Adbusters: More Realistic, Humble Economists Can Stop Environmental Ruin
http://adbusters.org/the_magazine/63.php?id=137# What do the English, the French, oysters, economics and the environment have in common? A lot, it turns out. The first three components of this equation form the title of a fascinating book by Robert Nield, former professor of economics at Cambridge, England. Nield has loved oysters all his life. Shortly after he retired, on a long vacation in France, a question occurred to him. Oysters are plentiful in France, with 2 billion a year being produced, yet scarce and expensive in England, which produces just 10 million. Why? Nield knew that this was not always the case – in the mid-nineteenth century oysters had been in such abundance in Britain that they were an important part of the diet of the Victorian poor. Why had that changed? His research took him deep into the intersection between economics and the environment. He determined that oysters all but disappeared in England because the disastrous laissez faire policies of nineteenth-century British governments allowed them to be harvested almost to extinction. Conversely, in France the extraction and conservation of this valuable natural resource was carefully regulated and controlled. Nield's entertaining book – if you really want to know how to open an oyster this is for you – illustrates the usefulness of thoughtful, real world economics when applied to environmental problems. Traditionally, many environmentalists recoil in horror at the very thought of economics. It's understandable, given the faith-like certainty which many economists attach to pure free-market solutions everywhere and at any time. Indeed, this is why I wrote the Death of Economics just over ten years ago. I wanted to do my bit to help kill off a wholly unrealistic and damaging way of viewing the world. But at the forefront of the discipline, there is a lot going on to make economics more practical and useful. Granted, many economists themselves haven't caught up with this trend, and remain stuck in their old ways. Yet environmentalists can profit – if I dare link these two words together – from the direction economics is moving. The most important point is that the best economists are now designing their theories around the facts. Strange but true! Most economic theory bears no relationship to the evidence, but simply assumes that everyone behaves rationally, exactly like the orthodox theory postulates. Increasingly, at the forefront of economics, this is no longer the case. Here, for example, is 2001 economics Nobel laureate George Akerlof in his Nobel lecture: "In this new style [of economics], the economic model is customized to describe the salient features of reality that describe the special problem under consideration." In plain English, the model must be designed to explain the particular problem at hand. Akerlof is saying: we cannot simply presume that a standard, free-market approach is the best. We must take account of the evidence. And here is the current Governor of the Bank of England, Mervyn King, himself a distinguished former academic: "Economics tells you how to think, not what to think. It is not a set of settled conclusions about issues." King is particularly scathing about models with "optimizing" behavior, the very hallmark of free market theory: "It is vital never to confuse the real world with a model." What does this mean for the environment? Well, it means there are economists who can think in sensible ways and who will not insist on text book, free market solutions. And environmentalists can strengthen their case by working with and not against them. An absolutely vital question is what can be done to prevent the world from running out of natural resources. First of all, an observation which is guaranteed to raise hackles. The prices of most resources have been falling over long periods of time compared to prices of manufactured goods, the current oil scare not withstanding. Economics certainly does suggest that this implies that demand has not been running ahead of supply. Otherwise the prices would rise and not fall. But here is where the danger of unthinking economics lies. We cannot extrapolate from this and assume that the "market" will solve all our problems. A standard economic line is: "even if we start running out, prices will rise and there will be incentives to discover new supplies, new ways of doing things, so everything will be fine." The best economics, on its own terms, has shown this is not necessarily true. As long ago as 1979, Partha Dasgupta of Cambridge and Geoff Heal of Columbia proved, in a purely theoretical model of the free market, that we cannot presume in advance that prices will adjust to ensure there are no problems For their part, environmentalists need to accept that markets and private property can play an important role in policy. And for their's, economists need to be more humble and realize just how hard it is to come up with the right sort of institutional structure, the right sort of regulation, and the right sort of incentives to produce the elusive mix of policies which stand a reasonable chance of working. A good example of this pragmatic approach is the congestion charge introduced in 2003 by the mayor of London, Ken Livingstone. In the major global city of London, traffic was becoming a nightmare and pollution was high. Livingstone's political background is so far to the left he makes Edward Kennedy types seem like evangelical Republicans. Yet in the first instance, he relied upon a market-based policy, and raised the price of driving into London at peak times. The policy wasn't based on the assumption that everyone acts "rationally," still less on the assumption that the free market always produces the best solution. But it has worked. Congestion has eased and pollution is down. The challenge now is to evolve a set of policies for the longer term. A combination of regulation and incentives in the form of better public transport is being evolved to try to wean more people away from the car on a permanent basis. The mayor's economists are heavily involved in this whole process. No one is talking about the "free market," "optimal polices" or "rational behavior." Instead, their models are trying, in Akerlof's words, to "explain the particular problem at hand." Looking at another British example, in April 2002 the UK government brought in a scheme to meet pollution reduction targets under the Kyoto Protocol. Companies can participate in what is known as the emissions trading scheme. Under this, the firm must undertake a binding agreement to reduce its use of energy. In return for this, it receives allowances to produce emissions at the agreed level. The real innovation is that these permits can be traded. If a company finds that it's easier to meet its target than it originally thought, it can sell some of its permits. Equally, if a firm miscalculates in the opposite direction, it can buy permits which allow it to produce emissions at a higher level than its original target. The overall target is met, even though individual firms make mistakes. In reality, even big firms have far from perfect information – quite unlike in the economic textbooks. The scheme recognizes this, and has proved a great success. Ultimately, the point is that whether we are dealing with oysters or traffic congestion or pollution, the key to our success lies with a realistic, less ideological, more humble economics. Paul Ormerod was for several years Head of the Economic Assessment Unit of The Economist. He currently runs Volterra Consulting and his most recent book is Why Most Things Fail.
