Matthew Kahn, author of the cheeky book Climatopolis: How Our Cities will Thrive in the Hotter Future, likes to compliment our research (Schlenker and Roberts, 2009) on potential climate impacts to agriculture by saying it will cause valuable innovation that will prevent its dismal predictions from ever occurring.Matt has a point, one that has been made many times in other contexts by economists with Chicago School roots. Although in Matt’s case (and most all of the others), it feels more like a third stage of denial than a serious academic argument.It’s not just Matt. Today, the serious climate economist (or Serious?) is supposed to write about adaptation. It feels taboo to suggest that adaptation is difficult. Yet, the conventional wisdom here is almost surely wrong. Everyone seems to ignore or miscomprehend basic microeconomic theory: adaptation is a second or higher-order effect, probably as ignorable as it is unpredictable.
Michael Roberts is a top agricultural economist. Here is his Google Scholar page. He earned his Ph.D. at the UC Berkeley. UC Berkeley is a major trainer in agricultural and environmental economics and it is center of behavioral economics. This blog post will touch on both of these topics. Keep in mind that the University of Chicago is neither a center of agricultural economics nor behavioral economics (Dr. Thaler doesn't train that many students and the department has not made a large investment in behavioral studies).
As I continue to think about the economics of climate change adaptation, I now recognize that much of the "doom and gloom" is based on a type of behavioral economics model of investment under uncertainty. As a product of the Lucas and Prescott "Investment under rational expectations", I have a much different view point. ...It appears to me that general equilibrium theorists need to teach partial equilibrium empiricists about their core model. Partial equilibrium thinkers implicitly assume that production will continue to take place at its current location and that price signals do not guide investment choices. With these restrictions, they can focus on "one equation" models analyzing how output co-moves with temperature. By zeroing out thousands of behavioral responses (such as moving farming to another location or growing a more robust crop or hedging risk), such an analysis is bound to yield scary numbers in terms of "costs from BAU". Once one begins to think about the spatial location of economic activity, then whole new possibilities appear.
Some farmers have subsidized crop insurance (nearly all in the U.S. do). But I don't think insurance much affects production choices at all. Futures markets seem to “work” pretty well and could be influenced by anticipated climate change. We actually use a full-blown rational expectations model to estimate how much they might be affected by anticipated climate change right now: about 2% higher than they otherwise would be.Do I think people are myopic? Very often, yes. Do I think markets are myopic? By and large, no, but maybe sometimes. I believe less in bubbles than Robert Shiller, even though I'm a great admirer of his work. Especially for commodity markets (if not the marcoeconomy) I think rational expectations models are a good baseline for thinking about commodity prices, very much including food commodity prices. And I think rational expectations models can have other useful purposes, too. I actually do think the Lucas enterprise has created some useful tools, even if I find the RBC center of macro more than a bit delusional.I think climate and anticipated climate change will affect output (for good and bad), which will affect prices, and that prices will affect what farmers plant, where they plant it, and trade. But none of this, I would argue, is what economists conventionally refer to as adaptation. A little more on response to prices below...Again, my beef with the field right now is that we are too blase about miracle of adaptation. It’s easy to tell horror stories that the data cannot refute. Much of economist tribe won’t look there—it feels taboo. JPE won’t publish such an article. We have blinders on when uncertainty is our greatest enemy.
There is much more (Matt asks five questions and Mike answers them) so read the whole thing.
[After all, by checking their Google Scholar page and RePEc rankings and acknowledging their pedigrees (Berkeley! Chicago!), you can tell that these are guys are who we should be paying attention to!]
