Modern mainstream economics: science or ideology? Hungarian Academy of Science

1. Modern mainstream economics: science or ideology? Hungarian Academy of Science 27. November 2006 Prof.Kasim Tatić, Ph.D. Institute for Advanced Studies on Science, Technology and Society Graz School of Economics and Business Sarajevo kasim.tatic@efsa.unsa.ba

2. Ideology is a shared belief system that may serve at once to motivate and to justify. • It generally asserts normative values and includes causative beliefs. How do things happen? What does it all mean? • An ideology may be utopian and progressive or protective of the status quo. • It offers a way in which to order the world, defining enemies and allies, dangers and opportunities, us and them.

3. Ideologies are formal, structured, and involve their own particular logic, often appearing • in the guise of science or objective knowledge. • Ideology is implicated in collective action, as criticism, explanation, or promise. • It is represented in symbols and beliefs held by a community and is publicly expressed.

4. Science in the broadest sense refers to any system of knowledge attained by verifiable means. • In a more restricted sense, science refers to a system of acquiring knowledge based on empiricismandexperimentation, as well as to the organized body of knowledge humans have gained by such research.

5. Fields of science are commonly classified along two major lines: • Natural sciences, the study of the natural phenomena; • Social sciences, the systematic study of human behavior and societies.

6. Neoliberalism - A political movement beginning in the 1960s that blends traditional liberal concerns with an emphasis on free market and continuouseconomic growth. • It is against government regulation, environmentalism and fair trade.

7. Neoclassical economics, as the Chicago School of thought is now called, has become an international elite consensus, one that provides the foundation for the entire global political economy. • In the United States, young members of the middle and upper-middle class first learn its precepts in the academy.

8. Polls routinely show that economists and the general public have widely divergent views on the economy, but among the well-educated that gap is far narrower. • A 2001 study ... showed that those with college degrees are more likely to subscribe to the views of neoclassical economists than the general public...

9. Because neoclassical economics always presents itself as a value-neutral description of the world, its ideological commitments can be adopted by those who learn it without any recognition that they are ideological. This is the source of some very spirited debate within the field itself.

10. A growing global movement of “heterodox” economists has criticized the ideological confines and blindspots of the neoclassical approach. • As Nobel Laureate Joseph Stiglitz put it, the dominance of the neoclassical model is a “triumph of ideology over science.”

11. When equity and efficiency tradeoffs ... arise, mainstream economists are systematically biased in favor of efficiency because that’s what they are experts on. • Efficiency they can measure and analyze. • Fairness? That’s the turf of philosophers and politicians.

12. According to mainstream economists it is notoriously difficult to measure fairness; it is notoriously inefficient to try and that is why the mainstream economists efficiently pass it along to those to whom the opportunity cost of arguing is zero: the philosophers.

13. "Efficiency' can really only apply to machines or machine-like actions. That is, one can tinker with a machine to make it go faster, (car engines), or do more maneuvers etc; That can be measured. • But markets are not machines, they're fictional or abstract creations, (in the same sense money is), that allow transactions between humans. Because they're fictional or abstract, they can be created any number of ways. • There are no "markets-in-themselves" to use a Kantian terminology.

14. Markets can be created to reflect certain social/ philosophical/ religious values that can be "measured" in a sense.The present-day market reflects the values that society now holds. Those values are, (as far as I see), the accumulation of material wealth and the expansion of means to create more wealth. • They are not values that hold the needs of future generations in view, nor the environment, nor the spread of economic and social equality to as many as possible.

15. This tendency is most pronounced in discussions of economic growth, and how the benefits of that growth should be distributed. • Nobel Laureate Bob Lucas, said that “once you start to think about the benefits of high growth, it’s hard to think about anything else.” In other words, first worry about how best to grow the pie, then how to slice it up. Let efficiency trump equity, create wealth, and then you can use the extra wealth you’ve created to alleviate inequality.

16. This makes a certain amount of sense. But when this rhetoric comes to dominate our politics, the problem of inequality is never addressed. • NOWis always the time for growing, LATERis always the time to address concerns about equity. ...

