The F-twist – realism, economic policy analysis and climate change – part 2

Tom Foster

This article is a continuation of the article with the same title that appeared in the previous issue of ERA Review. “F-twist” refers to the term “Friedman twist” coined by Paul Samuelson, describing Milton Friedman’s view that “the more significant the theory, the more unrealistic the assumptions”.

STEM vs Economics
Compare the Tacoma Bridge collapse response by the STEM (Science Technology Engineering & Mathematics) professions, to the mainstream economics profession that views unrealistic assumptions as a ‘virtue’, and continues to hold this view decades after it was first conceived by Friedman.

One example is from Friedman himself, his concept of the ‘natural rate of unemployment’, known today as the non-accelerating inflation rate of unemployment (NAIRU), which rests on the supposed ‘trade-off’ between unemployment and inflation as described by the Phillips Curve (Hail 2018, pp4749). A leading introductory economics textbook has elevated this ‘trade-off’ to the status of one of the Ten Principles of Economics: Principle 10: Society faces a short-term trade-off between inflation and unemployment (Gans et al 2018, p18). Yet the evidence from empirical data shows “unemployment has often fallen below (…) the NAIRU rate without inflation accelerating at all” (Hail, 2018, p49). Elevating the unrealistic assumption of NAIRU to the status of a ‘principle’ positions the NAIRU index as something that ‘just is’ one thinks of stone tablets handed down by God and thus removed from critical debate, as it’s not contestable.

Another example of an unrealistic assumption is the insistence of economist William Nordhaus that a roof will protect you from climate change, as much of a developed nation’s economy is “undertaken indoors in carefully controlled environments” (Keen, 2023, Slide 5). Keen shows (Keen, 2021) that economists making “their own predictions using (…) spurious methods“ (Keen, 2021, p1149) and economists like Nordhaus ”misrepresent [ing] the scientific literature” (Keen, 2021, p1149) has lead to their forecasts being “noticeably sanguine” on the “economic damage from climate change (…), compared to the warnings by scientists about damage to the biosphere” (Keen, 2021, p1149).

Where’s the accountability?
Another comparison is with accountability, which is a key feature of STEM professions. Professional engineers must hold professional liability insurance and, in general, if responsible for approving major engineering designs must be chartered engineers (Engineers Australia, n.d.). It’s also mandatory for registered healthcare practitioners in Australia to hold appropriate medical indemnity insurance in case they need to defend a malpractice suit (AHPRA, n.d.). In the field of economics, however, were the economists’ models that were used in the lead up to the 2008 Global Financial Crisis (Kinley, 2018) ever subject to legal accountability into the failure of those models, like the Tacoma Bridge collapse was?

Why would economists not seek accountability when their models consistently predict incorrectly? Perhaps it’s in the training of economists. On reading John Harvey’s comment on the training and educatiing of economics students “I think that the current system is broken” (Harvey, 2020, p19) I wondered whether economic students should get shown videos equivalent to the collapse of the Tacoma Bridge as a warning about what their economic models should avoid.

Outside influences
Perhaps however, the answer to these questions can be found in the influence of vested interests on the profession of economics, especially with the rise and dominance of neoliberalism (Quiggin, 2022). Neoliberalism has a political purpose to it; “Its entire objecttive is to co-opt economics and subvert the public interest to suit the needs of powerful capitalist institutions and the politicians, economists, financiers, philosophers, bankers, thinktanks and media organisations that are willing to support them” (Connelly, 2018). And influential economists such as Friedman have been part of this neoliberal political movement (Quiggin, 2022) (Connelly, 2018) (Henriksen, et al, 2017).

Would “powerful” influences have any need for economics that doesn’t predict outcomes in its interest? And why change models even if the predictions of those models are consistently wrong? Harvey also observed that “the imperfect nature of scientific inquiry should lead us (as economists) to the conclusion that vigorous debate within a plurality of perspectives is the process most likely to generate useful and reliable explanations of economic phenomenon. Instead, the incentives that exist in our discipline encourage monism when we need plurism, consent when real progress is more likely with dissent” (Harvey, 2020, p33).

When Harvey’s observation is considered with repeating poor model predictions that suit powerful interests, from a neoliberal’s perspective, this sounds like a virtuous circle has been created by our economics profession to provide intellectual succour for the preferences of these powerful but minority interests.

Impact on climate policies
In his 2018 lecture to receive that year’s Nobel Memorial Prize in Economic Sciences for his analysis of climate change and related macroeconomic issues (Nordhaus, 2018), William Nordhaus repeated his unrealistic assumption that climate change will have minimal impact on a modern economy’s Gross Domestic Product (GDP), as “many sectors of the high income countries (such as laboratory clean rooms) are highly managed” (Nordhaus, 2018, p448).

However, Nordhaus ignores the fact that the resources used by these sectors and its workers rely on global supply chains integrated with the countries in “low-income and tropical regions”, where he is unequivocal that the “potential damages (of climate chan-ge) are likely to be most heavily concentrated” (Nord-haus, 2018, p448). Nordhaus seems to have excluded from his model the realistic assumpt-ion that climate change will disrupt global supply chains, as the world recently experienced during the Covid-19 pandemic (Harapko, 2023), impacting production in these sectors.

