Ch 1: The Aims and Motivation for This Research

1.1 The aims and motivation for this research

This thesis sets out to explore some of the key dimensions in the process of sociotechnological change inherent in the shift to a lower carbon economy. This agenda is not exclusively tied to the need to control the risks associated with dangerous climate change from greenhouse gas emissions. Rather, it is also driven by concerns of energy security, resource geopolitics as well as competition, industry and employment imperatives. Indeed, as will be shown, some of the forces which can most profoundly drive carbon emissions may have no connection at all with climate change priorities and policies, but are the outcomes of broader changes in political organisation and economic structure and performance.

Out of the diversity of interactions between actors, technologies and policies surrounding these processes, one key question emerges: can societies really shift the structure of their economies so fundamentally as to achieve a low carbon future within a reasonable timeframe?

In this thesis an integrated approach of economic and political change is developed to interrogate this question. This work is positioned within the field of economic and political geography. This critiques and extends the general theory of equilibrium and price-based analysis favoured by neoclassical economics, to assess, more broadly, how the evolving structure of the economy, its politics, laws and public opinion shape the nature of socio-technological outcomes across time and in different locations in a way that gives rise to the diversity of social and economic outcomes we observe in the world around us.

The motivation to move from an analytical approach based on equilibrium, to one based on evolution, is grounded in the now widely acknowledged problems with the neoclassical paradigm as a basis for understanding and predicting certain economic phenomena and the ‘solutions’ that an evolutionary approach offers. It also reflects the author’s own intellectual development from an undergraduate economist via the roles of an economist in the Australian government, then as an applied economist in industry; to a doctoral student at Oxford. This also explains the somewhat anachronistic review of the theoretical literature in Part One, starting with the neoclassical treatment of the nature and direction of technological change before moving onto the evolutionary theories, despite the later having their grounding in earlier work of political economy. Having been ‘brought up’ in the neoclassical school in the early 1990s, the author’s early economic training fell into what Paul Krugman (2009) has called ‘The Dark Age’ of macroeconomics:

Remember, what defined the Dark Ages wasn’t the fact that they were primitive – the Bronze Age was primitive too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much that had been known to the ancient Greeks and Romans had been forgotten by the barbarian kingdom that followed.

The integrated approach of economic and political change presented in this thesis is thus an attempt to bring the ‘political’ back into the study of the economy, while learning from recent developments in neoclassical and alternative theories. It is argued that to be relevant for decision makers in government or industry, such an integrated approach should be considered fundamental to the reliable explanation and prediction of observed economic phenomena. Indeed, methodologically at least, this type of detailed case study description as a foundation for analysis is what many applied economists are likely to be doing already. The key point is: in order to more robustly and reliably support decision-makers in industry and the policy process in government; the context specific institutional setting in which neoclassical analysis is conducted must be understood and taken into account. Such is the experience of the author, and as such, this thesis is also an attempt to place a coherent theoretical and methodological framework around this type of applied research.

However, this work is not an outright rejection of neoclassical theory. It will be suggested that the equilibrium-based paradigm of welfare economics offers a useful framework to understand and explain shorter-run phenomena along what are called “stable states” or pathways in the economy. Evolutionary logic, on the other hand, emphasises the absence of a stable state, a world of constant change which, following Schumpeter and others, this thesis argues is driven forward by the incessant nature of technological innovation inspired by the power of our creative intelligence, curiosity and ingenuity.

Geographers and others have long expressed concern over the emphasis placed by the neoclassical approach on equilibrium and parsimony and the resultant loss of institutional realism (e.g. Clark, Feldman and Gertler, 2000; Martin, 2010; Deitz, Michie and Oughton, 2011; Dosi et al., 1988; Freeman and Louca, 2001; Hodgson, 1988; Galbraith, 1958; Hayek, 1974; Schumpeter, 1942[1975] and others). Through its restrictive and unrealistic assumptions, the neoclassical approach sets out to create a world where interesting issues can be explored and key relationships examined without the confounding factors found in the actual world. For example, just as physicists describe motion on a frictionless plain or gravity in a world without air resistance, economists describe changes in relative prices and quantities of goods or services in a world without politics, transaction costs, or (crucially, for the subject of this thesis) significant shifts in technology. It is not that theorists believe that the world is without air, or that the economy is static in time and institutionally consistent across different countries, their approach reflects that it is simply just too hard to study everything at once.

