The Economics of the Yasun? Initiative: Climate Change as if Thermodynamics Mattered

The Economics of the Yasun? Initiative: Climate Change as if Thermodynamics Mattered

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Overview

Climate change lends itself to both political economy and humor. Vogel argues that mainstream economics fails to recognize the thermodynamic nature of climate change, thereby missing the point of Northern appropriation of the atmospheric sink. The payment Ecuador seeks for not drilling in the Yasuní is equitable and efficient. Heeding the call of Deirdre (formerly Donald) McCloskey that economics needs humour, Vogel has written a scathing critique of economics-as-usual which also entertains.

Product Details

ISBN-13: 9781843318743
Publisher: Anthem Press
Publication date: 12/11/2009
Series: Anthem Environmental Studies
Pages: 148
Product dimensions: 8.50(w) x 5.50(h) x 1.00(d)

About the Author

Joseph Henry Vogel is Professor of Economics at the University of Puerto Rico-Río Piedras and serves on the International Tribunal of Climate Justice.

Graciela Chichilnisky has worked extensively in the Kyoto Protocol process, creating and designing the carbon market that became international law in 2005.

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The Economics of the Yasuní Initiative

Climate Change as if Thermodynamics Mattered


By Joseph Henry Vogel

Wimbledon Publishing Company

Copyright © 2009 Joseph Henry Vogel
All rights reserved.
ISBN: 978-1-84331-878-1



CHAPTER 1

THERMODYNAMICS

The Language Chosen Defines the Debate


"Sunk costs" is a useful concept. Its definition in economic theory has many expressions in popular speech. The favorites seem to be "don't spend good money after bad" and "let bygones be bygones." In less colloquial language, decisions should be taken on the basis of future benefits related to future costs and not on the basis of past costs. One should not let a poor prior decision color the decision to be taken now. Nevertheless, they do and that is why "sunk costs" is such a useful concept. The seemingly endless American wars in Afghanistan and Iraq are a good example. Politics explains why presidents and prime ministers do not apply the concept of sunk costs. In matters as grave as war, reversal of course is an admission of a monstrous error. So, to avoid paying the political price, the powers-that-be will "kick the can down the road" and ignore the concept of sunk costs. In the case of the simultaneous American wars, the price tag is already estimated in the trillions of dollars.

Economic theory is not much different. Its conceptual framework now exhibits sunk costs and nowhere is this more evident than in climate change and the intertwined mass extinction crisis. I italicize the adverb "now" to emphasize that at one time the benefits of the framework were greater than the costs, but that time has long since past. When did it pass? Why did it pass? And what exactly do I mean by economic theory?

Let us examine the last question first. Economic theory is a seductively simple model of resource allocation. Indeed, it is so simple that a thumbnail sketch can do it justice. People are assumed to be rational and will express their self-interest in the marketplace. Through the continuous adjustment of prices and quantities, the allocation of resources steadily moves toward an equilibrium at which point the supply of goods and services equals demand for those goods and services. Introductory textbooks diagram the process as a circular flow where households supply the factors (land, labor, and capital) to the firms which produce the goods and services. Such diagrams come with a caveat found a few pages later, viz., whenever the nature of a good militates against a market transaction (e.g. a lighthouse), either the government should provide it or think of some way to create a market where none previously existed.

With "economic theory" now defined, we return to our initial questions "when did the time for it pass?" and "why did it pass?" A clue lies in entertaining "when did economic theory begin?" and "why did it begin?" In the first chapter to The Worldly Philosophers, Robert L. Heilbroner notes "[a]n odd fact: man had struggled with the economic problem since long before the time of the Pharaohs, and in these centuries he had produced philosophers by the score, scientists, political thinkers, historians, artists by the gross, statesmen by the hundred of dozen. Why, then, were there no economists?" The next chapter is entitled "The Economic Revolution" and Heilbroner resolves the enigma: the "agents" of production (viz., tradeable land, employable labor, and fluid capital) were not sufficiently plentiful throughout most of history to make economic theory useful for explaining resource allocation. "Lacking land, labor, and capital, the Middle Ages lacked the market; and lacking the market (despite its colorful local marts and traveling fairs), society ran by custom and tradition." The ecologist would interpret Heilbroner's explanation as one of scale. Tradeable land, employable labor, and fluid capital indeed existed before the end of the eighteenth century, but not at the scale necessary to account for the allocation of most resources. Just as scale is the ultimate answer to "why did economic theory begin?" it is also the answer to "why did the time for it pass?" At some point, the scale of pollution, ignored in the circular flow between households and firms, reaches a threshold where it begins to re-configure the very possibilities for production. So the question "when did it pass?" really becomes "when was that scale realized?"

