Economics and the environment: Perception and reality

Wow.  I realised David Suzuki was a little bit loose when he talked about economics – but he’s a smart man.  I assumed that when he talked he was merely bemoaning the fact that environment issues get ignored in policy, not that he actually had no idea how economics or the allocation of resources worked.

If these quotes are true, my view of him was far too generous (via Offsetting Behaviour).

“David Suzuki is another skeptic and he offers a great anecdote about economic thinking. While at the University of British Columbia, Suzuki figured it would be a good idea to supplement his academic background in biology with an understanding of economics. During the first class, Suzuki’s instructor stood at the blackboard drawing lines in chalk to show the flow from the resource base into the market, with subsidiary industries adding value and creating wealth for investors.

Suzuki pointed to the side of the blackboard that was empty of equations, the resource base, and asked whether the calculations took into account the effect of human activity on the environment, the diminishing reserves and growing waste that Suzuki reasonably regarded as a cost mortgaged into the future. “That’s an externality,” the instructor responded drily. In other words, the environment is something external to the grand human workings of the market and not worth factoring in. Suzuki left the class on the spot.”

Holy sh*t, this is one of the dumbest – most arrogant – things I’ve read this morning … and I’ve just finished reading some of my own writing!

An externality is one of the central reasons why an economist justifies policy – it is a concept used to define thing that aren’t captured in market prices, and justify intervention.  It is the very reason why so many economists actually do believe something needs to be actively done in environmental policy … contrary to the view among many people that economists don’t care.

I’ve been told by people that “one of the main weaknesses of economics is that it ignores the environment” – my reply is always “actually, one of economics main strengths is the way it can coherently put the environment, and trade-offs, into a framework”.

If the very icon for environmental policy has such a poor understanding of Econ 101 ideas – ideas that are REQUIRED to form GOOD policy – I have to admit I generally feel very concerned about the whole issue.

Note:  If anyone wants to know how bad this mistake is, its sort of like if you had to do some accounts for your business – but you thought the idea of addition was some voodoo way of transforming numbers without any meaning.  Externalities are one of the earliest concepts that are taught in economics – immediately after we learn what supply and demand represent.

  • http://offsettingbehaviour.blogspot.com Eric Crampton

    1. I worry that we screw up as a profession in how we handle externality at Principles level. Way too many folks come away with munged versions like Suzuki’s, or with the notion that we can throw everything else away when there’s any kind of market failure.
    2. I’m glad that I was able to outsource this post to you; I often use my shared items feed (and Twitter favourites) as a place to store pieces for later reading or posting. Had planned on writing this one up this afternoon, and now you’ve done it for me. Many thanks.
    3. Note the comments further down in that Auld post where Suzuki wants to blow up all the economics departments. 

    • http://www.tvhe.co.nz Matt Nolan

      “I worry that we screw up as a profession in how we handle externality at Principles level. Way too many folks come away with munged versions like Suzuki’s, or with the notion that we can throw everything else away when there’s any kind of market failure.”

      When I was being taught the idea of an externality was made very clear.  The one thing I did notice is all the students who had a PRECONCEPTION that economics ignored such things – and as a result, they were unwilling to actually learn about the ideas.

      This point got even more heavily reinforced when I tutored, and I tried to explain to people that this was a framework.

      It is hard to teach people who do not want to learn – especially when society appears to reward them for ignoring the truth.

      “I’m glad that I was able to outsource this post to you; I often use my shared items feed (and Twitter favourites) as a place to store pieces for later reading or posting. Had planned on writing this one up this afternoon, and now you’ve done it for me. Many thanks.”

      I come over to your blog a few times a day to see what’s on the list – it is very useful ;)

      “Note the comments further down in that Auld post where Suzuki wants to blow up all the economics departments. “

      My god.

      I notice that the solution he suggests is actually just Pigovian taxation … maybe its in his interest to pretend economists are idiots so he can claim all the good ideas for himself.

