Never waste a good crisis

It’s impossible to write about 2020 without resorting to clichés. Yes, it was weird buying the groceries with a facemask on, keeping 1.5 meter distance from other customers. Yes, I missed meeting colleagues and students in person, having trad sessions in the pub, and going to Roadburn with my brother. Yes, I’m also sick and tired of conspiracy theorists undermining science and public health. Yes, I’m also happy to see the back of this shitty year. But for me the best way to characterize this year, or for me personally the last couple of years, is the cliché from just after the Second World War, when the world lay in ruins and Winston Churchill urged world leaders not to miss this opportunity to make sure we do better next time.

Never waste a good crisis

It was March, we were having our third strategy meeting with our new Chair, Francisco Alpízar, and Francisco informed us that from the next day onwards we were strongly urged to work at home. All meetings and all education would have to take place online. We could only briefly enter the office to collect what we needed to do our job.

By that time the Wageningen University education IT system had just migrated from Blackboard to Brightspace, and we were in the middle of setting up our courses in that new system. For many of us Blackboard was no more than a place to make our slides available to the students, but Brightspace offered many more possibilities to enrich our teaching with online quizzes, discussion boards, and online lectures. The university had also been pushing the flipped-classroom model amongst its teaching staff, but so far with mixed success. In an old-fashioned Dutch university course, teachers use lectures to summarize course material that students can principally also find in their book. There are many drawbacks to this model: not least the overlap between lecture and written text, which is why many students either skip the text or the lecture, but also the fact that all students are offered the same material regardless of their prior knowledge. The flipped-classroom approach expects students to study the material in advance because the lecture will build on that material, rather than rehash it. Converting my course on cost-benefit analysis to the flipped-classroom model had been on my to-do list for a long time.

So that’s what I did. I figured that lockdown was the perfect excuse to have students study the reading material and watch a bunch of video clips before discussing the material in an online session. Francisco, who contributed to the course, was stuck in Costa Rica with a poor internet connection and a nine-hour time difference, so online lectures were a no-go for him anyway. It’s been a hell of a job converting my lectures to video clips and making online exercises, but it was worth it. Evaluations were pretty good and I enjoyed the discussions we had despite not meeting in person. I also noticed that online sessions allow for things that are more difficult to do in person, such as interactive polls. Hopefully the new set-up allows us to tailor the material to the diversity of students, which is a perpetual issue in Wageningen, and to make our teaching more engaging. In any case, there is no way I’m going back to the old model for this course – on the contrary, more likely I will also flip the classroom in other courses.

Never waste a good crisis

I left the tenure track near the end of 2019, and 2020 is the year that my position officially changed from that of associate professor to senior lecturer. It feels like being dumped by your partner and realizing that the two of you should have parted ways a long time ago. I had been struggling for some years to find my own research focus and to find enough time to work on my publications besides my teaching obligations, which were admittedly excessive. My next up-or-out moment was coming up, but my chances were slim. I had not realized a single publication in 2019 and I had had limited success in recruiting new PhD candidates. My course evaluations, on the other hand, were very positive. So when Francisco suggested I move out of the tenure track and into a lecturer position I may have had some misgivings to overcome but not many.

Those misgivings had everything to do with the deeply ingrained sense in Academia that the people doing the cutting-edge research are the Real McCoy, and all the others, from teachers to IT folks to secretaries to canteen staff, are a mere derivative of those scientific front soldiers. Nobody wins a Nobel Prize for teaching; the university rankings that students use for their school choice depend disproportionally on research. I felt like Butch in Pulp Fiction, being told by Marcellus to “fuck pride” and betray what he once regarded his calling in life.

