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Neo-Liberal Economists: “We Are Irrational”

January 21, 2015 by filed under Columns, Sustainable Planet No Comments

“Irrational is a strong word, which connotes impulsivity, emotionality, and a stubborn resistance to reasonable argument.” Economics Nobel laureate Daniel Kahneman [1]

On global warming Kahneman wrote that it is “preposterous to forecast what it would be like to live on a warmer planet when we did not even know what it is like to live in California.” Kahneman was concerned whether or not people would be happy in a warmer world, warming more than ten times faster than at any other time in the last hundred million years, as shown by the example in Figure 1 [2] while physical scientists worry whether we will survive at all. See Figure 2 for the current physical state of California. I suppose people can still be happy right up until the time there is no more water to drink. Perceptive people who see it coming years in advance may be unhappy but if there are not many of those Kahneman may be right.

Figure 1 comparison of the rate of current anthropogenic climate change with one of the most remarkable climate events in the last hundred years.

Figure 1 comparison of the rate of current anthropogenic climate change with one of the most remarkable climate events in the last hundred years.

Figure 2 The California Drought.   Source: https://theconomicsof.wordpress.com/2014/09/14/el-nino/

Figure 2 The California Drought. Source: https://theconomicsof.wordpress.com/2014/09/14/el-nino/

Moving on, never mind that economic Nobel laureate Robert Solow’s production function is not just overly simplified it is not even physical [3]. The human economy simply does not work the way economists think it does. It runs on energy, or more precisely on an energy gradient. See Figure 2 [4]. Atmospheric physicist Timothy Garrett estimates that it takes 9.7±0.3 milliwatts to produce one 1990 US dollar [5].

The dominant economic model in America today is the neo-liberal school of free-market economics. It ignores the role of energy, pollution and human nature. This is why one result of liberalizing the financial sector begun under Reagan and Thatcher has been the explosion of worldwide organized crime [6] not to mention the Great Contraction of 2008 [7]. Economists seem not to be aware that the most efficient way to make a whole lot of money is to steal it and that is what laissez-faire free markets encourage. It has been estimated that 1% of humans are psychopaths [8], so who do economists think are going to dominate an unregulated economy? The good news is that Daniel Kahneman’s Behavioral Economics replaces economics Nobel Laureate Milton Friedman’s consumer units with actual human beings. Kahneman, though a human-caused global warming denier and therefore resistant to reasonable argument, insists that humans are not irrational [1].

Figure 3, Energy flow through the human economy during the last two millennia (red curve) and human accumulation of wealth (blue curve)

Figure 3, Energy flow through the human economy during the last two millennia (red curve) and human accumulation of wealth (blue curve)

In their own words:

“Oil is a renewable resource, with no intrinsic value over and above its marginal cost… There is no original stock or store of wealth to be doled out on any special criterion… Capital markets are equipped to handle oil depletion…It is all a matter of money”, M.A. Adelman, Professor of Economics, MIT

“It is appropriate to conclude that, as long as the sun shines brightly on our fair planet, the appropriate estimate for the drag on the economy from increasing entropy is zero.” Economist William Nordhaus

“ … the world can, in effect, get along without natural resources … at some finite cost, production can be freed of dependence on exhaustible resources altogether….” Economics Nobel Laureate Robert Solow

“Natural resources. Hold your hat – our supplies of natural resources are not finite in any economic sense. Nor does past experience give reason to expect natural resources to become more scarce. Rather, if history is any guide, natural resources will progressively become less costly, hence less scarce, and will constitute a smaller proportion of our expenses in future years. Population growth is likely to have a long-run beneficial impact on the natural-resource situation.” Economist Julian Simon [9]

Economist F. Scott Armstrong, testifying [10] before congress on human-caused climate change, an irrational circumstance to begin with, in 2011 said: “I actually try not to learn a lot about climate change. I am a forecasting guy.” Given that he missed forecasting the Great Contraction of 2008 [11], one might ask why Congress would care about his opinion on anything else?

George Mason University economist/statistician, Edward Wegman was invited by conservatives to testify on climate change. When asked by Illinois Democrat Jan Schakowsky if he knew how carbon dioxide traps infrared heat in our atmosphere, Wegman replied [12] “Carbon dioxide is heavier than air. Where it sits in the atmosphere profile, I don’t know. I’m not an atmospheric scientist to know that. But presumably, if the atmospheric – if carbon dioxide is close to the surface of the earth, it’s not reflecting a lot of infrared back.” Wegman could have simply said he didn’t know.

