In the International Monetary Fund’s (IMF) Finance & Development Magazine, Karen Dynan – former chief economist of the US Treasury – recently lamented the declining influence of economists over policy making. A recent opinion piece about climate change by two economists published in the leading Swiss quality newspaper Neue Zürcher Zeitung (NZZ) suggests that that may be a good thing.
Dynan suggests that the reason for a loss of influence of economists over the political discourse is that “[p]olitical leaders are more likely to prioritize ideology and expediency over economic analysis.”
The opinion piece in the NZZ suggests a different reason: Namely, that key tenets of mainstream neoclassical economics about people, government, and business makes economists appear increasingly out of touch with the realities of the 21st century.
Indeed, mainstream economics seems to be struggling in particular with adapting to climate change! William Nordhaus’s influential work on climate economics has been labelled ‘appallingly bad,’ but still celebrated inside the mainstream economics bubble with their fake Nobel Prize. But as the world continues on its trajectory to almost certain self-destruction, economists increasingly seem to live in a world of their own. The NZZ opinion piece is a microcosm of what’s wrong with mainstream economics.
A cynical account of climate action as business
The title of the article translates as something like “Until recently climate change was considered ‘humanity’s greatest challenge.’ Of the rise and decline of a debate”. The subtitle reiterates that “Until recently climate change dominated the discourse. Today it is hardly a topic any more.”
This is an intriguing claim, which does not square with the type of news and information I’m exposed to on a daily basis. But the article itself makes a rather different point than what the title suggests anyway. It essentially states that for a long time, climate change was used as a tool to either gain political capital through virtue signalling or economic capital through rent seeking. This, the authors argue, is now changing. Politically defined climate change targets are moving closer, which shifts the focus from remote goals and vague declarations of intention to concrete costs for climate change mitigation that have to be paid for now. That has led to what they call “the return of reason” and of a “more realistic” “fundamental economic logic,” i.e. good old cost benefit analysis. (I believe that shift is what they equate with the end of the debate, although I am not sure why. Possibly because economic cost-benefit analysis means a return of ‘the Truth’ – capital T – and hence no room for debate any more?)
While the shift from vague promises to concrete action is an interesting observation, the article is disturbing in its tone. It suggests that activists, businesses, and politicians have exaggerated climate change for selfish reasons. It also contains passages that suggest a more fundamental scepticism towards the reality of climate change, e.g. by placing phrases like “existential threat” that climate change represents in inverted commas. Or by suggesting that while the 1.5 warming target has already been reached, people consider that an increase of 1.5 degrees Celsius over 175 years (counting from 1850 “the start of industrialisation” according to them [!]), is actually not very much. And that – they predict – won’t change in the future.
It is not entirely clear from the passage whether the authors are arguing that 1.5 degrees increase is objectively not very much or whether people will never be convinced that it is. But given that the passage is under the heading “return of reason requires time,” they probably agree with that scepticism. More generally, the passage illustrates a common trend amongst mainstream economists when it comes to climate change: While taking transition risk - i.e. financial risks stemming from stranded fossil fuel assets and costs of investment in green technologies – very seriously, they dismiss the physical risks stemming from climate change itself.
Economics imperialism – and its limits
The passage on the 1.5C target also reveals an important reason why mainstream economics is losing its relevance. Namely “economics imperialism.” Economists’ turning the assumptions, theories, tools, and methods of their discipline towards broader social phenomena (e.g. family, education, crime) has had a considerable impact on much of the social sciences. A prime example of mainstream economists turning their tools on subjects that they do not understand is Gary Becker, an exponent of the Chicago School of Economics. In a famous essays he argued that there is such a thing as a marriage market where people make rational choices about the partner they choose. I’ve always felt that this probably tells us a lot about Gary Becker – and possibly his wife – but very little about the rest of humanity.
But mainstream economists’ inability to understand (or accept) the limits of their knowledge and the boundaries of their legitimate expertise, start undermining their credibility when they turn their attention to the natural sciences. To an economist a 1.5 unit increase over 175 years may not seem like very much (a compound annual growth rate of .05% or so). And that may be true if we were talking about – say – inflation, or GDP. But we are not. We are talking about the average surface temperature on the planet. Whether or not 1.5 degrees seems like a lot to economists is simply irrelevant – what matters is what climatologists, biologists, ecologists think about it.
Economists’ tendency to see their discipline as the most advanced of the social sciences – only one step away from physics with its natural laws and rock-solid experimental methods – is undermining their credibility when they seek to apply ‘economics imperialism’ to the natural sciences. Here, disagreement about the interpretation of observed social phenomena – which is inevitable in the social sciences – is replaced with the hard facts of physical reality. Economic imperialism is less effective in displacing established knowledge in such fields – and attempting to do so may actually undermine its credibility.
