Decarbonization: A Keynesian View

The International Economy has asked me to take part in a couple of their recent roundtables on economic policy. My first contribution, on productivity growth, is here (scroll down). My second one, on green investment, is below. But first, I want to explain a little more what I was trying to do with it.

I am not trying to minimize that challenge of dealing with the climate change. But I do want to reject one common way of thinking about those challenges — as a “cost”, as some quantity of other needs that will have to go unmet. I reject it because output isn’t fixed — a serious effort to deal with climate change will presumably lead to a boom with much higher levels of employment and investment. And more broadly I reject it because it’s profoundly wrong to think of the complex activities of production as being equivalent to a certain quantity of “stuff”.

There’s a Marxist version of this, which I also reject — that the reproduction of capitalism requires an ever-increasing flow of material inputs and outputs, which rules out any kind of environmental sustainability. I think this mistakenly equates the situation facing the individual capitalist — the need to maximize money sales relative to money outlays — with the logic of the system as a whole. There is no necessary link between endless accumulation of money and any particular transformation of the material world. To me the real reason capitalism makes it so hard to address climate change isn’t any objective need to dump carbon into the atmosphere. It’s the obstacles that private property and the pursuit of profit — and their supporting ideologies — create for any kind of conscious reorganization of productive activity.

The question was, who will be the winners and losers from the transition away from carbon? Here’s what I wrote:

The response to climate change is often conceived as a form of austerity—how much consumption must we give up today to avoid the costs of an uninhabitable planet tomorrow? This way of thinking is natural for economists, brought up to think in terms of the allocation of scarce means among competing ends. By some means or other—prices, permits, or plans—part of our fixed stock of resources must, in this view, be used to prevent (or cope with) climate change, reducing the resources available to meet other needs.

The economics of climate change look quite different from a Keynesian perspective, in which demand constraints are pervasive and the fundamental economic problem is not scarcity but coordination. In this view, the real resources for decarbonization will not have to be with- drawn from other uses. They can come from an expansion of society’s productive capabilities, thanks to the demand created by clean-energy investment itself. Addressing climate change need not imply a lower standard of living—if it boosts employment and steps up the pace of technological change, it may well lead to a higher one.

People rightly compare the scale of the transition to clean technologies to the mobilization for World War II. Often forgotten, though, is that in countries spared the direct destruction of the fighting, like the United States, wartime mobilization did not crowd out civilian production. Instead, it led to a remarkable acceleration of employment and productivity growth. Production of a liberty ship required 1,200 man hours in 1941, only 500 by 1944. These rapid productivity gains, spurred by the high-pressure economy of the war, meant there was no overall tradeoff between more guns and more butter.

At the same time, the degree to which all wartime economies—even the United States—were centrally planned, reinforces a lesson that economic historians such as Alexander Gerschenkron and Alice Amsden have drawn from the experience of late industrializers: however effective decentralized markets may be at allocating resources at the margin, there is a limit to the speed and scale on which they can operate. The larger and faster the redirection of production, the more it requires conscious direction—though not necessarily by the state.

In a world where output is fundamentally limited by demand, action to deal with climate change doesn’t require sacrifice. Do we really live in such a world? Think back a few years, when macroeconomic discussions were all about secular stagnation and savings gluts. The headlines may have faded, but the conditions that prompted them have not. There’s good reason to think that the main limit to capital spending still is not scarce savings, but limited outlets for profitable investment, and that the key obstacle to faster growth is not technology or “structural” constraints, but the willingness of people to spend money. Bringing clean energy to scale will call forth new spending, both public and private, in abundance.

Of course, not everyone will benefit from the clean energy boom. The problem of stranded assets is real— any effective response to climate change will mean that much of the world’s coal and oil never comes out of the ground. But it’s not clear how far this problem extends beyond the fossil fuel sector. For manufacturers, even in the most carbon-intensive industries, only a small part of their value as enterprises comes from the capital equipment they own. More important is their role in coordinating production—a role that conventional economic models, myopically focused on coordination through markets, have largely ignored. organizing complex production processes, and maintaining trust and cooperation among the various participants in them, are difficult problems, solved not by markets but by the firm as an ongoing social organism. This coordination function will retain its value even as production itself is transformed.