Friday, September 26, 2008

New wikipedia entry

Just a short note this time.

I have written a new wikipedia entry for the Rebound Effect - which many of you would know is the topic of my thesis. If you are interested in a brief summary of what I have been spending my time on this past year, take a look.

http://en.wikipedia.org/wiki/Rebound_effect_(conservation)

Wednesday, September 24, 2008

The Tyranny of Choice

No, the title is not original and there is a good reason for this – choices have long been a source of concern for many people. And in recent years, choices have grown at a rapid rate. The question posed by Barry Schwartz, author of the book The Paradox of Choice, is whether all this choice has improved the welfare of society. Or, as he suggests, has the dazzling array of choices put as all at a disadvantage. How does this paradox occur?

First imagine choosing an ice-cream flavour. First you go to a store with only chocolate and vanilla. You weigh up the benefits of each flavour against the other, and make a choice. If you choose chocolate, vanilla is what economists term the opportunity cost. It is the forgone alternative for making a decision. Every time we make a choice, not only are we choosing one alternative, we are choosing to forgo another.

No let’s consider an ice-cream store with 30 flavours. To make a decision here, you need to weigh up the benefits of each of the 30 flavours to decide which is preferred. This is no mean feat, considering the likely limitations in knowledge of each of the flavours. When we decide, the opportunity cost of the decision is any one of the 29 other flavours we have forgone. And quite simply, the more alternatives we forgo, the less likely we are to be assured that the decision we made was the best alternative. In fact, people are much less happy with the decision they made when there are more alternatives, even if it is definitely the best one for them. This is because there is only a slight benefit over the second best alternative, and people only judge outcomes on this marginal benefit.

Also, if we compare ice-cream flavours in a pairwise manner, which means comparing two at a time, to determine our preferred flavour, we end up with 2¬30 small decisions to make, equal to the one we made at the previous store when we only had to decide between chocolate and vanilla. This can often lead to decision paralysis, where we simply avoid the choice because the process of making a choice itself is such a burden that the ice-cream will not make up for it.

Decision paralysis can bee seen widely in everyday life. At the moment, a friend of mine is visiting from abroad, and is trying to make a choice about his direction in life. Because there are so many options to choose he cannot pick one over the other, and when he does choose, there will be a second best alternative very close to as good as the one he takes, which he will always compare himself to.

In behavioural economics experiments it has been clearly shown that too much choice is a hindrance. For example, consider those free taste tests you sometimes get at the supermarket. It has been shown that it is best not to give too many options. The taste tests that give less than five varieties get more people to buy any one of them than taste tests with ten or more varieties. Also, companies that offer only three or fewer alternative health insurance plans to their employees in the US, get a much higher uptake in insurance than those who offer between ten and thirty different plans.

This leaves us in a tricky situation. If we only derive satisfaction from the benefit we get from a choice compared with the next best alternative, than too much choice is bring down human welfare. It is making us unhappy. But is there an optimal amount of choice?

Friday, September 19, 2008

Valuing the apples and bananas

It has come up for discussion in blogs, at bbqs, and international conventions, but we are still no closer to a workable solution for valuing the environment. When I say environment, what I mean specifically are natural ecological systems. And when I say valuing, I mean determining the contribution of these systems to the welfare of humanity. The difficulty for environmental economists is determining the value of these ecological systems in a common measure with the value we derived from conventional consumption – that is, in dollar terms. If we can establish a value for the environment it becomes a simple procedure to evaluate the human welfare implications of any land development.

So how do we go about comparing apples (the welfare we gain from the environment) and bananas (the welfare we gain from consumption)? One approach often used is to estimate the contribution of one particular ecological service, for example pollination by insects, to the economic production (http://news.mongabay.com/2008/0916-pollination.html). But this conventional approach estimates the contribution of ecological services to the production of real goods – in the pollination example, the contribution to agricultural production. By this only tells half the story. It tells the banana story, as it only looks at the value to production. The apple story is the welfare we gain from pollination in terms of its role in ecological systems that provide us with clean air, water, and any other non-economic way it which it improves the human experience. We cannot maximise human welfare without an estimate of apples and bananas.

