{"id":274,"date":"2014-10-15T07:30:40","date_gmt":"2014-10-15T07:30:40","guid":{"rendered":"http:\/\/sussexnrggrp.wordpress.com\/?p=274"},"modified":"2014-11-04T12:58:45","modified_gmt":"2014-11-04T12:58:45","slug":"neoclassical-theory-promises-a-world-of-sustainable-consumption","status":"publish","type":"post","link":"https:\/\/blogs.sussex.ac.uk\/sussexenergygroup\/2014\/10\/15\/neoclassical-theory-promises-a-world-of-sustainable-consumption\/","title":{"rendered":"Neoclassical theory promises: a world of sustainable consumption"},"content":{"rendered":"

By Harry Saunders<\/em><\/strong><\/p>\n

Allow yourself for a moment to picture a time; say 5, 10, 50 generations in the future.\u00a0 Imagine yourself in a world where everyone is consuming at a level that satisfies them.\u00a0 People need to work only a small fraction of their time, and the need for work diminishes persistently so leisure time is ever-rising.\u00a0 And the economic machine you see working there is automatically and continuously reducing its assaults on natural ecosystems globally.<\/p>\n

Impossible, right?\u00a0 As it happens, neoclassical economics<\/a> says not.<\/p>\n

Surprising as this might seem, would it further surprise you to learn this economic machine has all the trappings of a free market, competitive, private-ownership economy, including producers who maximize their profits?<\/strong>\u00a0 And that this very dynamic is what propels and enables this \u201cgolden age\u201d for households \u2013 and for the environment?<\/p>\n

More Good Surprises<\/strong><\/p>\n

Before succumbing to (what must be) your deep suspicion that this all must be dreadfully theoretical and so cannot be trusted to depict reality in any meaningful way, there are other good things to be reported about this economy.<\/p>\n

Forces at work in the economy act to limit or erase income inequality.\u00a0 Persistent poverty is disallowed.\u00a0 The economy stabilizes on what is called a \u201cgolden age path\u201d where intergenerational equity is automatically assured.<\/p>\n

And despite what you may have read, such an economy does not require growth to sustain itself.<\/p>\n

Intriguingly, this state of affairs depends not on altruistic behavior but on natural dynamics arising when agents act in their narrow self-interest \u2013 it does not presume any rallying cry for people to act with the larger good in mind.\u00a0 It happens by itself, with or without altruism. It is a natural ecosystem, in other words.<\/p>\n

Neoclassical Theory and Reality<\/strong><\/p>\n

That\u2019s a lot to swallow, you say.<\/p>\n

Once you can envision the commonsense mechanics at work, swallowing will be easier.\u00a0 But to help this along, let\u2019s first attack a root of your concern: theory<\/strong> vs reality<\/strong>.<\/p>\n

Because of the care with which generations of brilliant economic minds have assembled it, neoclassical economics points a very reliable finger at powerful economic forces at work in the real world.\u00a0 And while it might not seem so from the abstract-looking mathematics and seemingly arbitrary \u201cassumptions\u201d that infuse it, neoclassical theory today successfully surviving came down to us from economists possessed by a consuming passion for explaining real things about the real world.<\/p>\n

All the above conclusions follow from a standard framework stripped to its bare essentials.\u00a0 Its theoretical foundation is undergirded by three massive pillars<\/strong>, each festooned with laurels of the Nobel variety.\u00a0 And actually a fourth pillar<\/strong> that should have been likewise festooned.\u00a0 That is, five of the great economists of past few decades \u2013 Kenneth Arrow<\/a>, Gerard Debreu<\/a>, Robert Solow<\/a>, Edmund Phelps<\/a>, Franco Modigliani<\/a> (Laureates all) \u2013 built the three pillars economists know as general equilibrium theory<\/strong>, neoclassical growth theory<\/strong>, and neoclassical consumption theory<\/strong>.\u00a0 Ronald Shephard<\/a> created the fourth pillar, called (somewhat obscurely) duality theory<\/strong>.\u00a0 Each of these accomplishments was hard won, and each represents a truly fundamental advance in our economic understanding.<\/p>\n

