Is Economics Destroying the World?

|

George Mason University English professor Robert Nadeau has a silly article in Scientific American in which he "proves" that economics is not a "science." Amusingly, Nadeau seems blissfully unaware of the fact that his preferred "science," i.e., ecology, is rife with metaphors stolen borrowed from economics, beginning with Darwin's use of Malthus in formulating the theory of natural selection. Darwin, in his Autobiography wrote:

In October 1838, that is, fifteen months after I had begun my systematic enquiry, I happened to read for amusement 'Malthus on Population,' and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The result of this would be the formation of new species. Here then I had at last got a theory by which to work…

As it turns out, Malthus's description fit the natural world, but failed when it came to describing the activities of human beings.

In 1992, at the first Earth Summit in Brazil, I listened to environmentalist dim bulb, Hazel Henderson, declare to a crowd of activists that "economics is brain damage." Henderson went on to suggest to the hooting and hollering delight of the crowd that all economists be rounded up and put into re-education camps.

Another idea adopted by ecologists from economics is the tragedy of the commons. The concept was made famous in ecologist Garrett Hardin's 1968 article of the same name. But Hardin did not originate the concept-it goes all the way back to Thucydides. One modern economic formulation of the concept appeared in the 1949 treatise Human Action, by economist Ludwig von Mises, where he described the tragedy of the commons (and I maintain that all environmental problems occur in open access commons) in this way:

If land is not owned by anybody, although legal formalism may call it public property, it is used without any regard to the disadvantages resulting. Those who are in a position to appropriate to themselves the returns — lumber and game of the forests, fish of the water areas, and mineral deposits of the subsoil — do not bother about the later effects of their mode of exploitation. For them, erosion of the soil, depletion of the exhaustible resources and other impairments of the future utilization are external costs not entering into their calculation of input and output. They cut down trees without any regard for fresh shoots or reforestation. In hunting and fishing, they do not shrink from methods preventing the repopulation of the hunting and fishing grounds.

Of course, economics can and should be critiqued - that's how errors are corrected and new discoveries made. Nadeau's biggest error is that he fails to understand that economics is a positive sum game, not the negative sum evolutionary game played by most other creatures. In other words, Nadeau, like most ecologists, is still stuck with economic ideas that are over two centuries out of date. We now know that most of the human economy is in fact intangible.

In any case, I invite you to take a look at Nadeau's "critiques." From the article:

  • The market system is a closed circular flow between production and consumption, with no inlets or outlets.
  • Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
  • The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
  • The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
  • There are no biophysical limits to the growth of market systems.

All of the above statements are false, or misleadingly incomplete at best. On the basis of them, Nadeau goes on to assert:

If the environmental crisis did not exist, the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory—the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale. Because neoclassical economics does not even acknowledge the costs of environmental problems and the limits to economic growth, it constitutes one of the greatest barriers to combating climate change and other threats to the planet. It is imperative that economists devise new theories that will take all the realities of our global system into account.

For some real information on economics see Stanford University economist Paul Romer's excellent article on economic growth. For my non-technical take on the alleged limits to growth see my article The Law of Increasing Returns. As for Nadeau, I hope that he will some day soon walk across campus and talk to some his colleagues at George Mason's excellent economics department.

Hat tip: Charles Masoner