The only reason we have certainty that conventional consumption (the stuff money can buy) provides us with increased welfare is because we are willing to pay for it. If we are voluntarily willing to give up other consumption for consumption of that good we must be benefiting. But if we take this willingness to pay principle to the environment, we face some hurdles. First, imaging your willingness to pay for a day’s breathable air. For me, it is almost infinite (if there is no alternative way of getting breathable air). Then we can look at water. A man dying of thirst in the desert would pay his life’s fortune for a little clean water. So in a way, we could say that these environmental services we get each day for free are infinitely valuable.

But most of us still receive these free environmental services each day even though we have severely disrupted the ecological systems that support it. So how do we know whether development that destroys ecological systems leads to a reduction in the welfare?

These are just some of the hurdles we face when trying incorporate the value to humanity from the environment into consideration. If you know of other concerns, please let me know. This is a big topic that will be the focus of much future research.

Wednesday, September 10, 2008

Too fat to fail

I remember a quirky line from Richard Branson’s autobiography. It went something like this – if you borrow $40,000 from the bank and can’t repay, it’s your problem, but if you borrow $40million and can’t repay, it’s the bank’s problem. He was talking about borrowing to buy planes for Virgin airlines, but a similar principle applies in so many places – the larger your business, the more people who have an interest in keeping it going. This includes the lenders but also the employees, other firms that do business with you, and the customers.

The reason I raise this point is because of the US Federal government bailout of Freddie Mac and Fannie Mae - both private firms dealing in the secondary market for mortgages. While Fannie Mae is a former government agency, and was privatised in 1968, Freddie Mac is a wholly private company, chartered by the US congress in 1970 to provide competition in the secondary mortgage market. All assets of these companies are solely owned by the shareholders, who also reap the profits from their investment.

So we see an interesting dilemma. For an economist, competition between producers provides great benefits to society by responding to demands and pushing down prices. However, inherent in this competitive environment is that businesses will occasionally fail. Problems arise when firms become very large. You can imagine that if the Queensland bank Suncorp went broke – that’s 9000 people out of a job, not to mention the problems with people who are insured by them, and flow on effects to other businesses.

I think economists often forget that their model of perfect markets is far removed from reality. In this model there are a large number of buyers and sellers, and no barriers to entry. Any market with few players and high capital costs is not perfectly competitive. If a firm fails in these oligopolistic markets there can be quite a degree of social disruption. Governments see these social costs as motivation for bailing out large firms. The US, an icon of capitalism, has probably the worst track record for corporate bailouts, with the airline industry post 9-11 another example.

What is most interesting about the bailout of the two secondary mortgage market players is that the intention is to prop up the whole economy. But you don’t see the government propping up the family fish and chip shop, or the local grocer, even though that is their intention in the end. One must wonder what criteria is used to determine whether a corporate bailout will or will not occur.

It is a surprising that any government would go ahead and privatise an industry if they are going to guarantee the newly created private firm against bankruptcy anyway. One criteria for privatisation much surely be that the firm be allowed to go bust. In any case, the issue over excessive scale of corporate enterprise, to the point where failure of the firm creates massive social disruption, should be an issue for governments worldwide.

Any thoughts on this type of government involvement in private enterprise?

Tuesday, September 2, 2008

Change required for change - a common conundrum

I have witnessed an interesting trend from experts lately. And probably have for a long time, but only recently noticed. They all simply state the obvious - change can happen when change happens.

Maybe an example would help me explain. I watched an interesting movie lately called Where in the world is Osama bin Laden. The guy from Supersize Me goes in search of bin Laden, and along the way interviews an expert on the Middle East. He says, that peace will come, but whenever the process gets started, someone goes and blows something up. Only when people stop fighting for long enough can we begin the peace process. To translate – when peace comes, peace comes. The ‘process of peace’ is peace itself – so where on Earth do you start?

Another example. On the news a few nights ago, an expert on eating disorders said (and I’ll just paraphrase) “that people need to accept their eating disorder and overcome their emotional attachment before therapy can take place”. So, therapy only works if you’ve already cured yourself!

This got me thinking about the origins of change. If the experts can at best say that change comes because change comes, where did it really come from?

I think I’ve found an answer in agent-based computational modelling (ACM). What is that you might ask? Well it’s basically a computer tool that can show how the individual actions of agents (people) in an environment can generate order on a macro level. You simply give each agent a set of rules to live by, and then run the program. As the agents interact with each other and their environment, they simply follow the rules, and you often get amazing patterns occurring.

