Post-Keynesian consumer choice for the economics of sustainable forest management

1
Post-Keynesian consumer choice for the
economics of sustainable forest management

• Marc Lavoie
• University of Ottawa

2
Heterodox vs Orthodox economics

• NON-ORTHODOX PARADIGM
• HETERODOX PARADIGM
• POST-CLASSICAL PARADIGM
• RADICAL POLITICAL ECONOMY
• REVIVAL OF POLITICAL ECONOMY

• ORTHODOX PARADIGM
• DOMINANT PARADIGM
• THE MAINSTREAM
• NEOCLASSICAL ECONOMICS

3
Examples of heterodox schools

• Post-Keynesians
• Marxists, Radicals
• Institutionalits
• Social and Humanistic economists
• Structuralists
• New Keynesians of the third kind?

4
Presuppositions of heterodox and orthodox
programmes
Paradigm Paradigm
Presupposition Heterodoxy Orthodoxy
Epistemology Realism Instrumentalism
Ontology Holism Individualism
Rationality Ecological rationality Hyper rationality
Theoretical Core Production, growth Exchange, scarcity
Political core State Intervention Free markets
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POST-KEYNESIAN FEATURES

• The principle of effective demand
• Both in the short and in the long run
• The importance and irreversibility of time
• Historical time
• (Knightian) Fundamental uncertainty
• Dynamics, the traverse
• Hysteresis
• Multiple equilibria
• No confidence in market mechanisms and price
  substitution effects to bring about optimal
  solutions
• (e.g., Cambridge capital controversies)
• Pluralism of methods and theories

6
PK choice theory

• Not that much has been written
• However, what has been written by the best-known
  PK writers is relatively consistent
• Joan Robinson, Luigi Pasinetti, Alfred Eichner

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PK choice theory Inspiration

• René Roy (Econometrica 1943)
• Nicholas Georgescu-Roegen 1954, 1966
• Peter Earl 1983, 1986, now editor of Journal of
  Psychological Economics
• Some work in behavioural economics
• Humanistic economics (Lutz and Lux 1979)

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Seven PK principles of choice

• Procedural/Ecological rationality
• Non-compensatory rules
• Satiable needs
• Tresholds
• Separability of needs
• Utility trees, incommensurability, incongruity,
  weak comparability
• Subordination of needs
• Hierarchy, irreducibility, dominance,
  lexicographic choice
• Growth of needs (income effects)
• Non-independence
• Imitation, lifestyles, marketing (J.K. Galbraith,
  Veblen)
• Heredity
• Choices are reference dependent path dependence

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PK vs Ecological economics

• Tight links between PK and ecological economics
  of choice
• The precautionary principle (radical uncertainty)
• The heredidity principle
• Multidimensional choice
• Choices without prices without apologies 

10
Lexicographic choice in ecological economics

• Edwards 1986
• Stevens 1991
• Lockwood 1996
• Spash and Manley 1998
• Spash 1998
• Van den Bergh et al. 2000
• Gowdy and Ayumi 2001
• Dismissal of the neoclassical axiom of
  indifference (axiom of continuity) or axiom of
  gross substitution

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Figure 1 The neoclassical indifference approach
and the hesitation region
Neoclassical B gt A C lt A there exists D A DAD
indifference curve
Ecological Hesitation areas Intransitive choices,
weakly comparable
Y
B
?
Indifference area hesitation region
More preferred area
D
?
B
?
A
?
y0
?
?
C
D
Less preferred area
Indifference area hesitation region
?
C
F
f0
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Figure 2Choices of a lexicographic nature with
thresholds
B gt B gt A gt A gt D gt C No continuity D not A
Y
?
B
A
?
More preferred area
Less preferred area
D
B
?
?
A
?
y0
Threshold
?
C
Less preferred area
Less preferred area
F
f0
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Implications of lexicographic ordering for
contingency evaluation

• In theory, WTP and WTA (WTS) estimates should be
  very close to each other
• In practice, WTA gtgt WTP (Knetsch, Gowdy),
  specially in cases of incommensurability
• Possible explanations
• Heredity principle (we hold on more dearly to
  something which we already have)
• Ordering of a lexicographic nature

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Anomalous responses in contingency studies

• Large number of zero bids
• Large number of infinite bids
• Several refusals to bid
• The willingness to sell will be undefined for
  agents that hold preferences of a lexicographic
  nature whenever their income exceeds their
  minimum standard of living. In that case, an
  altruist committed to the welfare of wildlife and
  future generations is expected to protest against
  contingent markets when asked for minimum WTS by
  either refusing to bid, bidding zero dollars, or
  bidding an extremely high amount (Edwards 1986,
  149).

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Lexicographic ordering

• Lockwood (1996, 99) concludes that his pilot
  study shows that some individuals do have
  complex preference maps which include regions of
  lexicographic preference for the protection of
  native forests from logging.
• Stevens and al. (1991, 398) claim that most
  respondents gave answers that were inconsistent
  with both the neoclassical trade-off approach or
  the lexicographic theory. However, 80 percent of
  the remainder gave responses that were consistent
  with lexicographic preference orderings.

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Further evidence of ordering of a lexicographic
nature

• Spash and Hanley (1995) have investigated the
  motives behind zero bids. They found that nearly
  none of the zero bids were given for reasons of
  zero value. Rather, some participants to the
  study said that they could not afford to pay
  anything, while most zero-bidders claimed that
  ecosystem rights ought to be protected at all
  costs, and hence should be protected by law.
• Kahneman and Knetsch (1992, 69) claim that
  participants to contingency evaluation are bound
  to respond with indignation to questions about
  accepting more pollution over existing pristine
  landscapes, this indignation being expressed by
  the rejection of the transaction as
  illegitimate, or by absurdly high bids.

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Figure 3Neoclassical contingency value
assessment, with indifference curves
Income Y
WTA yd y0 WTP y0 yc Nearly equal A D,
B C
?
D
yd
B
y0
A
?
?
U0
yc
C
?
U-
Forest size F
f0
fd
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Figure 4 Contingency value assessment with
choices of a lexicographic nature
quasi-indifference curves(graph Edwards 1986
algebra Lockwood 1996)
Y
Start at A Apparent WTP ya y But B is not
to C, C gt B WTP underestimates the true value of
the forest WTA is infinite or undefined
B
A
ya
?
?
C
D
?
?
Threshold y
G
E
ye
?
?
F
f0
fd
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Conclusion

• WTP and WTA can arrive at widely different
  estimates
• WTP does not correctly reflect the willingness to
  trade of the consumer
• WTA most likely also underestimates the value
  attributed to the public good, specially if
  apparent excessively-high bids are rejected.

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Theater and lexicographic ordering Jean Anouilh,
Linvitation au château, 1951

• M How much do you want to leave without seeing
  him again?
• I Nothing, Sir. I did not intend to see him
  again.
• M Miss, I dont like it when things are free.
• I Do free things worry you?
• M They seem priceless to me.... I find you very
  likeable and I am willing to be very generous to
  you. How much do you want?
• I Nothing, Sir.
• M Its too dear.
• M Messerchman I Isabelle