While this approach may be as legitimate a method in economics at it is in physics, a problem has arisen because regulatory structure in the ‘real world’ has been put in place based on neoclassical axioms. For example, under the idealised conditions of the model, the government is usually viewed as an inherently inefficient agent and social objectives are seen to be best satisfied through private market exchange. One manifestation of this logic was the deregulation of financial markets based on the efficient markets hypothesis. This has now been attributed to have significantly contributed to the financial crisis of 2008 and the subsequent recession (Colander, et al., 2009; Kay, 2011). What has occurred is that economists educated in quite often abstract theoretical (and often mathematical) models have built institutional frameworks around those idealised models with little comprehension of what actors in the real world might make of them. In light of the instabilities and perverse incentives created from this, what seems to be lacking in this approach is that basic respect for observed facts, which is so important to the modern scientific method and fundamental in geography.

Furthermore, the ‘market-based’ approach of the neo-classical school has an inherent values neutral logic – in that ethical questions are generally put to one side and are only valued insofar as they are expressed in market transactions – the ‘laws of demand-and-supply’ rule. In reality, there are likely to be other goals such as social equity, personal liberty or environmental protection which are valued and may or may not be consistent with efficient economic growth and the unrestrained laws of demand and supply. The point is that by treating preferences as exogenously given, the neoclassical approach suppresses the analysis of the normative process of their formation. Understanding this process is crucial, as it contributes through the political and commercial process to define the institutions which provide the context for market action. This plays a significant role in explaining the heterogeneity of social and economic outcomes we observe in the world, and, in the context of the shift to a low carbon economy, is central – as such a shift involves active choice or political agency to be exercised, as will be explained and argued in the body of this research.

The neoclassical vision of the world probably found its high tide at the turn of the 1990s with the liberalisation agenda of the Reagan-Thatcher administrations and the political downfall of collectivism and central-planning in Russia and Eastern Europe (Michie, 2001:1233). However, as the decade progressed, a number of events worked against the universal validity of this viewpoint, including: the collapse of economic activity and chronic institutional instability in the newly independent former Soviet Republics and the manifest failure of the Washington Consensus to sustain a successful programme based on market reform and deregulation of state functions in the developing world. However, the strongest perceived failure of the neoclassical paradigm, drawing critics ranging from Queen Elizabeth II downwards, has been its failure to explain and predict the series of crises in monetary markets, culminating in 2008 in the second largest collapse in economic output since the Great Depression. One important gauge of this change in theoretical sentiment is to be found in the Economist by the institution of the column Schumpeter, and in the March 2008 article ‘Order in the Jungle’:

Economists became fascinated by the rule of law after the crumbling of the “Washington consensus”. This consensus, which was economic orthodoxy in the 1980s, held that the best way for countries to grow was to “get the policies right”… But the Asian crisis of 1997-98 shook economists’ confidence that they knew which policies were, in fact, right. This drove them to reexamine what had gone wrong. The answer, they concluded, was the institutional setting of policymaking…

While in the same article Francis Fukuyama (albeit “from the perspective of a political scientist”) was given space to opine: “I believe that the institutionalists have won this argument hands down,” the intellectual heritage of “getting the policies right” still looms large over mainstream economics – as manifested in the climate change sphere by the ongoing policy choice chestnut “to tax or to trade” (e.g. Nordhaus, 2007).

In the heat of the recent crisis, many of the most important policy decisions for economic management have become highly pragmatic, based very little on economic theory, neo-classical or otherwise, such as the multitrillion dollar nationalisations of banks. While these dramas play out, climate change policy has been left somewhat in the doldrums, bereft of strong direction – some prominent examples being the drifting of negotiations to extend the Kyoto Protocol and the vacillating politics of ‘to tax or trade’ in the United States and Australia. If there is one, the unifying logic that seems to have replaced the “market-driven” approaches of the 1980s and 1990s is now more of a pragmatic “what works” or at best an “evidence-based policy” approach (which, as Diane Coyle (2007:253) dryly notes, makes you wonder what came beforehand). On this basis there seems to be a new agenda for political economy that needs to be articulated with some urgency. This point was recently made in The Routledge studies in contemporary political economy, especially Deitz, et al., (2011) in the context of the environment and climate change.