ACM has been used to show how cooperation can emerge from a population of selfish individuals. As they interact they learn how cooperation can bring beneficial outcomes. But occasionally one of the agents stops cooperating, and depending on the strategy of the others, they can all act selfishly again. But then, cooperation can build up once more.

There are parallels between this and the dilemma of peace in the Middle East. When peace appears to be on its way, one agent stops cooperating, then all the previous cooperation collapses. Then the whole thing starts again.

ACM also has found that long periods of cooperation actually reinforces cooperation by making individuals tolerant of small discrepancies from other agents. But at some point agents will begins to abuse this tolerance. They will free ride, until there are so many free-riders that the others stop benefiting from cooperation, and we start the process once more. The optimistic finding of one of these models is that after a few long periods of peace, a final period of peace emerged that was sustained until the limits of computational power. My only concern is that in this model agents lived forever, and my suspicion is that if agents reproduce, due to lack of experience of the population, the chances of getting to this point are much lower.

Anyway, the expert was right the peace is needed for peace.

The big feature of ACM is that radical changes can appear to happen spontaneously in an environmental where every agent is simple following the same set of rules. Individual actions change even though the rules they are applying stay the same. So the eating disorder person may simply one day ‘snap out of it’ simply because the unconscious, instinctual rules tell us to – just like the got us into it in the first place.

I would like some more examples of change requiring change if you have any.

Sunday, August 31, 2008

Population - the forbidden debate

A newspaper article this morning got me thinking about the untouchable issue of population growth. It is available here. Basically, the article publicised the not so surprising fact that SE Queensland’s rate of population growth is slowing. But what it did mention was the causal relationship between the supply of housing and population growth.

If we are to believe this article then increasing the supply of housing causes population growth – it must be true if the opposite is true. We have probably heard the phrase ‘build it and they will come’. Such a saying did not gain popularity because it is irrelevant. It gained popularity because is very close to the truth. If you would like an rather academic discussion of Say’s law – the theoretical argument that supply constitutes demand, have a read here.

The main point I want to raise today is that population growth is not something we respond to, as the state government so often puts it. It is something that comes about in response to economic conditions. When there is a boom – high growth. When there is a bust – low growth. Just today I sat in a seminar on the impact of war on reproductive rates of women. And yes, the supply of men also has an impact on reproductive rates and population. Imagine how well we could plan cities, towns, and infrastructure, as well as putting away areas for conservation, if we knew which factors highly influenced peoples reproductive decisions. We could plan, knowing in advance, the flow on effects from our policies. I wonder how much discussion was had before the introduction of the baby bonus? Or even discussion of the need for such direct stimulation, if indirect means can be equally effective.

So why would I raise population growth as an issue. Because for an economist environmentalist, labour supply is an important component in determining the net environmental impact of society. The more people we have, the more man/woman hours can be put to work producing goods and consuming natural resources.

The question we need to ask ourselves is what population we would like? It seems pretty radical to think about this. It brings images of China, oppression, and a violation of peoples right to reproduce. But this need not be so. While the Chinese have targeted population growth directly, if we believe that external factors influence population growth, then all we need to do is manipulate these factors to give people incentive not to reproduce. If we want more growth – just build more houses.

Monday, August 25, 2008

Thinking about the little things

I want to take up a topic that probably not many other bloggers have dealt with – dog poo. Why is this an issue for an economist environmentalist you might ask? Because today I was chastised for letting the dog poo in the park, and it got me thinking about the inconsistency in many of our actions.

Now, I try and clean up after the dog when we walk – it seems ridiculous to leave dog poo on the footpath where it is likely to be stood on. But he doesn’t like doing his business out in the open, and generally finds a spot in a garden to do it (not a private garden, but I am trying to describe the type of area he likes). If this is the case, I leave it. And, this was the case today.

But it got me thinking about the whole dog poo in a plastic bag philosophy. I know that this type of regulation is trying to avoid poo all over the streets, but I sometimes see how ironic the situation can get. We go to get groceries and are told to refuse a bag, and then told in the next breath to get a bag for the dogs poo, which will then be trucked to some far away landfill, to wait thousands of years for the plastic bag to breakdown and be back on it’s way back through the ecosystem. And at the same time all of this is happening, we truck in poo from other animals of choice to put on the garden to help the plants grow. So after all of this, I get the feeling that no bag is a more logical choice.

