Voices in the air

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In his General Theory, Keynes famously wrote that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood’:

Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back… [The] ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.

Knowing the intellectual provenance of a public policy or political slogan can give you some idea of its substance. This is the case for the the Australian government’s proposed carbon tax.

Thirty years ago it was possible to describe the environmental-policy debate between economists (within government agencies and without), as an asymmetric contest between:

  1. Those who would rely on price signals to abate pollution, either through imposition of a Pigovian tax, or through the delineation and assignment of property rights, and Coasean bargaining.

    This position harked back to the market-as-superior-information-processor arguments of Mises and Hayek;

  2. An ecological economics concerned with physical quantities, and based on the matrix notation of Sraffa, Von Neumann and Leontief.

    This group considered production to be a circular process using its own outputs (and natural resources) as physical inputs and creating pollution/waste as a joint product.

    It suggested reducing or setting targets for pollutant emissions through absolute physical limits expressed in non-price units, gesturing towards the in-kind calculation of Otto Neurath and Frederick Soddy, and socialist planning.

The argument of the first group against the second was that prices were the best indices of scarcity or social cost.

Benevolent policymakers who wanted producers in a market economy to substitute a ‘clean’ technology or production process for an environmentally-damaging, resource-depleting or pollution-intensive one should do this by allowing prices to incorporate information on the environmental effects of the respective activities (e.g. by levying a Pigovian tax).

Firms would then adjust the quantity used of a physical good or process in response to these changes in relative prices. With a tax levied on pollution, profit-maximizing firms could be expected to choose production methods that were more favourable to the environment.

The technical argument of the second group against the first rested, among other things, on the possibility that introducing ‘green taxes’ could have ‘perverse’ effects involving reverse substitution or reswitching.

This could lead to increased employment of pollution-intensive production techniques even as the ‘price’ of pollution rose, implying the non-existence of what was commonly termed an inverse (i.e. monotonically downward-sloping) ‘pollution demand function’. (Empirical examples of ‘environmental reswitching’ were given by economists such as Peter Albin and J. Barkley Rosser Jr.)

This fact about choice of technique meant that, at a given level of pollution, the elasticity of pollution with respect to a pollution tax would be indeterminate. On the other hand, and notwithstanding the claims of Morris Adelman and others, there were definite limits to the substitution between inputs, and to changes in the technical conditions of production, that could be induced by changes in relative prices (such as those resulting from a pollution tax).

Firms could deploy resources between sectors in response to price signals, but there was no equivalent substance for nature to re-allocate between branches of the ecosphere.

More generally, the projection of the physical conditions of production (a two-dimensional input-output matrix, whose coefficients specified how much of the output of each industry was technically required as an input for each other industry) on to a one-dimensional price vector represented a loss of information content. The former contained all the information necessary to compute the latter, but the reverse operation was impossible.

Price accordingly was not the ultimate bearer of information on which decisions should be based. Planning in physical units might be a better way to deal with the environmental consequences of economic activity.

Since then, the second group has largely been consigned from mainstream environmental economics to the theoretical boondocks of industrial ecology and life-cycle assessment.

The first group has secured complete scholarly ascendancy – essentially by banishing its opponent from the field. This is why the Australian Prime Minister has repeatedly seen fit to describe an ‘economic consensus’ on the need for a ‘market-based mechanism to price carbon’ and limit pollutant emissions. (So too have the Treasurer and the Minister for Climate Change).

The total victory of group (1) in the arena of ‘environmental economics’ (specifically the problem of pollution-emission abatement) has coincided with the intrusion during recent decades of the capitalist market, its characteristic modes of valuation, and private-property rights into new social domains, including higher education, health, retirement provision, entire countries, charity and now the atmosphere.

The latter item is perhaps the most tricky, presenting a high chance of instinctive resistance from the populace. People may have been taught to believe that ownership of land is natural and universal, and that essential services can be delivered more efficiently by private firms, but they have not yet absorbed the same lessons about the air above them.

One step towards accomplishing the latter task was for environmental economics to became a subset of mainstream welfare economics, concerned with intergenerational equity, externalities, public goods, bargaining games and informational asymmetries, etc. Scholars could then apply to natural resources the lessons of the Coase theorem on the need for well-defined property rights.

