The final liberation of Adam Smith

Our profession, Energy Efficiency Promoters, has been held hostage – as has the entire society – by hard-core neo-classical economists for too a long time. But we may now see the end of this captivity. They have preached to us the gospel of Adam Smith and the blessing of the invisible hand. A hand that acts secretly to make the market deliver everything we need according to our preferences, since we have the necessary information and when prices are right. If energy efficiency is good it will be supplied in the right amount. No need to bother - just relax!

Adam Smith had in his opus, “The Wealth of Nations,” shown that when the butcher, the brewer and the baker acted in their pure self-interest they would deliver the right amount of ingredients to his dinner. A Swedish journalist, Katrine Marçal (née Kielos), remarked a few years ago that Mr Smith would still have remained hungry if not his mother had prepared his meals! She did so not as an actor on the market but as an act of motherly care and without being paid. If that also was in her “self-interest” could be debated.

Mr Smith may have been misinterpreted since he also wrote a book “The Theory of Moral Sentiments” in which he claimed that even if man was inclined to be selfish he was understanding himself only by observing other people and thereby the moral in his own activities. This part seems to have disappeared in modern economics and in the mathematization of the discipline. This hard-core interpretation of economics as being, almost as physics, a way to discover the natural “laws” has taken over. It has turned into an engineering science where you learn to design a machine to create welfare. No people involved only invisible hands.

Still this model is useful! Not to design policies BUT as a way to map the territory. By assuming that all humans could be economically rational we are able to calculate how far we can go and how far we are off target. We are actually using this way of thinking every time we think about the potential for energy efficiency. We are doing it when considering the difference between business as usual and the targets we would like to set in terms of economy or climate or jobs or environment or ….It serves well to understand the static dimensions of a society.

BUT this model is NOT useful for designing policies that entice people and organisations to move in the desired direction. For this we need a dynamic model inhabited by HUMANs with all their (our) flaws. Such models require the thinking of behavioural economics. This is the discipline for which Robert H. Thaler was awarded the Nobel Prize in economics this year and for that matter Daniel Kahneman, George Akerlof and Robert Shiller had the same prize in earlier years.

Thaler pronounced in his thank you address after the banquet that he had discovered traces of human life in economics where many other economists avoided such strange existences and preferred the textbook creatures that he calls ECONs.

In the presentation before delivering the prize to Thaler the representative for the Nobel awarding committee had earlier said that this could be seen as the final liberation of Adam Smith! Let us hope that it is so and that we may now turn to a more fruitful debate on how we can design policies that enables people to embrace energy efficiency with enthusiasm.

The views expressed in this column are those of the columnist and do not necessarily reflect the views of eceee or any of its members.