But I was already getting fed up with the system. The extreme competition in Academia, combined with managers’ obsession with metrics, has created a situation where overwork and conformism have become the norm. It is a habitat where alpha males, or athlete scientists if you will, have become the dominant species at the expense of methodological and theoretical diversity. This applies to Academia in general, but even more so to the economics discipline. Behavioural and experimental economics may be all the rage in the top journals, but economists’ obsession with being the fundamental physics of social science still narrows their perspective. Meanwhile the paper that I’m most proud of so far is on wicked problems, which I like to tell my students are not rocket science – they are a lot more difficult because they cannot be formalized. It is a direction I want to explore further, in collaboration with sociologists and anthropologists, but that would have been nigh impossible to defend to a promotion committee full of economists. Hopefully my lecturer position allows me to venture further out of the box and the mainstream, and do stuff that inspires me.

I am also worried about the values that this hypercompetitive system teaches our students. Just this week I got a thank-you note from one of my thesis students who highly appreciated my urging to find a healthy work-life balance. I believe this is important – too many people get burnouts because they think they should. In a system where scientists tell each other they should have field trips instead of vacations, what do we teach students about maintaining their own mental health? We often make the mistake of assuming that academic education means stuffing textbook theories in youngsters’ minds, but to be a functioning academic also means being able to stand up for yourself, your values, your ideas, and your health in a demanding work environment.

Never waste a good crisis

Perhaps these ruminations are just a symptom of that other cliché, that crisis a guy my age is supposed to go through. I strongly believe there are two varieties of the midlife crisis. The malign variety is what most of us know from jokes and stories. It is the actual cliché of the sports car, the ill-conceived tattoo, and the trading of a stable long-term relationship for a new adventure with a much younger partner. The benign variety involves a shift from ambition and status as prime motivations to value and meaning, and from sleepwalking through the day-to-day distractions to developing a keener awareness of one’s place in the world. Both the malign and the benign variety stem from reaching a dead center in one’s life, either because you have reached all your goals or realize you will never reach them; and realizing that you are closer to the grave than to the cradle. In the malign midlife crisis people try to hide from their mortality in illusions of eternal youth; in the benign midlife crisis they become an adult at last.

Moving from a tenure-track position to a lecturer position fits neatly in that shift. The tenure track system is all about extrinsic motivation: you are only as good as other people think you are. I have never been an athlete academic, and it can be difficult to distinguish the things you want to do from the things you should do and the things you think you should want to do. Being a lecturer allows me to live more keenly by my personal values, i.e. to be creative and to make a difference in people’s lives, rather than the expectations of others.

I guess I have also become more spiritual, but I don’t like the term. “Spirituality” suggests a free-wheeling flirtation with superstition, half-understood religion, and pseudoscience. The disorganized sort of magical thinking that makes people refuse facemasks and vaccines, and waste their money on homeopathy and bioresonance machines. What I mean is a practice that develops a sense of perspective and reflection, as traditionally offered by religion. Two and a half years ago I found myself in a real-life koan: a situation that could not be solved by cognitive reasoning. It inspired me to take up zen meditation again, and ever since I start every day staring at a wall for half an hour. Zen goes straight to the heart of the matter without expecting us to take anything for granted. I don’t consider myself a Buddhist, but as far as I know zen Buddhism is the only religion that emphasizes great doubt as a virtue.

Never waste a good crisis

Will we come out of this crisis as better people? Will we build a more just and sustainable society on the ruins left by corona? At the beginning of this crisis 170 Dutch social and environmental scientists published an op-ed arguing just that. I find that their manifesto smacks of wishful thinking. Some of us may have rediscovered the importance of friends, family, art, and simplicity, and the futility of material pursuits and distant vacations. But we have also seen the erosion of science, journalism, and other democratic institutions all over the so-called free world, and especially in the United States, its purported leader. The first lockdown was characterized by a burst of solidarity and good will; the current one by anger, paranoia, and egocentrism. The good things may be limited to small practical changes: saving travel time by meeting online, being more flexible to work from a remote location, making education more engaging with online videos and exercises.

Whether those other positive changes come about depends on the choices you and I make. One of my favourite koans puts it succinctly:

A monk said to Chao Chou, “I have just entered this monastery. Please teach me.”
Chao Chou said, “Have you eaten your rice gruel?”
The monk said, “Yes, I have.”
Chao Chou said, “Wash your bowl.”
The monk understood.