      IMO, the majority of people who criticise economists on issues of allocation and “morality” are doing so to stroke their own egos – not because they actually have a novel point.  Stuff like this just makes me feel ill – and it doesn’t help that everytime I run into someone interested in the environment at a talk, I’ll have to explain the misinformation this f’er put in their heads :(

  • Kimble

    I see this quite often, and have probably talked about it here previously (i.e. the arrogance of engineers who dismiss economics for being unable to achieve a level of precise prediction they enjoy in their field.)

    Is economics the only area of study in which people feel as if they know enough to disregard it after their very first class? Do people walk out of their first calculus class, dismissing the entire branch of mathematics because “you cant add letters to a number!”? Does anyone walk out of their French class, damning the entire language, culture, and cuisine because “people talk in sentences, they dont just count to ten!”?

    During the financial crisis I had to continually inform people that the assumption of normal distribution of investment returns is not a tenet of economics. Neither is a perfectly rational homo economicus. Nor do economists argue that whatever maximises corporate profits must be the best policy.

    I tell them that we could fill entire library of books with how much they dont know about economics. In fact, we did.

    • http://www.tvhe.co.nz Matt Nolan

      ” the arrogance of engineers who dismiss economics for being unable to achieve a level of precise prediction they enjoy in their field”

      That also drives me insane.

      “Is economics the only area of study in which people feel as if they know enough to disregard it after their very first class?”

      Yes.  It has to do with the fact that people don’t think its really a skill – they think its something we can learn from introspection, and if other people disagree with our conclusions (or the framework seems to press against them) they are just wrong :(

      The key thing I try to remember when I talk to people is that, unlike other disciplines, economics is about something that people think they OWN – that is part of them.  The natural sciences are about things outside themselves – but economics cuts to the very idea of human behaviour and social interaction.  As a result, they have to feel like they know more – and when they disagree they just assume we are stupid, rather than thinking.

      In that case – I guess psychology may get the same response from people.  And to a lesser extent sociology.

      • http://www.nommoantenna.net nommopilot

        Try Art – everyone’s an expert and no one knows anything…
        Anyway, you may have noticed how climate scientists have been having a few issues with the acceptance of their findings regarding Anthropogenically induced Climate Change over the past few years.  The same kind of problems you complain of are in evidence.  Like climate science, economics deals with systems that are far too complex to allow accurate predictions of outcomes: everything is all models and proxies and inferences:  too much information to be able to boil it down to simple statements.
        Deniers of AGW have an easy time writing off sound scientific concepts because the terminologies used hide the complexities underlying the concepts.  (ie. It’s an “externality” therefore it is not included in the considerations of economic models, right?)
        Very difficult to present an explanation that is sufficiently complex to explain an idea and sufficiently simple to not bore the listener to death or require laborious definitions throughout any discussion.
        I can understand how it can happen and I think this is perhaps the reason for reactions like university-suzuki’s.
        It’s all very well to complain that laypeople do not understand your discipline sufficiently, though, or complain that people’s preconceptions are the problem, but why do they have these preconceptions?  What can be done to improve things?

        • http://www.tvhe.co.nz Matt Nolan

          Completely agree with what you are saying – good points.

          In terms of what can economists do to improve understanding about the things we agree upon – I think we have to be transparent, and just try to make sure that the ideas are clearly communicated … that is somewhere where there needs to be an improvement for sure.

          However, the problem is that in economics there are SO MANY people who tell everyone they know everything – and there is no way for people to tell who they can trust.  As a result, when it comes to many issues where there is a lot of agreement among economists – economists still struggle to get the point across, because people choose to believe someone else.

          Add to this the fact that, when it comes to policy, economists turn around and stick value judgments in – and immediately people associate this with economics.  Taking us back to step 1 :(

          I think teach basic economic concepts at the start of high school.  They are easy as chips to understand, and give people a starting people for understanding where things are coming from.

