Note that Krugman here is talking about the “textbook Eco 101” approach and not, of course, the “better” Eco 108 non text-book approach we take! In any case, he is making a point that I try to make, endlessly so – that the world is a bit more complex than Eco 101-ism suggests it is. But, big surprise, I still believe he is massively off-target in his message and for several reasons. I wonder if you could figure them out.
That said, there are reasons Econ 101 may not be right here. There is some evidence that consumers aren’t hyper rational when it comes to conservation, that they may pass up conservation opportunities even when it would save them money — and in that case rule rather than prices may be the right way to make them change. And to the extent that we’re talking about innovation, the Econ 101 case says nothing at all: the efficiency case for carbon pricing is about making best use of existing technology, not about providing incentives to develop better technology.
But leave all that aside, and ask: how *important* is it that our carbon-emissions strategy take the form of a universal or near-universal price on carbon?
The answer, in principle, is that it depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution — telling, say, power companies what to do or not to do — is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as putting a quick end to the practice of burning coal to generate electricity — getting to broad-based carbon pricing is much less central.
And what I gather from reading various analyses of our prospects is that we’re closer to case #2 than to case #1: the problem of limiting climate change isn’t all that complex. End coal-burning and you’ve gone a significant way; a few other big things get you another substantial part of the way. Yes, comprehensive carbon pricing would be best, but it’s not the sine qua non of effective action.
The point is that just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance, here or elsewhere. People should know what’s in the textbook; above all, they should buy my book! But never imagine that it’s the be-all and end-all of what matters.
While criticizing the Eco 101 approach for lacking nuance and sophistication, he is … lacking nuance and sophistication. Why? Take the issue of carbon – he is pulling the wool over your eyes by making you think that the “solution” to climate change is “less carbon.” It most certainly is not THE solution, but it takes more than an Eco 101 approach to illustrate that point, which of course Krugman does not wish to do for his readers. Indeed, such a presumption is making (at least) two tenuous assumptions, one about the nature of climate change itself and another about economic responses to it. Astute readers may figure out what these assumptions are, we’ve written about them dozens of times here already.
Why else? Perhaps more important, and this is a really common lack of nuance in articles like these, is that the “beyond 101” approach requires both models and evidence about the rationality, behavioral foibles, knowledge issues and outright cronyism of actors in the political and administrative sphere. It’s really kitchy to just say, “when people are deciding on how many Reeses Peanut Butter Cups to eat, they often make mistakes” but then of course make the heroic assumption that actors in the political sphere, where trillions of dollars are at stake, are somehow the embodiment of rational economic actors. Phooey I say. Krugman does get one point “right” it is that carbon pricing is in fact NOT the sine qua non of effective action. But he therefore is making a straw-manish argument. Not all good economists think it is the sine qua non, but a good number believe it is a reasonable no-regrets policy particularly when some other policies may be more difficult.
Without printing up for you a massive lecture on the economics of climate change, it sufficies to paraphrase Mr. Krugman’s last paragraph. “The point is that just because clever criticisms of Eco 101 make a smart, counterintuitive point, doesn’t make that point of central importance, here or elsewhere. People should know what is in the snake oil jar (ok, that was a bit harsh); above all, they should read widely in economics, but never imagine that the thoughts of any one person are the be=all and end-all of what matters.