17. In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. • The top group's share of corporate wealth has grown by half since 1991, when it was 38.7 percent.

18. From 2003 to 2004, the average incomes of the bottom 99 percent of households grew by less than 3 percent, after adjusting for inflation. • In contrast, the average incomes of the top one percent of households experienced a jump of almost 17 percent, after adjusting for inflation. (Census data show that real median income fell between 2003 and 2004.

19. The problem is that mainstream economics cannot offer a coherent development concept except "let's just go on and see what happens".

20. “The whole mainstream economics focuses on economic growth, how fast we can make economies grow. Economic growth does tend to raise all boats." • In the literal sense of causing sea levels to rise, they may have a point.

21. Existing model of economic growth represent an inefficient use of human resources. • The hidden model that lies at the heart of neo-classical economics as it exists in practice is Social Darwinism, the belief that biology and science support the existence of a particular social order, the social order which, by happy circumstance and the virtue of our history, happens to be the one in place at this time.

22. Globalization

23. What is sustainable development What is the link between the Bible Friedrich Nietzche, and sustainable development ?

24. Some key features of sustainable development

25. Can we have growth and environmental sustainability? • Yes - but it needs to be: • Smart • Appropriate • Low carbon • Efficient in resource use

26. Can we have growth and environmental sustainability? • Developed countries have managed to increase resource efficiencies as technology has improved • But…consumption growth has swamped these gains in efficiency of units • We need innovation in consumption and distribution as well as in production

27. globalization represents the process of increasing convergence and interdependence of national economies and of the international scope and availability of markets, distribution systems, capital, labor, and technology.

28. Globalization on all levels leads toward continuous requests for increased competitiveness. • Our goal is to highlight the role and significance of the environment and natural resources in the process of creation of competitive advantages in a globaly connected world.

29. Competitiveness • Competitiveness can be thought of as the ability of a company (or industry, or country) to constantly increase its productivity in creating differntiated goods that respond to market demand, and to bring those goods to markets efficiently, while at the same time fostering an increasingly discriminating customer base. (Porter)

30. EU Thematic Strategy on the Sustainable Use of Resources • Objective: • “ensuring that the consumption of resources and their associated impacts do not exceed the carrying capacity of the environment and breaking the linkages between economic growth and resource use” • (common position adopted by the council 27/9/2001)

31. Concerns • growth of economies outweighs resource productivity improvements • waste generation is 1:1 coupled to economic growth • emissions of selected pollutants is decreasing but aggregated pressures continue to increase: territorial degradation, urban sprawl, etc.

32. Concerns • green house gas emissions from transport and tourism continues to increase • biodiversity, tropical forests, fish stocks, groundwater quality, urban air quality, ozone layer integrity, etc. are endangered

33. Energy data OECD 1998 2020 change TPS (1) 213 400 275 622 +30% TPS/GDP (2) 10.9 8.0 -19% TPS/capita (3) 196 221 +18% (1) Total primary energy supply in PJ (2) TPS divided by GDP in GJ/100 US dollars (3) GJ/capita Energy units are measured in petajoules (PJ). One PJ equals (approximately) 278 million kWh of electricity; 25 million cubic metres of natural gas; 24 thousand tonnes of oil equivalent; and 34 thousand tonnes of coal equivalent.

35. Decoupling • The term decoupling refers to breaking the link between “environmental bads” and “economic goods.” • Absolute decoupling is said to occur when the environmentally relevant variable is stable or decreasing while the economic driving force is growing. • Decoupling is said to be relative when the growth rate of the environmentally relevant variable is positive, but less than the growth rate of the economic variable.

36. Decoupling • Decoupling can be measured by decoupling indicators that have an environmental pressure variable for numerator and an economic variable as denominator. Sometimes, the denominator or driving force may be population growth or some other variable. • The evidence presented in the OECD Report “Indicators to Measure Decoupling of Environmental Pressure from Economic Growth” shows that relative decoupling is widespread in OECD Member countries.