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  • Pangolin

    Economics is crap and you know it’s crap way deep down. All the economists in the world stood around with their thumbs up their behinds in 2008 and the only thing that they could agree on is that the Federal Reserve should print money and bail out the (extremely wealthy) people who caused the problems. 

    Certainly if somebody suggested the Fed print money and hand it out to poor people the worlds collected economists would go into fits about “moral hazard.”  

    The fact that you crap on Dr. Suzuki for walking out of an econ class because it ignores the bulk of the biosphere as an “externality” just goes to show you how out of touch you are.

    Economist: the guys who gets paid by wealthier people than himself to explain in confusing terms to poorer people why they should suffer to increase the wealth of the rich man.  

    • http://www.tvhe.co.nz Matt Nolan

      I see, so you don’t know what economists have actually said – definitely haven’t read anything we’ve said here about the bailouts and moral hazard – so I those notes I’ll just leave you to look up moral hazard on the blog.

      The reason I disagreed with Dr Suzuki was that he, like you, doesn’t know what an externality is – and the fact that economists use it as proof that we SHOULD have government intervention.  It is part of a framework, not something we ignore, and if either of you actually listened to an economist you might know that instead of arbitrarily attacking them.

      Look, you obviously don’t understand economics or what economists do – and since you decided to be a prick, I’ll treat you with no respect.  If you decide you actually want to talk about it, and show the slightest interest in hearing a different side, I would be more than happy to discuss is sensibly.

  • Kimble

    <blockquote>the only thing that they could agree on is that the Federal Reserve should print money and bail out the (extremely wealthy) people who caused the problems. </blockquote>

    Dammit, we were supposed to all agree on that? I hate missing these memos, I must have looked such a fool when I said the exact opposite!

    • http://www.tvhe.co.nz Matt Nolan

      Isn’t it amazing how people just love to put words in our mouths. 

      Its pretty typical though, people need someone to “blame”, so they blame the people who discuss trade-offs and try to explain what is going on objectively – I think its called shooting the messenger ;)

      • Kimble

        In a fair world, they would just blame the people who use manipulated data to support contrived conclusions. I think it would be called shooting the massager.

        • http://www.tvhe.co.nz Matt Nolan

          I know people how would support a literal version of that.

          I promise I don’t make conclusions – don’t shoot me :D

  • Kimble

    On an unrelated matter, the html tags arent working.

  • Kirk

    What a fun string of posts. As an environmentalist i find this all very interesting.
    It seems that economics is now used as a catch all term to describe anything related to money. In the media, politics and even during a recent foray at university the word “economics” seems to be synonymous with profit maximisation.

    • http://www.tvhe.co.nz Matt Nolan

      Thanks.

      I think that impression comes from the fact that the economics framework can be used to understand what is going on in very obvious markets – such as the stock market.  However, its a framework – and it can be used to understand all issues of allocation, that is the point of it.

      Profit maximisation is extremely essential in all this – as its a behavioural relationship.  If firms really are profit maximising, or maximising over some set of objectives, we need to assume that in order to accurately describe their behaviour – we aren’t saying this leads to the “best outcomes” we are just describing what is going on.

      With that in mind, we can then discuss what this implies for outcomes – the idea of an “externality” captures the fact that the objectives private agents are working to meet might differ from what is in the interest of everyone, due to their actions having an impact “outside their market”.  In turn it acts as a justification for policy.

      Which is why I found these quotes from Suzuki both ill informed and insulting – not to mention the fact that some of the most environmentalist people I know are economists.

  • Kimble

    The second class in Econ101?

    Externalities, and how they are integral to the field of economics.

    • http://www.tvhe.co.nz Matt Nolan

      When I was a young boy externalities were about the third class.

      Class 1 was “economics is the study of scarcity”, “every choice has an opportunity cost”.

