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. NON-ORTHODOX PARADIGM HETERODOX PARADIGM POST-CLASSICAL PARADIGM RADICAL POLITICAL ECONOMY REVIVAL OF POLITICAL ECONOMY ORTHODOX PARADIGM DOMINANT PARADIGM THE MAINSTREAM NEOCLASSICAL ECONOMICS Heterodox vs Orthodox 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

5. 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

7. 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)

8. 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

9. 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

11. Figure 1 The neoclassical indifference approach and the hesitation region Neoclassical: B > A C < 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

12. Figure 2Choices of a lexicographic nature with thresholds B > B’ > A’ > A > D > C No continuity: D not = A Y A’  B  More preferred area Less preferred area D B’   A y0  Threshold  C Less preferred area Less preferred area F f0

13. Implications of lexicographic ordering for contingency evaluation • In theory, WTP and WTA (WTS) estimates should be very close to each other • In practice, WTA >> 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

14. 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).

15. 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”.

16. 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”.

17. Figure 3Neoclassical contingency value assessment, with indifference curves Income Y WTA = yd – y0 WTP = y0 – yc Nearly equal A = D, B = C  D yd y0 B A   U0 yc C  U- Forest size F fd f0

18. 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 > B WTP underestimates the true value of the forest WTA is infinite or undefined B A ya   D C   Threshold y* G E ye   F f0 fd

19. 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.

20. Theater and lexicographic ordering: Jean Anouilh, L’invitation 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 don’t 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: It’s too dear. • M: Messerchman ; I : Isabelle