“In the long-run, we are all dead” said John Maynard Keynes. Thanks to our obsession with economic growth, Keynes’s long-run may not be as far as he imagined. Since its inception, the Nobel prize for economics has been awarded to contributions enhancing economic growth, improving market efficiency or explaining economic cycles. But in doing so, the impacts of hyper competitive free markets on the planet, have been ignored.
This year’s Nobel goes to William Nordhaus for “integrating climate change into long-run macroeconomic analysis” and Paul Romer “for integrating technological innovations into long-run macroeconomic analysis”.
Both the economists have built upon the work of Robert Solow who was awarded the Nobel in 1987. Today, 31 years after Solow, Romer’s explanation of the endogenous nature of technological progress and it’s potential to boost economic growth doesn’t fail to fascinate them. This growth OCD of economists has been infuriating ecologists who value the planet’s carrying capacity more than a growing economy. Even when discussing climate change, economists tend to quantify it in terms of ‘GDP lost’ or its mitigation as a percent of GDP.
Perhaps as a long overdue consolation, this year the Nobel was shared with William Nordhaus. For the first time since 1969, a contribution on economics and its impacts on the biosphere are considered worthy of a Nobel. This is indeed good as it will trigger conferences and debates relating economics with climate change, but it could be too late to wake up governments who are throwing scraps at climate change mitigation. Keynes’s long-run could be around the corner.
DICE, Nordhaus’s contribution to environmental economics, is a model which integrates economics, carbon cycles and climate sciences, using chemistry, physics and economics. DICE has great use in modelling policy interventions and cost-benefit analysis of climate change mitigation measures. It has helped immensely in supporting climate change warnings of Nordhaus and others. As expected, the model is not without criticism. The most common being that it is sensitive to assumptions and discount rates. However, it is the other OCD of economists – faith on mathematical models – which some ecologists may not completely agree with. Math models do not account for human greed, illegitimate marketplace activities or government lobbying. Billions of consumers demanding new phones every day, are exogenous to the model.
More importantly, economic models are limited by our understanding of how nature behaves, and that does not inspire confidence. For example, we have been poor at predicting ecosystem behaviours which face a rapid change in the rate of change – second derivatives – of multiple variables simultaneously. This same committee awarded a Nobel to Paul Muller for DDT and years later, the world banned it when its effect underwent a bio-magnification in human milk, something Muller’s models and lab experiments could not predict. And when economic models leave out on the voracious consumer appetites, they have lost much of their ecologist audience.
DICE is being used by US EPA for a long time and the US has seen substantial improvement in its environment. However, this has many contributors – outsourced manufacturing, technological sophistication (Romer’s province) and citizen’s increased willingness to pay for a better environment are important ones which could have assisted DICE modeled policies.
There is no doubt that Nordhaus’s contributions in economics and climate change are monumental. He has been a strong critic of climate change skeptics, has pulled up the STERN Review for its ‘unrealistic 0.1% discount rate’ assumption; and most importantly has unequivocally said that the 2 degree temperature rise target is ludicrous if major policies are not immediately taken up. Towards this message, DICE is a powerful tool to model impacts of policies.
As much as I would like to believe Nordhaus’s contributions will benefit the planet, I stand skeptical, but open to correction.
William D. Nordaus’s important works
1. Is Growth Obsolete? 1972. Economic Research: Retrospect and Prospect, Volume 5. Available here http://www.nber.org/chapters/c7620.pdf
2. History of Lighting. 1996. The Economics of New Goods. Chapter title Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not (p 27-70)
3. The “Stern Review” on the Economics of Climate Change. 2006. NBER Working Paper No. 12741. Available here http://www.nber.org/papers/w12741