|Title||Economic theory and the transition to sustainability: a comparison of approaches|
|Publication Type||Tyndall Working Paper|
|Series||Tyndall Centre Working Papers|
|Tyndall Consortium Institution|| |
|Secondary Title||Tyndall Centre Working Paper 62|
|Keywords||comparison of approaches, Economic theory, transition to sustainability|
|Year of Publication||2004|
Computable General Equilibrium (CGE) models are widely used in the assessment of policies directed towards sustainable development, such as emission permits for CO2 abatement. This paper argues that these models, based on marginal neoclassical analysis, are too rigid and stylised to represent the system-wide changes necessary over many years if economic development is to become sustainable. Generally they rely on one year's data to project decades into the future, relying on unfounded assumptions to generate the transition from the current economic structure to a sustainable one. They purport to measure the costs of policies for sustainability, but these costs are for marginal changes in models that are based on implausible assumptions about technical change, industrial organisation and consumer behaviour. Furthermore the solutions of the models rely on contrived functional forms of equations, chosen not for their realism but for their tractability. The CGE approach is contrasted with a space-time economics (STE) systems approach based on less restrictive measure theory and numerical analysis that emphasises indivisibilities, externalities, socio-political valuations and economies of specialisation. The conclusion of the paper is that CGE models are misleading and inadequate tools for policy analysis. For long-run sustainability analysis, they are not only misleading but represent a fundamental misunderstanding about economic systems and how they change.