Where Economics Fails
The dismal science is in great need of a paradigm shift to better align with the principles of other natural sciences
It is becoming increasingly clear that the traditional economic models that have been used to guide government policy for decades are growing more obsolete with every passing day. The science focuses on abstract caricatures of man and the way they act and how that aligns with the greater society. Many of the models and many of their observations are observable and noteworthy in most every possible policy area, such as the effect of subsidies, tax policy, tariffs, price controls, etc. However, there is one area in which traditional economic thinking has little grounding.
That would, of course, have to be an environmental policy. So too does the relatively new field of Behavioral economics publish studies casting doubt on the traditional assumption that man is completely rational when it comes to economic pursuit. I feel that one trip to Walmart could show that though. The problem is that the studies of behavioral economics, environmental and ecological economics, and traditional economics have a fatal disconnect.
Traditional economic orthodoxy calls for cost-benefit analysis when analyzing public policy. Most times this is better for the consumer in the short term as the cost paid is the lowest, ideally, price, while the benefit is highest relative to incurred costs. What about the long term? Is the solution that is cost effective necessarily best for long term growth. Is it cost-effective? Does it do the best possible job at meeting the ideal ends, no matter the cost? The two are entirely different in terms of analysis. Take for example a child who is deathly ill. The cost-benefit analysis would suggest buying off-brand medicine as it is cheaper, and would still bring about some net-benefit.
A cost-effective solution would be on-brand medically prescribed medicine from the pharmacist as it is more likely that it will be effective in treating the child's illness. Second, it can be hard to bring everything into economic terms, as benefits are not the same as values and beliefs. You can't convert life, democracy, love, etc. to wholly economic terms without resorting to fancy mind tricks. These mind tricks are also made by experts in their fields, economics, which is what good environmental policy should avoid doing. These criticisms are not to say that cost-benefit analysis is entirely useless when determining public policy, on the contrary, it is incredibly helpful in crafting public policy, but it should never be the only thing considered.
The reason being, of course, is a serious miscalculation in economics. Many economists assume in their models that a consumer wants and preferences are equal to their beliefs and personal values. A want is non-falsifiable, it can neither be true nor false because there exist no grounds to challenge personal wants of another. The only thing that economists could theoretically measure is the intensity in which I hold my wants, which is expressed by a consumers willingness to pay. These calculations of intensity tell us nothing about the legitimacy of those wants.
Beliefs and values, on the other hand, are subject to evaluation and can be proven true or false. Beliefs exist in the real world, they can be supported by evidence and analyzed critically. On these grounds, beliefs are objective. And it would be faulty logic to conclude that they are equal because the subjective cannot, by definition, equal the subjective. This assumption implies heavily that everyone is a consumer, and that is where their complexity stops. But this is far from the truth. People exist outside of consumption and they represent their values, their beliefs in nearly everything they do. For these reasons, we cannot solely resort to mathematical analysis of net benefits, but must also analyze the merit of ideas, of policy, of beliefs on philosophical, on scientific, on logical grounds.
This issue must be resolved in the field if we want to move forward on an issue that has tormented economists for decades. The first attempt to make headway on the issue was the formation of the study of Environmental economics. This led to some very important models and insights that have done wonders for the way we view economic and environmental policy. Consider, for example, the Kuznet's curve which postulates that as economies grow, they care very little about pollution and thus produce more and more of it. As they develop, however, they are able to care about the environment and have the resources to allocate to helping it. So the richer a country gets, the less pollution it emits as well. While not entirely true, it does hold a good insight, an provides a key analysis that the greater production capabilities a nation has, the fewer resources it must devote to it, and thus, less pollution. Or consider the cap and trade program that has seen major success in reducing sulfur emissions, in helping the overfishing concern, and recently reducing carbon emissions in states like California. Or even the Pigouvian tax which calls for tax pollution as a way to better reflect the cost to society that production entails. All of these observations come with their own criticisms and shortfalls, but they have moved environmentalism forward by presenting a more politically feasible alternative.
Behavioral economics was next and really started to hit its stride in the late 1970s and early '80s. They were the first to use the field of psychology to critically analyze consumers behavior when presented with various scenarios. The key conclusion from many of their findings is that humans are irrational most of the time and that they don't always act in their own best interest or in the interest of others. This is critical because it calls into question economists observations about Homo Economicus, the perfect rational being that responds to all signals from the market and all the incentives around them. This is actually far from the case.
The newest, and most comprehensive field, Ecological economics, presented us with a brand new paradigm. Embedded within many of the assumptions economists make is an infinite propensity for growth; in other words, that the economy can always grow. This paradigm rejects this assumption, saying we can only grow to the limits in which the environment will allow us, and it also questions the importance of growth in the traditional sense. Growth means to increase in size relative to a past state, however, to develop means to fundamentally change into something new. Development, then, becomes the key in this framework of analyzing the economy. We cannot continue to grow, grow, grow without bound, however, an economy can always develop. This field encompasses many of the traditional economic models of society, with similar values as environmental economics, but its premise is fundamentally different. This allows for a whole new outlook on the field.
With all these three frameworks in mind, we can construct some patchwork of all sub-sects of economics into a comprehensive view of the world that is compatible with ecology, environmental science, human psychology, and traditional theoretical economics that is better able to tackle difficult problems. The problem of economics is that much of the theory is taken as gospel and applied to every situation, but this fails because the real world is always changing. One theory of static equilibrium, of the market mechanism, cannot include, or even imagine, real-world concerns. This is why we must move away from a traditional view of the economy and move towards a holistic account of the world, one that encompasses cross-field research and insights and realizes it's short-comings. We cannot continue to measure economics as above the other sciences when it comes to the realm of public policy, especially environmental policy, because it greatly endangers us in the long term, but the land, the fish, the creatures of the forest, and so many more. The problem with economics is not a problem of reason, of logic, but rather one of integration. This is where it fails the public, it fails the people that the field of study aims to help the most.
