Frank Ackerman, "Autistic Economics vs. the Environment"

Post-Autistic Economics Network

www.paecon.net

from post-autistic economics newsletter : issue no. 5, March, 2001

Autistic Economics vs. the Environment
Frank Ackerman (research director of the Global Development and Environment Institute at Tufts University)

The unrealistic mathematical models of "autistic economics" would be bad enough if they
stayed in the classroom, detached from the real world. Unfortunately, though, the dominant
school of economics has itself become a powerful political force: at least in the U.S., it is
rapidly reshaping public policy in its own image. In the area I am most familiar with,
environmental policy, the invasion of abstract economic theory threatens to impose the logic
of the marketplace on the very different reality of nature.

Conventional economics has, since Pigou, recognized the importance of unpriced
environmental externalities. Even if all the other assumptions of the competitive model are
granted, market outcomes are not optimal unless all externalities are internalized - through
Pigouvian taxes, or under rare special conditions, through private negotiations a la Coase.

But what is the status of these observations about externalities? Are they one more entry in

a long list of ways in which the model of perfect competition fails to describe reality? Or are

they the only remaining problem, the last obstacle to be overcome in the pursuit of optimality?

The latter, alas, is a very common assumption in environmental economics.

The specific problems caused by the misuse of economic theory in environmental policy include:

1. Reliance on computable general equilibrium (CGE) models. In the realm of mathematical

theory, it has been known since the 1970s that the existence of an equilibrium point in a

general equilibrium model does not imply anything about the dynamics of the model. The

much-discussed static equilibrium point is Pareto-optimal under the usual conditions, but

may also be dynamically unstable under small perturbations, rendering it unattainable or

unsustainable - and hence irrelevant in practice, even if the model were otherwise a good

approximation to reality. (See reference 1.)

However, CGE models have all but conquered the world of American policy analysis. No

signs of theoretical uncertainty can be seen; instead, use of the general equilibrium

framework is taken as the mark of good science. The results are no better than the

underlying assumptions: leading CGE forecasts of the effects of the North American

Free Trade Agreement (NAFTA) on industrial pollution have been wrong by several orders

of magnitude.

2. Mindless monetization. The Pigouvian agenda requires a monetary value for every

significant externality. Yet many environmental externalities involve risks of irreversible

damages, large but uncertain costs, impacts on future generations, or values, such as

human life, that cannot meaningfully be monetized. (2) Economics rushes in, however,

where ethics fears to tread: one common figure, used in many cost-benefit analyses, is

that a human life is worth $6.1 million (in 1999 dollars). About ten years ago, Kip Viscusi

surveyed all published studies of the monetary value of a life, many of them done by himself

and his co-workers, and calculated the average - which, adjusted for inflation, reached $6.1

million by 1999

There are several technical problems with "Viscusi's number", as well as its obvious ethical

and philosophical failures. But the $6.1 million number appeared, and was treated as an

established fact, in a recent U.S. EPA cost-benefit analysis of arsenic standards for drinking

water. Based in part on that analysis, EPA set the standard at more than three times the

technologically feasible minimum level. With the higher standard, more people will die of

arsenic-related cancers, but at $6.1 million apiece, they (we) just weren't worth saving. (3)

3. Advocacy of laissez-faire. Economic theory confronts the world with a tangled mixture

of description and prescription. While it seeks to value externalities and thus make markets

more perfect, it also critiques taxes and policies that deviate from unregulated market

outcomes. Economists are fond of identifying the "distortionary" effects of public policy,

measured relative to a hypothetical, perfectly competitive market economy with little or no

public sector. The implication is typically that the government is misusing resources that

could be better allocated by the market. In particular, too much, or the wrong things, are

being done to protect the environment.

There is an urgent need for a more realistic economics of the environment, with theories

and analyses that can help to create environmentally sustainable economic activity. The

new field of ecological economics offers promising first steps in this direction; and there is

a continuing role for critiques of the misuses of conventional theory in the realm of public

policy. The struggle against autistic economics is far more than an academic debate.

References:

(1) Ackerman, "Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory", on

the website of the Global Development and Environment Institute (G-DAE) at http://ase.tufts.edu/gdae/

(2) Ackerman and Gallagher, "Getting the Prices Wrong: The Uses and Abuses of Market-Based Environmental

Policy", at http://ase.tufts.edu/gdae/

(3) For more discussion of this point, see Ackerman comments on the proposed arsenic regulation at

http://ase.tufts.edu/gdae/

SUGGESTED CITATION:

Ackerman, Frank (2001) “Autistic Economics vs. the Environment”, post-autistic economics newsletter : issue no. 5, March, article 1. http://www.btinternet.com/~pae_news/review/issue5.htm