Ben Wolcott ‘14 is an honors Economics major and a course major in Sociology and Anthropology. He is not a member of Swarthmore Mountain Justice.
At the recent teach-in about divestment, Professors Kuperberg and Jefferson correctly described the implications of this tactic in a neoclassical world. I am worried that our community is inappropriately privileging their economic arguments. If you want an example, look no further than the Phoenix’s recent news story on the teach-in.
Mainstream economics is a tool that has strengths and weaknesses. At its core, neoclassical theory examines the incentives around actors’ instrumental self-interest in order to describe and predict action given constraints. Unfortunately, neoclassical economics hurts our understanding of both the benefits and the costs of divestment. I will start with the benefits.
While mainstream economics can help us understand situations that encourage people to act in their rational self-interest, it is worse than useless in describing how actors’ value-commitments impact their decisions. Nobel prize-winning economist Amartya Sen famously describes this problem in his 1977 article “Rational Fools.” Sen argues that people often follow their commitments even if it makes them worse off. While this is a hard argument for rational choice theorists to agree to, Sen gives examples of decisions that actors choose even though those options lower their utility.
It is not a coincidence that social movements fit into this category. If people only follow their rational self-interest, many social movements would likely fail due to what economists call the collective action problem. While those on the frontlines of extraction have more immediate incentives to fight, it seems descriptively false to say that all activists have enough of an instrumental reason to dedicate themselves to a movement for climate justice.
While someone who believes in rational choice theory would argue that all activists are committed because their dedication brings them enough utility to outweigh the costs, this falls descriptively flat. Even though rational choice theory is tautological and therefore cannot be proven false, it seems unreasonable to say that many activists pour their hearts and souls into campaigns because it makes them feel good. While those feelings exist, many activists continue to fight even when it does not feel good. They do this because of their value-commitment.
To be clear, mainstream economics can only understand commitments as “preferences,” which every neoclassical model takes as given and consistent. Therefore, a neoclassical economist cannot talk about the growth of social movements because that change in preferences cannot be conceptualized within their models. In contrast, political analysis is helpful in understanding why people have value-commitments and how these commitments are shaped.
This distinction is essential for understanding why political considerations are more important than economic ones when discussing the potential benefits of divestment. While I agree that the tactic will not hurt firms’ profits in the short run, I do not think that any informed person on campus would disagree with this point.
Groups like Mountain Justice see divestment as a crucial strategy to build a social movement that can use students’ positions within institutions of influence to demand meaningful environmental change. Because the economic theory that Professors Kuperberg and Jefferson use cannot meaningfully conceptualize of social movements, it makes sense that they did not factor Swarthmore’s power to create societal change into their presentations. This limitation of neoclassical economics matters because all of the short-term benefits that advocates of divestment claim the tactic could bring are political, not economic.
Still, even if economics cannot conceptualize of the benefits of divestment, it could still help us understand the costs. Professor Jefferson carefully explained how limiting the diversification in our stocks by divesting would raise the risk in our portfolio or lower its return, all other things equal.
Professor Jefferson’s analysis implied that any negative change to the endowment — no matter how small — would set off painful decisions about what cuts to make. This argument is based on the classic assumption “all other things equal.” While this is technically accurate, it gives off the wrong impression. All other things will not be equal.
Opponents of divestment make it seem as though the tactic would force the college to make meaningful cuts because it’s operating budget would be lower than it would be otherwise. This argument fails because the endowment’s relationship to the operating budget is more complex than that.
For example, let’s say that in an average year, the endowment makes a return of 8% plus or minus 5%. If the costs of divestment are small, then it is unlikely that you would ever be able to notice the impact of divestment on the operating budget because the returns shift every year. Recent studies do show that the cost would be small. A 2013 study from the Aperio Group estimates that the cost of divesting from the entire extractive industry would impose a miniscule penalty: .0034%.
To put this in context, the endowment’s rate of return was a shocking 24% two years ago. In that good year, the college only spent about one third of the returns and plowed the rest back into the endowment. Even if the college had divested two years ago, the small cost would have impacted the growth of the endowment and not our operating budget.
While the returns from two years ago are not representative, it is clear that the rate of return on the endowment is constantly shifting. Divestment would not bring up new conversations about difficult budget cuts because any small impact it would have could occur in any year due to variation in the college’s rate of return. Because all other things are never equal, our administrators are already adept at running Swarthmore as the returns on the endowment constantly shift.
It is misleading to imply that our community would have to make tough choices about financial aid, environmental studies, and staff compensation if it divests. It is a scare tactic, and our community should demand that professors and members of the Board of Managers stop using it immediately.
Even if neoclassical theory cannot tell us much about the costs or benefits of divestment, maybe it can point the way for alternative actions. For example, Professor Kuperberg argued that Mountain Justice’s time would be better spent building a movement for a carbon tax at the socially optimal level. One problem with a carbon tax is that no one knows what that level should be.
While most people might argue that we should make it very high due to this uncertainty, the fossil fuel industry has significant power to shape legislation in Congress. Historically, carbon taxes have often been too small because of the power that fossil fuel companies wield. Without countervailing power from somewhere else, it seems unlikely that a meaningful carbon tax will be passed.
Luckily, there’s a nationwide movement trying to build that power right now. It’s called divestment, and it’s growing fast.
Furthermore, after so many economists failed to predict the recent housing bubble, I am surprised that more people are not questioning the stock prices of fossil fuel companies. If you believe that as global warming gets worse, our country will eventually take meaningful environmental action, then you should also believe that fossil fuel stocks are overvalued. Currently, the stock prices of firms that make profits from extraction assume that all found reserves will be burned.
This assumption flies in the face of conservative climate science estimates, which argue that only a third of current reserves can be burned before 2050 if the world is going to avoid climate catastrophe. After HSBC makes this point in a recent study, they argue that for the sector, “the potential value at risk could rise to 40-60% of market cap.” Part of the reason for rational financial markets to fail comes from the inability of financial theory to deal with uncertainty. While risk can be modeled and is incorporated into stock prices, uncertainty cannot.
While a rational actor might try to ride out the bubble until the last moment possible, Swarthmore College should not. I see no real choice between moral leadership and maximizing returns to the endowment.
Ultimately, everyone engaging in this conversation should examine why economists have so much say on a question that is mostly political. In America today, neoclassical economics is a dominant discipline. While its tools can be useful, it often fails to appreciate the complexities of human action.
Economics is often called the “dismal science” partially because it views people as instrumentally rational and cannot meaningfully conceptualize action based on value-commitments. We need every tool at our disposal to address climate change, and it would be dismal if we abandoned divestment due to economic arguments.