37. Decoupling • The concept of decoupling is attractive for its simplicity. Graphs displaying a rising GDP juxtaposed with diminishing pollutant emissions, or pollutant emissions rising faster than GDP, convey a very clear message.

38. Decoupling • However, graphs of synthetic decoupling indicators often convey mixed, or double, messages. In a growing economy, relative decoupling will imply that environmental pressures are still rising. • Equally, if economic activity is falling, relative or even absolute decoupling may not imply a positive development for society as a whole.

39. Decoupling • Decoupling concept has no automatic link to the environment’s capacity to sustain, absorb or resist pressures of various kinds (deposition, discharges). In the case of renewable natural resources, a meaningful interpretation of the relationship of environmental pressure to economic driving forces will require information about the intensity of use of the resource in question, i.e. of harvesting rate compared to renewal rate.

40. Increase in energy consumption • According to Joke Waller-Hunter, former Director of the Environment Directorate of OECD, despite eco-efficiency improvements, overall environmental degradation has persisted in most cases. OECD countries reduced the energy intensity of their economies by 31% in the period 1973-1996, but they increased total energy consumption by 23% over the same period. Their total energy use is expected to grow by a further 30-50% to 2020. (Waller-Hunter 2000).

41. GHG emission • The similar situation is with greenhouse gas emissions. While the output of GHG emissions relative to GDP has fallen for OECD countries in recent years, total absolute emissions have risen. Under current policies, OECD countries could increase GHG emissions by a further 30% to 2010, far from the overall Kyoto Protocol target of a 5% reduction from 1990 levels to 2008-2012.

42. Transport increase • In some cases, there are no signs of any real improvement. This is true of transportation, where motor vehicle kilometers traveled in the OECD are expected to increase by at least 65% in the period 1990-2020 and passenger air kilometers are expected almost to quadruple.

43. Increse in energy consumption • “Energy is a key resource for our economy. Overall demand is predicted to grow substantially over the coming decades, by 30% for the OECD countries and by 70% for the world as a whole in the next 30 years. For the EU, these increases are smaller than the targeted doubling of the economy over the same period; if efforts are maintained, the decoupling of energy use from economic growth will continue. However, energy consumption will still increase in absolute terms (European Commission 2003,).

44. EU Directorate forecast • An annual economic growth of 3% leads to a doubling of the economy in 25 years .(An annual growth of 3% leads to a cumulated growth in 25 years with a factor of (1.03)25 = 2. Hundred years of growth gives rise to a cumulated growth of (1.03)100 = 20).

45. EU Directorate forecast • If this growth is realized within the production and consumption patterns of today, including the use of currently available technologies, the resource use will grow with a factor 2 as well. In this case there is a 1:1 coupling of economic growth and resource use.

46. EU Directorate forecast Fortunately, this scenario will not happen. The economic growth is not simply realized by doing more of the same. In the coming decades a considerable amount of value will be created, which material and energy intensity is less than today’s products and services. Reasons: The growing contribution of services to the economy and The ongoing improvement of technologies is another one.

47. EU Directorate forecast • Nevertheless, the increase of energy and material use will be considerable, e.g. the energy use in OECD countries is expected to grow in the next 20 years by 35% and by 51% worldwide (OECD 2001). This means that economic growth and resource use are decoupled to some extent. Rresource use is growing, but less steep than the growth of the economy. This phenomenon is called relative decoupling. Absolute decoupling would take place if the growth of the resource use would be negative” (European Commission 2002,)

48. Decoupling resource use from economic growtth

49. If the resource use increases it may be assumed that various environmental pressures, associated with resource use, also grow. Environmental statistics show that this is indeed the case, although the growth of various environmentally relevant variables is considerable less than the economic growth and less than the growth of the resource use as well. Thus the phenomenon of decoupling is also visible if environmental pressures are related to economic growth.

50. For example, the growth rate of emissions of sulphur dioxide is less than the growth rate of GDP. However, since many environmental pressures are still increasing decoupling is only relative for these emissions.