But pedigree aside, what you really want to know is how cautiously you need to treat the disturbing fact that this theoretical foundation is, well, theoretical, and rests on challengeable assumptions. And what may be worse, embodies these assumptions in mathematical equations that seem offputtingly arbitrary.<\/p>\n

The equations are neither arbitrary nor arbitrarily constructed.\u00a0 As for the assumptions, these are deeply commonsensical.\u00a0 Were you to read a clear, reader-friendly verbal description of each assumption, without looking at the mathematics, each would make sound sense to you.\u00a0 The mathematics is simply the economist\u2019s way of making these statements perfectly precise.\u00a0 It allows economists to converse among themselves in shorthand, bless their nerdish souls. These conversants require that the assumptions and relationships be stated in a form that brooks no challenge as to their exact meaning.<\/p>\n

Schumpeter\u2019s Challenge<\/strong><\/p>\n

Numerous new economic approaches have arisen in recent years, including social network theory, agent-based modeling, etc.\u00a0 Without here explaining why (subject of a future post), none of these is inconsistent with what is pictured here.\u00a0\u00a0 But Joseph Schumpeter<\/a> deserves special attention.<\/p>\n

The author of \u201ccreative destruction<\/a>,\u201d Schumpeter saw that progress in an economy was actually one that moves in fits and starts, where new developments arise not because returns to capital happen to be at some particular level or the like as traditional neoclassicists might have it, but rather directly out of the innovation of entrepreneurs.\u00a0\u00a0 New production capacity arises, unpredictably producing new things and destroying old ones, because of Schumpeterian dynamics, not out of neoclassical necessity.<\/p>\n

Nonetheless, the larger neoclassical framework encompasses Schumpeter\u2019s idea, in the aggregate.\u00a0 Neoclassical technology trends \u2013 having effects identical to those in the Schumpeterian picture \u2013 allow accurate portrayal of the economy\u2019s aggregate functioning when responding to innovation\u2019s engine..<\/p>\n

And how am I to believe this aggregate picture is the correct picture, you ask?\u00a0 An analogy will make this easier. For those familiar with the discipline of thermodynamics, you\u2019ll know that the behavior of a gas is highly predictable, even though it is behavior arising from gazillions of tiny molecules, moving around randomly and chaotically. Boyle\u2019s law and the \u201cideal gas law,\u201d for instance, are extremely simple equations delivering simple relations among pressure, volume and temperature that are (for all intents and purposes) perfectly predictive.\u00a0 These laws\u2019 physical validity was proved by the discipline of statistical mechanics to be directly connected to the random behavior of individual molecules.\u00a0 Things in aggregate somehow seem to be smoother and more straightforwardly predictable.<\/p>\n

In like fashion, neoclassical laws govern molecular Schumpeterian chaos in the large, extracting visible simplicity out of underlying complexity.\u00a0 New goods, services, and industries \u2013 though we cannot know what these will be \u2013 will always require households to supply the needed capital and labor, and to consume the products offered.<\/p>\n

The Mechanics of it All<\/strong><\/p>\n

Where credibility is best built is by looking at what the theoretical construct is saying in day-to-day language.\u00a0 While brevity of discourse prevents it, a full accounting would describe the natural mechanics of how households drive the entire economic machine via their contributions of labor and capital (savings) to producers; how producers in turn deliver households consumption goods and services; how households own the means of production; how the economy values uncompensated labor such as household operations and child care as equivalent to paid labor; how prices lock to quantities; and how the economy autonomously evolves toward maximizing \u201ceconomic welfare,\u201d something akin to maximizing the \u201csize of the pie\u201d left over as surplus from this economic machine after it\u2019s fed.<\/p>\n

And how all of this results in an economy that does not require growth to sustain itself but where producers get exactly what they need from households to run the machine in zero-growth mode indefinitely.\u00a0 All the subject of a future post, perhaps.<\/p>\n

Where the Good Things Come From<\/strong><\/p>\n

But more exciting than how this economy functions is the way it behaves when allowed to unfold in its own way.\u00a0 Here we return to the aforementioned surprises.\u00a0 For instance, in this economy capital owners cannot claim a larger share of the pie than is due them.\u00a0 Natural forces engage to drive the economy always back to a balance wherein wealth derived from capital investments and from wages paid to labor both lock on a level that optimally serves household preferences.\u00a0 Capital and labor claims on wealth resist getting out of balance.<\/p>\n

