Escaping the Last Malthusian Trap: a presentation to IIED by Eric Beinhocker

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In this presentation to IIED as part of the organisation's Critical Themes series, Eric Beinhocker discusses the emerging research that describes the economy as an evolving complex system and what it means for the future of economic growth, climate change, and environmental sustainability. Beinhocker is the Executive Director of the Institute for New Economic Thinking's research programme at the Oxford Martin School, University of Oxford, a member of the Said Business School at Oxford, and a Visiting Professor of Economics at Central European University.

Transcript of Escaping the Last Malthusian Trap: a presentation to IIED by Eric Beinhocker

  • 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