1. iiedEscapingthe Last Malthusian TrapAtalkby EricBeinhocker INETOxfordLondon 6February2014 Copyright2014 EricBeinhocker Allrightsreserved

2. Thelast MalthusiantrapTodays discussionWhyneoclassical economicsisthe wrongtoolfor climatechangeAcomplexity economicsview ofgrowth Escapingthe trap:creaAng arevoluAon incarbon producAvity 3. Thelast Malthusian trapWhyneo-classical economicsisthe wrongtoolfor climatechangeAcomplexity economicsview ofgrowth Escapingthe trap:creaAng arevoluAon incarbon producAvity 4. Some2.5millionyearsofeconomichistory(inbrief) WorldGDPpercapita 1990internaHonaldollarsWorldpopulaAon Thousands7,0007,000,0006,0006,000,0005,000,0005,0004,000,0004,0003,000,0003,0002,000,0002,0001,000,0001,0000 -2,500,000 -2,000,000 -1,500,000 -1,000,000 -500,0000 0500,000YearSource:USCensusBureauHistoricalEsHmatesof WorldPopulaHon;Kremer(1993)-2,500,000 -2,000,000 -1,500,000 -1,000,000 -500,0000500,000YearSource:DeLong(2005);data2.5millionto1millionB.C. extrapolated 5. TheMalthusiantrap(circa1000BCto1800AD) Malthusinanutshell A Wages SubsistenceC B PopulaHon12 Stagnantincomes Globalincomeperperson(1800AD=1) 10 8 6 4Malthusiantrap2 0 1000BC 500BC 0 500 1000 1500 1800AD 900 RisingpopulaAon Thousands 800 700 600 500 400 300 200 100 0 Source:Clark(2007)500 1000 1500 1800AD Source:USCensusBureauHistoricalEsHmates ofWorldPopulaHon;Kremer(1993) 6. UnHl1800Malthusthenathirdoftheworldescaped ruled Globalincomeperperson(indexed1800AD=1) 12 10 8 The Great Divergence 6 4 IndustrialRevoluHon2 Malthusiantrap0 1000BC Source:Clark(2007)500BC 0 500 1000 1500 2000AD 7. butwithanunsustainablegrowthmodel Changesin greenhouse gasesfrom icecoreand moderndata400 350 RadiaHveforcing(Wm2) CO2(ppm) 300 250 10,000 5000 Time(before2005) Source:IPCCAR4WG1(2007)0 8. andanotherthirdoftheworldarepoisedtoescape Annualhouseholddisposableincome ThousandsRMB,real2000Numberofhouseholds(millions)2005 2015 2025 CHINA 200andabove1.03.48.2100-1991.65.719.040-99112.68.8 71.425-39 Lessthan25214.175.7 74.2107.554.1 57.8ThousandsRMB,real2000 INDIA 1000andabove1.2500-99910.990-199 Lessthan90 Source:McKinseyGlobalInsHtute9.55.52.4200-4993.333.155.1 91.3 101.1106.0 74.194.9 93.1 49.9 9. WefaceournalMalthusiantrapPeak at 550 ppm, long-term stabilization 550 ppmAnnualemissionsimpliedbyCopenhagenAccordpledges(GtCO2e)Peak at 510 ppm, long-term stabilization 450 ppm70Peak at 480 ppm, long-term stabilization 400 ppm65Low range of pledges60 55 50 Probability of temperature increase under 2C302.0C70-85%353.0C40-60%40Expected temperature increase15-30%451.8C25 20 15 10 5 0 2005High range of pledges 201020152020202520302035204020452050Source: Taking Stock Emissions Levels Implied by the Copenhagen Accord, Project Catalyst, February 2010. 10. WhatweneedtodoandquesHonsforeconomics Theworldsto-dolist Re-dotheIndustrial RevoluHon,creaHnga sustainableeconomic system TransiHontoalow- carboneconomywith minimalimpacton welfareandgrowth, especiallyforthe developingworld Drivetheabovewith policyconductglobal socialengineeringon anunprecedented scaleQuesAonsforeconomics HowdidtherstIndustrial RevoluHonoccur?How mightwecreateanew one? WhataretheinteracHons betweenwelfare,growth andde-carbonisaHon?How doweassessthetrade- os? Whataretheleverage points?Howdoweavoid unintendedconsequences? Preserveindividual