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...