Climate change, the knowledge problem, and the good life.

Author:Ammous, Saifedean

"The curious task of economics is to demonstrate to men how little they know about what they imagine they can design."

--Friedrich Hayek

  1. The Unknowability of Future Advance

    Fifty years ago, the thought of seven billion people on earth seemed impossible. Another fifty years before that, the idea of three billion people on earth looked unimaginable. Two hundred years ago, the idea of two billion people would have sounded heretical to anyone--most of all Alfred Malthus, who gave more thought to this question than perhaps anyone else. And yet, the impossible, unimaginable, and heretical all came to pass, as the earth has supported these huge numbers and the population continues to rise. It has done so because humans have invented new resources and new ways of dealing with resources that were revolutionary and changed life as we know it drastically. These inventions include the steam engine, fertilizers, desalination, antibiotics, and immunization, to name but a few. They were not only revolutionary; they were fundamentally and completely unforeseeable. Even when they were invented, no one could have foreseen the incredible impact they would have on humanity. Who could have guessed that a little tinkering with a pump in northern England would launch the Industrial Revolution that would completely change the world?

    At every point in history, we are ignorant of what humans' future actions and ingenuity will bring about. They might bring about another revolutionary engine utilizing a new energy source, a cure for cancer, or a nuclear war. Or, they might not. However, we can be sure there will be new discoveries as a result of restless tinkering and the imagining of heretofore inconceivable possibilities, and the cumulative force of these discoveries will change things. The trouble is that we can never predict their arrival. If we could, they would not be new discoveries. As philosopher Karl Popper quipped, to predict the wheel is to invent it (MacIntyre 2011, p. 109). The key insight that allows us to understand the logic of scientific discovery is that it is fundamentally unknown before it happens.

    Understanding this point is very important when thinking of mechanisms to address climate change. It is unwise to put all of our eggs in the basket of technologies that are not yet proven, because the evolution of these technologies is uncertain, and because relying on them might hinder the development of newer ones that we have not anticipated. The experience of investing heavily in biofuels development illustrates this lesson.

    Since the "energy crisis" of the 1970s, biofuels researchers have touted cellulosic ethanol as the technology that will make biofuels a viable, significant contributor to the energy mix. (1) This promise has consumed ever-increasing subsidies and incentivized many biofuel-supporting policies. Yet, after decades of subsidies and expected innovation, the promise of cellulosic ethanol has not materialized. Instead, the subsidies to biofuels have led to mass deforestation and to the development of dirty sources of biofuels. But perhaps most importantly, by tying up vast resources and brain power in the so-far futile search for this one energy source, policy makers may have prevented the emergence of other, better energy sources.

    We ought not to rely on uncertain technologies as magic bullets, but remain open to unforeseen possibilities of technological advance. It will not be possible to make a correct choice, ex ante, of which technologies will succeed in addressing climate change. The technologies that will succeed will do so by proving themselves in the real world, not in a theoretical study before they are implemented. As such, a tax on carbon would have been a far better policy, as it would have incentivized the innovation of all carbon-friendly technologies while taxing and punishing all carbon-intensive technologies.

  2. Knightian Uncertainty

    To succeed in the task of controlling climate change will generally require us to take into account that social and economic systems are involved. One trouble this involvement causes is that the response of the actors in such a system is uncertain.

    An extreme, though admirably clear, definition of uncertainty was introduced by the American economic theorist Frank Knight in his 1921 book Risk, Uncertainty, and Profit. In Knight's terms, uncertainty meant a condition in which the probabilities assigned to various contingencies and factors are unknown--"unmeasurable" in his terminology (Knight 1921). Knight may have had in mind that in the social world, such as a national economy, there may have been unseen changes in conditions, so there are no time series data from which to form a reliable estimate of the desired probability distribution(s). The Chinese have a familiar proverb underlining that point: "A man in the river can never stand in the same place twice."

    But Knight may have had in mind...

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