Economic geographers have responded by highlighting that the biggest economic problems, such as climate change, require a more comprehensive analysis to support decision making. It has been argued that the solutions to such issues need to recognise the observed reality of the systematic departures from the ‘rational actor’ model of human decision making and also position actors within a process of geographically contexualised institutional evolution (Clark, 2011; Gertler, 2010; Martin, 2010). For instance, Clark argues that neoclassical partial equilibrium analysis has reinforced incrementalism in the economy by putting Pareto optimality, a condition, he argues, is unlikely to ever exist, at its analytical heart. This is an important point, and one that will be explored in greater detail in Parts One and Two through the classification of technological change in the economy into three classes: reproduction (movement along a production function), transformation (movement of the production function) and transition (movement to a completely new production function).

It is relevant to note that this thesis addresses a dialectic between neoclassical equilibrium-based theory and a historically rich evolutionary economic paradigm which has been taking place for over a century. For example, at the end of the nineteenth century, the English economic historian T. E. Cliffe Leslie (1875) wrote: ‘two different conceptions of political economy now divide economists’. He goes on to define an ‘English approach’ as one that treats political economy as a body of universal truths or natural laws, or at least as a science whose fundamental principles are all fully ascertainable and indisputable.

This was a movement for rigorous dispassionate mathematical reasoning (e.g. Cournot 1838, Senior 1836, Edgeworth, 1881, Marshall, 1890) which was viewed as necessary to free political economy from subjectivist influences. To this Cliffe contrasted the ‘German School’ which drew on the ‘Older Historical School’ and which followed Hegelian principles of realism – that human nature with its seeming contradictions between the rational mind and the impulsive body, should be seen as part of an integrated and united whole. This body of work was led by Wilhelm Roscher (1843), who argued that any attempt to create rules for economic behaviour would be contingent upon their historical, social and institutional contexts and that this would require a multidisciplinary form of empiricism in scholarship.

Thus we see that political economy was the precursor to economics – i.e. political economy was economics – the former term being replaced by the latter towards the end of the nineteenth century, due to the increasingly scientistic connotations of ‘economics’ (Groenewegen, 2008). As Clark (2011) notes, today there are many definitions of political economy, some rooted in these historical traditions, some set against them, some highly normative, and others very shallow. Indeed, in many cases ‘political economy’ has taken on simply a symbolic meaning, used to emphasise methodological differences from the mainstream neoclassical school. The term has become increasingly loose, associated with an eclectic set of methodologies, or simply denoting analysis that introduces ‘non-economic’ factors, especially political factors.

For example, some economists use the term to describe issues that relate to public policy within their work such as the implementation process of emissions trading schemes, usually as an aside in explanation to why outcomes differ in practice from what neoclassical theory suggests (e.g. the rent seeking behaviour which explains why emissions trading tends to be preferred as a regulatory instrument by industry over taxation (Fankhauser and Hepburn, 2010:4385), a ‘political economy’ observation that has prompted Deiter Helm (2005) to call emissions trading not a polluter pays approach, but a pollutee-pays approach. For others, political economy represents the body of work, building on the Virginia and Chicago Schools, which analyses the functioning of democratic political institutions using economic tools, based around notions of rational choice (Besley, 20 2006). For still others, political economy also means the study of how political institutions interact with the economy, but in this case, there is a stronger emphasis on an interdisciplinary approach, admitting a wider range of questions and methods (Dietz, et al. 2011:2).

For Clark (2011), political economy seeks to:

understand the relationship between human behaviour and social institutions, emphasising the constructive nature of institutional design for realising human aspirations.

Such aspirations may include economic development, social equity, individual liberty as well as what Clark describes as humanity’s “common commitment to environmental sustainability”. However, Clark goes on to note that “if institutions are understood as setting the rules whereby people collaborate, then it is not just a question of environmental regulation, it is also a question of what counts as legitimate use of the environment”. This qualification distinguishes the geographer’s approach to political economy from one that might focus more on a universal conception of value (such as basic human rights). Considering that the ‘environment’ is actually quite particular to time and place, Clark suggests that perhaps the most subtle theory of political economy is one that can realise a rapprochement at the local level with global objections such as the stabilisation of global CO2 at levels that control the worst of climatic risks. This reinforces Paul Robbins (2003) call for “an everyday political ecology of the state”.

Within geography and the climate change context this agenda has been pursued most significantly by Compston and Bailey (2008) and Compston and Bailey (2012). This research has highlighted the practical difficulties in overcoming entrenched organisational and institutional rigidities as well as identifying pathways for flexibility in institutional realignment to achieve carbon mitigation. It has also sought to empirically progress beyond the notion that institutions matter to interrogate what institutions matter in which circumstances for what purpose. This detail is crucial for policy choice, but is one which is often overlooked by not just by the neoclassical framework’s universalist logic, but even some econometric studies of institutions based on broad measures such as ‘rule of law’ or ‘political stability’ (Gertler, 2010:12).