Those who are very familiar with this blog would know that neither the use of poo bags, or not, will have an effect on the consumption of oil (of which the plastic is made). But is seems like an odd thing to keep people employed in the poo shipping business when a simpler alternative is available.

One further little thing I got thinking about is whether animal excrement is even a form of pollution. In some cases, we see ibis poo all over the ground and it bothers some people – the ibis are polluting our cities. But what about the poo of every other animal alive! What about koala poo? Surely koalas can’t be the perpetrators of pollution! Or would they be of they we nearby to our homes? We want nature close by, as long as it keeps to itself and we interact with it on our terms only.

Well, that’s just a small issue I’ve been thinking about today. Does anyone else think that animals can pollute? Thoughts on the poo bag conundrum?

Tuesday, August 19, 2008

Free will and determinism

A mighty debate has emerged in the corridors of Z block, where I have an office at QUT. As you might expect, I was the instigator of this debate. It all started innocently enough, when I proposed that we examine an article that suggests people do not know their own tastes and preferences (you can find a version of it here http://www.bos.frb.org/economic/wp/wp2005/wp0510.pdf).
If we do no know whether something is good or bad, and simply use our immediate environment for clues, where does our free will fit in? And does the concept even exist?

It is a hard thing to question the idea of free will, and that is probably because there is no agreement on a specific definition. I will try and narrow this down. The definition must certainly cover the notion that each individual is responsible for their own actions, as they are an expression of their free will. This enables us to differentiate actions as the result of personal will as opposed to the will of others. It must also entail the idea of choice. That the actions we choose to take were not set, and that we faced opportunities to exercise our free will to determine which choice to make. Free will must therefore be a necessary precondition for any personal responsibility.

My debate in the corridors started because I suggested that of course free will cannot exist, because free will itself must have a cause. An idea cannot come from nowhere. And if it could, why do we pursue scientific endeavour? If one thing can come from nowhere, what is to stop many other physical occurrences coming from nowhere? This lead nicely into the idea of determinism, which put simply, says that every cause has a cause. So if free will causes my actions, then something must cause my free will. In the article we examined, this free will was caused by the suggestions of the author during his experiments.

I might take this a step further. Recent experiments have shown that decisions that might have previously bee regarded as free will, can be predicted up to 10 seconds before they are made by scanning unconscious brain activity (see http://www.physorg.com/news127395619.html). So in that period between the prediction of the choice, does the participant have free will to change their decision? I suggest not. If you have seen any of Derren Brown shows, this type of control by the subconscious seems all powerful (you can read about him here http://www.derrenbrown.co.uk/ or check youtube for some interesting videos).

So if our decisions are caused by subconscious environmental cues, and are made before we even know it, where does this leave free will and personal responsibility? How can we convict a criminal for his actions when they are determined solely by his environment (and genes of course)? To turn this conundrum around, how would we convict an alternative criminal whose free will appears from nowhere? His defence would be that my free will just appeared in my brain and made me do it – it was beyond my control. So some level of causality is required, although my brain gets tired thinking about these issues. (maybe have a read of http://plato.stanford.edu/entries/freewill/)

These are some interesting issues, and point to the heart of scientific endeavour and our understanding of humanity. What are your thoughts? How would you define free will? And do you believe every cause has a cause?

Wednesday, August 13, 2008

Externalities v irrationality

I would like raise an issue that has been rattling around my mind for many years now. After spending time travelling to various countries around the world, trends regarding the attitude of countries to personal and community responsibility have begun to emerge. For example, in Canada ski resorts bomb for avalanches outside the skiable terrain and search these off-piste areas at the end of each day. In Austria, unless there is a danger of avalanche on-piste it is every man for himself in other areas. You find similar things around the cities. In Vancouver I noticed people cross the street wherever and whenever suits. In Brisbane you get fined for jaywalking. I’m sure you can think of many other ways that some governments choose to protect individuals from themselves, but fail to protect individuals from the actions of others.

An economist would take the stance that role of government is to protect property rights, and in particular, to rectify the externalities that occur when one persons actions incur costs on another. In all other ways, individuals should be able to rationally choose for themselves the amount of risk they are willing to take. Let’s take Australian smoking regulations as an example. The first point of call for governments was to protect individuals from themselves by requiring warning labels on packaging. It was not until very recently that governments stepped in to protect non-smokers from smokers in many public buildings with indoor smoking laws.