It is tempting to fast forward a few centuries and date the end of the usefulness of economic theory to the first Intergovernmental Panel on Climate Change (IPCC) convened by Margaret Thatcher in 1990. By that date, the scale of global pollution was already fully realized. However, the IPCC did not happen overnight. We have overshot our chronology and must rewind a bit. The IPCC lagged a growing public awareness that greenhouse gases were a threat to mankind and the biosphere. I would put the date of passage of the usefulness of economic theory twenty years earlier, around the first Earth Day: 1970. However, like the IPCC, the inaugural Earth Day also lagged another growing awareness which gelled with Rachel Carson's hugely successful Silent Spring in 1962. By 1966, the economist Kenneth E. Boulding expressed an alternative to mainstream theory in The Economics of the Coming Spaceship Earth: "The essential measure of the success of the economy is not production and consumption at all, but the nature, extent, quality, and complexity of the total capital stock, including in this the state of the human bodies and minds included in the system." However, the siren for a new economics originates largely outside economics – a result consonant with Thomas Kuhn's The Structure of Scientific Revolutions. I refer to Garrett Hardin's "The Tragedy of the Commons" and the much maligned The Population Bomb by Paul R. Ehrlich. Both were published in 1968, the tumultuous year when students marched in Washington and on Paris. Hardin's elegantly short article quickly became one of the most cited in the history of Science and Ehrlich's book, an instant bestseller.

The politicians of the time responded to the swelling public sentiment and the popularized scientific scholarship. In the US, the Republican administration of Richard Milhous Nixon (1968–1974) assimilated the varied lessons of the environmental movement and established the Environmental Protection Agency (EPA) in 1970. By the end of that decade, almost every country in the North had established some sort of ministry or agency of environmental protection. In the South, it took a bit longer. For example, Ecuador did not establish its Ministry of the Environment until 1996, ironically housing its temporary offices over a sales showroom for gas-guzzling four-wheel drive vehicles.

Some may disagree with my chronology of the sunk costs of economic theory and the transition to institutional limits. They will cite the Ronald Reagan counterrevolution that ushered in massive deregulation as it trumpeted unbridled capitalism. Optimism was de rigueur in the Reagan presidency (1980–1988) and environmentalism, the religion of Cassandras. In Reagan's mind, trees released more CO2 than cars, and the eruption of Mount Saint Helen, more sulfur dioxide than the fleet of automobiles worldwide. What the former actor did to science, he also did to economics. The new "reaganomics" rested on the unlikely scenario that income tax cuts would increase tax revenue. The experiment was run over Reagan's tenure with results that were surprisingly disastrous: deficits skyrocketed to levels which were twice those predicted by the non-partisan "pessimists." Although the economics profession was appalled by reaganomics, few realized how formal economic theory actually abetted it. With respect to regulation and pollution, the obtuse language of economics contrasted with the unambiguous prescriptions of "supply-side economics." Mainstream economists were viewing pollution as a technical problem awaiting a technical solution by economists tinkering with mathematical models. In many ways, The Stern Review is both the culmination of that waiting and a rejection to wait any longer.

Unlike tenured professors of economics, politicians live in the short-run and have always felt "the fierce urgency of now." In the US, a succession of administrations, both Republican and Democrat (Reagan I&II, Bush-père I, Clinton I&II, and Bush-son I&II), either rescinded or refused to accept any new institutional limits proposed from abroad (e.g. the Kyoto Protocol, the Convention on Biological Diversity, the Law of the Sea). Even worse, the parties in power weakened institutional limits previously imposed from within (e.g. the standards of the Corporate Average Fuel Efficiency, the Clean Water Act, the Clean Air Act, and so on). In other words, from Reagan I through Bush-son II, vested interests succeeded in shifting costs to both the outside world and future generations of Americans. Although internal resistance existed, it was roundly ridiculed. Walter Mondale, the Democrat challenger to Reagan in the 1984 presidential race campaigned against "the credit card economy" and lost by the largest landslide ever recorded (49 of the 50 states). Success in cost-shifting reached its apogee under the brazen George W. Bush who has been labeled "conservatism's true loyal heir."

