Thursday, August 7, 2008

The Economist Has No Clothes ... Why Economics is failing the environment

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Robert Nadeau wrote an opinion piece titled "The Economist Has No Clothes: Unscientific assumptions in economic theory are undermining efforts to solve environmental problems" for Scientific American in March. This is a hugely insightful article and well worth a read.

Basically, he points out that the core of neo-classical economics is a sham. It's creators adapted their equations from the physics of the day and then arbitrarily and without justification reassigned the meaning of variables to suit their own purpose. And despite the fact that the creators were warned that what they were doing was unjustified - presto! Economics suddenly became scientific and rigorous - what complete and total hogwash!

It doesn't matter that the equations they borrowed were shortly to become obsolete themselves, the foundation was flawed from the start. His article looks at the flawed background of economics and key assumptions which are endangering our environment. He says:

Unfortunately, it is clear that neoclassical economics has also become outdated. The theory is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.

Paraphrasing and commenting these:
  • The market system is a closed circular flow between production and consumption, with no inlets or outlets. (Where do raw materials come from and waste go to?)
  • Natural resources are separate and distinct the market system, and value of these resources are determined by this system. (Doesn't this sound like a recipe for delusion and denial?)
  • The costs of damage to the natural environment lie outside the market system. (The system does not account for the true cost of environmental damage).
  • Natural resources are largely inexhaustible or have alternatives. (No acknowledgement of limits or feasibility).
  • There are no biophysical limits to the growth of market systems. (Doh!)

He concludes that these underlying flaws in economic theory are a major obstacle to addressing climate change and environmental issues. Again, from the article:

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.

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