Elegant simplicity

One of the most widely criticized assumption is also the one that brings elegant simplicity to the subject. The assumption is that we are rational maximisers. That is to say for each one of us maximizes something which economics usually only vaguely labels as “utility”. In theory, utility could be anything, even subjective. Indeed, its roots probably lies in the idea that utility is a proxy for happiness. This is evidenced by the quote “the greatest happiness for the greatest number of people” which is the heart of utilitarianism.

The problem with subjectivity

As with all things subjective, happiness is a very hard thing to measure.  People’s ratings of their own happiness, for example, can be significantly influenced by asking them priming questions.  In one study researchers affected self-assessment of subjects’ happiness by asking them questions about their dating lives before they rated their own happiness.

Even if it were easy to measure, given the proliferation of self help books and gurus, I doubt if we are really happiness maximizers; but I digress.

The homo economicus

Given the difficulty of dealing with subjective definitions of “utility”, most of economics assumes utility to be money or its equivalents. Herein lies the problem – most of us are NOT rational money-maximizers! Paul Krugman in his recent essay titled “How Did Economists Get It So Wrong?” called it “mistaking beauty for truth”. While the assumption makes for beautiful models, it is simply not true.

Study after study has shown that we value the risk of small losses higher than equivalent gains. We value things we own higher than we would have if we didn’t own them. We feel the need to reciprocate any favors bestowed upon us. Even with games like the ultimatum game, people have been shown to incur a cost to themselves to punish others who they think are unjust.

These and more studies on human behavior are littered with evidence for our irrationality. Of course, you won’t find a lot of people (economists excluded) claiming that we are perfectly rational.  This criticism has lead to a caricature of human beings as seen by economists into a separate species called homo economicus.

Economic growth as panacea

These behavioral problems with economics are well known. In fact there are fields of study called behavioral economics  and behavioral finance. Why, then, am I waxing about it? Well, for one, all of us seem to have accepted economic indicators such as GDP and GDP growth rate as the prime measures of well-being. Policy is decided to promote economic growth, we target growth numbers; indeed, we view economic growth as an almost-panacea to all our problems. Don’t get me wrong, I am neither a Luddite nor a communist. However, I do see some problems with this worldview.

Lifting masses out of poverty

We often hear this phrase, that economic growth lifts X million people out of poverty. I am not sure if systematic evidence exists for this. In a very well written article about the ills of pure free market capitalism called “Beyond Selfishness”, Henry Mintzberg, Robert Simons and Kunal Basu argue that growth has actually increased the income disparity in the US. They argue that, in real terms, the lowest class may actually be worse off after growth and that the richest are disproportionately better off. In other words, a gross 8% GDP growth may conceal 125% growth to the ultra-rich and -2% “growth” to the ultra poor.

Of course, some disparity is to be expected. In economics, most of this would be attributed to “productivity”. The argument is probably correct. But the reasoning stops abruptly at productivity. What causes such drastic differences in productivity? Some of it may be attributable to industriousness and inherent abilities of people, but a lot would probably be attributable to opportunity.

Relativity

Another problem with economic growth is that, while a homo economics would be happy if his assets grew in absolute terms, a homo sapien would only be happy if he is better than the homo sapien sitting on the next tree branch! Again, don’t get me wrong, I am not saying absolute growth is not good. I am merely suggesting that, possibly, rat race, lack of leisure time etc., that are hallmarks of our time are probably a result of our mindless pursuit of higher productivity.

But what about happiness?

Our beautiful neighbor up north, Bhutan, has come up with a nice concept christened Gross national happiness. King Jigme Singye Wangchuck , who abdicated his throne to create democracy in Bhutan came up with this concept. Although this suffers from the problem of being vague, it seems like a neat start.

The question remains, while the imaginary homo economicus may be ecstatic at our unwavering focus on growth, what about us, ordinary mortals?

In simple terms, India’s stance is “climate change? Ain’t my problem!”.

It is our problem!

But, the fact remains that climate change is eminently “our problem”.  Here are some reasons why it is:

1. The issue of poverty is  linked with subsistence farming and rural communities. 68% of land under cultivation in India is rain fed.  There is some evidence to so support the claim that climate change is making monsoons more erratic and is increasing the severity extreme events. 
2. What is the effect of climate change on the gangetic plain that is home to some 500 million people? The Himalayan glaciers that feed the mighty rivers are retreating at the rate of 10-15 meters a year, the effect of which could be massive flooding followed by drought events.
3. In general, agricultural production in India of rice and wheat is projected to drop between a massive 40% to 52% if temperatures were to rise by 2.5  to 4.9 degrees centigrade.
4. In particular, rice is very vulnerable to climate change. Rice is a very important staple crop in India.  It is estimated the rice production will fall 10% for every degree rise in temperature. 
5. Sea level rise is another climate change induced menace that India can ill afford. Apart from ecological destruction of important natural resources such as sundarbans, it can disrupt coastal economies by flooding, damages by extreme events and intrusion of saltwater in freshwater and groundwater resources. 
6. Sea water acidification and general temperature increase puts stress on marine ecosystems causing events such as coral bleaching. India should be concerned about the sustainability of the fisheries resources that it depends on.

These are big problems that will affect us no matter who puts up more carbon dioxide in atmosphere.  We share the planet with all the people whose unsustainable lives have “caused the problem” and we aren’t “helping” even if we keep well below the global per-capita average!

There is an upside, an opportunity.

A saner position for India is to acknowledge this global problem and demand that the developed world help us cope.

If we are going to move to  a carbon neutral economy sooner or later,  does huge investments in carbon tainted infrastructure make sense?

Let us look at one sector responsible for carbon emissions – power sector.  There are several things in this sector that are unique to India.  Our losses in transmission and distribution, for example, stood at 33% in 2005 , in other words we have a very inefficient grid. We also have a huge power theft problem. I guess this is partly motivated by our ethic that stealing from government is okay. Moreover, considerable section of our country still remains off-grid.

On the flip side, India as also very well endowed with natural energy resources such as sunlight and wind. We receive about 5,000 trillion kWh/year in solar energy. All these make up for a case that creatively funded (with some subsidies from developed countries), community run (because, while stealing from government is okay in our culture, stealing from our neighbors is most certainly not), off grid electricity generation near the place of consumption could solve multiple problems by creating sustainable (both economically and ecologically) energy infrastructure and eliminating inefficiency of  centralized grid.

India also has huge potential in terms of carbon sequestration, for example, using the Terra Preta or Biochar method. This method involves converting biomass that is agricultural byproduct into charcoal and using it to fertilize soil, thereby also achieving sequestration of carbon. This could potential be paid for by some sort of carbon trading scheme, providing triple benefits to farmers involved – provide an additional source of income, increase soil fertility and also reduce global warming!

With regards to our policy, we could act like a stubborn child and refuse to move ahead. We could demand for our share of “right to pollute” on a per-capita basis and slam the west for ruining the world before we could. The saner option, however, remains that we recognize the need to change and do it in a way that is both politically savvy and economically advantageous for us in the long run, which inevitably involves keeping our growth sustainable ecologically.