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.

Previous posts

Next post

  • Doughnut Economics (6): Be explicit about distributive justice

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.

Previous posts

Next post

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.

Previous posts

Upcoming posts

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.

Previous post:

Upcoming posts:

Doughnut Economics (1)

Kate Raworth’s book Doughnut Economics has caused a fair amount of controversy, not least among Dutch economists. This piece is a good illustration: Bas Jacobs (Erasmus University, Rotterdam) explicitly warns against reading it, accusing Raworth of attacking strawmen, while Ewald Engelen (University of Amsterdam) hails the book as “the book of 2017.” I find the sheer polarization and vitriol in such debates fascinating: what makes people disagree so fundamentally with each other on issues each finds self-evident?

And then fellow-tweeps Anthony Rogers and Ngaio Hotte suggested to read it as some sort of resource economics Twitter book club so I decided to buy it. I’ll write my impressions in a series of blog posts, but first I want to say a few things about where I come from, and with what state of mind I started reading the book. In the meantime this might already explain some of the extremely hostile responses by economists.

Where I come from

In an elevator I would introduce myself as a natural resource economist, but actually my academic background is a bit more complicated. At highschool I had only about two years of economics – I hated it and dropped it as soon as I could. After highschool I studied Environmental Studies at a Dutch polytechnic institute (Hogeschool in Dutch, comparable to the German Hochschule). Only somewhere in the fourth and last year of this education programme I developed an interest in the economics of the environment. Sure we want a clean environment, but how clean? When is it clean enough, and how much health care, wealth, and other goodies are we willing to forgo to reach that quality? I also felt my education so far had been inadequate: I knew a little of everything, but I was an expert in nothing.

So I came to Wageningen University to follow a study programme called, back then, Agricultural and Environmental Economics. I became fascinated with the combination of economics and ecology: I wrote a minor thesis on fisheries economics, and in my PhD thesis I combined metapopulation ecology with spatial-economic land use models. More recently I got bored with bioeconomic modelling so I am now exploring the boundaries between my field and other social sciences, such as psychology, sociology, and anthropology. Even though I first felt my environmental studies were too broad, I now think it enabled me to understand and communicate with other sciences – the horizontal bar in the T-shaped model that Wageningen University likes to champion. The vertical bar is my economics education.

So where am I now? I’m no Bas Jacobs, nor am I Ewald Engelen. If you want me to list my top five economics books of the year you’ll have to wait at least five years before I have read enough of them. (Note that this post appears more than a year after I started reading Doughnut Economics – so much to read, so little time.) I’m your average associate professor on the tenure track, struggling to find time to keep up with the literature between the teaching, supervising PhD candidates, writing proposals, and joining committee meetings. What I’m trying to say is: I cannot pretend to speak for the entire field of economics. The field is too broad for anyone to oversee anyway, so my perspective is only one of many possible perspectives and probably a very limited one at that. All I can and will do is draw from my own experiences in class, conference rooms, and coffee breaks with colleagues. I might avoid topics I know nothing of, and I’m sure I won’t be able to avoid saying a few silly things.

My mindset reading Doughnut Economics

I started reading the book with a fair dose of skepticism, and it is important to understand where that skepticism came from, not least because it may explain why economists’ responses have been so downright hostile. As a natural resource economist I work a lot with other disciplines, notably ecology, sociology, and environmental science. Here are just a few responses I usually get after telling people I’m an economist:

  • “You look more like a leftie to me!” (If only you knew.)
  • “What I think is really stupid of you economists is that you think the economy can keep growing forever…” (We don’t)
  • “You economists ignore the environment. You call it an externality, as if it does not matter!” (That’s not what an externality is)
  • “Economics is not really a science, is it? After all you did not see the crisis coming” (Neither can climate scientists predict specific hurricanes.)

I can relate to climate scientists who have to debunk the same old nonsense time and again (“You don’t take into account the sun’s influence!” “The climate has not warmed in 16 years!”). The difference is, unfortunately, that climate contrarians usually do not get the starry-eyed media attention that anti-economics writers tend to get.

Don’t get me wrong here – I think there is a lot in my field that can be improved and criticism is vital. The tragedy is that a lot of the criticism comes from people who don’t know what they are  talking about, who have their own dogmas, prejudices, and political bias, and, most tragically, whose prejudice and poor understanding of the field prevents them from seeing the problems that do deserve attention.

