July 8th, 2020 by The Beam
Originally published on The Beam.
By Kyle Baranko
As scientists repeatedly confirm, human activity has tipped the biosphere out of its natural balance, and governments have begun enacting policies designed to accelerate the transition to sustainable energy. Supportive politicians are using many avenues of legal power, like executive orders and government agencies, to muster all the policy tools at their disposal, including tax incentives, subsidies, and research grants, to address climate change.
However, political responses are not happening fast or effectively; almost all nations are on track to fall short of their Paris Agreement targets. Social movements are putting pressure on politicians to enact change, but politicians are limited by governing institutions and the ideologies of their constituents, some of which do not believe in the problem, let alone a government-driven solution.
Avoiding catastrophe requires a structural socioeconomic overhaul, but without popular political mandates, how can nation-states respond without compromising classical liberal values?
The answer: change the flawed ideological assumptions that underpin governing institutions.
Civilization is a function of the interrelated activity of governing institutions, technology, culture, and energy sources. Institutions are human-made; they set the rules of the game and change slowly. Dynamic processes like technology and culture evolve, consume energy, and create complexity within these institutional parameters.
Institutions materialize our beliefs about how the world works. Political systems like democracy come from support for free speech and the idea that freedom leads to more peaceful societies; legal entities like corporations come from the belief in private property; financial markets come from capitalism.
The problem is the continued use of an outdated ideology – neoclassical economics – to support and justify institutions leftover from the industrial age, therefore holding back the development of climate-friendly institutions.
The first political economists, from Adam Smith to Marx, Keynes, Hayek, and Friedman, rigorously analyzed the market mechanism and thought deeply about which policy measures would lead to a prosperous society. The common emphasis was on labor and capital, because they were the only limiting factors of production at the time. As a result, economists of the Industrial era treated technology and energy as external variables – black boxes defined independently of the main production function.
As the economy grows relative to the ecosystem, the limiting factors of economic growth shift to clean water, clean air, available energy, and raw materials. The focus on capital and labor becomes increasingly unhelpful.
Specialization and comparative advantage created vast improvements in production efficiency and distribution of goods, but they built a fragile, globalized civilization where environmental risks threaten the stability and resilience of human systems; a natural disaster in one corner of the world can raise commodity prices or create resource shortages elsewhere. To understand how this happened, we need a more dynamic approach to modeling the environment and technology.
The environment is a complex system, not an externality. Modern economics should incorporate laws of thermodynamics to account for physical constraints on economic growth. It should model how low-entropy sources of energy, like natural resource and fossil fuel stocks, flow through the economy and exit as high-entropy energy: waste and pollution. In standard models of production and consumption, value, denoted in money, cycles through the economy unscathed. In reality, entropy dictates that all inputs are taken from the environment, transformed into usable goods and discarded as waste.
Neoclassical economics also overlooks the intricate nature of technology. Technology’s relationship with institutions is dynamic — it both shapes and is shaped by institutions. The centralized nature of natural resources and the massive technical infrastructure needed for extraction inspired centralized institutions to manage this complex process. Hydrocarbons created a massive energy windfall enabling modern infrastructure, like railroads and electricity grids, and our institutions slowly evolved to facilitate this process. The energy industry, as well as finance, agriculture, and manufacturing, became increasingly centralized to maintain the industrial system, creating a powerful and intertwined institutional inertia extremely difficult to slow down.
Neoclassical economics inspired us to quantify economic growth via Gross Domestic Product (GDP) and organize political economy via the nation-state. These centralizing institutions drove civilization to embrace specialization, free markets, and other behaviors maximizing economic growth. These institutions are tightly interdependent; for example, economic growth has been – and still is – the basis for a nation-state’s political legitimacy. The industrial institutions used today are designed to funnel natural resources through the economy and maximize economic growth; so as long as we are using these institutions and ideologies to guide policy, this will be the end result.
Our goal should be to decentralize institutions, facilitate lean infrastructure, and prioritize sustainable energy technologies. For all the damage we have done to the biosphere, the Industrial Revolution led to remarkable advances in quality of life. Any new underpinning economic ideology should embrace the positive aspects of capitalism, like its emphasis on funding innovation, and incentivize the adoption of sustainable, decentralizing technologies. Just as the invention of bonds and equities financed centralized corporations to extract oil and mass-produce automobiles, we need decentralized institutional innovations to finance and incentivize small-scale, adaptive energy systems, encouraging the adoption of wind, solar, battery storage, and other sustainable technologies. Together, technological and institutional innovations can create a virtuous cycle of coevolution poised to reintegrate economic activity with natural earth flows.
Building the transmission lines needed to move renewable energy from their point of generation to the population centers where it is consumed is a logistical dilemma. Is there a better system for managing property than private or public ownership? Central banking aims for a narrow set of goals, encouraging perpetual economic growth and consumption. It is time to rethink state-backed money and adopt currencies that incentivize saving, not spending – it is time to ditch the nation-state. Building the institutions needed to address climate change requires thinking outside the ideological comfort zone and embracing new waves of creative economic thinkers that think big and conceptualize the economy as an extension of the ecosystem. Our guiding brand of economics, and therefore our institutions, are excessively theoretical, reductionist, and mechanical; by considering civilization as a complex energy system, we can integrate economic models and institutions with the natural laws of the biosphere.
Kyle is a data analyst for Kevala Analytics, which provides data-driven insights for an evolving energy market. He is passionate about using data science to accelerate the renewable energy transition and understand the economics of climate change. Kyle lives in New York City and you can follow him on Twitter at @Kbaranko_391.
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