“Towards a shift in paradigms? : how uncertainty about future climate change may contribute to increased institutionalization of the economy”

Abstract

This thesis is based on theory and secondary data seen in a context of climate change and uncertainty, with the overall purpose of commenting on possible future conditions of the economy. It argues that there is reason to expect increased institutionalization, with a possible shift in paradigms, from neoclassical to institutional economics, as an extreme. The main objective of the thesis is to argue this possibility. It constructs a plausible causal relationship wherein neoclassical utility- and profit-maximizing individuals and companies experience severe complications in risk assessment and management as a result of the unpredictability associated with consequences of climate change. Cost-benefit analysis (CBA), a traditional risk assessment tool, shows signs of insufficiency in estimating the costbenefit ratios of climate change mitigation, particularly when applied in calculation of the probabilities for catastrophic events. This has implications for the general economy, as incentives arise to change the focus of risk assessment from exclusively attempting to predict future costs and losses, to also include an evaluation and possible strengthening of the present resilience and adaptive capabilities of partners and other actors in the economy. These incentives are strengthened since the insurance industry, as a primary manager of risk, experience the same problems in calculating probabilities for the occurrence of adverse events as the general economy. Estimating degree of risk is thus problematized, which subsequently complicates pricing of insurance products. Ultimately, increasing and unmanageable risk is an incentive to buy insurance for most actors, yet a disincentive for the insurance industry to sell. There are examples that insurance companies have refused insurance renewals after severe events, a strategy which fits perfectly with the neoclassical assumption of actors as utility- and profit-maximizing. Thus, some responsibility for managing risk may devolve to individuals and companies, whose interrelations are also increasingly laden with risks and uncertainties deriving from social and strategic issues. These are negatively influenced by the unpredictability of climate change, which indicates a mutually reinforcing interdependency. Social and strategic issues are fast becoming primary corporate concerns, which explain the rapidly evolving concept of Corporate Social Responsibility. Complemented by the loss of direct control over value chains modern network-based global business entails, this would presumably cause companies to integrate closer on local level to retain control, whereby also local communities and companies might benefit. Extended cooperation and long-time interaction suggests institutional growth, which could contribute to a shift in paradigms.