Another unrealistic assumption is Nordhaus’s “prediction for the impact of GDP of a 4°C increase in global temperature – the level he describes as “optimal” in his ‘Nobel Prize’ lecture, since according to his model, it minimises the joint costs of damage and abatement” (Keen, 2021, p1161). This contrasts with the realistic assumptions proposed by earth scientists that “the 1.5 °C Paris target is now out of reach, meaning that we now do not have a ‘safe’ climate future. The best outcome we can now achieve is to stay some-what below 2 °C: an outcome that would present significant challenges to human societies as well as severe impacts on the natural world” (Steffen, 2022, p25).

So a global average temperature that a Nobel prize winner in economics sees as optimal, would be regarded by earth scientists as a death sentence for most human beings, with those remaining presumably living out a scenario akin to a combination of Mad Max (Mad Max, 1979-2015) with The Walking Dead (The Walking Dead 2010–2022)!

Interestingly in his Nobel Prize lecture (Nordhaus, 2018) Nordhaus does not come across as a typical climate denier (Readfearn, 2023). Instead, he demonstrates that he understands the science, the significant risks and the potential solution pathways, including recognising abatement of greenhouse gas (GHG) emissions is “the only feasible and responsible policy” (Nordhaus 2018, p448). He proposes that countries create and join global climate clubs in order to overcome traditional geopolitical politics that has so far resisted authentic action on avoiding catastrophic climate change. This is admirable on his part, however his proposal claims to work by keeping the abatement price as low as possible in order to attract membership to the clubs: “However, as the price rises (…) it becomes very difficult to get full participation (in climate clubs) because the costs of abatement are more than the costs of the tariffs” (Nordhaus, 2018, p463). Had he used realistic assumptions the abatement price would be a lot higher, and as a consequence his climate club proposal less attractive to vested interests.

Conclusion
The F-Twist helped give neoclassical economics the veneer of science, insulating its practitioners from real accountability for their actions. Also, the use of unrealistic assumptions assisted neoclassical economics to become the dominant form of economic theory by being ideologically ‘aligned’ to the interests of a powerful minority. This understanding helps to explain why the Friedman’s 1953 F-twist paper remains influential and manifests itself throughout economic policy analysis including that of climate change, even as recent as 2018 in Nordhaus’s Nobel lecture.

However, whilst the Nordhaus 2018 Nobel lecture on one hand reflects the status that the F-twist has achieved in influencing economics and climate policy, Nordhaus may now be constrained by his unrealistic assumptions in his long career in research as in his lecture it appears Nordhaus is attempting to thread the needle between what powerful interests want to hear, his career record, and what he recognises now as realistic climate science.

Had the F-twist theory been ignored, most likely we would have seen generations of economists directing their intellects to solving societal issues using realistic assumptions including that of avoiding catastrophic climate change. As it stands, orthodox economists will be as complicit as confirmed climate denialists.

References

Tom Foster holds a Bachelor of Engineering (Electrical) Honours degree from the University of NSW, a Post Graduate Diploma in Management from MGSM and is currently studying for the Master of Economics of Sustainability degree at Torrens University.

Gans, J., King, S., Byford, M., & Mankiw, N. G. (2018). Principles of microeconomics (7th Asia pacific). Cengage Australia.

Hail, S. (2018). Economics for sustainable prosperity. Springer. Retrieved from https://ebookcentral.proquest.com/lib/think/detail.action?docID=5391845

Harapko, S. (2023, 6) How COVID-19 impacted supply chains and what comes next. Ernst & Young LLP https://www.ey.com/en_au/supply-chain/how-covid-19-impacted-supply-chains-and-whatcomes-next

Keen, S. (2021). The appallingly bad neoclassical economics of climate change. Globalizations, 18(7), 1149–1177. https://doi.org/10.1080/14747731.2020.1807856,  https://www-tandfonline-

Keen, S. (2023) The appallingly bad neoclassical economics of climate change. Lecture 8 of BECOSD401 Foundations of Real-World Economics. [Lecture Slides] Torrens University. BECOSD401 Slides 8 (Keen).pdf

Kinley, D. (2018, September 21). The global financial crisis changed everything, and nothing. ABC News Opinion. https://www.abc.net.au/news/2018-09-21/gfc-australian-economy-wall-street-financepoverty/10282472

Mad Max (1979-2015). Motion Picture franchise. The Mad Max film series

Nordhaus, W. D. (2018). Climate change: The ultimate challenge for economics. The Nobel Prize. https://www.nobelprize.org/uploads/2018/10/nordhaus-lecture.pdf

Nordhaus, W. D. (2018). Climate change: The ultimate challenge for economics—Lecture slides. The Nobel Prize. https://www.nobelprize.org/uploads/2018/10/nordhaus-slides.pdf

Readfearn, G. (2023, February 7) Former Australian PM Tony Abbott joins board of UK climate sceptic thinktank. The Guardian Australia
https://www.theguardian.com/australia-news/2023/feb/07/former-australian-pm-tony-abbottjoins-board-climate-sceptic-thinktank-global-warming-policy-foundation

Steffen, W. (2022). The earth system, the great acceleration and the Anthropocene. In S. J. Williams & R. Taylor (Eds.), Sustainability and the new economics: Synthesising ecological economics and modern monetary theory (pp. 15-32). Springer. Retrieved from https://ebookcentral-proquest-com.torrens.idm.oclc.org/lib/think/reader.action?docID=6824934&ppg=20