The Entropy Law and the Economic Process

I am reading Georgescu-Roegen 's mighty work and not at the first time of trying. It is a huge, dense and rich tome, rich in the manner of chocolate mousse but similarly hard to take in large quantities. But this is August and the month when even the over-worked drones of the modern academy can find some time for reading and so I am treating myself to a surfeit of chocolate mousse and will be sharing some select spoonfuls via this blog.

For those who do not know this book or its author it is worth beginning by saying that  Georgescu-Roegen (henceforth GR) was born in Constanta on the Black Sea coast of Romania in 1906. He studied first mathematics and then statistics and economics, on a scholarship to Paris and in London with Karl Pearson. After communism came to Romania he went to the US where he taught economics at Vanderbilt University from 1950 to 1976. We probably know about GR because of the work of his student Herman Daly, who began with a fairly conventional career but seems to have been so influenced by the thought of his heretic teacher that he started taking the biophysical limits seriously and developed, with others, the school of Ecological Economics that is now one of the major critical approaches to the neoclassical hegemony.

I was drawn to the book because, unlike so many economist who began as mathematicians, GR did not remain in the abstract world of numbers and figures, trying to make the systems of life fit into the place statistics had designed for it. Rather his objective was to address the relationship between the biological world and the theorising of economists directly and honestly. Since this task lies at the heart of the interest of a green economist a careful reading of the book is inevitable. However, to challenge the discipline he was so much a part of GR needed to conduct a deep and systematic analysis of how economics worked in the middle of the last century, and it is the outcome of this that the The Entropy Law and the Economic Process presents.

GR begins with a survey of the philosophy of science, as a background to discussing whether economics can ever be a science. Here he draws in many of the philosophical greats, reminding us, for example that it was Kant's view (explained in his wonderfully titled Prolegomena to Any Future Metaphysics that will be Able to Present itself as a Science) that, rather than observing the world and then theorising from our findings, we create our theories and then force our observations to fit them: 'the understanding does not draw its laws (a priori) from nature, but prescribes them to nature' (p. 35).

GR's target, of course, is the early theorists of economics, who sought to transform economics into 'a physico-mathematical science', for example Leon Walras who, when faced with the impossibility of extending the concept of 'utility' this far apparently exclaimed 'Eh bien! This difficulty is not insurmountable. Let us suppose that this measure exists, and we shall be able to give an exact and mathematical account' of the influence of utility on prices and on other economic variables (p. 40). Perhaps it was Walras who was the original inspiration for the joke that asks how many economists it takes to change a light-bulb. The answer is none at all, because they assume that the light-bulb has already been changed.

Jevons was similarly optimistic about the potential of the new sciences and the load-bearing capacity of its concepts. Having declared his intention to rebuild economics as 'the mechanics of utility and self-interest' he waved his hand optimistically at the large quantity of data in account-books and the like as an indication of the nature of economics as a quantitative study, but 'failed to go on to explain how ordinary statistical data could be substituted for the variables of his mechanical equations' (p. 40) GR likens this to 'planning a fish hatchery in a moist flower bed'.

His conclusion on the work of these pioneers of the economic science is damning, his target its misplaced enthusiasm for mechanistic epistemology and for using logic in an inappropriate context: 'For I believe that what social sciences, nay, all sciences need is not so much a new Galileo or a new Newton as a new Aristotle who would prescribe new rules for handling those notions that Logic cannot deal with'.

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Keen as Mustard

I spent some time last week at a very interesting conference in Edinburgh called
Just Banking. The conference was addressed by Adam Posen, of the Monetary Policy Committee of the Bank of England, who joked that he had been aware that, in our company, he would rapidly metamorphose into Margaret Thatcher, which was a relief since he was more used to being seen as a dangerous radical. His presentation was workmanlike and gave us useful information. But his proposals were typical of those who cling to market ideology even in the face of its utter discrediting. His most powerful proposal was a counter-cyclical, inversely proportional property tax, to counteract property booms, which he rightly identified as a key factor in this crash. The much more efficient solution of informal political control of housing finance, as prevailed Before Thatcher, could not be countenanced. Disappointingly, Posen failed to answer questions about quantitative easing, even though they were factual and could have no possible impact on market sentiment.