Within geography, this is the agenda which the author’s own research programme seeks to contribute to. This has involved: a book chapter (Howarth and Foxall, 2012) in Compston and Bailey (2012) involving the development of a case study on the economics and politics of energy and climate change in Russia (Chapter 7); a paper published in Political Geography on the economics and politics of greenhouse gas mitigation in Australia (Howarth and Foxall, 2010) (Chapter 6); the publication of a co-authored book Carbon markets: an international business guide (Brohé, et al., 2009) examining the economics and politics of climate change and emissions trading focusing on the European Union; the United States, Australia, New Zealand and Japan (an extract from which comprises Chapter 5); and the economics and politics of energy efficiency in Germany through a case study of CFL diffusion which has been submitted to Environment and Planning A (Chapter 4).

In addition, the integrated 22 approach to political and economic change presented in the next section of this Chapter was also published in European Panning Studies (Howarth, 2012). Perhaps most significantly, over the course of this D.Phil., the author’s co-authored book was recognised as one of the top 25 academic titles in the economics category by the journal Choice, a publication of the American Libraries Association – and is used as a basis for teaching in many universities around the world – including at workshops and lectures at Oxford run by the author.

Thus, while the body of work presented in this thesis represents a cohesive collection of work on the theme of the shift to a low carbon economy, it is part of a much wider research and teaching project of the author which, for example, has also involved field work on nuclear risk in Chernobyl, and the supervision of master’s theses on topics including electric car and bike diffusion in Australia and China and the evolution of emissions trading in China and Turkey and consideration of cooperation and competition in the co-evolution of the wind energy sector in China and Denmark. Throughout this work, the geographical situatedness of institutions is a central theme, so that while the case studies are quite diverse, this theme binds the work together.

Just as the political dimensions of the economy have been gradually excluded by what Hayek called an increasingly ‘scientistic’ approach to the study of economic phenomena – so too has ‘the government’ become seen as a mutually exclusive way of organising the economy when compared to ‘the market’. Increasingly, this dichotomy is being reconsidered as false – and not only false, but also damaging in its policy ramifications (Coyle, 2010:218):

… both [the market and government] are types of economic institution, designed to organise our life in large social groups. None of these institutions could exist and function outside a basic political framework, usually the national state which provides – with varying degrees of success – a legal framework, including the law of contract and employment laws, protection of property, policing and enforcement, security, standards of weights and measures, a monetary standard, and also sets the macroeconomic context. Indeed, the very concept of property, without which no economic activity from barter onward would occur, is shaped by the state.

It is the realignment of these institutions that set the context for social and economic action that Coyle argues should be the focus of the policy challenge:

[debt, climate change, social inequality] … all these reflect the failure of political and social institutions to keep pace with the ways the economy and technology have developed in the past generation. The natural world is the most urgent and potentially catastrophic manifestation of the inadequacy of institutions we have for co-ordinating the lives and decisions of seven billion people. But these crises of sustainability are related. They are all, including the environmental challenges – the symptoms of a failure of the institutions that shape our economies and societies, the forms through which we reach collective decisions. The term institutions encompasses both markets on the one hand and political and governance structures on the other.

Such contributions exemplify the resurgence of interest in political economy. This has come in a number of guises. Clark (2011) identifies two broad theoretical currents: renewed interest in the nature and scope of decision-making, using empirical studies to show that it is subject to systematic biases and anomalies, rather than simple minded ‘rationality’ as assumed in neoclassical models (Chapter 3); and secondly in the growing influence of institutional economics and the re-introduction of the notion of ‘value’ lost in the ambivalence of the neo-classical approach with respects to the ‘good’ society (Chapters 4-7).

So far, a high-level overview of the aims and motivation of this research has been articulated. To recapitulate, these are:

  • To articulate a theoretical approach to the study of economy that provides a synthesis between ‘economic’ equilibrium-based neoclassical theory and ‘political’ institutionally rich evolutionary theories; and
  • To demonstrate how such analysis might be put to work to examine the shift to a low carbon economy.

Having made this broad case for political economy as the vehicle for understanding the study of the shift to a low carbon economy; the next section presents the author’s specific conception of what such an integrated approach might look like. This theory is not intended as an ontological description of reality, but rather, as a set of analytical and heuristic tools with which empirical observations may be understood and patterns identified on which predictions of the future can be made.

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