.

Fast-forward to the 1960s, and we see that scientists, policy makers, and activists started paying increasing attention to environmental problems. Rachel Carson wrote “Silent Spring”, and Paul Ehrlich “The Population Bomb”; WWF, Environmental Defence Fund, and the Club of Rome were founded; Santa Barbara suffered a major oil spill. The 1970s saw the Club of Rome’s “Limits to Growth” report and a global oil crisis, and in the 1980s concerns were rising over acid rain. No wonder economists also started to look into these issues, and in 1979 the Association of Environmental and Resource Economists was founded. And what do we find in one of the most widely used textbooks on environmental economics?

GraphTietenberg

Source: Tietenberg & Lewis, Environmental and Natural Resource Economics. Routledge.

That’s right: not an economic system that somehow exists independently of its environment and natural resources, but one that is embedded in a wider natural environment that provides resources and absorbs pollution. So the allegation that economists have all the time ignored the environment strikes me as odd, to put it mildly. Rather, the model we use depends on the problem we set out to address. There is as little reason to blame a regional economist for not taking into account climate change as there is to blame an environmental economist for not making his models spatially explicit. Unless, of course, such aspects are important for the problem you’re dealing with – but because you cannot take into account everything, you have to simplify. My PhD dissertation, for example, featured spatially explicit analyses because it addressed the question how habitat fragmentation can be reduced cost-effectively. It did not, however, take into account the impact of the methane emissions or nitrate leaching from the dairy farms where such habitat was being created. That wasn’t the question.

Are markets infallible?

But how about markets? Don’t economics textbooks present markets as infallible? Don’t they ignore the environment? Let’s take a classic in this respect: Economics by Greg Mankiw and Mark Taylor. Mr Mankiw self-identifies as a small-government, low-tax, free-market conservative, and he has served as chairman of president George W. Bush’s economics advisers. Students in the Occupy movement staged a walkout at one of his lectures to protest, as they put it, the market-friendly one-sidedness of his lectures. Surely his Econ 101 texbook would spread the neoliberal love? Here is what it says about market failures such as monopolies, environmental pollution, and public goods:

First, our analysis assumed that markets are perfectly competitive. In the real world, however, competition is sometimes far from perfect. In some markets a single buyer or seller (or a small group of them) may be able to control market prices. This ability to influence prices is called market power. Market power can cause markets to be inefficient because it keeps the price and quantity away from the equilibrium of supply and demand.

Second, our analysis assumed that the outcome in a market matters only to the buyers and sellers in that market. Yet, in the real world, the decisions of buyers and sellers sometimes affect people who are not participants in the market at all. Pollution is the classic example of a market outcome that affects people not in the market. Such side effects, called externalities, cause welfare in a market to depend on more than just the value to the buyers and the cost to the sellers. Because buyers and sellers do not take these side effects into account when deciding how much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole.

Market power and externalities are examples of a general phenomenon called market failure – the inability of some unregulated markets to allocate resources efficiently. When markets fail, public policy can potentially remedy the problem and increase economic efficiency. Microeconomists devote much effort to studying when market failure is likely and what sorts of policies are best at correcting market failures.

Mankiw & Taylor 2006, Economics, Thomson. Page 144-145.

Don’t start that the use of the term “side effect” suggests that externalities are unimportant – the book devotes an entire chapter on them and Mankiw himself supports taxation of fossil fuels. Externalities are a side effect to individual economic decision-makers in a market, i.e. firms, but surely not to society as a whole. Besides externalities, Mankiw’s introductory economics book also devotes chapters to monopolies and public goods. What do you mean markets can’t fail?

A few words about the commons

Raworth also appears to confuse common property resources with open access resources, and her reverence for the digital commons only adds to the confusion. Common property is exactly that – property, i.e. something that belongs to some people and not to others. Open access resources are owned by nobody, but they can be taken by anybody. It’s exactly that difference between property and no-property that is driving the overexploitation of open access resources such as high-seas fisheries.

This is in fact a common confusion, even among economists themselves. All too often I come across a false dichotomy between private property and something that is referred to, rather interchangeably, as common pool, common property, “the commons”, or open access. We should probably blame Hardin, who coined the term “Tragedy of the Commons” but in fact described a mechanism that is present in open access resources, not in commons. As Raworth rightly argues, Elinor Ostrom demonstrated that common property resources are usually managed quite well, by a mixture of peer pressure, social norms, or even religious rules. Hardin used common grazing land as an example, but in reality these lands are good examples of such well-managed resources! For this reason I try to avoid the term “Tragedy of the Commons” in my lectures. I much prefer Daniel Bromley’s distinction of four property regimes: private, public, common, and open access. The latter is in fact a no-property regime, which has seen many examples of overexploitation.

