09 September 2009

Economics and climate change

Today's Express has a piece by Mihir Sharma - the biggest failure of economics is not the finance theorists and their belief in rational, efficient markets, but is on climate change

we scoff at “exaggerated” future costs from warming. For years mocked as dismal killjoys by everyone else, we have picked on solemn, doom-prophesying climate scientists like the second geekiest kid at school sneers at the geekiest. A profession central to which is working out the cost of the opportunity foregone has a massive failure of imagination when it comes to climate change costs.

There are other examples of a deeply-ingrained fanaticism getting the better of common sense. Take the furore surrounding the Stern Report, a big cost-benefit analysis that argued acting now on climate change was economically wise.
But economists undermined the report politically by attacking Stern’s choice of the “rate of time preference” — how much we in the present value the future. In particular, they said Stern committed the cardinal sin of not using the rate at which the markets valued the future, because the financial markets are efficient about information like that. (Seriously. This is true.)

Arguing about macro-costs and benefits and growth paths won’t help. Get micro-economists on the job instead.

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