The Economics of Climate Change and the Change of Climate in Economics

Kevin Maréchal, Kevin Maréchal

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136305078
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Climate change is without question the single most important issue the world faces over the next hundred years. The most recent scientific data have led to the conclusion that the globally averaged net effect of human activities since 1750 has been one of warming and that continued greenhouse gas emissions at or above current rates would cause this process to continue to the severe detriment of our environment. This unequivocal link between climate change and human activity requires an urgent, world-wide shift towards a low carbon economy and coordinated policies and measures to manage this transition.

The starting point and core idea of this book is the long-held observation that the
threat of climate change calls for a change of climate in economics. Inherent characteristics of the climate problem including complexity, irreversibility and deep uncertainty challenge core economic assumptions and mainstream economic theory appears inappropriately equipped to deal with this crucial issue.

Kevin Maréchal shows how themes and approaches from evolutionary and ecological economics can be united to provide a theoretical framework that is better suited to tackle the problem.

1	Introduction

The starting point of the research presented in this book is the long-held observation that the threat of climate change calls for a change of climate in economics. Borrowing from the jargon used in climate policy, adaptation measures could also usefully target the academic discipline of economics.

Given that inherent characteristics of the climate problem (e.g. complexity, irreversibility, deep uncertainty, etc.) challenge core economic assumptions, mainstream economic theory¹ does not appear appropriately equipped to deal with this crucial issue. As claimed in Ackerman (2007, p. 2), this means that “new assumptions and analyses are needed in economics in order to comprehend and respond to the problem of climate change”.

In parallel (and without environmental considerations being the driving force), the mainstream model in economics has also long been (and still is) strongly criticised and disputed by numerous scholars – both from within and outside the field of economics. For the sake of functionality, these criticisms – whether they relate to theoretical inconsistencies or are empirically based – all challenge part of the Cartesian/Newtonian legacy of economics. This legacy can be shown to have led to a model imprinted with “mechanistic reductionism”. The mechanistic side refers to the Homo oeconomicus² construct while reductionism refers to the quest for micro-foundations materialised into the representative agent hypothesis (see Chapter 2). These two hypotheses constitute, together with the conjecture of perfect markets, the building blocks of the framework of general equilibrium economics.

Even though it is functional for the purpose of this work to present them separately, the flaws of economics in dealing with the specificities of the climate issue are not considered independent from the fundamental objections made to the theoretical framework of mainstream economics. The former only make the latter seem more loaded while the current failure of traditional climate policies informed by mainstream economics render the need for complementary approaches more urgent.

The ecological imperative – magnified by the potential threat of strong climate change – is used throughout this work as a guiding post (i.e. an objective functionality) that is helpful when looking for an alternative framework with which to analyse the climate issue. Although the works developed within the realm of ecological economics have greatly contributed to emphasise that the economic sphere is embedded in a finite biophysical universe (i.e. the biosphere), it has yet to develop a new synthesis. As acknowledged in Gowdy and Erickson (2005a, p. 20), ecological economics is at a crossroads and should be careful not to become “a caricature (…) as Walrasian wine in a new bottle”.

The stance of this research is that the coupling of insights from the framework of evolutionary economics with the perspective of ecological economics provides a promising way forward both theoretically to avoid the above-mentioned dead-end feared by Gowdy and Erickson (2005a) as well as on a more applied basis with respect to a better comprehension of the climate problem. Such a coupled approach is not new as illustrated by the pioneer work of Kenneth Boulding who linked both concepts of evolution and ecology (Boulding, 1978, 1981; see also Chapter 6 in this volume). As claimed in van den Bergh (2007, p. 521), ecological economics and evolutionary economics “share many characteristics and can be combined in a fruitful way” – which renders the coupling approach both legitimate and promising.

As argued in different chapters of this work, the choice of evolutionary economics as the alternative perspective through which to analyse the economics of climate change is quite straightforward starting from our initial observation. Indeed, given the type of criticisms formulated against mainstream economics, a framework resting on a different view of individual rationality and allowing for richer and more complex causalities to be justified, is required. Besides, a short detour through the historical development of economics as a discipline came to reinforce this choice given that it underlined that the Newtonian influence on economics was made to the detriment of biology as a potential alternative source of inspiration. Intuitively, a perspective inspired by biological metaphors and which thus theorises economic evolution in a totally different manner than in mainstream economics seemed worth investigating for dealing with the climate issue and its aforementioned characteristics.

