approaching economics – scientifically

Reading for my economics coursework and exam, I have found a couple of texts making interesting points:

Much of the economic debate around public goods assumes there is a “tragedy of the commons”: If there is some resource everybody can use, nobody will have an incentive to preserve it, it will invariably be overexploited and collapse. Such situations do certainly occur unsurprisingly in a profit-driven economy – but they do not always occur when they could. Standard theory fails to explain or even admit this, Elinor Ostrom makes an attempt to explore it:

Some scholarly articles about the “tradegy of the commons” recommend that “the state” control most natural resources to prevent their destruction, others recommend that privatizing those resources will solve the problem. What one can observe in the world, however, is that neither the state nor the market is uniformly successful in enabling individuals to sustain long-term, productive use of natural resource systems. Futher, communities of individuals have relied on institutions resembling neither the state nor the market to govern some resource systems with reasonable degrees of success over long periods of time.

Last year’s noble laureate Ostrom has researched those institutions for decades and presents some of the results in her book “Governing the Commons”. She sharply criticises the widespread application of the “tragedy of the commons” and “prisoners dilemma”-idea as “use of models as metaphors”. That is, some apparent similarities between those models and natural settings are used to convey the idea that the models are accurate representations of those settings – an assumption that is hardly ever critically investigated. Where this happens, it is often found to be wrong.

Another issue in environmental economics is the recommendation of either taxes or permit systems for pollution regulation. In the pure theory, both instruments are largely equivalent, but let’s see what W.D. Nordhaus, economics professor at Yale, has to say on their relative merit for regulation GHG emissions:

One advantage of price-type approaches is that they can more easily and flexibly integrate economic costs and benefits of emissions reductions, whereas the approach in the Kyoto Protocol has no discernible connection with ultimate environmental or economic goals. This advantage is emphatically reinforced by the large uncertainties and the evolving scientific knowledge in this area. Emissions taxes are more efficient in the face of massive uncertainties because of the relative linearity of the benefits compared with the costs. A related point is that quantitative limits will produce high volatility in the market price of carbon under an emissions-targeting approach. In addition, a tax approach can capture the revenues more easily than quantitative approaches, and may add less to the distortion caused by existing taxes. The tax approach also provides less opportunity for corruption and financial finagling than quantitative limits, because it creates no artificial scarcities to encourage rent-seeking behavior.

I am not just cherry-picking – this is actually the conclusion of his article “To Tax or Not to Tax: Alternative
Approaches to Slowing Global Warming” (Review of Environmental Economics and Policy, volume 1, issue 1, winter 2007, pp. 26–44 doi: 10.1093/reep/rem008).

Basically all our lectures were based on the so-called “general equilibrium theory” – so what may an economist such as Nicholas Kaldor has to comment on the matter?

The purpose of my lecture today is to explain why, in my view, the prevailing theory of value – what I called, in a shorthand way “equilibrium economics” – is barren and irrelevant as an apparatus of thought to deal with the manner of operation of economic forces, or as an instrument for non-trivial predictions concerning the effects of economic changes, whether induced by political action or by other causes. […] unlike any scientific theory, where the basic assumptions are chosen on the basis of direct observation of the phenomena the behaviour of which forms the subject-matter of the theory, the basic assumptions of economic theory are either of a kind that are unverifiable – such as that producers “maximise” their profits or consumers “maximise” their utility – or of a kind which are directly contradicted by observation – for example, perfect competition, perfect divisibility, linear-homogenous and continously differentiable production functions, wholly ompersonal market relations, exclusive role of prices in information flows and perfect knowledge of all relevant prices by all agents and perfect foresight.

The beautiful title of that article: The irrelevance of equilibrium economics (The economics journal, vol. 82 n°328 Dec. 1972, pp 1237-1255).

So, if we want to understand how economy really works, I am afraid I know no better way than actually going back to first principles:

The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.

A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another. The nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference. Neither are we here concerned to know how the object satisfies these wants, whether directly as means of subsistence, or indirectly as means of production.

Every useful thing, as iron, paper, &c., may be looked at from the two points of view of quality and quantity. […]

The utility of a thing makes it a use value. But this utility is not a thing of air. Being limited by the physical properties of the commodity, it has no existence apart from that commodity.[…]
Exchange value, at first sight, presents itself as a quantitative relation, as the proportion in which values in use of one sort are exchanged for those of another sort, a relation constantly changing with time and place. Hence exchange value appears to be something accidental and purely relative, and consequently an intrinsic value, i.e., an exchange value that is inseparably connected with, inherent in commodities, seems a contradiction in terms. Let us consider the matter a little more closely.

Karl Marx, The Capital, Vol.1 (and for a reason the most-cited author in the history of mankind)

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