That is all we can do: wash our bowls.

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.

Previous posts

Next post

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.

Previous posts

Next post

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 (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?


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:

Why cost-benefit analysis is a much better context for ecosystem service valuation than natural capital accounts

Help! I just discovered I agree with George Monbiot!

Well, sort of. He makes a number of sensible points against natural capital accounting that are worth considering:

Natural capital accounting suggests substitutability. Prices are substitutions. In a market money is best understood as a numeraire good, a good that has no immediate value of its own but that acts as an intermediary and a yardstick for the value (read: relative scarcity) of all the other commodities. I know natural capital adherents who try to estimate the monetary value of ecosystems, but flinch at any suggestion of it being a “price tag”: ecosystems cannot be substituted, they say. If a commodity cannot be substituted it has an infinite price. Attach a finite number to it, and it becomes substitutable. Period. This means two things. First, as Monbiot rightly argues, a price is meaningless without the suggestion of a transaction. Indeed, much non-market valuation aims at finding the compensating variation of a public good: how much money people should pay (receive) to make them just as happy as if they had not seen the public good reduced (improved). But these are incremental changes, whereas natural capital accounting regards the value of total stocks of capital. Second, if you value the total area of forest at some price (usually the per-hectare value times the area in hectares) you suggest we would be happy if we sold all our forest at that price (plus, say, one euro). But the per-hectare value reflects the marginal value of the first hectare you would cut; by the time you’re done cutting all the forest the last tree will be worth astronomic sums of money.

Pricing something crowds out intrinsic motivations to preserve it. A growing body of social-psychological research demonstrates that this is indeed a risk. A now-classic study demonstrated that when parents were fined for being late to pick up their kids at a day-care centre, they were more likely to be late – paying the fine absolved them of the moral obligation to be on time. Another study demonstrates that when being informed on the economic value of a park, people are less likely to donate money to its conservation.

I don’t think monetary valuation is entirely useless, but I do admit I’m getting more skeptical of natural capital accounting. Originally non-market valuation was developed to be included in cost-benefit analysis, and I think it should stay there. For three reasons:

Cost-benefit analysis has a null option. A properly done CBA compares at least two alternatives: adopting the policy and not adopting the policy. Both alternatives should be defined carefully, so they can be compared on their positive and negative effects on human well-being. NCA has no such null option. Suppose the government wants to build a highway straight through a forest. A CBA would compare two alternatives: one where we keep the forest and accept the traffic jams, and one where we lose the forest but win travel time. Comparing the economic costs and benefits of both alternatives gives us the incremental costs and benefits of building the highway. Now, I know that NCA was never meant to be used in such decisions (which raises for me the question what it is being used for), but the example demonstrates the problem with its lack of a null option: if we lose the forest, what do we have left? There is no proper definition of “no forest”: is it barren land, a hole in the soil, a graveyard of trees? The worst case of valuation-without-context is replacement cost pricing, where the forest is valued by the costs you would make to rebuild it elsewhere if it disappears. In a CBA such rebuilding efforts could be part of your policy alternative, and the CBA will inform you on the merits of that choice. In NCA, however, you would have to assume that the forest would be rebuilt no matter what.

Cost-benefit analysis is done in incremental terms. As rightly pointed out by Monbiot (and, actually, many economists), it is silly to assume that the total value of a biome is equal to its marginal value times its area. In fact, economists developing methods to value natural capital are aware of this, so what they do is to account for the value of natural capital in a way that is consistent with how we calculate GDP. Nevertheless, the very act of valuing all forest in a country yields numbers that are very difficult to interpret, and therefore prone to misinterpretation. In a CBA, both alternatives are defined by a proper storyline and a delineation.

