Economics needs a climate revolution

The economics discipline has failed to understand the climate crisis – let alone provide effective policy solutions for it. Change is underway, but it cannot come fast enough.

climate march walk away from fossil fuels
Climate march in London, with a banner saying ‘Walk Away from Fossil Fuels’. Rapidly phasing out fossil fuels—not getting “back to normal”—is the only path to stabilise the world’s climate. Image: Garry Knight, CC0 1.0

Nowhere are the limitations of neoclassical economic thinking – the DNA of economics as it is currently taught and practiced – more apparent than in the face of the climate crisis. While there are fresh ideas and models emerging, the old orthodoxy remains deeply entrenched. Change cannot come fast enough.

The economics discipline has failed to understand the climate crisis – let alone provide effective policy solutions for it – because most economists tend to divide problems into small, manageable pieces. Rational people, they are wont to say, think at the margin. What matters is not the average or totality of one’s actions but rather the very next step, weighed against the immediate alternatives.

Such thinking is indeed rational for small discrete problems. Compartmentalisation is necessary for managing competing demands on one’s time and attention. But marginal thinking is inadequate for an all-consuming problem touching every aspect of society.

Economists also tend to equate rationality with precision. The discipline’s power over public discourse and policymaking lies in its implicit claim that those who cannot compute precise benefits and costs are somehow irrational.

This allows economists – and their models – to ignore pervasive climate risks and uncertainties, including the possibility of climatic tipping points and societal responses to them. And when one considers economists’ fixation with equilibrium models, the mismatch between the climate challenge and the discipline’s current tools becomes too glaring to ignore.

Yes, a return to equilibrium – getting “back to normal” – is an all-too-human preference. But it is precisely the opposite of what is needed – rapidly phasing out fossil fuels – to stabilise the world’s climate.

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