freedom?Unfortunately tradiAonal economics ill-equipped toanswer thesequesAons 11. Thelast MalthusiantrapAcomplexity economicsview ofgrowthWhy neoclassical economicsis thewrongtool forclimate change Escapingthe trap:creaAng arevoluAon incarbon producAvity 12. Neoclassicaleconomicscannotexplain keycharacterisHcsoftheeconomy 13. Theeconomyisviewedasanequilibriumsystem 14. Theeconomyisviewedasanequilibriumsystem butsuchasystemcannotgrowexplosively,create novelty,norspontaneouslyself-organize 15. Andsuchasystemcannotjustcrashasourshas 16. Theaccidentalhistoryofequilibriumineconomics 17. Neoclassicalfailure#1:Theoryofgrowth Y(t)=Output CannotexplaintheIndustrial RevoluHonF(K(t),A(t)*L(t)) Capital Knowledge Labour NoconnecHonwiththephysical worldSource:Bolow(1956),Romer(1996),Nelson(1996),Daly(1999) 18. Neoclassicalfailure#2:Humanbehaviour Theorydoesntmatchrealworldbehaviour ExponenHal discounHng Hyperbolic discounHng Example Societyspends$1billiontodaytosave10livesperyearinperpetuity Socialcostofcapitalequals5% ExponenAalanswer Cost=$4.76million perlifesaved Source:AxtelandMcRae(2006a),(2006b)Hyperbolicanswer Cost=$1millionto$4million perlifesaved 19. Neoclassicalfailure#3:Cost-benetanalysis Discount ate! Discountrrate! Prof.WilliamNordhaus Lord(Nicholas)Stern Climateuncertaintyhasfattailswithpowerlawscaling Cost-benetanalysistypicallyassumesawaythetails Wouldpayalottoavoidcatastrophe,e.g.Weitzmans DismalTheoremSource:Stein(2006),Nordhaus(2007),Weitzman(2007),Barker(2008) 20. Neoclassicalfailure#4:Timesymmetry Cost-benetanalysisanddiscounAngassumepathindependenceandAmesymmetry Samuelson:MRS(,)independentofCButclimateeectsarehighlypathdependentandlargelyirreversibleonhumanAmescales Source:ArrowandFischer(1974),Frederich,Lowenstein,Donohue(2002),Dietz(2007) 21. Thelast MalthusiantrapAcomplexity economics viewof growthWhyneo-classical economicsisthe wrongtoolfor climatechangeEscapingthe trap:creaAng arevoluAon incarbon producAvity 22. AdierentexplanaHontheeconomyisacomplex adapHvesystemComplexAdapHveSystemManyinteracHngagentsand organizaHonsofagentsDesignsandstrategies evolveoverHmeMacroparernsemerge frommicrobehavior 23. Aparadigmshis TRADITIONALECONOMICSCOMPLEXITYECONOMICSDynamicsEconomiesareclosed,staHc,linear systemsinequilibriumEconomiesareopen,dynamic, non-linearsystemsfarfromequilibriumAgentsHomogeneousagents OnlyuseraHonaldeducHon Makenomistakes,havenobiases NoneedtolearnHeterogeneousagents MixdeducHve/inducHvedecisions Subjecttoerrorsandbiases LearnandadaptoverHmeNetworksAssumeagentsonlyinteractindirectly throughmarketmechanismsExplicitlyaccountsforagent-to-agent interacHonsandrelaHonshipsEmergenceTreatsmicroandmacroeconomicsas separatedisciplinesMacroparernsemergefrommicro behaviorsandinteracHonsEvoluHonNoendogenousmechanismfor creaHngnoveltyorgrowthinorder andcomplexityEvoluHonaryprocesscreates noveltyandgrowingorderand complexityoverHme 24. LonghistoryofevoluHonineconomics(andviceversa)Problems Drivenbyabiologicalmetaphorfortheeconomy NotbuiltonageneralcomputaHonalviewofevoluHon 25. EvoluHonisasearchalgorithmfortorderVARIATIONSELECTIONAMPLIFICATIONCreateavarietyofexperimentsSelectdesignsthataretAmplifytdesigns, de-amplifyuntdesignsREPEAT 26. EvoluHonarysearchthroughdeducHve-Hnkering 27. Technologiesevolve 28. EconomicevoluAonoccursinthreedesignspacesPhysical technologiesBusiness plansSocial technologies 29. WhatwouldeconomicevoluHonlooklike? Non-linear wealth creationIncreasing variety and complexitySpontaneous selforganization 30. ButwecannotavoidtheSecondLawof Thermodynamicseconomicorderdoesnot comeforfree 31. Understandingthemotherofallcomplexsystems??? 