RETHINKING THE SCIENCE, ECONOMICS AND DIPLOMANCY OF CLIMATE CHANGE WITH SIMON SHARPE
Economists for Future: Equilibrium economics as a straw man, like you say in the book, does not represent the diversity of academic research, but it does claim authority, set the terms of public debate, and directly influence the decisions of governments. To what do you ascribe the authority gained by neoclassical economics? And we ask this because, in hindsight, there have been schools of thought (for quite some time now) and emerging strands within them that have provided a much better analysis of our economy as an ecosystem.
Simon Sharpe: First, equilibrium economics has the advantage of simplicity. It appears to give ‘correct’ answers to complex problems. This is an illusion, but an attractive one. Second, it benefited from a deliberate campaign to establish its dominance, with philanthropists and vested interests funding think tanks, academics, and political actors to promote its messages over many decades. This story is told well by Mirowski and Plehwe in ‘The Road from Mont Pelerin’. Third, it has achieved system lock-in. The most prestigious economics journals refuse to publish research that does not fit the equilibrium economics paradigm. Universities are assessed and funded according to how often they publish in top journals. Academics are marginalised by universities if they do not help bring in the funding. The Rethinking Economics movement has been at the forefront of detailing this problem, through investigations such as those recorded in ‘The Econocracy’ by Moran, Earle, and Ward-Perkins.
E4F: At several places in the book you mention, with illustrative examples, that a certain kind of economic analysis is unhelpful to the public, to policymakers, and to the economics profession itself. Using Robert Pindyck’s term, you call this situation ‘worse than usual’. Do you have any thoughts on why economics did not change its approaches to address climate change faster?
SS: System lock-in, as I described above, is a big part of the answer. I also think there is a deeper reason. To some extent, economics as a field seems to have lost its understanding of the scientific method. When people point out that the assumptions underlying equilibrium economics theory are completely at odds with reality, economists often respond that of course they already know that, but theory doesn’t really matter, and economics these days is all about data analysis. This position fails to recognise how theory shapes the questions we ask, the tools we use, and the way we understand the evidence that we see.
Several writers have suggested that this situation has its roots in the 1870s, when some economists wanted their field to be seen as ‘more scientific’. To achieve this, they developed ways to express economic problems and their solutions in the form of mathematical equations. Unfortunately, with the maths they had at that time, they could only doing this by making unrealistic assumptions. Over the decades that followed, the attachment to mathematical solutions only strengthened: Robert Lucas, the leading theorist of neoclassical economics, wrote that ‘Economic theory is mathematic analysis. Everything else is just pictures and talk.’ But maths is the language of science, not the method. The persistent refusal to change theory in the face of contradictory evidence has taken the discipline into such a strange place that Paul Romer, a former chief economist of the World Bank, has described macroeconomics as a ‘pseudoscience’ with a ‘noncommittal relationship with the truth.’
E4F: Would you say that for the longest time it (economics) didn’t need to change its approaches? Has the historical evidence of the power of some of the tipping points changed anything?
SS: I would say that for a long time there has been a great need for economics to change its approach. To deal with problems such as poverty and development, inequality, financial instability, industrial competitiveness, and climate change, it is much more helpful to develop an understanding of the economy in all its possible dynamic states, instead of limiting our focus to the special state of equilibrium.
The observation of tipping points in low carbon transitions being crossed now, such as solar and wind power becoming cheaper than coal and gas power, and electric vehicles beginning to outcompete petrol cars, is dramatically changing perceptions of the economics of climate change. This is prompting many people to look at examples of technology transitions from the past, and to understand what actions were taken that sped them up. When they do that, they quickly see that the transition to horses to cars was not achieved by putting a tax on horse-poo.
E4F: In what ways do you think the economics profession has been helpful and unhelpful in influencing climate policy in the past and the present? To what extent do you think policymakers are still using bad economics to govern their climate policies?
SS: Helpful influences include work such as the Stern Review, which showed that the risks of inaction on climate change were likely to be much greater than the costs of action; the reports of the New Climate Economy initiative, which showed the high degree of synergy between reducing emissions and increasing productivity; and work by groups such as the Carbon Trust which showed that well designed policy could accelerate innovation in clean technologies.
The unhelpful influence of equilibrium economics starts with it framing the problem in the wrong way: as a problem of ‘marginal abatement’ of emissions, instead of a problem of system transitions in the emitting sectors. By starting from the wrong assumptions, it has given misleading advice in relation to the three main levers of policy: that investment is inefficient compared to tax, that regulation adds costs, and that tax should be designed on the basis of an absolute value (the social cost of carbon) instead of a relative value (the amount needed to make a clean technology outcompete a fossil fuel). Theory and models that do not assume equilibrium, and observational evidence of what has worked so far, suggest the opposite is true as a general rule, in each case.
Very often, policymakers are using economic principles and analytical approaches designed for contexts of marginal change, and applying these to inform climate change policy – where the aim is to accelerate innovation and structural change. This makes it harder for policymakers to find good answers to their problems. A report from the Economics of Energy Innovation and System Transition project (eeist.co.uk) found that policies central to the most outstanding successes so far in low carbon transitions in China, India, Brazil and Europe were generally adopted despite, and not because of, the predominant economic analysis and advice. With more helpful economic advice, we could be replicating these successes more often.
