Representing Human Decision-Making in Environmental Modelling - Environmental Modelling: Finding Simplicity in Complexity - page 285

Agreement is the most obvious and important outcome of
this problem. This decoupling looks set to continue how-
ever, as the global modelling community explores ways
to develop scenarios in parallel with the GCMs (rather
than sequentially as described above) to save on comput-
ing time 'to generate larger [GCM] ensembles at higher
resolution, hopefully leading to refined simulations of
regional change and extreme events, and a more robust
representation of uncertainties and/or probabilities [in
understanding the atmosphere]' (Moss et al ., 2008: iv).
Yet again, the emphasis is on the 'hard' science rather
than the root cause of the environmental issue (human
activity and policy making). It is important to tackle both
in order to make progress.

Contemporary economics can be broadly divided
into two branches: macroeconomics, which deals with
national or regional economies as a whole; and micro-
economics, which deals with the economic decision
making of individuals, households, firms and other
agents within those economies. Environmental models
that need to consider human activity over large temporal
and spatial extents (such as global climate-change model-
ling) are more likely to make use principles and models
from macroeconomics because of the consistency in
scales. For the same reasons, human-environmental
modelling on smaller scales is more likely to use models
and approaches from microeconomics.
Standard macroeconomic models depend on projec-
tions of factors such as income, economic activity and
trade with the application of cost-benefit analysis for
different environmental factors. Governmental and inter-
national organizations such as the World Bank will tend to
evaluate costs and benefits relative to gross domestic prod-
uct (GDP) or gross national product (GNP). Cantor and
Yohe (1998) provide an excellent overview of the insights
and limitations of this approach with reference to global
greenhouse gas emissions. The insights include greater
understanding about how economic activity influences
changes in GHG emissions, about how international trade
interacts with economic growth and emissions, the effects
of economic incentives on decisions related to emissions,
and the importance of institutional structures and market
adjustments for emissions.
The limitations Cantor and Yohe describe can be
divided into two categories. First, comparison problems
arise as a result of measurement problems. Comparisons
between countries are difficult because different catego-
rizations may be used, because of the need to evaluate
the relative effects of different activities, and because of
exchange-rate issues. Even though more reliable compar-
isons using purchasing power parities are possible, these
are not usually used by institutions such as the World
Bank, leading to obvious problems in interpretation. It
may also be difficult to evaluate the true level of economic
activity, particularly in less industrialized nations, where
the informal economy has been estimated to be responsi-
ble for 80-98% of activity relative to the GDP, 30-57% of
employment and 33-75% of credit (Shukla, 1994). Other
means are required for evaluating these roles. Ignoring
them would significantly impact on particularly the rural
sectors in less industrialized areas. There is also the related
issue of how to measure inequality at the international
scale, so that issues of equity may be addressed within a
modelling framework.

18.3 Economic modelling

18.3.1 Neoclassical economics

Economics studies human activity and behaviour by con-
sidering the tradeoffs people make between the alternative
uses of scarce resources for desired ends (Robbins, 1932).
Classical economics is founded to a large degree on the
assumption that free markets regulate themselves as an
emergent property of the unintended consequences of
individuals pursuing their own wants and needs (the
'invisible hand' of Adam Smith - Smith, 1776). From the
late nineteenth century, economists transformed their
field by developing theories and methods grounded more
firmly in mathematics and the scientific method. This
neoclassical economics, as it became known, emphasizes
the existence of economic equilibria that result from ratio-
nal actors maximizing their utility and profit, and con-
tinued the idea that economic phenomena (and human
activity) can be explained by aggregating the activities
of many individuals' decision-making. Much of con-
temporary mainstream economic theory and modelling
continues in a similar vein, with three main assumptions:

aggregated outcomes from the sum of all actors' deci-
sions do not differ systematically from what those actors
expected them to be when they made their decisions
(rational expectations);

•

actors' decisions are based on the rational process of
comparing costs with benefits (rational choice theory);

•

a typical decision-making actor can be classified to
be of a certain type and that all actors of the same
type are identical in their decision-making strategy (the
existence of a 'representative agent').

•