More cheeringly, I was lucky enough to have dinner with Steve Keen, a key critique of the dominance of neoclassical methods in economics. Keen is most famous for his book Debunking Economics and it became clear during our chat that his revulsion against neoclassical methods and theories goes back a long way, all the way to his students days, in fact. He is now involved in a bitter battle with the powerful neoclassical orthodoxy, for which I pay tribute to him. He has gone beyond being ignored and laughed at and has reached the stage of being fought, bitterly, personally and viciously.

In spite of his utter rejection of the nonsense of neoclassical models and assumptions, Steve Keen is still committed to the importance of maths in economics, and his own presentation in Edinburgh was mostly taken up with the high-speed presentation of a mathematical model. At the point where the whizzing models, which were calculating in real time on his slides, began to make me feel physically sick, I stopped trying to understand. Because I believe that the 'political' is just as important as the 'economy', this sort of methodological exclusion makes me nervous, so later during dinner I questioned Keen about this reliance on maths.

His response was an interesting one. Economies, he argued, are complex systems and our minds cannot encompass the complex and dynamic relationships between the different variables that comprise them. In Keen's opinion only Schumpeter was smart enough to be able to correctly work out all the complex feedback loops and interactions that are present in economic systems without the use of maths. Others such as Marx and Keynes tried, but it led to mistakes in their theory. Mathemetical modelling of systems enable us to avoid these mistakes.

I must say that I enjoyed this argument, but am not convinced by it. In my view, an understanding of the spiritual value of life and the ability to mediate between humans and the natural world are far more useful qualities for an economist than complex maths, hence my paper 'The Economist as Shaman'. This is not to rule maths out: in many cases it is, as Steve argued, efficient and useful. But maths should also be the servant of thoughtful, philosophical economists; it should never be the master of human social or political motivation.
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Elite Syncopations

For those not familiar with the working of universities this post may seem rather obscure, but in reality it explains one crucial mechanism used by neoclassical economists to ensure that the routes to publication and promotion are controlled by their own. It explains how orthodoxy maintains its hold on the economics profession.

This is a large claim made for a research paper presented at the recent Association for Heterodox Economics conference in Nottingham by Harry Bloch, from Curtin University in Perth, Australia. It traced how Australian economists were involved in the process of deciding the quality of different pieces of research produced by their peers. In Australia this process is transparent; in the UK it is not. Hence the focus on scholars on the other side of the world.

The academics were told to rank the journals they commonly read into four categories; it was suggested that they should have 5% in A* (Nobel Prize material), 15% in A, 30% in B and 50% in C. The first conclusion from Table 5 is that economists are very hard on themselves: they considered a full 60% of journals in the also-rans category, a much lower percentage than other disciplines.

But it also demonstrates the domination of the field by proponents of econometrics. The method of regression analysis is the fast route to promotion. A mathematical model is always ranked more highly in terms of esteem than a paper which relates to a real-world problem, such as the financial crisis for example. Theory is rated well, with applied economics – that area which deals with policy – less so. Meanwhile ‘other economics’, such as that which actually questions the status quo, receives the lowest rating, with no journals featuring in the A* category at all.

It is also important to note that these were not everyday academics but Professors and members of professional societies. These are the guardians of orthodoxy, and their own work is likely to be in the field of econometrics and economic theory that presently dominate. As the table shows, none of the journals that covered heterodox economics was included in the A* ranking, making it extremely difficult for those outside the mainstream to achieve research funding. The process of ranking specifically excluded heterodox economists, although they were identified as a specific group - the only group to be excluded.

The second table (Table 7) illustrates the effectiveness of the gatekeeping by the orthodox. It shows the domination of the field by conventional economics while the majority of economists with different views languish at the lower tiers.

Bloch concludes his article as follows:

'The processes employed in the 2010 round of research evaluation under Excellence in Research for Australia (ERA) did not provide a fair assessment of heterodox economics research in Australia. The rankings used as the indicator of the quality for journal articles were unbalanced in favour of economic theory and econometrics and against applied economics and other economics (which included heterodox economics).'