And the rest of the world, where were they? Leaders in the other OECD countries were embarrassed by US excesses but not sufficiently so to say no. They kowtowed to the "Washington Consensus" which imposed austerity on the less developed countries. Among other horrors, the austerity translated into reduced budgets for regulatory agencies. Pusillanimity mixed with hypocrisy as one leader after another endorsed Agenda 21 – the comprehensive blueprint for action on sustainable development. Once signed, its lofty goals were quickly forgotten. From the broad sweep of history, the Northern ecological debt to the South, which arguably began as long ago as Columbus' first voyage, assumed a new and frightening form in 1990: climate change.

Why didn't civil society in both the North and South object? The simple fact is that they did object. The most conspicuous venue has been the World Forum on Sustainable Development – the anti-Davos held annually in the South. Other actions were also noteworthy but seldom reported in the corporate news media. For the sake of space, I will mention just one. An "Ecological Debt Day" is celebrated every year and is occasionally covered by the BBC but never by the corporate media such as CNN or FOX. Ecological Debt Day is the day when humanity would have used up the resources that nature would have renewed over the entire year. The inaugural "Ecological Debt Day" was 19 December 1987 and in 2008 was moved up to 23 September. In short, the South has never slept on its rights and the legal principle of laches cannot be invoked.

It is easy to criticize what happened and far more difficult to construct alternatives for the future. Indeed, rejection of economic theory must mean acceptance of something else. Surprisingly, that something else is not new, not radical, and not even outside the history of economic thought. It is mainstream science and grounded in what Albert Einstein was "convinced" was "[t]he only physical theory of universal content concerning ... that, within the framework of the applicability of its basic concepts, it will never be overthrown." I refer to the economic implications of nineteenth century thermodynamics and more specifically, twenty-first century non-equilibrium thermodynamics (NET).

Just as economic theory is sufficiently simple to afford a thumbnail sketch, so too is NET. The first law of thermodynamics is that energy and matter are conserved. The second law, also known as the entropy law, is that disorder increases in a closed system. Apparent contradictions (e.g. life, a crystal, a flame) are in fact consistent with the second law when one recognizes that Earth's system is open and that the emerging order is at the expense of increasing disorder of the energy gradient (e.g. the food digested, the heat dissipated in crystallization, the candle wax burned). Eric Schneider, a pioneer of NET, and Dorion Sagan, a science writer, put it this way: "There are several differences between the gradient-fed cycling systems of weather and those of life. Living systems, for example, though gradient-based and cyclical, persist in the aggregate far longer than the average storm system. Nonetheless, both storm systems and those of life belong to the same class. Both are NET systems."

With the public psyche prepped from the turbulent 1960s, economic theory was ready for a veritable Gestalt in the 1970s. In 1971, Nicholas Georgescu-Roegen published The Entropy Law and the Economic Process and in 1973, E. F. Schumacher published Small is Beautiful: Economics as if People Mattered. Georgescu-Roegen conceptualized resource allocation as metabolic flows of energy and material that move steadily toward the sink; Schumacher advocated appropriate technologies to manage those flows and "obtain the maximum level of well being for the minimum amount of consumption." Herman E. Daly, arguably Georgescu-Roegen's most illustrious student, elaborated the implications in Steady State Economics (1977) and launched the operational principles of sustainable development. An identifiable school of thought had emerged but the economics profession received it with stony silence. In the preface to the second edition of Steady State Economics (1991), Daly writes that the first edition was "aggressively ignored by mainstream economists in major universities [even though] it did strike a responsive chord among many biologists. In the new millennium, it is far more difficult to "aggressively ignore" ecological economics as academic journals, undergraduate textbooks, and large international societies have coalesced under its banner. Nevertheless, it is not impossible. The Stern Review does not index either ecological economics or thermodynamics and continues with economics-as-usual.