As if this weren\u2019t enough, there is another startling thing about this future economy: persistent poverty is disallowed.\u00a0 Any economy suffering from under-capitalization and\/or over-supply of labor (i.e., high unemployment) will automatically move to a condition of full employment and will generate sufficient productive capital stock for itself to match the satisfaction-maximizing consumption of households seen in any other economy.\u00a0 Natural economic forces act to drive toward this state of affairs.<\/p>\n

One other, intellectually-arresting thing (last one, I promise):\u00a0 This economy will be on what is called a \u201cgolden age path,\u201d so named by Nobel Laureate economist Edmund Phelps who first discovered such behavior.\u00a0 Phelps\u2019 \u201cGolden Rule of Accumulation\u201d<\/a> \u2013 christened thus because it follows the golden rule principle of \u201cdo unto others [i.e., future generations] as you would want them to do unto you\u201d \u2013 is automatically honored.\u00a0 That is, at each point in time, the choices made by households occur in such a way that the welfare delivered to each succeeding generation will be no less than the welfare of the current one (and, with ongoing technology improvements, will be greater).<\/p>\n

The Caveats<\/strong><\/p>\n

For this world to actually exist, it would have to be the case that the declining assault on natural capital is aggressive enough to preserve its health and ongoing viability.\u00a0 And in any case, the economy would have to maintain at a level that adheres to natural capital\u2019s carrying capacity or below.<\/p>\n

In this regard, the above portrayal of this economy makes one significant assumption: that the global human population has stabilized at some fixed level (or is rising ever so slightly). Current trends seem to point in this direction, but it is still an assumption.\u00a0 The framework furthermore makes no prediction as to whether any particular population size will be sustainable by way of honoring natural capital\u2019s carrying capacity.\u00a0 It only predicts that under circumstances of a fixed population, consumption can remain steady and calls on natural resources decline.\u00a0 No doubt any particular consumption level will have a powerful bearing on the \u201cGaia-balancing\u201d equation.\u00a0 The hard work ongoing by ecologists and a throng of others will be needed to determine the hard ecological limits of natural capital that will better enable us to solve this crucial-to-humanity equation.<\/p>\n

One other thing: Even though calls on raw resources are declining, this is not the same as saying these come without assaults on natural capital beyond just the potential to exhaust some of them.\u00a0 If these resources generate emissions or other pollutants, they assault natural capital another way that further threatens sustainability.<\/p>\n

But be reminded that we are looking generations hence.\u00a0 Is it really that difficult to envision a world generations down the road where means have been found to supply clean, cheap, and abundant energy?\u00a0 And to handle other raw materials in a way that makes them continually recyclable so as not to impinge on natural capital in any way that nature cannot replenish?<\/p>\n

That is the story.\u00a0 If your skepticism remains unquenched, you are invited to test your misgivings against a recently-released article<\/a> in Ecological Economics.<\/p>\n

Final Word<\/strong><\/p>\n

The economic future of human civilization may not be quite so miserable as you or others around you might worry.\u00a0 Despite the fulsome challenges directly facing humanity today, there is a highly alluring future painted by good old neoclassical economics that may not in fact be that far beyond our reach; or at least not far beyond the reach of your progeny x generations hence.\u00a0 Pick the value of x for yourself.\u00a0 Then decide the direction you want to travel to help them arrive there.<\/p>\n

\"HarrySaunders\"<\/a>Harry Saunders<\/a> is the Managing Director<\/strong> of Decision Processes Incorporated<\/a>. He has consulted at numerous Fortune 100 companies including Chevron, General Motors<\/strong> and Hewlett Packard<\/strong>. He is also a Senior Fellow<\/strong> at The Breakthrough Institute<\/a>. <\/em><\/p>\nFollow Sussex Energy Group \"Facebook\"<\/a>\"twitter\"<\/a>\"linkedin\"<\/a><\/span>","protected":false},"excerpt":{"rendered":"

By Harry Saunders Allow yourself for a moment to picture a time; say 5, 10, 50 generations in the future.\u00a0 Imagine yourself in a world where everyone is consuming at a level that satisfies them.\u00a0 People need to work only…<\/span><\/p>\n

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