Monday, March 27, 2006

Tides Turning

A new book, Tides Turning, predicts that climate change is likely to be abrupt and cataclysmic—and that these sudden shifts could cripple national economies.

Newsweek has an interesting interview with the book's author here.

Implicit in this article, and mainstream economists are the first to admit, is the idea that there’s tremendous uncertainty and an unknown territory when it comes to modeling and estimating the costs of pollution, climate change, and natural disasters.

Yet sometimes in the assumed belief that free markets address most issues big and small, we fail to realize that in reality there are significant limitations and staleness with the economics discipline and free markets, particularly when dealing with uncertainty in complex, open systems with unknown transaction costs.

This is despite Nobel economist Ronald Coase’s work decades ago on transaction and social costs, that is, when property rights are fixed and defined, it was possible to “internalize externalities” like pollution. While it was a good starting point it was only for closed systems (two parties) with known transaction costs.

Unfortunately, meanwhile many have come to assume that mother nature is a trash collector that works for free, when it’s that we just don’t know how to accurately measure such externalities so it’s as if such costs don’t exist, even when it does and is often quite visible for show like Katrina.

To get a good sense of the limitations with Coase’s theorem as it applies to externalities like pollution, see A Critique of the Chicago School of Economics: Ronald Coase and the Coase Theorem