      Class 2 was “what is supply and demand” and “what do they represent”

      Once you have those you could start to discuss the idea of “market failure” – which involves externalities for sure.

      It looks like the class Suzuki went to started with macro – not wonder he wanted to leave ;)

  • http://www.sustento.org.nz Raf

    I think the frustration expressed by Suzuki is that economists seem to have been identified with the neo-liberal dogma that markets work best and markets are the only way to organise our society. This is compounded by the merry go round that sees economists go from government departments (primarily Treasury) to investment banks and back again.

    There is also a feeling that economics is fracturing under the weight of a debt based monetary system that hasn’t quite been understood or explained properly. This is changing as many people are working on trying to understand why market are constantly failing and why policy makers make decisions which are hard to justify. 

    Suzuki’s reaction to his economics lecturer may have been the way in which “externalities” were dismissed as a minor concern, something relevant but not entirely of importance. Recent studies would show that to be a mistake with ecosystem goods and services being well in excess of traditional measures of economic activity.

    That shouldn’t take away from the fact that economics is a very important discipline. How we manage our households is a fundamental concern. However, i think it has lost its way, becoming bogged down in the political contest and being overtaken and directed by vested interests to the detriment of all.

    There should be no delineation between economists and environmentalists. This just causes separation. After all if economics is about allocation of resources, then the environment should be a core focus and not something to be added on or treated as a different discipline. I think Suzuki’s actions probably stem from this.

    A couple of interesting readings which add to this debate are Diane Coyle’s “The Economics of Enough” and also Adam Kessler’s paper on Cognitive Dissonance and the GFC.  

    • http://www.tvhe.co.nz Matt Nolan

      Hi Raf,

      “I think the frustration expressed by Suzuki is that economists seem to have been identified with the neo-liberal dogma that markets work best and markets are the only way to organise our society”

      Markets are the name for the interaction between individuals we can’t “organise our society” in any way that doesn’t involve them – they are a descriptive device.  A belief in any type of institutional or market failure needs to come from understanding markets – not from saying that we need to find a way to control society more explicitly.

      “There is also a feeling that economics is fracturing under the weight of a debt based monetary system that hasn’t quite been understood or explained properly. This is changing as many people are working on trying to understand why market are constantly failing and why policy makers make decisions which are hard to justify. “

      The economic method has stayed completely relevant – a lot of people just haven’t wanted to use it.  We can only talk about market and policy failure by discussing the incentives involved – that is economics.

      “Suzuki’s reaction to his economics lecturer may have been the way in which “externalities” were dismissed as a minor concern”

      This wouldn’t happen.  Externalities are a core part of economics teaching from very very early on.  I’ve tutored 1st and 2nd year economics and I know how much of a big deal we make about this issue – and how the default example is ALWAYS pollution.

      “That shouldn’t take away from the fact that economics is a very important discipline. How we manage our households is a fundamental concern. However, i think it has lost its way, becoming bogged down in the political contest and being overtaken and directed by vested interests to the detriment of all.”

      Economics isn’t about household management – it is about describing trade-offs so that we can understand the allocation of scarce resources.  It is the perfect method for discussing environmentalism.

      “There should be no delineation between economists and environmentalists. This just causes separation. After all if economics is about allocation of resources, then the environment should be a core focus and not something to be added on or treated as a different discipline. I think Suzuki’s actions probably stem from this.”

      Which is why the economic discipline DOES NOT differ from this – at all.  It is why there are so many economists discussing environmental issues.  It is why the push for an ETS, or a carbon tax, has had such a long history in economics – and the idea of regulating and/or creating property rights in the face of pollution has a much much longer history.

      Suzuki has decided to attack one of the closest allies of the environmental movement on the basis that he doesn’t understand them – the very policy conclusions he has now reached COME FROM economics, but he likes to pretend they are from scientists.

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  • http://www.organizationaltheory.net/tag/organization-theory/ organization theory

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