A dismal anthropology
Mainstream neoclassical economics’ imperialism is driven by a universalist theory about human motivation that lies at its hard: Rational Choice Theory, i.e. the idea that people make choices that best align with their preferences. The problem with Rational Choice Theory – according to economist Amartya Sen – is that it relies on a very thin definition of rationality – namely rationality as “intelligent pursuit of self-interest” (in Sen’s introduction to the 250th anniversary edition of Adam Smith’s Theory of Moral Sentiments).
If self-interest – Georg Stigler another Chicago School Economist claimed – dominates the majority of men. Why then – he continued – not “also in all their political undertakings?” The answer that the authors of the NZZ comment like most mainstream economists would certainly give is: “Well, it does!” And that is why any public-good orientated action cannot be taken at face value, but must be seen as hiding ulterior motives.
This dismal anthropology is another reason why economics is reaching the limits of its usefulness and credibility. With self-interest – most often narrowly defined as increasing one’s material wealth – as the only rational motivation of any human being (be they managers of big companies, politicians, or indeed bachelors on a dating app), any public action needs to be scrutinised for the underlying selfish motives of the people who advocate for it. That is what ultimately destroys any confidence in collective action for the common good, which we so desperately need when it comes to climate action.
Climate change mitigation as business
Applying this dismal anthropology to climate change measures (or Klimaschutz in German which translates as “climate protection”), the authors of the NZZ piece can only reach one conclusion: rather than a genuine attempt to address the climate crisis, climate action is a way for various actors to enrich themselves.
Until recently, they argue, climate change measures had been a “business.” That is what happens – according to their understanding of “modern economic theory” – with any problem that exists for a long time and is difficult to tackle: It will be used by social actors to gain political and economic capital.
They identify six mechanisms that led to that sorry state:
Firstly, promoting climate change measures is a form of “virtue signalling” (my term not theirs) that signals that “one is symbolically doing the right thing,” which voters may like, even though it does not solve any real issues. Adding a fatalist twist on another economist trope – collective action problems – the authors argue that symbolic policy is particularly likely in the area of climate change mitigation, because each individual country’s contribution does not solve the problem and therefore it does not matter whether its climate change measures are effective or not.
Secondly, any climate mitigation measure provides new sources of revenue for both politicians and economic actors, e.g. in the form of subsidies or the sale of certifications. Companies benefiting from government support for green technologies are labelled “subsidies profiteers.”(Interestingly, the indirect subsidies through tax breaks given to oil companies do not get a mention here, even though large multinational companies have a great deal more power to ‘profiteer’ from favourable treatment by the government than the average “clean tech” startup.)
Thirdly, there are political benefits to be had: ‘Owning’ the topic of climate change is a source of power in the sense that politicians can extend their power via subsidies, new regulations, and duties. All this without being held accountable for effective policies, because climate change is treated in a “moralising” fashion (which makes rational assessment impossible – at least that is how I interpret their somewhat convoluted point).
Fourthly, there is another economist trope that “bureaucrats” will jump on any opportunity to create more regulation. Of course, not because they think it is necessary to protect the public from harm, but because it provides selfish utility-maximising bureaucrats with additional authority, influence, and resources.
Fifthly, focussing on climate change as the cause of societal problems was an excuse to divert attention from the actual causes of the world’s ills. For instance, poverty is increasingly blamed on climate change rather than corruption or inefficient government.
Finally, companies face higher costs due to climate change measures, but they can pass these on to consumers – in some cases increasing prices even beyond the actual increased costs (This ‘mechanism’ presumably seeks to explain why business went along with it).
In short, climate change activism and policies were merely a smokescreen for selfish utility maximisation by various economic and political actors.
The argument developed here provides a microcosm of the mainstream economist worldview – which also explains its increasing irrelevance. The key elements are: Distain for morality by equating any moral claim or action with irrationality and sinister ulterior motives; the public choice trope of the selfish politician and bureaucrat who will never be motivated by the pursuit of the public good; the myth of the ever-expanding state and the uselessness of regulation; the trope of the “subsidy profiteer.” More fundamentally underlying all this is the fatalist idea that the “crooked timber of humanity” cannot be straightened – selfish utility maximisation needs to be accepted as a fact of nature – and any attempt to change behaviours other than through incentives are moralising.
They go on to predict that climate change measures will become a marginal political theme in the future, because we are now back in the realm of reason and cost-benefit analysis. What will predominate is not attempts to protect the climate, but to adapt to the change with more “realistic, tangible, and implementable alternatives” (what exactly these alternatives to climate change mitigation are remains vague – there is another article by the same authors on CO2 pricing. To mainstream economists CO2 pricing appears to be the only acceptable measure – as long as it does not contain “equity weighting” of course).
Regardless, all these tired tropes that the authors ascribe to “modern economics” – rather than “ideology and expediency” – may explain why policy makers are less and less listening to mainstream economists.
