I would like to return to a theme of a recent blog post I published here. Â Everyone knows that behavioral economics has had a great decade. Â You don’t have to be as smart as Sunstein and Thaler to appreciate a good nudge. Â For some background on behavioral economics, I suggest reading this piece Â or these slides.
Allow me to apologize upfront for making a bunch of simplifications. Â This is a blog post! Â I will not put this entry on my vita. Â In my work on climate change adaptation, I have assumed that we will not figure out how to solve the global free rider problem and thus will not cap our aggregate greenhouse gas emissions. Â This pessimism is based on my travels in China, my discussions with people in the developing world (who seek to become middle class urbanites) and my examination of Congressional voting patterns on carbon mitigation efforts. Â Given that we have released too much gas, I have focused on the micro economic “small ball” of how we individually and collectively adapt to climate change. Â Behavioral economics and neo-classical economics offer sharply different predictions of our future.
Let’s do the cliche easy case in which we are 100% Homer Simpsons. Â By this I mean that the world is populated with Homer Simpsons. He is a behavioral economist’s poster boy as he focuses on current pleasure and lives life now making a bunch of choices that his future self will regret. Â Homer doesn’t know “that he doesn’t know” what climate change will do to the world. Â He lives in ignorant bliss about the coming days of pain that his suburban lifestyle has unintentionally caused. Â He makes no backup plans and his society suffers a terrible and ironic day of reckoning. Â Like the Titanic, they sink.
Let’s do another easy case, we are 100% Mr. Spock. Â He is neo-classical man. He sees the iceberg and he comes up with a pro-active plan to steer around it. Â Rational expectations and recognizing “known unknowns” leads him to take out insurance in terms of reducing carbon emissions now and making strategic investments such as retreating from areas where sea level rise will flood. Â Such a population faces lower adaptation costs because of pro-active ex-ante investments and shrewd responses as climate change unfolds.
Now, the interesting case is the mixture model. Â Assume we are a population comprised of 98% Homers and 2% Spocks. Â What is the equilibrium outcome in this case? Â The world has 7 billion people so there are 140 million Spocks among us. Â Will they have to repopulate the world after the days of pain begin in 2050? Â I don’t think so. Â Â The Homers and their expected aggregate suffering in our Hotter unpredictable future creates a huge market opportunity for the 2% Spocks. Â Anticipated pain creates a profit opportunity for the entrepreneurs. Â These entrepreneurs will focus on a series of challenges ranging from food production, to transportation, to flood resistance, to water delivery to help us to adapt to the new challenges we will face.
The point of this blog post is that the existence of “behavioral agents” actually helps us to adapt to future crises because it creates a market for solutions. Â I agree with Joe Romm and other climate hawks that such Homers hurt in today’s political arena because they can’t be convinced to vote for a carbon tax but we need to separate out median voter politics from market outcomes.
To finish this blog post, and to repeat for the 200th time, I am a fan of a huge carbon tax now. Â I would vote in favor of $8 a gallon gas ( I don’t drive and I’m deeply concerned about climate change). Â Â There hasn’t been enough discussion that at the heart of the climate change debate is the belief among the intellectual elite that we are Homer and that we aren’t armed with either wits or anticipation about the new challenges we have unintentionally unleashed.