This is an important critique of neoclassical economics but it is too long for this page. The introduction and conclusion are copied below, and just the titles of other sections. To read the complete article, click here. See also this short note by the same author.
Introduction
Tipping points—elements of the Earth's climatic system that can be flipped from one state to another with a relatively minor change in temperature, and which could then cause major and abrupt changes in the climatic system itself—are a key concern for climate scientists (Lenton et al. 2023, p. 36). One of leading scientists in this field is Tim Lenton from Exeter University in the UK, and in 2008 he conducted a survey of experts on what were then regarded as the nine major and most vulnerable such tipping points—see Table 15.105F
The paper "Tipping elements in the Earth's climate system" concluded that:
Society may be lulled into a false sense of security by smooth projections of global change. Our synthesis of present knowledge suggests that a variety of tipping elements could reach their critical point within this century under anthropogenic climate change. The greatest threats are tipping the Arctic sea-ice and the Greenland ice sheet, and at least five other elements could surprise us by exhibiting a nearby tipping point. (Lenton et al. 2008b, p. 1792. Emphasis added)
I was first alerted to the existence of this paper by a comment in Nordhaus's manual for DICE—"Dynamic Integrated Climate and Economy", the mathematical model he constructed by which he converts expected temperature increases into expected economic damages—in which he stated that:
The current version assumes that damages are a quadratic function of temperature change and does not include sharp thresholds or tipping points, but this is consistent with the survey by Lenton et al. (2008) (Nordhaus and Sztorc 2013, p. 11. Emphasis added)
He then elaborated in his book The Climate Casino (Nordhaus 2013) that:
There have been a few systematic surveys of tipping points in earth systems. A particularly interesting one by Lenton and colleagues examined the important tipping elements and assessed their timing… The most important tipping points, in their view, have a threshold temperature tipping value of 3°C or higher … or have a time scale of at least 300 years … Their review finds no critical tipping elements with a time horizon less than 300 years until global temperatures have increased by at least 3°C. (Nordhaus 2013, p. 60. Emphasis added)
Pardon me for stating the obvious, but Nordhaus's reading of this paper is almost the exact opposite of what the paper actually said.
Far from the triggering of tipping points lying 300 years in the future, Lenton et al. warned that they were likely this century;106F far from a function like a quadratic, with its gradual increase in steepness as temperatures rise, being appropriate for estimating damages, they warned that such a function could lull us into "a false sense of security"; and far from 3°C of warming being required to flip tipping elements from one state to another, they asserted that much lower levels of warming would be sufficient to tip what were then seen as the two most vulnerable, Arctic summer sea-ice107F and Greenland—see Table 15—while five of the remaining seven could "surprise us by exhibiting a nearby tipping point".
Table 15: Key Features of Tipping elements in Table 1 of (Lenton et al. 2008b, p. 1788)
Click on the image to enlarge.
I would fail any student who submitted what Nordhaus wrote as a summary of Lenton's paper. But instead, Nordhaus was awarded the "Nobel" Prize in Economics in 2018 for his work on climate change.
If any recipient exposed the real role of this Prize, it is Nordhaus. The Economics "Nobel" Prize was not established by Alfred Nobel, and nor is it funded by the Nobel Foundation.109F It was established by the Swedish Central Bank in 1968, as a means to counter the social-democratic approach to economic policy that was popular in Sweden at the time (Offer and Söderberg 2016). Its formal name is "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel", and the Nobel family has been campaigning for decades, unsuccessfully, to terminate the Economics award—or to have its name trimmed to "The Sveriges Riksbank Prize", which doesn't implicate or piggyback on the Nobel name.110F
Given the fact that the economics departments at top-ranked Universities are dominated by Neoclassical economists, the selection process for this Prize111F means that it is awarded, not for advancing human knowledge as is the case with the real Nobels, but for defending the Neoclassical paradigm from criticism.
Here, Nordhaus did both very well, and very badly.
He did very well, because a core belief of Neoclassical economics is that market solutions are best, except where there is an "externality" in which either the costs or benefits of something are not fully captured in the market price.
Nordhaus treated climate change as an externality, and devised a market-based solution by involving a carbon price derived from what he called the "Social Cost of Carbon" (Nordhaus and Barrage 2023, p. 25). The empirical estimates he and other Neoclassical economists have made of the economic damages from global warming, versus the costs of attenuating those damages, implied that a price of $6 per ton of CO2 in 2022, rising to $90 per ton by 2040,112F would be enough to bring about the optimum balance between damages and the costs of reducing those damages. This, he asserts, would result in a temperature increase by 2100 of 2.7°C above pre-industrial temperatures, with damages to GDP in 2100 of 2.6%, compared to what GDP in 2100 would have been in the absence of global warming (Nordhaus and Barrage 2023, pp. 22-24).
He also defended Neoclassical methodology against the challenge posed by the system dynamics approach developed by Jay Forrester, and embodied both in The Limits to Growth (Meadows, Randers, and Meadows 1972) and its predecessor World Dynamics (Forrester 1971, 1973). Nordhaus not only denigrated the system dynamics approach (Nordhaus 1973, 1992a), but also developed an alternative based on the Neoclassical Ramsey Growth model (Ramsey 1928), DICE (Nordhaus 1993b). This was the world's first "Integrated Assessment Model" (IAM), and since then, the economic analysis of climate change has been dominated by Neoclassical models—including Richard Tol's FUND (Tol 1995) and Chris Hope's PAGE (Hope, Anderson, and Wenman 1993)—rather than descendants of WORLD3, the system dynamics model behind the Limits to Growth.
