We invited Yannis Dafermos from University of the West of England and the New Economics Foundation to our seminar series ”Misum meets”. He spoke on the topic ”Building a Model to integrate the Macro-Economy, the Financial System and the Ecosystem”.
Yannis Dafermos of the New Economics Foundation spoke this morning about the model that he and his colleagues are building , which integrates the macro-economy, the financial system and the ecosystem. The model is a synthesis of ecological economics and post-Keynesian stock-flow consistent modelling, which both focus on essential aspects of the economy, the ecosystem and the financial system, respectively, but have yet to be combined into a coherent approach. Working in the tradition of Georgescu-Roegen (ecological economics) and Wynne Godley (stock-flow consistent modelling), Mr. Dafermos’s approach is firmly outside of the mainstream. In the presentation he critiqued the neoclassical “Integrated Assessment Modelling” (IAM) used in standard climate models, arguing that they are based upon the assumption that output is determined by the supply-side only (although not the supply side that is the ecosystem), and not demand as in Keynesian economics, and that they use a production function that does not take energy or physical matter into account. These flaws lead to misguided projections, he argued, and do not, for example, take the economic effects of environmental degradation into account. By focusing on prices only, IAM also leads to the necessary but in my view dangerously insufficient policy conclusion that there should be a price on carbon, and not much else. Other policies, such as fiscal, financial, regulatory and industrial policies are left out, a flaw that Mr. Dafermos’s modelling aims to correct.
Mr. Dafermos guided us through the interlocking parts of his model, an inevitably complex and intellectually challenging but therefore also rewarding exercise. For someone who is not trained in mathematics or economics, it is obviously quite difficult to assess the viability of the model, but I found the focus on both ecological and financial flows, arranged in balance sheets where all inputs and outputs and all assets and liabilities equal zero, was intuitively pleasing. Unfortunately, we did not manage to convince anyone representing mainstream economics to critique the model, which would have been interesting. We tried to, but the candidate we reached out to was of the view that post-Keynesian economics is not scientific, and therefore did not want to participate in debating it. This in itself, I think, was an interesting illustration of the seemingly insurmountable paradigmatic differences within the economics discipline. Without an opposing view it was difficult, as I mentioned, to evaluate the validity of the model, but I found it convincing. Being familiar with Wynne Godley’s work (if not Georgescu-Roegen’s), particularly his prescient predictions about the Euro-crisis (in the 1992 London Review of Books article Maastricht and all that) and the recessionary effects of the Clinton surplus in the late 1990s (in the LROB 2000 article What if they start saving again? written just before the dotcom crash), I found the intellectual foundations to be reassuring.
The discussion afterwards made clear that there are plenty of potential other factors that could be applied to refine the model, for example having different variables for unemployment in advanced countries versus the developing world, where informal employment is widespread. Dafermos and his colleagues also plan to integrate the government sector and a central bank in the model, in order to model green investment policies and other state policies that would influence the climate. The project is yet in its early stage, it seems, and we look forward to see how it will develop. The seminar represents the beginning of a fruitful dialogue, I believe.
Written by: Max Jerneck
More about Yannis Dafermos project A New Macroecological Model here.