More than for most academic disciplines, the survival and successful transmission of a particular economic idea depends quite clearly on its utility for this or that social group.

If, as Keynes said, ruling elites and state managers are conscious or unwitting hosts of economic ideas, which dwell in books, brains and hard drives, over time the differential survival and use of these ideas will derive from how well each can be used to advance the interests of contending classes. The ‘scribbled’ ideas of some long-dead economists are evergreen; others fall by the theoretical wayside. Some are banished, sharing the fate of their unlucky constituencies; others are elevated alongside the fortunes of their backers.

This is less true for those economists who advance narrow policy prescriptions than for those propose who broad shifts in conceptual outlook. The names of Smith, Ricardo, Henry George and Keynes himself have each been closely aligned with sectional interests (e.g. urban manufacturers versus agricultural landowners, industrial and commercial firms versus bondholders). The movement of their stocks in the journalistic and political world, if not within the academy, have corresponded closely to social-political trajectories (though recently Wayne Swan namechecked Keynes, rather pathetically, for PR purposes).

Alongside the achievement of a scholarly pseudo-consensus on ‘price signals’ and ‘property rights’ as the best way to limit pollution, contemporary Australian politics has developed an ever-more attenuated ideological spectrum, in which each party with parliamentary representatives shares a common set of background assumptions regarding the role of the market.

(The Greens, who sometimes add anti-market rhetoric to their social liberalism, nonetheless officially consider themselves ‘beyond left and right’ on economic matters, and support key neoliberal nostrums. Their record as part of several state coalition governments illustrates this commitment; Tasmanian leader Nick McKim recently promised to implement ‘tough decisions’ on ‘savings and productivity improvements’ in health and education, following the savage budget of Premier-Treasurer Lara Giddings. In agreeing to the closure of 20 schools, firing of nearly 2000 public-sector workers, and a $100 million cut in public health expenditure, McKim nodded towards the previous efforts of Christine Milne and Bob Brown during the 1989-92 Labor-Greens government: ‘Once again the Greens have been prepared to help to haul the budget back on track after the spending sprees of majority governments.’)

With all members of the political class agreeing on the economic fundamentals, there is little need for any public figure to discuss them seriously, any more than there is reason for fish to debate the merits of water.

When we add to this fact how boring and forbidding contemporary economics appears to the non-specialist, we can see why public debate (i.e. that conducted outside the business media and Productivity Commission reports) surrounding the Australian government’s proposed carbon tax has been, to a truly remarkable extent, shorn of economic substance.

Both advocates and opponents have contended largely on the ground of natural science, seeking to capture its authority for their respective positions, which are supposed to follow automatically from ‘the science’.

Representatives of the government have, of course, been explicit in identifying the application of a ‘carbon price’ as a microeconomic reform in the tradition of the Hawke-Keating regulatory changes of the 1980s and 1990s: compulsory subscription to pension schemes, union-imposed wage restraint and enterprise bargaining, capital-market liberalization, tariff reduction and removal, etc.

The Hawke-era economic advisor, Ross Garnaut, has had a key public role (though I suspect his area of professional expertise is confused by many casual observers).

But these are not the sort of unwitting intellectual influences by long-dead economists, with ‘the gradual encroachment of ideas…after a certain interval’, which Keynes wrote of.

When Greens Senator Christine Milne speaks of the need for ‘price signals’ to deal with the problems of climate change, she is not repeating the distilled wisdom of Ross Garnaut or Nicholas Stern. She is, consciously or not (!), repeating the right-wing arguments from the 1920s of Mises and Hayek against the claims for in-kind calculation favoured by the socialist Neurath, the Nobelist Soddy, Karl William Kapp, Popper-Lynkeus and Ballod-Atlanticus.

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3 Responses to “Voices in the air”

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  3. Australian native title in context: incorporated group-based property in the SW Pacific | Churls Gone Wild Says:

    […] the expansion of private ownership rights into new domains including retirement provision, the atmosphere, marine fisheries, river basins, higher education, charity, and whole regions of the […]

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