The remainder of this chapter is structured as follows. Before fully entering on the description of the content of the research per se, we take the following section to briefly evoke the objective pursued in this introductory chapter. In Section 1.2, we discuss the criticisms formulated against the mainstream framework with respect to environmental and climate-related issues.

Based on these considerations, Section 1.3 sketches the first elements on which our approach is based. These elements are further detailed in Section 1.4, which discusses the important notions of technological lock-in and path dependence and relates them to insights from the work of Thorstein Veblen. Finally, the fifth section of this introductory chapter presents an overview of the content of the research.³ The main objective of this last section is to describe how the respective chapters are linked with each other as well as the path followed throughout the research. More specifically, this concluding section serves to explain how the elements raised in the previous sections have been used in our analysis and where this had led us, both in terms of theoretical considerations regarding the central notion of habits and with respect to policy implications for energy and climate policy.

1.1 Aims and scope

The importance of the introductory chapter is made all the more essential by the fact that this research consists of a collection of articles. Although these articles have not been written in isolation from each other, it is nonetheless necessary to provide a brief overview of how they relate to each other. However, it seems fundamental to also provide a clear description of the path followed throughout the research since we consider that the process that leads to a given outcome is at least as rich as the outcome itself in generating useful inputs.

Accordingly, beyond describing the context of the research, the objective of this introductory chapter is also to explain the logic that has been used throughout the research. This means looking at the methodological and conceptual paths followed in getting from the initial broad idea to its materialisation in terms of theoretical implications, policy recommendations and empirical findings. This will partly be done through explaining the structure of the research (i.e. how the different chapters are linked with each other) but will also require further complementary elements aimed at unveiling the “backstage” of the work. Especially, this will serve to highlight how this research has been performed in a circular fashion with ideas developed in one paper feeding back to the framework sketched in a previous one and paving the way for the empirical elements of the next one.

It is essential to bear in mind that what constituted the framework of the PhD on which this book is based was shaped and fine-tuned throughout the research process and not a given prism that was taken for granted and applied as such to the issue of climate change. Following these considerations, the idea is thus to provide the readers with the keys for grasping the building process that led us to the perspective eventually adopted for our analysis which, in retrospect, could be qualified as being grounded on Veblenian evolutionary economics.

However, it is beyond the scope of this introductory chapter to treat in detail every element and literature stream that has been helpful for our analysis. For instance, the whole debate regarding the puzzling presence of some degree of altruism among humans (under the form of “strong reciprocity”, as proposed in Gintis, 2000) has been of a fundamental importance in sketching our framework by highlighting the importance of group-level approaches (see Chapter 2).⁴ Nevertheless, here it is not possible to provide an exhaustive account of this debate which transcends the academic spheres of economic, biology and anthropology.

Still, it is important to note that the idea according to which group-level considerations matter has been essential in developing the approach used throughout this research. Most notably, it appears that the well-documented flaws of the Homo oeconomicus paradigm (e.g. Henrich et al., 2001; Richerson and Boyd, 1998) can be attributed to the fact that it does not take into account the social construction of individual preferences (Bowles and Gintis, 2004). The key thus lies in accounting for group dynamics in the analysis.

To this respect, Henrich (2004) develops a convincing argument that cultural group-level selection and the related transmission mechanisms are able to provide a robust explanation to the observed large-scale cooperation among unrelated strangers in one-shot situations. The essence of Henrich’s framework is that the developed specificities of human psychology (e.g. such as his “high fidelity” imitative abilities) and the mechanisms of cultural transmission that go along with it allow for the presence of some degree of altruism among humans.

This means that another relation between the different levels of analysis than the one implied in the micro-foundations approach must be looked for. More specifically, there needs to be a framework that can accommodate not only upward but also downward causation, without giving analytical priority to any level over the other (Hodgson, 1997, p. 405).