My experience with Economics of Good and Evil by Tomas Sedlacek is a good illustration of this. Sedlacek takes a very original approach to economics, drawing from philosophy and ancient mythology to reflect on how the field deals with moral questions. I gave up on the book when I read how Sedlacek interprets the concept of utility:

…it is clear that any sentence on the maximalization (sic) of such utility is naturally valid. We gain a tautology: Utility is gained by an individual through activities that increase utility. And because each person has utility from something else, we get: An individual does what he wants to. We can see that this sentence is vacuous – and for this reason it can be constantly “valid” because it says that A=A. […] If an individual maximizes utility, which everyone defines themselves, Popper would immediately ask: How would an individual have to act in order not to maximize their utility? In other words: Can one go in an opposite direction to their optimization function? If it is not possible to present a thinkable example, then the theory is not falsifiable and is de facto pointless. (Tomas Sedlacek, Economics of Good and Evil, Oxford University Press, 2011, pages 224-226)

Despite having been the Czech president’s economic advisor, Sedlacek does not seem to understand that utility functions were never meant to be a testable hypothesis any more than the Gordon-Schaefer growth function is supposed to hypothesize how populations grow. Both utility functions and biological growth functions are mere models, i.e. abstractions of much more complicated processes. In the case of utility functions this complicated process is how people decide what they want. Such a simplified model helps us understand the choices that people make and how their choices play out at an aggregate level in the overall economy. Utility functions are nothing but preference orderings: indeed, an individual does what he wants to do, but what he wants, how he acts upon what he wants, and how his choices interact with those of others, that is the object of investigation in economics.

The biggest tragedy, however, is that Sedlacek apparently has not read enough economics books to pinpoint the restrictive properties underlying utility functions. Utility functions need to have particular properties in order to be rational, i.e. consistent, so that they can be used in the kind of formal analyses that economists like to do. These properties can be tested, they have been tested, and some have been shown to be false in at least some situations and individuals. For example, utility functions (to be more precise, preference orderings) have to be transitive in order to be rational. This means that if you prefer A over B, and B over C, you must prefer A over C. This property can be tested in a simple laboratory setting, so many psychologists and behavioural economists have done so. Rather unsurprisingly, they found it is often violated.

Perhaps I should have checked who Tomas Sedlacek is before I read the book, because a search on Scopus yields two publications in Czech-language journals and one interview, where in the latter he repeats the tired old slur that “economics is a religion”. With all due respect to the Czech, publishing only in your local language is not exactly convincing of your awareness of the state of the art in your field. Nobody should take my opinion on economics seriously if my publication list featured nothing more than two publications in Economische en Statistische Berichten.

You might respond that in a field so fundamentally stuck in its own dogmas it takes an outsider to shake it up. But then I have to refer to climate science again. Suppose somebody who has never published in climate science, or only in a handful rather obscure journals, writes a book that purports to revolutionize climate science. Would you read it? Now add another feature: suppose that a casual browsing through the book reveals that it regurgitates all the nonsense that climate scientists have been debunking for years: that the so-called climate pause invalidates all of climate science, that climate scientists ignore the sun’s influence, that climate variation on geological scales suggests that current changes are nothing to worry about, and so on. Would you take it seriously – at all?

I hate to say this, but in that light I had every reason to be skeptical of Doughnut Economics. In Scopus I can find a whopping three peer-reviewed publications by Kate Raworth – none in economics journals. What’s more, see what Ewald Engelen wrote in his review of Doughnut Economics:

Take “externalities” – as if environmental pollution, depletion of resources, immeasurable animal suffering, declining species richness, carbon dioxide emissions are ‘external’ to our economic production, and not an intrinsic part of it.

I don’t know what I would find more shocking: that a best-selling book by somebody hailed as the new Keynes (granted, coming from George Monbiot you might not take this as a compliment) perpetuates the Suzuki Fallacy, or that somebody considered a celebrity economist in The Netherlands repeats this faux pas in his review.

So no, I did not expect much when I started reading Doughnut Economics.

Is it any good?

So now that I’ve read it, what do I think of the book? It’s certainly not as bad as Sedlacek’s – but that’s quite a low bar. Raworth makes an honest effort to construct an economics that is fit for the problems of the twenty-first century (global environmental change and dwindling resources combined with grinding poverty and repulsive inequality), where she believes that the economic approach has so far been inadequate. Not all is new, indeed, and while some economists accuse her of attacking strawmen, she actually cites a fair number of big names in economics who look beyond the standard neoclassical model, such as Elinor Ostrom, Richard Thaler, and Daniel Kahneman. She makes a number of very good observations, but also some statements that range from problematic to simply untrue – yes, she repeats the Suzuki Fallacy. My note book has a couple of “Spot on!!” notes as well as some “Nonsense!!” ones. Her recommendations are a mix of classical environmental-economic solutions, radical but interesting ideas, and poorly thought-through, hopelessly naive pies-in-the-sky.

So would I recommend it to my students? The short answer is: perhaps my MSc students, but definitely not my BSc students. For them there is simply too much in there that is simply not true (I want them to get the definition of externalities right, for example). The long answer is in the following blog posts.

Coming up next: