Economics, Climate ... & ... Learning from the Great Depression

 

William Nordhaus: Growth & Climate

The successor to Paul Samuelson’s text is (co-author) Nordhaus’s update. Samuelson's is the economics text I read in Econ 101. Nordhaus is a (Riksbank) Nobel winner for his work on the economic effects of climate change.

Excerpt:
 

But the business-as-usual baseline, against which costs of [climate related] action are measured, conveys a misleading message to policymakers that fossil fuels can be consumed in ever greater quantities without any negative consequences to growth itself.
 

Steve Keen, a heterodox economist, produced a blistering critique of IAMs and how they understate hugely the impact on global warming on economies and the planet. Keen says the IAM “assumed that empirical relationships derived from data on change in temperature and GDP between 1960 and 2014 can be extrapolated out to 2100—thus assuming that 3.2°C more of global warming won’t alter the climate! They have assumed that tipping points—critical features of the Earth’s climate such as the Greenland and West Antarctic icesheets, the Amazon rainforest, and the “Atlantic Meridional Overturning Circulation” which keeps Europe warm today—can be tipped with only minimal additional damage to GDP.”

The great merit of Nordhaus’ work is that he always tried to use empirical evidence to support his models; he was not just an arcane neoclassical micro theorist. However, what seriously weakened his contributions was his commitment to the unrealistic assumptions of neoclassical theory.


James Galbraith: What Can the Last Great Crash Say About the Next One? Oil, AI, and the Perils of Technological Revolution

This is a terrific article well worth reading in full. A few excerpts:

All life requires resources, which must be extracted from the environment, with a sufficient surplus so as to make it possible to work, develop, grow and reproduce. And this is no less true of any mechanical system, or of any economy. Access to resources requires energy, which comes in the first instance from sunlight, or from its stored forms, including wood, coal, oil, natural gas – as well as the nuclei of certain very heavy atoms. To get at the energy requires tools, which are built according to plans, and at increasing levels of complexity as technologies advance. But complexity is a two-edged sword. It permits ever-greater efficiency in the use of resources, thus ever-greater levels of production and the improvement in human life – but it induces fragility in the system as a whole. Once a system is built, it functions in a certain, predictable and predetermined way, so long as the conditions for which it was designed hold good. But those conditions may change. Simple systems are robust; complex ones are prone to major breakdowns and disasters.

Economic value arises because that which is necessary, or desired, is often scarce. And this is particularly true of goods or services that are newly created, imagined, or packaged in such a way as to appear to be new. Innovation is by definition recent, and by definition has a single originator. Innovation is usually achieved by introducing a new level of complexity, as well as other improvements of design or recombination of existing technical forms. During the window, however brief, when imitations are few, the originator enjoys a degree of market and monopoly power, enhancing the economic value associated with the scarcity of the innovation. This is the moment when fortunes can be made. And economic life is dominated by the search for fortune, arising from producing that which is new, better, or made more cheaply but just as well, than that which already exists.

These are the basic elements of what Jing Chen and I, in a small book published in 2025, have called “entropy economics.” Our goal was (and is) to bring economics into alignment with the understanding, now prevalent in every other field of human inquiry, of the second law of thermodynamics – the entropy law – which is the most fundamental law of nature. We believe that this is the key to understanding that there was, in fact, a precipitating technological event behind both the Great Crash and the Depression.

For mainstream (neoclassical) economics, technological change is a largely continuous process, with phases of acceleration and deceleration. It cannot make things worse. That is why mainstream economists are relentless techno-enthusiasts – they see the dynamism of capitalism as its principal justification, in the face of inequalities, environmental degradation, and the working population’s native suspicion of the capitalist class. Joseph Schumpeter, a conservative but definitely non-mainstream observer of the 1930s, took a much colder and more clear-eyed view, summed up in the phrase “creative destruction.” Schumpeter’s insight was that new technologies destroy older civilizations and ways of life, leading (he argued) to improvements for the survivors but not without severe costs for those invested in the previous systems and methods. Indeed for this reason peasant farmers and medieval guilds were by nature technologically conservative: they wanted to keep what they had and were not concerned about the great gains accruing later on to someone else. Schumpeter however, so far as I’m aware, did not specifically identify a new technology bridging the crucial moment in this story.

We believe that the precipitating event, in this instance, was the announcement of the discovery, in Texas, Oklahoma and California, of vast reserves of oil.

[My addition: Which triggered a destruction of the old economy based on coal. Also helpful in making things worse: Coolidge and Hoover made national debt significantly smaller.]