Just as economic theory affords the possibility of a simple diagram to represent resource allocation, so too does thermodynamics. However, it's the opposite of a circle. Georgescu-Roegen writes:

[n]o other conception could be further from the correct interpretation of the facts. Even if only the physical fact of the economic process is taken into consideration, this process is not circular, but unidirectional. As far as this facet alone is concerned, the economic process consists of a continuous transformation of low entropy into high entropy, that is, into irrevocable waste or, with a topical term, into pollution.


Perhaps inspired by Georgescu-Roegen, Hardin drew a unidirectional diagram for "[a] truly general form of the production function under the accounting rules of a society that has adopted spaceship ecology must give equal emphasis to source, production, and sink:

Source (resources) [right arrow] Production (alterations) [right arrow] Sink (pollution thereof)"


Hardin contrasted the straight line above with the "cowboy economics" of the circular process:

"Hazy Resources [right arrow] Production [right arrow] Throwaway Wastes" (italics and differential font size, Hardin's)


Although derisive, "cowboy" is nevertheless an apt metaphor for economists who consider resources limitless and the sink, bottomless (looking down) or infinite (looking up). Metaphorically, one may even say that the 18th century Adam Smith was the first "cowboy economist" despite his never having set foot in the American West which, at the time, was Western Pennsylvania and the Ohio Valley. Smith qualifies as "cowboy" because the "invisible hand" does not recognize the physical transformation of scarce resources and its impact on the sink. Nevertheless, Smith's omission is excusable because of scale. For example, the pin factory that Smith celebrates in Chapter One of The Wealth of Nations must have had a chimney to burn its coal but the smoke did not merit consideration given the vastness of the Scottish sky in 1776. But time moves on. With the industrial revolution of the 19th century, what was once an insignificant plume steadily became the Big Smoke. In the 20th century, even the sky would assume new meaning. No longer associated with any one nation, the atmosphere is now quantified by its chemical composition in parts per million (ppm) and qualified as a global commons. Thermodynamically, the atmosphere is an open access sink with a depth of barely twenty kilometers, "roughly equivalent to the skin on an apple." Mainstream economists should note well that there are no substitute sinks and technology cannot create one. Those who wish to shoot our wastes into deep space, think again – the energy costs would create more entropy than the disposed wastes; those who wish to shoot our wastes into the deep Earth, think again – those cavities also have limited space.


(Continues...)

Excerpted from The Economics of the Yasuní Initiative by Joseph Henry Vogel. Copyright © 2009 Joseph Henry Vogel. Excerpted by permission of Wimbledon Publishing Company.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents

Prologue by José Manuel Hermida; Foreword by Graciela Chichilnisky; Introduction; Acknowledgments; Abbreviations; Chapter 1: Thermodynamics: The Language Chosen Defines the Debate; Chapter 2: The Tragedy of the Commons: A Class of Problems that has no Technical Solution; Chapter 3: The Willful Ignorance of Realpolitik: Market Failure or Cost-shifting Success?; Chapter 4: The General Theory of Second Best: A Rigorous Justification for an Intuitively Just Proposal; Chapter 5: Through the Bottleneck of a Cowboy Economy: Financing Shovel-ready Projects; Conclusions: Reason for Hope and Despair; Appendix: Annotated YouTube Filmography; Notes; Index

What People are Saying About This

Peter Singer

'In the present stalemate over climate change, new ideas are welcome. Vogel's presentation of the economics of the Yasuni Initiative is worth serious consideration.'  —Peter Singer is Professor of Bioethics at Princeton University. His books include ‘Animal Liberation, Practical Ethics, One World, The Ethics of What We Eat’ and ‘The Life You Can Save’

From the Publisher

'A springboard for a succinct, passionate exploration of the economics of anthropogenic climate change… It does what all good books should do: it makes you think.' —Doug Macdougall, Professor Emeritus, Scripps Institution of Oceanography and author of ‘Nature's Clock: How Scientists Measure the Age of Almost Everything’

'In the present stalemate over climate change, new ideas are welcome. Vogel's presentation of the economics of the Yasuni Initiative is worth serious consideration.'  —Peter Singer is Professor of Bioethics at Princeton University. His books include ‘Animal Liberation, Practical Ethics, One World, The Ethics of What We Eat’ and ‘The Life You Can Save’

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