Never, ever, bet on the prize winners. Remember, Bob Dylan was awarded the Nobel Prize for LITERATURE without ever even WRITING A BOOK! In his paper entitled “The Appallingly Bad Neoclassical Economics of Climate Change”, Steve Keen, arguably the greatest living economists, critiques the prize-winning work of the 2018 winner of the Fake Nobel in Economics, Steve Nordhaus
Read the whole thing if you’re economically inclined, but I anticipate that even non-economists will find his concluding section below to be both informative and amusing.
When I began this research, I expected that the main cause of Nordhaus’s extremely low predictions of damages from climate change would be the application of a very high discount rate (Nordhaus, 2007)11 to climate damages estimated by scientists (Hickel, 2018), and that a full critique of his work would require explaining why an equilibrium-based Neoclassical model like DICE12 was the wrong tool to analyse something as uncertain, dynamic and far-from-equilibrium as climate change (Blatt, 1979; DeCanio, 2003).13 Instead, I found that the computing adage ‘Garbage In, Garbage Out’
Figure 10. Kahn and Mohaddes’s linear extrapolation of the temperature: GDP relationship from 1960–2014 out till 2100 (Kahn et al., 2019, p. 6).
(GIGO) applied: it does not matter how good or how bad the actual model is, when it is fed ‘data’ like that concocted by Nordhaus and the like-minded Neoclassical economists who followed him. The numerical estimates to which they fitted their inappropriate models are, as shown here, utterly unrelated to the phenomenon of global warming. Even an appropriate model of the relationship between climate change and GDP would return garbage predictions if it were calibrated on ‘data’ like this.
This raises a key question: how did such transparently inadequate work get past academic referees?
Simplifying assumptions and the refereeing process: the poachers becomes the gatekeepers
One reason why this research agenda was not drowned at birth was the proclivity for Neoclassical economists to make assumptions on which their conclusions depend, and then dismiss any objections to them on the grounds that they are merely ‘simplifying assumptions’.
As Paul Romer observed, the standard justification for this is ‘Milton Friedman’s (1953) methodological assertion from unnamed authority that ‘the more significant the theory, the more unrealistic the assumptions’ (Romer, 2016, p. 5). Those who make this defence do not seem to have noted Fried-man’s footnote that ‘The converse of the proposition does not of course hold: assumptions that are unrealistic (in this sense) do not guarantee a significant theory’ (Friedman, 1953, p. 14).
A simplifying assumption is something which, if it is violated, makes only a small difference to your analysis. Musgrave points out that ‘Galileo’s assumption that air-resistance was negligible for the phenomena he investigated was a true statement about reality, and an important part of the explanation Galileo gave of those phenomena’ (Musgrave, 1990, p. 380). However, the kind of assumptions that Neoclassical economists frequently make, are ones where if the assumption is false, then the theory itself is invalidated (Keen, 2011, pp. 158–174).
This is clearly the case here with the core assumptions of Nordhaus and his Neoclassical colleagues. If activities that occur indoors are, in fact, subject to climate change; if the temperature to GDP relationships across space cannot be used as proxies for the impact of global warming on GDP, then their conclusions are completely false. Climate change will be at least one order of magnitude more damaging to the economy than their numbers imply – working solely from rejecting their spurious assumption that about 90{fb585635b9f6189e33442b25caac15ec2544d7054f182b4f92840c6cee65accd} of the economy will be unaffected by it. It could be far, far worse.
Unfortunately, referees who accept Friedman’s dictum that ‘a theory cannot be tested by the ‘realism’ of its ‘assumptions’’ (Friedman, 1953, p. 23) were unlikely to reject a paper because of its assumptions, especially if it otherwise made assumptions that Neoclassical economists accept.
Thus, Nordhaus’s initial sorties in this area received a free pass.
After this, a weakness of the refereeing process took over. As any published academic knows, once you are published in an area, journal editors will nominate you as a referee for that area. Thus, rather than peer review providing an independent check on the veracity of research, it can allow the enforcement of a hegemony. As one of the first of the very few Neoclassical economists to work on climate change, and the first to proffer empirical estimates of the damages to the economy from climate change, this put Nordhaus in the position to both frame the debate, and to play the role of gatekeeper. One can surmise that he relished this role, given not only his attacks on Forrester and the Limits to Growth (Meadows, Randers, et al., 1972; Nordhaus, 1973; Nordhaus et al., 1992), but also his attack on his fellow Neoclassical economist Nicholas Stern for using a low discount rate in The Stern Review (Nordhaus, 2007; Stern, 2007).
The product has been an undue degree of conformity in this community that even Tol acknowledged:
it is quite possible that the estimates are not independent, as there are only a relatively small number of studies, based on similar data, by authors who know each other well … although the number of researchers who published marginal damage cost estimates is larger than the number of researchers who published total impact estimates, it is still a reasonably small and close-knit community who may be subject to group-think, peer pressure, and self-censoring. (Tol, 2009, p. 37, 42–43)
Indeed.
Were climate change an effectively trivial area of public policy, then the appallingly bad work done by Neoclassical economists on climate change would not matter greatly. It could be treated, like the intentional Sokal hoax (Sokal, 2008), as merely a salutary tale about the foibles of the Academy.
But the impact of climate change upon the economy, human society, and the viability of the Earth’s biosphere in general, are matters of the greatest importance. That work this bad has been done, and been taken seriously, is therefore not merely an intellectual travesty like the Sokal hoax. If climate change does lead to the catastrophic outcomes that some scientists now openly con-template (Kulp & Strauss, 2019; Lenton et al., 2019; Lynas, 2020; Moses, 2020; Raymond et al., 2020; Wang et al., 2019; Xu et al., 2020; Yumashev et al., 2019), then these Neoclassical economists will be complicit in causing the greatest crisis, not merely in the history of capitalism, but potentially in the history of life on Earth.