Prices, prices, prices (as opposed to moral rhetoric)

Michael Greenstone, a University of Chicago economist who studies the economic impact of climate change, spoke to a group of about 200 last night at the University of Minnesota. It was the first annual Jon Goldstein Memorial Lecture on Environmental Policy and Economics.

The talk was interesting (more on that later), but perhaps the most quotable moment came at the end of the question and answer session, when an audience member asked Greenstone, who was sitting next to V.V. Chari on the stage, whether the focus shouldn't be on changing the way people live. Greenstone had said the problem we need to solve is to more accurately set the prices for energy, which currently don't account for the costs of consumption.

But the questioner said energy consumption is a function of people's lifestyles and societal norms. Shouldn't we all focus on changing the way people live instead of the prices of energy?

Greenstone smiled.

"OK, so that is a fabulous question and I'm just going to knock that one right out of the park here," he said. "I will reveal how narrow-minded I am in this answer, and you can walk out of here with a sense of moral superiority that I don't understand the way the world works, but as an economist, what's the answer? It's prices. All that stuff is a function of prices. Your norms and your this and your that, the way society's are formed and cities are shaped, that's all a function of the prices we set out and people respond to those prices."

"How's that?" Greenstone asked Chari.

Chari squared up and lifted his metaphorical bat.

"I think Michael hit it out of the park, but just to hit the park out of the park, here is a depressing statement about human beings," he said. "Preaching, moralizing, and hoping to change lifestyles by rhetoric alone, we've tried that zillions of times. The depressing statement about people is when it finally comes down to making decisions, especially important, pocketbook-oriented decisions, prices, prices, prices, prices. That's, at the end of the day, what people seem to respond to."

That feature of human beings, he said, may be depressing, but it's what we should design public policy around.