Doughnut economics (3): Choose your big picture

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

We all simplify

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

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

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

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

The model depends on the question asked

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

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

GraphTietenberg

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

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

Are markets infallible?

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

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

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

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

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

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

A few words about the commons

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

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

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

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

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

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Doughnut Economics (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:

"I want a MOOC"

How many university boards are like this guy when you replace “iPad app” by “MOOC“?

Client: “I want an iPad app.”
Designer: “For what purpose?”
Client: “I don’t know, I just want an iPad app.”
Source: Clients From Hell

Don’t get me wrong here. Some MOOCs are great. I recently discovered two great online courses on Real Analysis, and I’m currently going through Tom Sargent‘s and John Stachurski‘s online course on Quantitative Economics in Python. But the question why you want a MOOC, for whom it should be made, and to what purpose, should always be asked.

Burn the schools down

I guess it’s a tradition that every once in a while students revolt against the economics they are being taught. When I was doing my PhD it was a movement calling itself “post-autistic economics”, which was mainly active in France, but also got support elsewhere. I agreed with some of their complaints, although the argumentation was not always that strong and sometimes outright politically motivated (“Capitalism boo! Neo-feminist post-constructionalism yay!”). Later on they changed the name to “Real-World Economics”, perhaps not to offend people suffering from autism. Looking at their review I still don’t get the impression that they’re making much of a dent in the economics debate. Neither am I convinced by what they write, to put it politely.

But now a new revolt has emerged in Manchester. As far as I can see it is more constructive, and more well-argued than the post-autist movement. I agree with some of their points, but not all.

I agree with their proposition that economics teaching should take heed of insights from such fields as psychology, law, and policy science. I don’t know the Manchester program, but I find it curious that such subjects receive as little attention as the Manchester economics students claim. Besides microeconomics, macroeconomics, and econometrics, students in our BSc Economics and Governance program take courses and lectures on history, policy science, institutional economics, and behavioral economics. I guess it’s a question of discussing one particular model or theory very thoroughly, or discussing several different models or theories in a more shallow manner. Our Economics and Governance BSc chooses to be broad, and I agree with that, especially for a problem-oriented university as Wageningen.

I also agree with the Manchester students’ call for a more evidence-based economics, and more attention for the conditions under which different theories and models have more explanatory power than others.

But that’s also where my main objection lies: the call for “pluralism” is translated into more attention to other “schools of thought” than just neoclassical economics. According to the Merriam-Webster Dictionary, a school of thought is

a group sharing a common point of view in respect to some matter (e.g. “she belongs to the liberal school of thought”); also: a point of view recognized as held but not necessarily accepted (e.g. “there are two schools of thought about this question”)

An economist can be “of” a particular school of thought: for example, Paul Krugman is generally considered a Keynesian; Milton Friedman was a monetarist; Herman Daly is an ecological economist; John Kenneth Galbraith was an institutional economist. The natural scientists I work with can only shake their heads when I tell them this. In their fields, there are different theories that compete or need to be reconciled (e.g. general relativity versus quantum mechanics). Or there are different models for different situations, based on simplifying assumptions, and usually developed for a selection of cases but not for all (e.g. metapopulation theory, or the Beverton-Holt stock recruitment model). In that sense, economics is close to ecology: both deal with complex systems that cannot always be experimented on to test competing hypotheses, so we use models that describe a subset of the mechanisms at work. The difference, however, is that whereas even Ilkka Hanski will acknowledge that not all populations can be approached as metapopulations, economists argue as if either Krugman or Friedman is right. On the other hand, schools of thought also have a danger of being politically motivated: if schools of thought are just “points of view”, then you can pick and choose whichever one fits your political preferences. So if you like bow ties, become a Hayekian; if you want to keep your really cool Che Guevara t-shirt, declare yourself a Marxist. (If you’re looking for a steady job in economic policy, follow Keynes.)

In my humble opinion economists must get rid of schools. We should treat our theories like ecologists treat their models: to paraphrase George Box, our models are always wrong in some respect, but they may be useful in some cases. The challenge is to identify the conditions under which they can be useful.