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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  • Doughnut Economics (5): Understand emergent behaviour

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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