32. Thelast MalthusiantrapAcomplexity economicsview ofgrowthEscapingthe trap:creaAng arevoluAon incarbon producAvityWhyneoclassical economicsisthe wrongtoolfor climatechange 33. IndustrialrevoluAonsareproducAvityrevoluAonsPhysical technologiesBusiness plansSocial technologiesRapidevoluAon(e.g.Cambrianexplosion)RapidriseinproducAvity 34. HowdoweevolvehighercarbonproducHvity? KayaidenAtyF=Anthropogenic (CO2emissions)CarbonproducHvity ~ =Source:Beinhocker,et.al.(2008)p*GDP per capitaPopulaHon1 e * fg+*e*Energy intensity ofGDPNon-energyemissions andotherGHGsf Carbon intensity ofenergy$GDP CO2e 35. Togrowtheeconomyandreduceemissions,carbon producHvitymustrise10xto$7,300pertonneby2050 WorldGDP,US$tn(real2000)150 125 100 75 50 25 0146 +3.1% peryear 412000 2010 2020 2030 2040 2050 Globalemissions,tCO2e 60 55 -2.4% 50 peryear 40 30 20 10 02,0007,30010x7400 2000 2010 2020 2030 2040 2050 202000 2010 2020 2030 2040 2050Source:Beinhocker,et.al.(2008)CarbonproducAvity, US$(real2000)/tCO2e Carbon producHvity= 8,000 GDP 6,000 Emissions +5.6% 4,000 / peryear 36. Ifemissionsarecapped,highereconomicgrowth requireshighercarbonproducHvity CarbonproducAvityrequiredtoreach20GtCO2eby2050 US$(real2000)/tCO2e 16,000Annualreal growth,%14,000-2 -1 0 1 2 3 4 512,000 10,000 Basecaseforecast8,000 6,000 4,000 2,000Carbon producAvity required 870 1,300 2,000 3,100 4,700 7,000 10,500 15,8000 -2-1012GDPgrowthrequiredtohit20Gtat BAUcarbonproducHvitygrowth Source:GlobalInsight;IPCC;McKinseyanalysis345ForecastGDPgrowthrate 2008-2050,percentWithoutcarbon producHvitygrowth needtoshrink economyby>-2%per annum 37. Ifwecappedemissionsandlivedattodayscarbon producHvity,thereisnotmuchwecouldaord*Emissionsfromlandusechangenotincluded **Basedon10Gt/yearsustainableemissionsandfuturepopulaHonof10billionpeople Source:McKinseyanalysis 38. AcarbonproducHvityrevoluHonisrequired threeHmesfasterthantheindustrialrevoluHon IndexYear0=110 Carbon producHvity growthrequired 2008508USlaborproducHvity growth183019556420 0102030405060708090100110120130 YearsSource:Beinhocker,et.al.(2008) 39. Butno-onetodayisclosetorequiredcarbon producHvity CarbonproducAvity2007,177countries,allGHGsexcludingLULUCFAdjustedforpurchasingpowerparity,2050target=$13,300GDP/tonne Carbon producHvity US$000(PPP)/ tCO2e5.5 5.0SaintKirsandNevis SwitzerlandMauriHus4.5Bangladesh4.0SwedenSriLankaNorwayAveragecarbon producHvity3.5France3.0 2.5Japan Austria2.0 IndonesiaTurkeyGermanyMexico BrazilSouthKoreaIranAustraliaVenezuela SaudiArabia1.0 Nigeria 0.5 Liberia 0CanadaUnitedStatesQatarSouthAfrica Russia 0 5 TurkmenistanChina1015G8+5SingaporeItalyPakistan1.5 IndiaUnitedKingdom20253035Prosperity GDPpercapitaUS$000(PPP) Source:WRICAIT;UNFCCC;GlobalInsight;McKinseyanalysis404550 40. CarbonproducHvityhasincreasedoverHme,butnot nearlyquicklyenough*5-yearrunningaverage.EmissionsdataincludesCO2fromfossilfuelsandcement,withprojecHonsforCO2fromlandusechangesandve non-CO2gases(CH4,N2O,HFCs,PFCs,andSF6) Source:IEA,CDIAC,OECD,EPA,CEC,WorldBank,USBureau