Representing Human Decision-Making in Environmental Modelling - Environmental Modelling: Finding Simplicity in Complexity - page 286

Secondly, there are some difficult conceptual problems
that stem from the 'homogenizing' assumptions of
mainstream economic theory used in macroeconomics
(rational choice theory, representative agents, etc.).
Different sociopolitical conditions may influence the
pathways of economic growth followed by developing
countries. The ways in which industrialization occurs in
different countries may differentially affect the rates at
which greenhouse-gas emissions (GHG) are produced.
Another issue is how social and cultural differences
between countries and regions are accounted for. If
these differences are ignored, any policy developed
will be difficult or impossible to implement effectively.
Again, 'one-size-fits-all' models (like 'one-size-fits-all'
policies) are likely to be inappropriate. Finally, different
ideas of sustainability suggest highly contrasting views:
optimism that technological fixes will be possible due
to continued economic growth, pessimism that major
thresholds will be crossed leading to catastrophic decline
in environmental resources and economic growth,
or intermediate viewpoints relating to different levels
of adaptation (Figure 18.2). The standard approach
is to produce a series of scenarios based on these
viewpoints. If only a single viewpoint is acknowledged,
modelling outcomes and interpretations are likely to
be biased.
Two examples provide a good illustration of some
of these comparative and conceptual issues. Gielen and
Yagita (2002) modelled the impacts of different policies
to reduce greenhouse gases on global trade in the petro-
chemical industry. Using six regions - western Europe,
Japan, North America, eastern Europe, the Middle East
and the rest of the world - they simulated demand for
CO 2 emissions at different stages in the production cycle
of 50 petrochemicals. Energy and transportation costs
were considered along with other constraints such as
resource availability. Different scenarios were assessed
using taxes on greenhouse gases applied either globally,
or to specific regional subsets. Without imposition of
taxes, they projected a 67% increase in CO 2 emissions
from 1995 to 2025. This outcome is compared to decreases
of 4% with taxes of 7,500 t − 1 (approximately $US65 t − 1
in 2000) in western Europe and up to 58% with global
taxes of 15,000 t − 1 . However, in the case of nonglobal
taxes, production may only shift location and such an
approach to abatement has led many to suggest that it
would be infeasible due to the high costs. In contrast, Azar
and Schneider (2002) used a macroeconomic model to
suggest the costs of reducing CO 2 emissions to maintain
350 ppm in 2100 were of the order of $18 (US) trillion

(10 12 ) discounted to 1990 values. This figure may seem
high compared to a total world economy of $20 trillion
in 1990, but the standard approach is to assume income
growth over the same period, and put in this context the
extra cost is marginal. These examples demonstrate once
again the need for extreme care in interpreting results, in
assessing and comparing assumptions and scenarios, and
ensuring that our results are not misinterpreted by others.
The assumptions of macroeconomics and its ability
to forecast future economic activity have been criticized
more recently in light of the global economic slump
that began as a 'subprime' mortgage default problem
in the Unites States in 2007. Some of the more force-
ful criticisms (from economists themselves) blame the
field of economics for being blinded by the beauty of
its elegant simplifications and axioms, failing to see
where its assumptions and idealizations fail to match
the vagaries of empirical day-to-day economic activity
and behaviour (e.g. Bouchard 2008; Krugman 2009; and
discussion in Sheppard, 2011). The charge is that neo-
classical economists have been seduced by their models;
as warned in Chapter 2, they are now finding that their
models do not love them back. Former chairman of the
US Federal Reserve System Alan Greenspan has himself
admitted that he overestimated the ability of free markets
to regulate themselves and that his 'model' (i.e. under-
standing of how economies function) had been wrong
(Davidson, 2009). Bouchard (2008) has argued that neo-
classical economists need to re-establish their roots in
the positivist scientific method that began their field, and
develop more pragmatic and realistic representations of
what actually happens in the 'wild' and 'messy' free mar-
kets. Krugman (2009) has argued that 'flaws-and-frictions
economics' (emphasizing imperfect decision-making and
rejecting ideas of a perfectly free 'friction-less' market) will
become more important and that behavioural economics
will help to facilitate that charge.

18.3.2 Behavioural economics

Behavioural economics incorporates scientific research
on social, cognitive and emotional factors to understand
better economic decision-making (currently generally
microeconomic analyses). As a field, it has grown since
the mid-twentieth century in parallel with the field of
psychology and partly in response to the recognition
that neoclassical models of purely self-interested, oppor-
tunistic agents are destined to make important errors in
predicting actual human behaviour (Frank, 2006). The
Prisoner's Dilemma game, one of the prime examples