“My guess is that global warming will simply be another transient concern, barely worthy of consideration ten years from now in a book like this one.” Julian Simon, 1994, 20 years before yet another hottest year on record [13]. The probability that the Earth surface has not been warming since Simon penned his prediction is less than 1 part in ten billion billion using extreme event statistics [14]. Since the universe itself is only 13.8 billion years old, Simon would be correct one time in a billion universes or simply not at all.

Friedman describes the methodology of neo-liberal economics [15]. “In so far as a theory can be said to have assumptions at all, in so far as their realism can be judged independently of the validity of predictions, the relation between the significance of a theory and the realism of its assumptions is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have assumptions that are wildly inaccurate descriptive representations of reality and, in general, the more significant the theory, the more unrealistic the assumptions.”

Figure 3 shows just one way human-caused climate change is destroying our economy. Extreme weather related events are accelerating so fast that eventually the destroyed wealth will exceed the ability of the economy to generate wealth. In 2011, Dr. Peter Höppe, Head of the Geo Risks Research Department at Munich Re explained what had persuaded him of the causal link [16]: “For me the most convincing piece of evidence that global warming has been contributing already to more and more intense weather related natural catastrophes is the fact that while we find a steep increase in the number of loss relevant weather events (about tripling in the last 30 years) we only find a slight increase in geophysical (earthquake, volcano, tsunami) events, which should not be affected by global warming. If the whole trend we find in weather related disaster should be caused by reporting bias, or socio-demographic or economic developments we would expect to find it similarly for the geophysical events.”

Economist Steve Keen argues [17] forcefully that physicists, engineers, and biologists need to take the field over from the economists. Instead of our Congress trying to inform science with “wildly inaccurate descriptive representations of reality” we should be informing economics with hard evidence.

[1] Daniel Kahneman, Thinking Fast and Slow, Farrar, Straus and Giroux, 2011.

[2] Lee Kump, The last great global warming, Scientific American, July 2011

[3] Source: https://theconomicsof.wordpress.com/2014/09/14/el-nino/

[3] Robert U Ayres & Benjamin Warr, accounting for Growth: the Role of Physical Work, Center for the Management of Environmental Resources, INSEAD, Fontainebleau, France and Wiliam Barnett II, Dimensions and Economics: Some Problems, online version: www.mises.org/journals/qjae/pdf/qjae6_3_2.pdf.

[4] Tony Noerpel, Big Introduction to Big Data, http://brleader.com/?p=12957

[5] T. J. Garrett, “No way out? The double-bind in seeking global prosperity alongside mitigated climate change,” Earth Syst. Dynam., 3, 1–17, 2012, www.earth-syst-dynam.net/3/1/2012/ doi:10.5194/esd-3-1-2012

[6] Misha Glenny, McMafia: A Journey Through the Global Criminal Underworld, 2009

[7] Carmen Reinhart and Kenneth Rogoff “This Time is Different”.

[8] Kent A. Kiehl, The Psychopath Whisperer: The Science of Those Without Conscience, 2014

[9] Julian Simon, http://www.juliansimon.com/writings/Ultimate_Resource/TINTRO.txt

[10] Nate Silver, The Signal and the Noise, why so many predictions fail – but some do not, The Penguin Press, 2012.

[11] Most economists who did predict the great contraction such as Nouriel Rubini, Steve Keen, Dean Baker and Robert Shiller are well known. There is no evidence Armstrong predicted it and considerable evidence that nobody at the Wharton school “forecast” the great contraction. http://www.forbes.com/2009/11/18/behavorial-economics-indicators-entrepreneurs-finance-wharton.html and http://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-the-systemic-failure-of-academic-economics/KWP_1489_ColanderetalFinancial%20Crisis.pdf

[12] Michael Mann, The Hockey Stick and the Climate Wars, dispatches from the front lines, Columbia, 2012.

[13] http://www.webcitation.org/5XuOha9HO

[14] updated to include 2013 and 2014 from Tony Noerpel, To the Arctic Amplified and Bayes Applied, November 27, 2013, http://brleader.com/?p=12412

[15] Milton Friedman, The Methodology of Positive Economics, in Essays in Positive Economics, Chicago: University of Chicago Press, 1953, pp. 3-43.

[16] http://thinkprogress.org/climate/2011/01/04/207288/munich-re-pielke-extreme-weather-damages-climate-change/ and http://thinkprogress.org/climate/2015/01/15/3612054/global-warming-extreme-weather/

[17] Steve Keen, Debunking Economics, Zed Books, 2011.

Figure 4 Total number of catastrophic events world wide

Figure 4 Total number of catastrophic events world wide

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