We can expect no better form the UK's Research Excellence Framework process.
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Topsy-Turvy: Turning that Well-Worn Graph on its Head

Here is one for the theorists amongst you - a longer and deliciously academic paper available on request. But for now just enjoy the sense of complete upset that could be caused to a neoclassical economist by the thought that, not only is there supply and demand model (see the figure) ridiculously simplistic, but both lines might actually be oriented in the opposite direction from those conventionally illustrated.



Such is the hypothesis of the German-New Zealand economist Stefan Arne Kesting, who argues that, not only might the directions of the two curves be reversed, but it might actually be possible to posit that an equilibrium is reached.

Conventionally (see the diagram) the supply curve is illustrated as upward sloping, since as the price of a good increases the producer is willing to supply more. However, Kesting points out that, 'Based on arguments of economies of scale and increasing returns by Alfred Marshall. . . marginal and average costs of production and prices are shown to decrease in some instances when output is extended.' This might suggest a supply curve that slopes downwards for a certain range of prices.

In the case of the demand curve, Kesting argues that Veblen's ideas about conspicuous consumption might cause this to be upward sloping. The conventionally downward sloping curve is based on the assumption that as goods increase in price people buy less of them. But if those goods are status goods, the higher price might increase demand (superior branded clothes might be an example).

Kesting argues that the two curves might again meet at an equilibrium point, although each is the mirror image of that suggested by orthodox economic theory.

The easy way in which the most basic apparently scientific formulation of neoclassical economy theory can be turned on its head in this way indicates clearly the vulnerability of the whole house of cards by which our complex global economy is justified. Tweet

Hope Dawns in Disagreement

Regular readers of this blog will know that a recurring whinge relates to the strict orthodoxy of economics - as taught in universities and advised to governments - and the hegemony which it exercises across the globe in these early years of the 21st century. But first the Queen questions what economists are up to, and now from the pink pages of orthodoxy themselves, comes evidence of the paradigm beginning to crack. When FT journalists bewail the lack of uniformity amongst orthodox economists then times are becoming interesting indeed.

Krugman's questioning of free trade - a concept that traditionally stands alongside economic growth as one of the twin pillars supporting the edifice of the neoclassical catechism - is clear proof that the economists are ruffled. While capitalism is endowed with what my Marxist-Lentilist friend refers to as a Protean ability to adapt, the process is not a painless one. And while it is taking place is the moment of the system's greatest weakness.

Alongside Krugman the article cites Robert Barro, whose work on growth convergence argues that countries and regions within those countries will naturally tend towards similar rates of growth in the medium term. Evidence has failed to support this theory, but that has not held back the eminent economist's career. He is now accusing those economists who support major public spending to prevent a Depression of turning to magic. Once this criticism comes out of the armoury, no economist will be safe. From white-coated scientists to snake-oil witch-doctors, they will lose their sacred status at a stroke. Or am I just attempting to dream new year hopes into reality?

Clive Crook, for that, dear readers, is his name, is most upset by the fact that the politics that has always lain behind the neoclassical hegemony is being revealed as the profession comes under pressure for having allowed massive financial and environmental crises to occur. The consequent cracks allow space for the barbarians to rush in to challenge the citadel. Tweet

Discounting the Future

'Discounting’ is a clever wheeze that conventional economics uses to balance utility (its measure of what we want to gain through our economic activity) achieved in different time periods, based on the assumption that we would always rather have a bird in the hand than in the bush. This is in itself questionable, of course, but conventional economics is unable to take account of delayed gratification, not to mention concern for our fellow species.

The consequences of many environmental losses and impacts are likely to be felt many years into the future. In the case of climate change we may be talking about 2050 to 2100; in the case of nuclear pollution we are talking about hundreds of thousands of years. Discounting is the method economists use to compare these impacts as though they were all happening in the now.

