Quiggan as a New Simon

John Quiggan at Crooked Timber has a sensible post our future economy and global warming. This is done in the spirit of Julian Simon whose faith in human creativity was his weapon against the pessimists.

The first group are ‘Deep Green’ pessimists who see the end of consumer capitalism as both inevitable and desirable. At least since the reports of the Club of Rome in the 1970s, members of this group have argued that continued economic growth is inherently unsustainable.

The Club of Rome initially focused on claims that stocks of various mineral and energy resources would be exhausted within a few decades, but claims of this kind have been refuted by experience. Most mineral resources have actually become cheaper. Even in cases where prices have risen, the economic impact has been marginal, relative to the long-run trend of increasing income.

As a result, most Deep Greens now focus on limits to the capacity of the natural environment to support continued growth and assimilate waste products like CO2. Their central claim is that economic growth depends critically on the use of the natural environment as a dump for our waste products.

The Deep Green position is qualitatively different from that of participants in the climate change debate, including James Hansen and Stephen Schneider, who argue that we are already close to, or perhaps past, a point where our activities will critically damage the environment. From the point of view of these commentators, damage to the environment is the result of mistaken (but hopefully reversible) policy choices, rather than an inherent consequence of modern civilisation.

The mirror image of Deep Green pessimism is that of the ‘Dark Brown’ pessimists who say that we should do nothing to stabilise the climate because to do so will wreck our standards of living. Dark Brown commentators from thinktanks like the Competitive Enterprise Institute warn of ruinous economic consequences even from modest first steps such as the implementation of the Kyoto Protocol. ...

The track record of Dark Brown pessimists is no better than that of the Club of Rome. Time after time, Dark Browns have opposed environmental improvements as too costly, repeatedly overestimating the costs and underestimating the benefits. The debate over CFCs and the ozone layer provides a good example, since it was one of the first issues to be addressed on a global scale. The doomsayers repeatedly attacked both the science behind the ban on CFCs and the economics of the policy, claiming it would cause massive economic damage. In reality, even without taking account of health benefits, it seems likely that the CFC ban yielded positive net economic benefits. ...

Underlying both Deep Green and Dark Brown positions is a fundamental misunderstanding of the nature of economic progress and of economic activity in a modern society. ...

The traditional model of economic growth is based on the accumulation of capital equipment, capable of converting an ever-larger volume of natural resources into physical products for human consumption.

Such a model leads naturally to the conclusion that economic growth cannot continue indefinitely. The classical economists of the 19th century, beginning with Malthus, were the first to reach this conclusion, which they phrased in terms of the idea of diminishing returns. ...

Long experience of sustained growth suggested that the classical economists were missing something. For a long time, growth models made to fit by adding an unexplained and exogenous source of growth called technological change, but this was always unsatisfactory. Technological change is itself the product of economic activity, and therefore subject to the same logic of diminishing returns. Something was missing.

It has gradually been recognised that the missing ingredient was information, embodied in technological improvements and in the minds of skilled and educated workers. Unlike physical inputs to production, information is not subject to diminishing returns. Once some piece of information, such as an improved way of producing a good or service is discovered, it can be used and reused indefinitely. Use by one person does not diminish its availability to others. This insight led to the development of ‘endogenous growth theory’ as opposed to older theories based on exogenous technological change. ...

That is, there is nothing in the nature of economic progress in a modern society that inherently requires increased volumes of physical output. Most growth will occur in activities where information is the crucial factor. But, it might still be argued, energy is essential to all of these activities, so a reduction in energy use must bring growth to a halt. The first part of this claim is true, but the second is false.

The most common problem with ‘energy fundamentalism’ is the failure to understand prices. As Hayek observed long ago prices are the critical information generated by a market economy. Even where explicit prices are not present, for example within firms and government agencies, increasing scarcity of any resource is reflected in higher implicit prices.

Before considering the future, we can use prices to assess the importance of energy in existing activity and the extent to which our current prosperity depends on readily available supplies of cheap energy. At current prices, primary energy accounts for less than 5 per cent of total expenditure. An immediate implication is that a doubling of the cost of primary energy, arising from a switch to more expensive sources of energy could cost no more than an additional 5 per cent.

But this is a substantial overestimate. An increase in the cost of carbon emissions would provide signals to users, from energy suppliers to industry to final consumers, of the need to become more efficient in using energy. Decades of cheap energy have produced a system characterized by inefficiencies at every stage of the process from production to final consumption.

Where the scope for efficiency improvement is limited, prices will signal the fact that some kinds of consumption are more costly than others. Consumers will respond, as they always have done, by changing consumption patterns to favor items that are relatively cheaper. Of course, this will entail social change, but relative prices change all the time, in many cases by much more than the likely change in energy prices. The plummeting cost of computers and the rapidly rising cost of healthcare provide two of the most important examples.

Taking account of efficiency improvements and substitution effects, it seems likely that a doubling of energy prices over a long period would reduce average income by no more than 2 to 3 per cent. ...

Despite the claims of Dark Browns and Deep Greens, we can, if we choose, have both a stable climate and steadily improving standards of living throughout the world.