However, Nordhaus also did very badly, because methods by which he derived empirical estimates of the economic damages from climate change were so transparently wrong that—despite my low opinion of Neoclassical economics in general—even I was shocked that these methods were accepted by referees. The referees of the "top" economics journals are exclusively Neoclassical economists, who have a similar devotion to the Neoclassical paradigm as Nordhaus, and comparable ignorance about the real world. But I was still stunned that they did not object to the bizarre empirical assumptions that Nordhaus made.
Other disciplines would not have been so forgiving. Any climate scientist would have rejected his first technique—later dubbed the "Enumerative Method" (Tol 2009, pp. 31-32)—when Nordhaus proposed it back in 1991 in "To Slow or Not to Slow: The Economics of The Greenhouse Effect" (Nordhaus 1991, pp. 930-931). Any self-respecting statistician would have rejected the second "Statistical" or "Cross-Sectional" method, which was developed by Nordhaus's colleague Robert Mendelsohn (Mendelsohn et al. 2000).113F The "expert surveys" Nordhaus conducted (Nordhaus 1994a; Nordhaus and Moffat 2017) would likewise have been torn apart by any experienced market researcher. Subsequent variations on these themes (Burke, Hsiang, and Miguel 2015; Kahn et al. 2021; Dietz et al. 2021a) would have been rejected by any scientist with an understanding of tipping points.
These methods do not, in Solow's colourful phrase, "pass the smell test: does this really make sense?". But they survived refereeing because they were evaluated by advocates of Neoclassical economics who "no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether" (Solow 2010).
Policymakers, media, the finance sector, and much of the general public, who are unaware of what Lenton later described as the "huge gulf" (Lenton and Ciscar 2013, p. 585) between economists and climate scientists, have acted as if the economists' estimates of damages are based on the work of scientists, and are therefore valid. As a consequence, humanity has taken trivial actions to combat climate change to date. Fossil fuel companies may have waged the war against action on climate change, but economists have been the arms dealers who have made the weapons of mass deception with which they have waged that war.
The great irony of the success of the fossil fuel disinformation campaign against action on global warming is that the weapons crafted for them by economists are so pathetically bad. I remember, before I started reading this literature, expecting to face the difficult task of explaining to a non-mathematical audience why the Ramsey growth model was the wrong foundation for modelling climate change, or why discount rates for damages should be low rather than high, and so on.114F But in fact, there was no need.
The fatal flaws in their analysis are fundamentally due to the ridiculously low estimates they have made, using ridiculously bad methods, of the damages that global warming will do to the economy. Even if the Ramsey growth models at the core of DICE, FUND, PAGE and other IAMs were perfect descriptions of reality—and they are far from that—then feeding in the numbers that economists have made up about global warming into those models would still vastly underestimate the damages that it will do to the economy. It's all in the numbers, and the methods they've used to make up those numbers are statistical nonsense.
Confusing the Weather with the Climate
Read this section in the original article
Confusing Space with Time
Read this section in the original article
Surveying mainly economists about Global Warming
Read this section in the original article
A Summing Up in 2009
Read this section in the original article
Assuming No Change to the Climate from Global Warming
Read this section in the original article
Reducing Tipping Points to Degrees
Read this section in the original article
Assuming Constant Acceleration in Economic Damages
Read this section in the original article
Modelling Weather without Precipitation
Read this section in the original article
The Shell and Pea Trick of Damages to Future GDP
Read this section in the original article
Conclusion
The only explanation for how bad this work by Neoclassical climate change economists has been is the methodological topic covered in the previous chapter: consciously or otherwise, Neoclassical economists respond to a perceived attack on their paradigm by making domain assumptions that appear reasonable to them, but are insane from any outsider's perspective. The paradigm is preserved, at the expense, when these crazy assumptions affect government policy, of harming the economy itself.
In the past, as with the Global Financial Crisis, this has simply meant that economists have blinded policymakers to economic events like the Great Depression and the Global Financial Crisis, where a corrective action by governments could ultimately attenuate the damage. But with Global Warming, their defence of their paradigm will in all likelihood put capitalism into an existential crisis. The damages from climate change will be far, far greater than economists have told policymakers they will be, and the remedies are not relatively simple economic policies like The New Deal, but engineering feats that humanity has never managed in the past, and which may be too little, too late, against the enormous forces of a perturbed climate.
Therefore, Neoclassical economics is not merely an inappropriate paradigm for the analysis of capitalism, but a deluded manner of thinking about capitalism that may end up causing the destruction of capitalism itself.
It has to go.
References
See the list of references in the original article
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ABOUT THE AUTHOR
Steve Keen is a Distinguished Research Fellow at UCL, the author of The New Economics: A Manifesto (2021), Debunking Economics (2011) and Can We Avoid Another Financial Crisis? (2017), and one of the few economists to anticipate the Global Financial Crisis of 2008, for which he received the Revere Award from the Real World Economics Review.
His main research interests are the complex systems approach to macroeconomics, and the economics of climate change. He has over 80 refereed publications on financial instability, money creation, logical and mathematical flaws in conventional and Marxian economic theory, the role of energy in production, and many other topics. He is ranked in 19th in Academic Influence’s list of influential economists. This is his Google Scholar site.
He designed the Open-Source system dynamics program Minsky, which is the first program to allow monetary economic models to be designed visually. He is about to release a commercial business intelligence program built on top of Minsky called Ravel©™.
He has previously been Professor of Economics at Kingston University London and the University of Western Sydney, Australia.
He is active on Twitter as @ProfSteveKeen, and is crowdfunding his non-mainstream research into economics via Patreon and Substack. He is now offering a set of “Mastermind” lectures via the site www.stevekeenfree.com.
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