By Cary Krosinsky - 18.
Economists are notoriously confident people. This makes sense, as economies only function because of what might be considered a form of collective positive will. The value of anything is what we are willing to pay for it (and the Value of Everything is roughly US$500 Trillion, or pretty much exactly half the real economy, half again is managed or overseen by financial institutions, but I digress).
If enough people have confidence in the value of anything, then economies work, and when they lose that confidence, well, we end up having the boom and bust cycles that occurred throughout the history of the British East India company, during much of the 1800's, and more commonly known financial periods which began in 1929 and more recently 2008.
Economies work because we want them to. and we look the other way when we have to (or choose to).
Why is the Value of Everything important? Consider there was a roughly $25-30 Trillion infusion of public cash into private markets during the 2008 recovery at low to zero interest rates. Markets not only largely ignore the effects of quantitative easing, few people actually understand them, but again I digress.
What I really wanted to say is that there are ultimately three distinct categories of economics:
1) What might be called Ringfenced Economics more typically referred to as Macroeconomics. But these approaches, most frequently symbolized by measures such as GDP are good for looking at specific regions, and for isolated portions of market systems which otherwise ignore important factors causing longer term problems. Witness the lack of a price of wanting a rainforest to exist in perpetuity as part of Brazil's annual GDP, or the lack of a price on carbon or water on the value of a company whose business affects water drawn from a region causing shortages over time or adding to carbon emissions directly or indirectly, but not paying for those at the time. GDP is an indicator of flow, yet doesn't consider stock. A Nobel Prize for Economics awaits the person who can figure out a better GDP (tip: sorry, it's not Gross National Happiness)
2) Then we have Theoretical Economics, which is the direct opposite of Ringfenced Economics. Many academic, tenured careers and departments function solely in this space (or solely in just 1) above, few combined these two, hence that Nobel Prize opportunity), living la vida loca, estimating the cost to society of carbon. Is it $5 a metric tonne? $25? $35? $200? $300? more? depends on who you ask - who pays, producers or consumers? what are the political ramifications? what will people pay? who gets the money? many questions, usually not answered. Efforts to perform Theoretical Economics are frustrating, as there is never a path to implementation, so its all just hypotheticals. Theoretical Economics either a) are justifying the status quo and ignore longer term, systemic problems (one would say to their detriment, history won't treat them kindly a la Milton Friedman, or do you still think he was right, surely you don't), or b) underestimating the fact that you are having fun with numbers, but really are suggesting major changes to the global financial system, and fair enough, here one suspects where the future lies, in systems thinking, in integrating minimum standards and understanding points of leverage in the system and coming up with mechanisms for necessary change, but too many Theoretical Economists aren't thinking big enough - think big people.
Biogeochemistry is another good example, ever heard of it? Check it out - an interesting new sounding field taking over senior positions at major academic institutions.
Biochemistry is (apparently) "the scientific discipline that involves the study of the chemical, physical, geological, and biological processes and reactions that govern the composition of the natural environment (including the biosphere, the cryosphere, the hydrosphere, the pedosphere, the atmosphere, and the lithosphere)." Fair enough, nice to understand biological processes and how things interact at a fine level of detail.
Now do a Google search on "Applied Biogeochemistry." I'll leave it at that.
Unless we have ways to implement theory, it's just another book on a shelf at the end of the day.
3) Then of course there is what might be called Bollocks Economics in the UK (or what we might call BS here in the good old US of A). Here you have talking heads on TV channels talking crap about daily market movements, or writing nonsense on a regular basis and getting a pass when they turned out to be horribly wrong. Just take a look back at so called financial journalism before the 2008 Global Financial Crisis.
Or look now at how little is written about how random the tariff policy of the current administration is (or the fact that the people advocating for this are Wilbur Ross, who's main qualification is having bailed Trump out over the decades and regardless Trump might oust Ross anyway, as he has no loyalty, if you want to have some fun, check out the background of each of the current, or mainly interim, members of the US Cabinet (shudder). Then there is Peter Navarro, basically found in a cracker jack box by Jared Kushner. Yet, the thinking on tariffs is rarely questioned, and relations with China continue to sour and at a time where Climate Change basically demands more cooperation.
What is the future for Economics given these limitations in practice and perspective?
The definition of Economics per the American Economic Association is that "Economics can be defined in a few different ways. It’s the study of scarcity, the study of how people use resources and respond to incentives, or the study of decision-making. It often involves topics like wealth and finance, but it’s not all about money."
Fair enough, but Economics in practice doesn't usually look at the whole system, even when practicing so-called Macroeconomics, that should be clear enough by now.
It's pretty clearly that Economics is limited as it is practiced, as it is manifested, as it is studied, and we need it to be more. Perhaps if more people recognized and admitted to these limitations in scope, both those immersed in more "mainstream" traditional forms of Economics, as well as those immersed solely in more specialized forms of environmental and social economics, we'd end up in a better place.
Somehow we need to meet in the middle one would think. A Nobel Prize awaits.
Cary Krosinsky - Lecturer, Yale and Brown; Co-Founder, Author and Advisor on Sustainable Finance
Comment by Paolo Sironi - FinTech Strategic Advisor | IBM Industry Academy | Author bestsellers Finance, Fintech, Economics
The economics-approach problem is solved and well addressed with latest publication of the theory and principles of “Financial Market Transparency”. Why? Because for the first time uncertainty (eg, climat change impact) can become endogenous to economic decision-making (always exogenous in traditional economics, so are externalities). Moreover, FMT is a practical theory which defines how to embed consequentialist ethics in a new model for central banks, regulators and banks to embed long term impact into investment decision making. To conclude, FMT is about open futures and transparency on cost, incentives and consequence in order to resolve even the mispricing of those few economists who attempt instead to discuss global warming externalities.
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Published on Jul 30, 2019
The Transparency Times is the official publication of the Transparency Task Force, the collaborative, campaigning community dedicated to driving up the levels of transparency in financial services, right around the world.
Further Relevant Publications in Ecological Economics