Cost-benefit analysis has a context. CBA is usually done to inform a concrete policy decision, and most of the time it is an input into a wider decision-making process that involves multiple stakeholders. Also, in this process many other values are considered besides economic value, such as social impacts, aesthetics, ethical considerations. Non-market valuation of ecosystem services can be part of this, but one can also choose not to monetize those values, and leave them to a wider debate that can also include other considerations. (I’m currently reading up on taboo trade-offs and the IPBES theoretical framework – exciting stuff!) At best, the valuations done within NCA are included in satellite accounts that also list biophysical parameters such as species richness, forest cover, and air quality. But the wide range of considerations that will feature in the public debate will still be reduced to a set of statistics.

Bumfights transactions

In 2002 a Las Vegas film maker came up with a hideous business model: pay homeless people a few dollars or a six pack of beer to conduct dangerous stunts, or to engage in fistfights with other homeless people, and film them. The movies, marketed under the insensitive brand name Bumfights, caused a storm of criticism, especially from advocacy organisations for homeless people, who argued the movies legitimized violence against homeless people, and were demeaning and dehumanizing to the people who participated.

The film makers responded that all homeless featured in the movies participated voluntarily. Surely they can make their own decisions? To which a professor responded

“Even if the homeless aren’t forced to perform, it’s inaccurate to describe people without adequate shelter, food or clothing as having choices.”

I hear the same argument in debates on international trade, Payments for Environmental Services, and other transactions between highly unequal parties: once an African lady reacted angrily to the concept of REDD+, arguing “it’s not a free choice!” I believe it points towards a moral flaw in economic theory that many of my colleagues either do not see, do not want to see, or just don’t care about. I call these transactions Bumfights transactions, after the movie series.

Forgive me for getting a bit theoretical here. Consider Rufus, the homeless man who featured prominently in Bumfights. Back then, Rufus had no home, no job, and he lived by what little he could earn by collecting empty cans. Let’s call the situation he lived in A. Say the film maker offered Rufus $5 if he would ride a shopping cart down a flight of steps. In other words, the film maker offered Rufus a new situation B, which you could define as A + $5 + S, where S is the humiliation and risk of serious injury that goes with the stunt. If Rufus preferred B to A (AB in mathematical notation), he would participate in the movie; if AB he would not. Obviously the film maker preferred AB: for only $5 he would have a lot of fun filming Rufus putting his life at risk, and he would make a big buck selling the video. So they could move from A (no transaction) to B (after the transaction), which they both preferred to A. What’s not to like? In economic terms this is called a Pareto improvement: a change that makes at least one person better off, and none worse off.

The objection to this logic is that Rufus “had no choice”, but an economist would point out that he did: he could choose to refuse participation and stick with collecting cans for a living. No matter how bad this situation was (I surely don’t envy him), obviously participating in Bumfights was better than not participating: after all, he participated, right? Not offering the choice would have left him in A, which is worse than B. The problem is not the transaction; the problem is poverty.

The flaw in this logic is that this may work in the sterile, utilitarian world of microeconomics, but in the real world the film maker also had a choice. He could have paid Rufus $100; he could have offered orange juice instead of alcohol (offering alcohol to somebody with a drinking problem is particularly nasty); he could have refrained from the transaction altogether and donate his $5 to the Salvation Army.

Another issue is that this line of reasoning only works if you care only about the consequences of an act: in other words, it follows a consequentialist ethic, where one could also follow a deontological ethic, or a virtues ethic. Many people consider making money in this way unethical, regardless of the consequences, just for its abusive nature.

Collecting up to 80 kg of sulphur in
a cloud of toxic volcanic fumes and
carrying it down the slope of
Mount Ijen, East Java: hey, it beats
starving to death!

Nevertheless, the line between an “equitable” transaction and a Bumfights transaction is blurry. To take the example of REDD+ again, many developing countries have come round to this idea, after initial opposition; it seems Costa Rica and Indonesia are quite keen on it. And how many people have jobs that are dangerous, or just mind-numbingly boring, just because the only alternative is starvation?

So next time you buy your clothes in a cheap clothes store, ask yourself: am I helping a poor Bangladeshi earn an income or am I taking advantage of his poverty? The question is more difficult than you might think.