Raworth has high expectations of the digital commons, and they might indeed appear like some sort of open access resource that is nevertheless thriving. But they are incomparable to resources such as land, fish, and water. Natural resources are depletable – the more you extract, the less there is left. So to make sure that there is enough of them left in the future we should limit their extraction. But one does not “extract” a digital resource: as artists and record companies painfully experience, information can be copied endlessly. No matter how many people use R, there will always be copies available for the next user. So to avoid depletion of common property or open access resources the digital commons are a poor model. They are more like public goods, like the ubiquitous lighthouse: non-excludable and non-rivalrous. Why individuals nevertheless make programmes such as R is a question that could be answered by Ostrom’s work on the role of social norms in their management.

I consider this one of the weaker chapters of Doughnut Economics. At best its message can be understood as that Samuelson developed his big picture to address the economic problems of his time, but that subsequent generations of economists have (wrongly) treated his circular flow diagram in the way that physicists treat gravity, or biologists treat evolution: a fundamental, unchanging law that is independent of the context or the problem to be addressed. Perhaps today Samuelson might have drawn a diagram more similar to Tietenberg’s.

Nevertheless I feel Raworth overstates her case when she suggests that economics as a whole views markets as infallible and the environment as unimportant. This is a pattern throughout the book: she makes very general and wild accusations that play well with the econopobes buying her book, but will probably hamper its ability to get the sensible part of her message across to economists.

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Doughnut Economics (2): Question the goal

The first of Kate Raworth’s “Seven Ways to Think Like a 21st-Century Economist” is to “Change the Goal”: we should ditch Gross Domestic Product (GDP) and develop alternatives that do justice to the defining environmental and development issues of our time. Raworth’s alternative, the Doughnut, consists of two types of indicators: a range of human well-being indicators that should all be above some minimum, and a range of environmental indicators that should all stay within some planetary boundary. The chapter argues that economists have focused too much on GDP as a key indicator of success in economic policy, and even worse, that economists strive for perpetual growth in GDP. Chapter 7 deals entirely with economic growth, so I’ll focus on her criticism of GDP here.

GDP: A poor measure, but whose fault is that?

The first question that came to my mind is: who is Raworth addressing when she argues against blind faith in GDP? At least the economists that I know are fully aware that GDP measures not happiness, but productivity. And even for productivity it is a poor indicator as it does not measure a host of productive activities, such as household work, volunteer work, and ‘free’ services (the latter of which have become ubiquitous in this age of Facebook and Twitter). Moreover, it does not include depreciation of capital. environmental degradation, and resource depletion; worst, expenses to clean up the environment are counted as productive exercises just like farming. So yes, GDP is a poor indicator of happiness, or life satisfaction, but I have never met an economist, or come across an economics textbook, that would argue otherwise.

So if economists caution against using GDP as a welfare indicator, who does Raworth have in mind? The chapter opens with a reference to a recent G20 pledge to “grow […] economies by 2.1%”. This is a pledge made by policy makers, not economists. And yes, policy makers love simple metrics, but they tend to forget where the metrics come from – something with sausage and laws. By the same token we can blame economic journalists, who spell doom whenever growth numbers are low and bliss when they are high. Granted, many of the may indeed have had an economics education – but then again, I wonder who has taught them that GDP is a measure of how happy we are with our lives.

In fact economists have developed alternative metrics of economic welfare that do take into account environmental degradation and resource depletion, such as genuine savings or the UN’s satellite accounts. Economists and ecologists are working together to develop methods to include decline in natural capital stocks in national accounting systems. The problem is that such metrics are a lot more difficult to produce than GDP, and particularly for natural capital accounting the methodology is still being developed. And whatever these indicators measure, they will always be poor indicators of something as personal and multidimensional as human well-being.

So yes, there is a lot wrong with GDP, but don’t blame economists for this: blame the politicians who don’t care to use the alternatives, and the journalists who fail to check what it represents.

