Monday, August 21, 2006

When activism diverges with capitalism

When it comes to economics, the recent consensus from all sorts of media (from Foreign Policy magazine to Adbusters magazine) seems to be that economic thought is too rigid and fails to meet the needs of society and the environment. For example, economics, they say, has failed to recognize that not all resources are renewable. Despite such criticism, I argue that the science of economics deserves more credit. In fact, the divergence of economic thought and human intuition is an excellent measure of the accuracy and flexibility of economics.
My most memorable initial impression of economics when I was a first-year undergraduate student was that many of the concepts in economics are incredibly intuitive. Similar to my observation, a reader in the comment section of the Economist's View blog points out that intuitive questions asked by activists are at times diverging with the solutions proposed by economists.

The comment was made specifically on the subject of Wal-Mart's expansion. It pointed out that activists have intuitively asked why Wal-Mart cannot offer higher wages. Meanwhile, economists are seeing that Wal-Mart truly can offer higher wages without affecting the store's profits. (Of course, not all economists agree that Wal-Mart's expansion is associated with adverse impacts, as I often observe when I find myself to be the lone defender of the anti-Wal-Mart-ization agenda on other blogs)

The Wal-Mart debate isn't the only platform where economics and activism diverge. The subject of subsidies is another example. Environmentalists argue that farm subsidies promote the degradation of soil long after the land has lost its ability to support farming. When a region is simply too hot and dry to farm on, subsidies encourage farmers to pursue costly irrigation measures, even at the risk of salinization. Similarly, economists have applied the anti-subsidy argument to 'our insane farm policy' and to urban development issues. Their view is that such subsidies drain the economy.

In today's Toronto Star Tyler Hamilton wrote on the subject of the divergence of green attitudes and business initiatives:

Tima Bansal, a professor at the Richard Ivey School of Business and an expert on sustainable business practices, says there's been a "mind shift" just over the last year or two with respect to the business world's approach to environmental issues.
"It used to be when you thought about environmental or sustainability issues, it was just a good thing to do," she says. "But people are realizing we can make money and do these things, and we don't have to leave our personal values at home. This is part of business — good business."

Perhaps it's worth asking if economics is too slow to find empirical evidence to support common sense intuition. As Milton Friedman once wrote, a theory cannot be judged by its assumptions, but only by the accuracy of its predictions. I would argue that the answer to my own question is no, economic theory does not hold back progress. For example, consider nuclear energy production. Not long ago it would have been unheard of for an environmental group to promote nuclear power; however, today this is not the case. Many environmentalists have recently begun embracing nuclear power.

Meanwhile, as an article in today's Globe and Mail points out, the profitability of uranium mining has soared since 2002, promoting further interest in the capabilities of nuclear power. Uranium's profitability began to climb simultaneously with increased public approval of nuclear energy. In other words, economic feasibility did not slow down progress.
Although economic theory doesn't have all the answers, it has kept up with society's needs more so than it receives credit for.

1 comment:

BSF said...

The real question is why it is that we have done such a lousy job of teaching basic economics to the public at large?