28 September 2009

Krugman Confuses Ends and Means

Paul Krugman has confused an end -- stabilizing concentrations of carbon dioxide in the atmosphere -- with a means to achieve that end -- cap and trade. Krugman writes:
In the absence of government action, the private sector will increase emissions up to the point where there is no further marginal benefit. That is, emissions will rise to whatever level is implied by profit-maximization, paying no attention to the effects on the environment.
Krugman is making a case for limiting emissions, and that argument is pretty solid accordng to basic economic theory. But he goes too far when he says that because a case for reducing emissions makes sense, it necessarily means that cap-and-trade makes sense. The problem with cap and trade lies not in economic theory, but in political realities. Cap and trade cannot work in the real world -- Krugman's means cannot achieve the ends he seeks. He just assumes policy success, which is easy to do in theoretical arguments, but pretty far from the real world where we actually have to live with the policies that emerge from the messy legislative process.

If cap and trade cannot work, then it would be logical that we should be exploring other means to reducing emissions. But instead, Krugman tries to shut down any discussion of alternative approaches by saying that if you don't accept his means, then you must not accept his ends. Krugman is ironically contributing the the very policy failure he seeks to avoid. Nothing like some messy facts to trouble an elegant theory.

3 comments:

Andrew said...

"Krugman is making a case for limiting emissions, and that argument is pretty solid accordng to basic economic theory."

Whose "basic economic theory" are you referring to? Not any genuine theory I'm aware of. Perhaps I can find it in Das Capital?

jgdes said...

Krugman gave a remarkably good account of how the majority of the economics profession failed to see the crash coming because of the widespread Panglossian belief in rational humans and perfect markets. To quote him here:

"First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd."

Now there are those of us who notice that the science world often suffers exactly the same delusions as economics because scientists are no less human. Replace the word "investors" with "scientists" and "efficient-market theory" with "the scientific method" and you have a perfect description of popular science scares throughout the history of science. And you can easily see the irrational exuberance (magic green fuels) and unwarranted panic (touting of worst case scenarios) in todays crop of scientists.

Another oddity is that while Krugman recognizes that the efficient market theory was nonsense he fails to notice that the cap and trade scheme is founded on that same cracked cornerstone and originated with the same people who were most responsible for our current slump.

Andrew said...

Utter nonsense, the current crisis is government failure in action not market failure. No market would ever tolerate handing out money willy nilly to people who can't afford houses to buy houses they'll never be able to pay for. No market would ever tolerate people making piggy banks out of their houses and second houses either-the only reason such high risks were taken on is because the government declared that not only could you do those things or should, but that it was your right

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