Insights from a rare self-reflective economist

I find economics an annoyingly smug discipline. Despite the contestable nature of much core economic theory, any critical analysis is quickly dismissed as heterodox and filed away under an appropriate sub discipline by the Serious economists. Because of this, whenever an academic economist takes a jibe at economics as a discipline, chances are their research is going to be pretty interesting.

This is what drew my attention to ecological economist John Gowdy, who begins this short talk on preferences and valuation by admitting that many of the most exciting developments in contemporary economics – such as the recognition that humans are part of social systems – are rather obvious to non-economists. 

If you have a spare 15 minutes I can recommend watching the video but, if not, here’s a quick summary.

Following his initial statement, Gowdy looks at these recent developments in a bit more detail explaining that research in behavioural economics is challenging some of the fundamental assumptions of textbook microeconomics. Microeconomics is the study of decision making at the individual or firm level and, therefore, these assumptions are often referred to collectively as the model of ‘economic man’: an individual who is purely selfish, perfectly rational and makes decisions based on a set of intrinsic preferences. Gowdy highlights research that contradicts the last of these assumptions by arguing that preferences are not constant or based on what is ‘best’ for an individual, but are influenced by a range of factors such as the opinions of respected figures.

Because individual preferences are not, therefore, innate Gowdy argues that conventional environmental valuation techniques that rely on the model of economic man are too simplistic. It may be possible to use individual preferences to derive monetary values for unpriced goods and services, but if these preferences are liable to change there is no guarantee that the calculated value is consistent with the most socially desirable outcomes.

Observing collective decision-making in rural Nigeria, he suggests that a more appropriate approach to environmental valuation would involve deliberation rather than algebra. While I agree in principle, I’m skeptical about the practicality of such deliberative valuation. Extended discussion to reach consensus may be an appropriate way to solve problems in a small rural community, but it’s not clear to me how such an approach would work when trying to establish values that are used to guide national-level decision-making.

Throughout the course of this blog I’ve noticed that this tradeoff between accuracy and practicality is a frequent problem in environmental economics. As I wrote earlier, I agree that environmental valuation is desirable in principle, as a way to highlight the social and economic importance of the environment to policy makers. However, in light of the practical issues I’ve examined I now find myself questioning the use of environmental valuation and wondering whether it threatens to do more harm than good. I’m still mulling this over so make sure you check back sometime in 2014 for my concluding thoughts. 

Until then, hope you’re all enjoying the Christmas break and Happy New Year!