When working out the costs and benefits of any economic policy or production process over time the outcome depends entirely on the discount rate that is applied. The higher the discount rate, the lower the future costs of current actions. The discounting formula has the effect of diminishing the impact of environmental destruction caused in this present time-period and making our current actions appear less costly to future generations.

The discount rate is made up of pure time preference and wealth components. The ‘pure time preference’ component is a source of much debate since logically it should be zero, jam today and jam tomorrow having equivalent utility value, in the economic jargon. However, experiments and everyday experience suggest that in reality people are impatient and prefer to have things now rather than later, suggesting that they have a positive time preference. Somewhat ironically, the suggestion that we ourselves are undermining the possibility of future life for human on earth may actually greater increase our time preference for present consumption.

The wealth component is based on the assumption that incomes will rise, so that future generations will be richer than the present one. So if we are concerned with equity we do less to protect future generations who we assume will be richer than we are. Again, there is an obvious problem with this line of reasoning, since the idea of ever-increasing consumption is itself based on the economic growth that may be destroying the potential for future generations to enjoy their comfortable lives. In this sense we might reasonable suggest a negative wealth component to the discount rate.

Estimates from the World Bank for discount rates for different countries indicate that for poorer countries the discount rates are negative, meaning that future consumption there should be valued more than present consumption and these countries should have very protective attitudes towards the environment. This is not found in reality – just another proof of the flawed thinking that underlies the concept of a discount rate. The rates for developed countries are high, which, if they were applied to environmental problems, would mean that we would make little effort to protect the environment since the discount rate would suggest that, not so far into the future, the impact of our present behaviour would have been greatly diminished.

While this may seem an arcane and technical discussion, it is one which has an enormous impact on our chances of protecting our environment, which is why I have weighed down my blog with it this unseasonably chilly morning. These discounts rates are applied when future impacts of current policies are calculated, and if the equations are in error then we risk huge future damage to our environment. This is why, following the publication of the Stern Review of the Economics of Climate Change, orthodox economists engaged in their usual trick of missing the wood for trees and focused their discussion almost entirely on the discount rate Stern had chosen.

Stern’s conclusion that we need to act rapidly to tackle climate change resulted from his setting what was, for orthodox economics, a very low discount rate. Conventional economists were shocked by the consequences for the economy and challenged this on the basis that it had exaggerated the effects of climate change in the distant future. Stern was basing all his conclusions on statistical models about the probability of events occurring. The possibility that the planet might cease to exist would clearly have a major impact on people’s ‘time preference’, i.e. their preference for consuming now rather than in a (possibly non-existent) tomorrow. Even an economist can grasp that.

As green economists we would argue that the only legitimate discount rate is zero, since all generations’ preferences should be treated equally and the time at which somebody lives should not affect their right to be part of our beautiful and unspoiled planet. Tweet

Suppertime games

One of the most depressing aspect of conventional economics is the way it reduces everything to a self-interested trade. Gary Becker, for example, suggests that women choose their husbands on the basis of the amount they earn; whereas men choose their wives on the basis of their ability to perform at dinner parties and assist the ascent up the slippery pole.

The most blatant expression of this underlying culture amongst economists is what we teach as 'game theory'. This is another jargonistic misnomer, since the situations we deal with are far from convivial evening entertainment. Whoever played games in a police station - the setting for the archetypical example of the genre: the prisoners' dilemma?

This is a game that questions whether you should trust your 'friend' when you've both been caught in some shared criminal activity. You are questioned in separate cells. If you both deny the crime you will both be let off. But if you deny it and your friend confesses, s/he will take all the penalty. If you confess and your friend denies it you will take all the punishment on yourself.

In reality, of course, all of these 'games' and their study become a self-fulfilling prophecy. If you take love and spontaneity out of human relationships you can guarantee that you will be unpopular and that most of your friends will be exactly the same calculating sort of person you are yourself. You will become less sociable and be more miserable. Such games are best avoided in life and in economics.

However, I recently heard of a game strategy I liked. It is called Always Generous and is fairly self-explanatory. It fits in well with my moral inclination and is also excellent for dealing with that awkward situation at the end of shared meals in a restaurant when nobody is sure whether they should pay for what they actually consumed or their share of the total.

