Economics, human motivations and solutions to climate change

One definition of economics is the study of the choices of individual and groups of humans make when faced with the fact of limited resources but unlimited needs and wants.

At the heart of neoclassical economics is the "rational actor" model of human behavior. That is, according to the model, individuals, groups and nations will consider the available options and then pick the one that maximizes benefit to them.

It's kind of a sad, uninspired model, if you think about it, because it assumes that people are more selfish than compassionate and more self-interested than creative. It is also the model around which the entire mainstream political debate for climate change solutions is based (I'm not including, here, the do-nothing or do-little antagonists like Senator James Inhofe).

To wit, in case you haven't been following, both sides of the mainstream climate change solutions debate predicate their arguments on the assumption that people and institutions will not moderate their use of fossil fuels unless efficiency measures and renewable energy become cheaper. In other words, according to the rational actor model, unless the change in behavior maximizes the benefit to them.

One side of the debate believes, in simplistic terms, in making efficiency and renewables attractive by raising the cost of fossil fuels (these are the cap-and-traders, the Joe Romm types). On the other side of the debate are those who think we should do it by lowering the cost of renewables (the invest in energy tech advocates, like Shellenberger and Nordhaus).

Because both of these approaches are based on "rational actor"-based economic theory, neither allows for the possibility that people might, say, be inspired to do the right thing for the sake of themselves and posterity or, say, because a less energy-intense lifestyle might have the potential for better quality of life.

Based on the neoclassical economic theory, in other words, the prevailing political solutions hold that if it's easier on people's pocketbooks to save the planet, they'll save it. If it turns out to be more expensive, we're doomed. Few other considerations apply.

Now, I'm not saying that there isn't some truth to the pocketbook theory. There is, but it's not the whole truth. This is why I go on about how a happier planet will make for happier people. There are more than dollars-and-cents motivations for changing. While planetary well-being may not mean we'll all be richer, it may mean that we can find a way to be happier and have better quality of life overall (look here and here, for example).

The problem is that such subtle motivations are hard to contain in neoclassical economic theory. That, in turn, may mean that our leaders, who depend on economists, don't have all the policy tools they need to enact climate change solutions.

Which leads me after a long-winded introduction to the nascent field of behavioral economics, which seeks to answer the same questions of how humans will act in the face of limited resources and unlimited needs, but does not hold to heart the rational actor model.

Instead, behavioral economics seeks to study empirically how people and their institutions actually behave and to apply this knowledge to predictions. In other words, it seeks to provide our officials with more robust policy tools (you can read New Yorker writer Elizabeth Kolbert's excellent review of a behavioral economics book here).

Anyway, a behavioral economist out of Rensselaer Polytechnic Institute in Troy, New York, Professor John M. Gowdy, has turned the lens of his science to climate change policy (see here). Below are some of his conclusions:

• "The current crisis of sustainability cannot be resolved within the confines of the system that generated it. For economic analysis this means stepping outside the Walrasian system with its emphasis on one part of human nature (greed and egoism) to the neglect of other the facets of human nature (cooperation, altruism)."
• "Increasing consumption does not translate into increasing social well-being... The drastic reduction in fossil fuel use required to stabilize the climate will certainly mean a reduction in the production of consumer goods... A number of economists call for a re-orientation of welfare policy goals from “income” to “well-being.""
• "Absolute income may not be correlated with well-being but relative income is... Relative losers in consumption reduction should be compensated in some way to minimize the relative income loss. The wealthy for example, could be rewarded with some sort of public recognition of their sacrifice for the common good. People are more inclined to give to public goods when they can be observed to do so and this should be incorporated into climate change policy."
• "“Development” in the third world need not follow the path of the industrialized nation during the twentieth century... Nussbaum (2000, chapter 4 and website of Human Development and Capabilities Association) has gone even further in calling for “distributive justice” creating the conditions for the realization of a set of central human capabilities... With a focus on individual happiness and self-actualization, the developing world could improve its position relative to the North without emulating the consumption frenzy that drove past economic growth."