The Economics of Delusion and the Delusion of Economics

by the Sandwichman

"Mutually Assured Delusion" is a great name for it. Interesting that the paper by Roland Benabou that Peter Dorman cited only mentions climate change in passing:

The types of enterprises that are most prone to collective delusions are thus:

(a) Those involving new technologies, products, markets or policies that combine a highly profitable upside and a potentially disastrous downside. High-powered incentives, when prevalent throughout the organization (e.g., performance bonuses affected by common market uncertainty) have a similar effect.

(b) Those in which participants have only limited exit options and, consequently, a lot riding on the soundness or folly of other’s judgements. Such dependence typically arises from irreversible or illiquid prior investments: specific human capital, professional reputation or network, company pension plan, etc. Alternatively, it could reflect the large-scale nature of the problem: state of the economy, quality of the government, global warming, etc.

Benabou's work, however, offers an intriguing theoretical model to back up Tim Jackson's assertions in Prosperity Without Growth about delusional expectations for a technological fix to climate change:

Never mind that decoupling isn’t happening. Never mind that no such economy has ever existed. Never mind that all our institutions and incentive structures continually point in the opposite direction. The dilemma, once recognised, looms so dangerously over our future that we are desperate to believe in miracles. Technology will save us. Capitalism is good at technology. So let’s just keep the show on the road and hope for the best.

We can’t entirely dismiss the potential for technological breakthroughs. In fact we already have at our disposal a range of technologies that could begin to deliver effective change. But the idea that these will emerge spontaneously by giving free reign to the competitive market is patently false.

This delusional strategy has reached its limits. We stand in urgent need of a clearer vision, more honest policy-making, something more robust in the way of a strategy with which to confront the dilemma of growth.

So, that's the choice: mutually assured delusion or prosperity without growth.

UPDATE: Maybe we shouldn't be using the word "growth". It's a misleading euphemism, like "national security". When the components of "growth" are divorced from any definite relationship to human well being and conservation of the natural world, then what "grows" is primarily delusion. The more accurate title for the Sustainable Development Commission's report would then have been "Prosperity Without Delusion."

I realize economists like to have it both ways with economic growth. On the one hand, there is "nothing new" in critiques of GDP. They "know it's not perfect." On the other hand, they insist on the serviceability of the measure for estimation and goal setting purposes -- as if there is some 'essence' of utility in the measure that escapes its structural defects. There is no such essence. What grows faster than GDP itself as GDP growth becomes the target of policy is the proportion of GDP that does not contribute to or even detracts from welfare and conservation. That "it's not perfect but it's still useful" dodge fits precisely the definition of cognitive dissonance.