Another example is the regulation of bicycle helmets (which is unique to Australia). Governments seem so keen to protect cyclists from themselves but fail to provide any road space for cyclists, nor training of the appropriate treatment of cyclist by drivers in the licence test, to protect them from the actions of others (or maybe that’s why we need helmets).

While I’m on to the cycling thing, I also seem to choke all the way to work each day from the exhaust of the motoring public. Pollution of this nature is the classic example of an externality in economics. It’s great that I have a helmet to protect me from falling, but the actions of others are costing me my lungs! Fair enough, I drive too, but since I bear a cost from ‘road pollution’ I would be happy to bear the cost of strict pollution regulation. Remember, I should be able to act in any way I choose as long as it does not impose costs on others. I have no right drive if that is the case.

I know some of you are thinking that the helmet laws and smoking laws are there to save the community incurring the health care costs, but you'll see from my health care post that such preventative actions lead to increased rather than decreased health care costs. The main message here is that root of these issues on the accepted scope of the legal term ‘duty of care’. In some countries, the government is seen to have an overly tight duty of care to the public, while in others there is much more personal duty of care.

So what is the reason for such frustrations? Simply, it offends me that an adult member of society cannot take responsibility for their own actions, while at the same time is in a position of bearing the costs of the actions of others. Also, it worries me that we are breeding a society that bears no personal responsibility, and has legal recourse to blame others. We laugh sometimes at the outcomes of court cases in the US, but don’t think we are immune from such stupidity. Imagine a society where I could governments take responsibility for individual stupidity. Where would it end? I agree that governments should make an effort to create a safe society, but they should not take responsibility away from the individual. They should protect us from others and let us take the consequences of our own actions.

Any thoughts, or interesting examples that I have missed?

Sunday, August 10, 2008

An effective approach to environmental issues

Those regular readers (Dan I’m thinking of you here) might get the impression I think we should do nothing for the environment, since ‘the system’ will just take over and our actions will be rendered either useless, or at worse, counterproductive. But there are some things I believe are effective, and should be doing now.

For starters, my previous blogs have made clear that without physical constraints resource consumption will continue at the maximum pace allowable by current technology. My ‘solution’ is to apply artificial physical constraints in some way before the true limits of the national or global resources are reached. The effect of such limits will be identical to when true physical limits will be reached – resource prices will rise and labour productivity will wane unless technology proceeds at a pace that more than offsets these price rises. I would expect that a general drop in production, which would appear as an economic recession, but I would also expect changing preferences of society resulting in new consumption habits, and also technology change to ease this burden on the well-being of society. This approach is an example of total supply side constraint, which is the only truly effective way to reduce resource consumption. Demand side constraints we have already seen to be next to useless in decreasing resource consumption (and associated land disturbance, pollution and other environmental woes).

This artificial limit could simply be achieved through traditional conservation – which means ‘fencing off’ some land areas we agree are untouchable. These areas will continue to provide society with those ecosystem services we take for granted but generally overlook since they fall outside the scope of any formal institution. Filtration of air and purification of water through the water cycle does not fall within national borders, nor is ownership of these services likely to exist, but they do have tremendous value to humanity. We should ensure a minimum level of supply of these services to society by taking some land out of the formal economic system, to be designated to the informal supply of ecological services.

In my version of this ‘solution’ (The inverted comma’s are to show that the solution is not without it’s own problems. The social unrest when incomes are going down and resource rich land is lying untouched nearby is one of them) it is not simply a matter of taking some land already untouched an saying this now protected, which has traditionally been the approach with national parks. I would suggest a more integrated approach that at it’s core rests on planning controls. Such controls can govern the extend to which land in employed within existing developed areas, and can actually be used to force rejuvenation of ecologically important areas such as wetlands.

This approach I believe will build robustness into our society in the face of future environmental problems. It will ensure that even if our formal economy suffers as a result resource scarcity, that the quality of life of the people will remain high due to continued supply of a high quality environment. Further, it will ensure space is available for future agricultural opportunities in a world of a new climate.

Even if the economic optimists are right, and resource shortages never pose a serious problem, implementing this type of approach still benefits society greatly by improving environmental conditions at home. And of course in the remaining economic realm of the land, our formal economy can function as it pleases with very little controls.

What do you think of this approach?