In a world where increasing number of people suffering from climate anxiety believe that climate change is a real threat rather than a cunny plan by bureaucrats and economic actors to make money and where China’s state-dominated economy is pulling ahead in both photovoltaic and electric vehicles, repeating like a broken record that government is the problem, Big Business is not; greed is good – or at least inevitable – while any non-selfish, non-maximising motivation of behaviour is ‘irrational,’ may simply sound like you are out of touch with reality rather than providing valuable insights to shape future policy.
More fundamentally, though the cynical view of humanity makes economists blind to any other aspect of human life than trade and commerce. It also makes them unfit to advise politicians.
The continuing flogging of dead horses
Dynan considers that “[t]he right response [to the waning influence of economists over policy making] is not to discard economic frameworks but to clarify how they were misapplied.” That, to me, sounds like the exactly wrong approach. Mainstream economics has not been misunderstood or misapplied but is fundamentally flawed. Therefore, what is needed is a better kind of economics. And there are, of course, already many so-called “heterodox” economists who have been working towards this goal (see for instance Geoff Hodgson’s work rejecting the homo economicus model).
Three things in particular require fixing in mainstream economics: The pro-big business bias, the parochial anti-statism, and the rejection of morality as a valid aspect human life.
One of the key aspects on which mainstream economics seems utterly out of touch with reality is its insistence that Big Business is not a problem – but the government is. Neo-liberal economists in the early 20th century – due to the experience with private (quasi-)monopolies resulting from 19th century laissez faire liberalism – were well aware that private market power was a threat not just to the functioning of markets, but to democracies themselves. Markets, to remain competitive and not monopolised, require rigorous state intervention not just for economic, but also political reasons. With the rise of the Chicago School of neoclassical economics and its belief in efficient, self-correcting markets, that knowledge has progressively been lost. Market concentration and private monopolies were now seen as a problem created by governments and flawed regulation, while markets if left truly free would wipe away any monopolist in due course (see my blog here).
Given the unheard-of concentration of economic power in the 21st century, which starts destroying not just competition but also democracies (see Musk’s, Thiel’s and other broligarchs’ influence over politics for instance), taking corporate power seriously as a problem seems like a key lesson for mainstream economists to learn from the past failures of their “frameworks.” Politicians seem slowly to wake up to that risk – even in the USA as Jerry Davis’s blog post suggests. Mainstream economists too should question the “government bad; business good” mantra.
A return to the origins of their discipline - most importantly to Adam Smith – would provide ample opportunity for such a rethink.
The anti-statism and de-regulatory zeal of mainstream economists is alien to Smithian economics. Smith rejected what he called the ‘savage patriotism’ of earlier societies and praised the civilising effect of the modern state which forms a ‘super-community’ that guarantees our safety and prosperity (in Thomas Poole’s words, p.114). As for state regulation, in The Wealth of Nations – wrongly considered by many as the Bible of free-marketism – Smith wrote: “When the regulation […] is in favour of the workmen, it is always just and equitable.” (I.i.10.ii, p.246). Modern mainstream Economists’ cynicism makes them blind to that civilising effect of the state. All they can see is a powerful instrument for someone to enrich themselves.
Smith would also provide the basis for a fundamental rethink of the one-dimensional, cynical homo economicus view of the world. Smith’s system has two pillars: Self-love and sympathy. The first is what motivates people in the sphere of exchange. It is why the baker provides us with bread (in exchange for money). The latter is what drives people in many other spheres of society and human life. Indeed, according to Amartya Sen, Smith’s political economy is crucially based on the pluralism of human motivations rather than the “cramped and simplistic theory of human rationality” (p.x and xi) of mainstream economics. Self-interest may explain why trade and exchange takes place, but it cannot even explain what makes such exchanges sustainable – namely trust and confidence. Trust and confidence rely on sympathy – “which interests [man] in the fortune of others, and render their happiness necessary to him, though he derives nothing from it […].” (The Theory of Moral Sentiments I.i. p.13).
Sympathy is crucial for tackling climate change as well as biodiversity loss. For centuries, sympathy not just for other humans but also for other animals too is what has driven myriads of people to take action for the environment – starting perhaps with the campaign against plumage trade in Victorian England, which has led to the establishment of the Royal Society for the Protection of Birds. The ‘dismal science’ of economics has become blind to that side of human nature and sees any reference to pro-social or moral sentiments as moralising, unrealistic fantasies by do-gooders, or a cunning plot in pursuit of self-enrichment.
To remain relevant in tackling today’s problems, rather than insisting that they have been misunderstood, mainstream economists would do well to start learning the lessons from past failings. Market fundamentalism led them to ignore the dangers of financial liberalisation before the Global Financial Crisis of 2008. Their lack of humility in face of climate change makes them equally blind to the next financial crisis, which many analysts and not-so-mainstream economists now see as real threat. Will mainstream economics maintain any relevance and influence over policy when that crisis strikes? For humanity’s sake the answer is hopefully no!