Question the goal

This does not mean that economists (or rather economics textbooks) walk out free. In one of the better pieces of the chapter, Raworth laments how modern economics seems to have forgotten the struggles of classical economists with defining the goal of economic policy. People like James Steuart and Adam Smith have thought long and hard about what should be the goal of what was then called political economy. As Raworth argues modern economics has simplified this to “how society manages its scarce resources,” or even worse, “what economists do.” This is not entirely fair: contemporary economists like Amartya Sen and Bruno Frey have written scores of books and papers about such issue as social justice and happiness. But open a first-year BSc economics textbook and one objective dominates, whether the analysis deals with taxation, monopolies, environmental pollution, or public goods: maximize the sum of all ‘utility’, or “willingness to pay”. (To be precise, there is a host of related measures to operationalise these concepts, but that is a bit of a technical matter.) But this is only one of many conceivable policy objectives. For example, why the sum of all utility? Why not maximize the utility of the worst-off citizen, like John Rawls argued? Or a weighted sum, so that we pay attention to all but we prioritise the worst-off? For an economics student, however, the maximization of the sum of all utility (whether expressed as willingness to pay, or consumer surplus, or utility as such) is so omnipresent that seeing it for what it is, namely one of many possible policy objectives, is as difficult as it is for a fish to develop a concept of water. Our textbooks hardly challenge our students to question the underlying assumptions, for example that satisfaction of wants is what makes people happy (Buddhist philosophy and modern psychology argue it doesn’t), that willingness to pay is a good indicator of utility (we all know it isn’t, but try repeating that every time you discuss market failures or travel cost method), and that aggregate welfare is all we need to consider in policy assessments (“maximize the cake’s size and let politicians deal with distribution” – but transfers are expensive and people live by more than bread alone). So while I disagree with Raworth’s charge that economists have some starry-eyed reverence for GDP as a welfare indicator, let alone a policy goal, she has a point that students should be familiarised with a wider range of normative frameworks and policy goals than the maximization of aggregate utility.

Now to the Doughnut

Raworth admits that the Doughnut is not extremely original: it builds on a concept developed earlier by Johan Rockström of the Stockholm Resilience Centre. Rockström identifies a set of planetary boundaries that define what he calls a “safe operating space” for humanity: not that things will surely blow up when we cross those lines, but we do know that things stayed okay for millennia when we didn’t cross them. To this upper bound to environmental pressure, Raworth adds a lower bound that represents what we minimally need. Her addition serves as a worthy reminder to environmentalists that people have needs too. However, like maximizing aggregate willingness to pay, it is also one of many possible economic goals: make sure that everybody is above the lower bound. In other words: it is a normative choice, just like maximizing aggregate utility. The essential issue is not to take any economic goal for granted.

What I take away from this is that we should question the goal of economic policy in class, over and over again. Utilitarian welfare economics is an extremely valuable tool for normative analysis – it might be the only set of assumptions that allows for quantitative analysis, from demand and supply curves on a blackboard to applied social cost-benefit analysis and natural capital accounting. Raworth’s Doughnut is another such quantification of objectives. But both approaches derive their usefulness from their very restrictive assumptions, and we must inspire our students to look beyond those assumptions.

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A plastic link between work and pleasure

IMG_5425I was in Indonesia recently with people of Wageningen University’s Environmental Policy Group to learn about the problems that the country is grappling with to deal with its plastic waste. After China, Indonesia is the second biggest source of marine plastic debris. This is a problem for Indonesia itself, but obviously also for other countries as like fish, marine waste respects no borders. The reasons vary from technical (moving waste around among thousands of islands is expensive) to behavioural (not too long ago people would wrap their food in banana leaves, which can be discarded), so the solution most likely comes from a combination of technical and behavioural interventions.

IMG_5444Bali appears to be ahead of the rest of the country. Bye Bye Plastic Bags is one of the better-known initiatives (no doubt a charming TED Talk has helped), but there are many more. And it seems the local government does not sit on its hands either: modern shops and shopping centers are prohibited from providing plastic bags. As great as this sounds, however, there are still many smaller shops that will be allowed to use, sell, and provide plastic bags, many of which may eventually end up in the sea. And Bali is a tourist hotspot with huge stakes in cleaning up its act, but Indonesia is a huge country where people in many other regions than Bali will feel they have bigger problems to deal with. So whoever can find a solution to reconcile technology, household behaviour, and economic growth, has his or her work cut out.

A message from Sonja

This is also one of those occasions where work and pleasure coincide. At the 2017 Festival Maritim me and the rest of Tobermore met Sonja O’Brien. Sonja runs the Boghill Centre, where I have spent many Christmas holidays learning new tunes and enjoying sessions in the vicinity of Kilfenora, County Clare, Ireland. In Bremen Sonja taught us an Old Time tune by the name of The Big Sciote:

BigSciote

Sonja gave us permission to play the tune at gigs, but only under one condition: we must ask the audience not to discard their plastics in the ocean. This is of course a promise we are happy to keep. We play the tune with two other Old Time tunes, Ora Lee and Sail Away Ladies. It’s one of our favourite sets! So feel free to play The Big Sciote if you like, but please remember: don’t throw your plastics in the ocean. Or the rivers. Or the street. Or wherever. Don’t buy it in the first place!

Anyway, happy holidays y’all.