Scotonomics: Neoclassical economists are missing this truth

THE phrases "path dependency" and “lock-in” mean that the past impacts the future. Of course, it does. Could you even make a more obvious statement?

Your decision to buy a particular brand of chocolate bar is influenced by how much you enjoyed that chocolate bar in the past. Your consumption now is “path dependent”. You won’t buy a vinyl record if you don’t own a record player. This isn’t really an option for you because you are “locked in” to listening to digital music.

We can all see how the past affects our decisions now and in the future. This is all too obvious, isn't it?

According to the mainstream economic narrative that drives policy in Scotland, the UK and governments across the globe, your decisions are unaffected by the past, and they are made solely using the price signal. So stop for a few seconds and try to remember when you bought something solely down to its price. I will leave you there for a while…

As I am sure you just realised, we only occasionally make decisions solely based on price. The £35 billion advertising industry in the UK wouldn’t exist if we were like the singularly price-focused individuals created by neoclassical economists. Under this particular and peculiar view of humans, we have no biases or favourites, and we never use any kind of mental shortcut to help us move through the day.

Like most of the assumptions neoclassical economists use, they are self-evidently untrue and not based on the real world. Yet, they form the basis of policy.

If only these assumptions stayed in the textbooks, but they instead drive policy. They have huge implications for our society, especially regarding the climate and biodiversity crisis. Policy is driven by the assumption that all we have to do is concentrate on the price of renewable energy, and all will be well.

SO, HOW IS THAT GOING?

LESS than 15% of electricity across the globe is generated by renewables.

Replacing electricity generated by oil and gas with renewables should be fairly straightforward for countries in the global north with a well-developed market for electricity generation, and price should be a massive incentive.

Last year, the UN reported that renewables were now cheaper than fossil fuels, yet around 44% of electricity in the UK still comes from fossil fuels, and it is almost 60% in the US. What is happening? Why are we still using fossil fuels if renewables are cheaper? The answer is, of course, that path dependency and lock-in are more important than price.

Path dependency has the annoying habit of turning good news into OK (at best) news.

A recent announcement from the International Energy Association (IEA) looks less encouraging when we think about path dependency: “The world added 50% more renewable capacity in 2023 than in 2022 and the next five years will see the fastest growth."

Like all global organisations, the IEA uses neoclassical economic models that do not factor in the real world's path dependency and lock-in. In their world, all that needs to happen is to continue to reduce the price of renewables, and all will be well. I am sure we will see renewable capacity growing in the next five years, but at some point, the real world will kick in.

Moving to renewables is challenging enough in the global north, and I believe that without significant restructuring of the global order, including cancelling debt for highly indebted nations, the problems in the global south will be insurmountable. Many countries in the global south currently rely on fossil fuels for more than 90% of their electricity generation and close to 100% when considering total energy consumption. Switching to renewable electricity generation is a doddle when compared to replacing fossil fuels in overall energy use.

This chart accounts for all the energy we use. Renewable energy use as of 2022 is around 5% of total energy consumption. Renewables use is growing, but so too is the use of fossil fuels. We are not even at a place where renewables are replacing fossil fuels; renewables add to the overall global energy use.

LOCKED IN

MUCH of the global economy is “locked in” to fossil fuels. Price has no impact. For example, it does not matter how cheap it is to power an electric car if there is no infrastructure to support those vehicles. And, of course, it doesn't matter how much cheaper it is per mile if you cannot afford to buy an electric car. If you are not connected to the grid, it matters little if electricity is cheaper than burning biomass.

Cultural and social norms also ensure we are locked in on certain paths. We find it difficult to break certain historical and cultural ties; for example, much North African cooking is done in clay pots on charcoal. How easy is it to switch to electricity? In the book Collapse: How Societies Choose To Fail Or Succeed, Jared Diamond links this type of cultural lock-in to the collapse of civilisations.

Neoclassical models see none of this. Professor Steve Keen recently tweeted: “None So Blind As Those Who Will Not See. Half a century of dealing with neoclassical economists has taught me to expect them to have zero comprehension of the bleedingly obvious.”

Understanding individuals as social animals opens a new perspective on adapting to change. Realising that we are locked into certain paths helps us see the real-world conditions and options that lay ahead of us, and perhaps most importantly, it tells us that price and the market will not solve all of our problems.

A real-world approach is currently missing from neoclassically dominated policy discussions in Scotland. This is a worrying situation for anyone interested in a liveable planet.