Understanding this view of causation is essential as it is a founding hypothesis of our analysis, giving rise to a view that institutions and habits as mutually constitute each other (as explained in Section 1.5). In addition, the self-reinforcing dynamic that this view implies is an important aspect to be underlined since it constitutes a major difference with the perspective of New Institutional Economics (NIE),⁵ where this characteristic is overlooked (see Hodgson, 2004, p. 656). Furthermore, as mentioned in van den Bergh and Gowdy (2003, p. 79), based on a thorough analysis of the similarities between micro-macro debates in economics and biology, “the advantage of such a multi-layered feedback system is that it can incorporate theories that so far have been presented opposite, partial and incomplete perspectives”.

Beyond this crucial element relative to the importance of accounting for both types of causation, it is also worth mentioning that many studies have shown that the cognitive abilities of individuals are limited (i.e. compared to those required for optimisation). This makes that they cannot behave as perfect optimisers for other reasons than the socio-cultural ones exposed above.⁶ For instance, people often misjudge probabilities when they take decisions under risk (Kahneman and Tversky, 1979), while they also suffer more from losses than they enjoy corresponding gains (this is the loss aversion problem raised in Kahneman, Knetsch and Thaler, 1990). People also tend to display what is called “hyperbolic” discounting (i.e. their behaviour implies lower discount rate for choices that are situated farther in the future) as exposed in Laibson (1997).⁷ Preferences are then no longer stationary, which is a problem as they need to be in order to calculate present values.⁸ Although hyperbolic discounting is easily accommodated for within the mainstream framework with minor modifications, it is still of importance per se in the case of a long-term issue such as climate change (as explained in Section 1.3).

The limits to human cognitive abilities are of great importance for the perspective of this research on climate policy (see, for instance, Gowdy, 2008). However, they will not all be discussed in more detail since, during the research it appeared more functional to concentrate on the sole notion of habits. The conjecture of this research is that this notion of habits is not only important for the thematic perspective of this research as well as for our theoretical framework (as shown in Chapters 3, 4 and 5), but it can also be viewed as a locus embracing most of the elements relative to the limited cognitive abilities of human beings. Indeed, not only is the presence of habits explained by the need to save cognitive resources, it can also be argued that reduced cognitive abilities may often contribute to the reinforcement of anchored habits.⁹

In a similar vein, this scope-related reasoning is also valid for the field of evolutionary economics itself. As already mentioned, the purpose of this chapter is to explain the sequence that drove us, step by step, to adopt an analytical framework building on Veblenian insights and with the notion of habits playing a central role (see Section 1.4). Since the objective of this research was to inform climate policy with a complementary economic contribution, we investigated the field of evolutionary economics spurred on by a necessary functionality: how could it provide responses to the theoretical drawbacks raised in the previous stages of the analysis, and how could these responses provide enlightening elements with respect to climate policy?

This is the main reason why the seminal work of Nelson and Winter (1982) has not been much used in our analysis, although we obviously acknowledge that their contribution to the field of evolutionary economics is incommensurable. This does not mean that their work and the much research that has followed are not insightful at all. For instance, their concept of routines is shown in Chapter 2 to be relevant to our perspective.¹⁰ However, they did not appear as readily useful to our perspective as, for instance, the literature on path dependence. Our stance with respect to the field of evolutionary economics is further detailed in Section 1.3.

1.2 Criticisms regarding the use of mainstream economics to analyse environmental and climate policy

Prior to developing our approach, it is important to present a brief overview of what we see as the main drawbacks of mainstream analyses related to environmental and climate policy. The application of mainstream economics to policy issues is known as welfare economics, an analytical model based on two fundamental theorems that enthrone competitive markets as the best way to ensure welfare efficiency (known as Pareto optimality in economic jargon).¹¹ As Gowdy claims,

these ideas turned economics away from questions of genuine well-being by shifting the policy focus from utility to consumption. They also justified the neglect of questions of distribution and the emphasis on economic growth as a general solution to basic economic problem such as poverty and environmental pollution.

(Gowdy, 2005, p. 3)

The use of welfare economics for analysing ecological issues started with the foundational work of Solow (1974) in a Special Issue of the Review of Economics...