The Always Generous strategy suggests that you break the deadlock by putting on the table at least a third more than you could owe under either of the other strategies. I've seen this done twice recently and it works a treat. Everybody puts in too much money - the excess can either go to the less well-off around the table or the waiters. When meanness is an option, generosity is always a better bet - in economics, in the restaurant and, most importantly, in life. Tweet

Go Forth and Quantify!

Having worked at a modern, 'metropolitan' university for six years I have finally started teaching economics. The resistance was more my choice than theirs, since I felt reluctant to teach the holy writ I didn't believe in. This term I'm sharing the applied economics course with a true believer. He does the graphs; I do the real-world horror stories.

My content has focused on climate change, food security, localisation and trade. Yesterday, perhaps to convince them that I really am an economist, I drew one of the classic economics graphs myself for the first time in years. It was the usual two lines, one sloping up, the other sloping down. Something magical and meaningful and mysterious was supposed to happen at the point where the two lines cross: equilibrium.

Of course the flaw with this method of representing the world in a system of initially straight and then, in the more advanced courses, curved lines, is that there are no numbers! Axes are labelled capital P and Q while points on the axes are labelled with lower-case ps and qs. The point of equilibrium is represented by p and q with an asterisk.

On one level I can see the funny side of this. In a rather dry and Puritanical sense, the signs and symbols of economics speak to the ritualistic side of proponents of the most positivistic of the social sciences. When I write of 'holy writ' it is only partly a joke. The jargon of economospeak carries power just as the words of the Nicene creed do. We shall not resist the command to compete, to achieve economies of scale, to avoid moral hazard. The true economist is convinced that s/he has some sense of order and some grasp of meaning in the world of uncertainty and unpredictability. What else is a religion for?

But beyond the humour something very serious is going on. The lines I was drawing were taken from the Stern Review and represented the costs and benefits of taking action to tackle climate change. They were literally matters of life and death. In this case numbers did emerge; numbers which gave justification to the continuation of the economic system that is eliminating our species and harming our planet. My question is whether something of such depth and importance should be left in the hands of economists.

*Thanks to Rupert Read for the title for this post. Tweet

What is Green Economics?

I recently consulted the wikipedia entry on Green Economics to discover that it has been eliminated. Somebody has translated it into a forwarder to 'ecological economics'. Whether this occurred through ignorance or political manipulation is not clear to me. What is clear is that we need to rebuild a decent entry on green economics. I'm going to start the process and would appreciate your support.

A rather glib phrase we often use as a short-hand for what green economics is about is 'Economics for People and the Planet' - what does this mean? For me a key difference between environmental, ecological and green branches of economics is that, while all three take the environment seriously (in contrast to neoclassical economics), green economics puts social justice at the heart of the discussion.

The typescript for my book which is also called Green Economics (imagination failure here I'm afraid!) is now with Earthscan and due for publication later this year. Producing it has made me think long and hard about what green economics might be, and I'm going to offer some tasters of the content of the book in this blog over the next couple of months.

So, to begin at the beginning, we need a definition. One that establishes why it is worth having green economics in the first place, and what distinguishes it from other branches of the subject. Here are some of the key pointers so far as I am concerned:

Green economics broadens the perspective of ‘economics’ beyond the concerns of the ‘rational economic man’. It seeks to include the perspectives of those who are marginalized within the present economic structure — primarily women and the poor of the world—as well as taking seriously the needs of the planet itself.

Green economics has not grown up as an academic discipline but from the grassroots. It is distinct from environmental economics, which uses conventional economics but brings the environment into the equation; and ecological economics, which is still a measurement-based and academically focused discipline. Green economics is rather about people and the planet.

Green economics seeks to move the target of our economy away from economic growth and towards flourishing, convivial human communities which do not threaten other species or the planet itself. In place of economic growth we should move towards a steady-state economy.

Green economics is the first significant alternative to capitalism that is not communism. It offers a different economic paradigm to challenge neoliberalism. Tweet