E4F: Given your professional experience, how do you think the policy space should (or at least can attempt to) capture much more complex stories than just looking at short run empirical data sets. How can policy making space learn from historical transformations of the past?
SS: Good policy should take into account the best available knowledge, whatever form it is in. This definitely includes historical evidence: the work of Frank Geels provides many examples of how socio-technological transitions unfolded, and from these we can see what kind of actions can be most effective in accelerating progress at each stage of a transition.
When we need to understand the dynamics of a complex system (such as a part of the economy that we’re trying to change) system mapping can be a helpful approach. This does not mean arbitrarily putting a lot of wiggly lines on a page that connect everything to everything else. It means carefully establishing the relationships between variables, and the feedbacks that those relationships create. This can help distinguish between actions whose effects will be self-amplifying, and those whose effects will be self-limiting.
Scenario analysis can be useful when we’re dealing with even more fundamental uncertainties about the future. The reality is that most significant public policy choices are made in a context of uncertainty. In such contexts, there is no ‘optimal’ solution.
E4F: Among other things, one issue that diplomacy has consistently failed (more so from the global north) is on the principles of equity and common but differentiated responsibility when addressing the disproportionate impacts of climate change on marginalized and vulnerable communities? At E4F we have maintained this as a critique for the economics profession too. We were wondering what your thoughts and assessment would be around that.
SS: I recently learned that some of the ‘integrated assessment models’ used to generate scenarios for global emissions reduction (as used in the reports of the Intergovernmental Panel on Climate Change’ assume equal marginal costs of abatement as a way of calculating where and when emissions reductions take place. This means that if at a given moment in time it is cheaper to decarbonise the power sector in Africa than to decarbonise heavy industry in Europe, then the model assumes that Africa acts while Europe waits. This is the opposite of an efficient way of reducing global emissions. As Carlota Perez documents in ‘Technological revolutions and financial capital’, the huge technology revolutions of the past each started with concentrated investment in the industrial and financial core of the global economy (wherever that was at the time) and then spread outward like ripples. We surely need that to happen again. To postpone actions in the rich world that could propagate innovation and structural change globally, just because marginal emissions reductions can be found more cheaply in poor countries, would be ridiculous.
Models can have normative power even when that is not their intention. Ridiculous assumptions like the one I describe above may be more easily spotted by those whose interests they adversely affect. This is why I believe there is a good case for more diversity of people in the climate economics profession, as well as for more diversity in its ideas.
E4F: You argue that climate change cannot be addressed in isolation from other global challenges, such as poverty, inequality, and biodiversity loss. How can we better integrate climate action into broader efforts to promote sustainable development? Or is this framing hindering a systems boundary approach? How would you frame it?
SS: Clearly we, humanity, have to solve all these problems at once. But I would argue that for any person, organisation, or process, it is helpful to know which problem is the focus. The first step of systems thinking is to decide your system boundary. If we try to solve all problems at once, we end up solving none of them.
I believe it has been a mistake of climate change diplomacy to focus so much on economy-wide emissions targets. This is like trying to agree world peace, or an end to poverty. Diplomacy never succeeds when its scope is set too wide. To make effective agreements, we have to break problems into manageable pieces. Climate diplomacy is most effective when it is focused on individual emitting sectors – in our report, ‘Accelerating the low carbon transition’, Frank Geels, David Victor and I explain why we think that is an appropriate system boundary.
It worries me that global negotiations on biodiversity appear in some ways to be following climate negotiations down the wrong path. The catastrophic loss of species and ecosystems is as large and complex a problem as climate change. Setting a goal of ending species extinction is like King Canute setting a goal to stop the incoming tide. Instead of setting global goals and then leaving countries to come up with individual strategies, the diplomacy of biodiversity should be focused on finding ways countries can work together to address each of the main causes of the problem.
E4F: How can we develop new metrics and indicators for measuring progress on climate change that go beyond traditional measures of economic growth and development, and how can we ensure that these metrics are widely adopted and used by policymakers and other stakeholders?
SS: To measure progress on climate change, we should focus less on economy-wide emissions, and more on zero emission solutions’ share of the market in each emitting sector of the economy. This will help direct attention to the actions that are needed to increase that share. It is these actions that will accelerate the transition, and so reduce emissions most quickly.
For measuring progress in economic development, we should focus more on outcomes and less on activity. Many people have said this in different ways. I like the way Eric Beinhocker puts it, that ultimately it is the diversity of solutions to human problems that we have access to, not the rate of activity or material throughput in the economy, that determines our living standards.
E4F: In an era of crisis on multiple fronts, there is an increasing need for university education to adapt. What role do you see for movements like Economists for Future, as catalysts in this scenario? What more can we do?
SS: Your movement is an inspiring one, and is much needed. I encourage you to identify and focus on your unique point of leverage. As students, you are well placed to push for changes in how economics is taught. Together with lecturers, you can push for changes in how economics teaching is assessed, and how research funding is prioritised. Together with those in government who want a form of economics that is more helpful for solving their problems, you can end the system lock-in of equilibrium economics. And if you communicate widely the success stories that can come from applying disequilibrium economics to climate change policy, you will support the growth and application of this new field of knowledge.
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