I thought it might be nice to put up on the front page a recent comment by Chris. He states:
I can't quite get my intuition around this counter-intuitive concept. I'd like to try to develop some points that still bamboozle me:
1. Equating dollars to energy: For the purposes of example let's make up an economy, let's call it Moldova, which is powered 100% by coal-fired power plants. Say Moldova is a pretty dodgy place and the coal-fired power plants are running break even: so it costs the same amount of Mol-dollars to produce the energy as what they sell it for. Intuitively we would expect that this system could work; that the Moldovians, however poor they may be, would have electricity. However if we substitute the words coal-fired power plant with solar panels it becomes impossible. In both examples the cost of production equals the price of their product. It's easy to understand that if in the process of creating the solar panel we require the same amount of electricity than it produces over it's lifetime we gain nothing since we can easily equate apples with apples. However when we equate dollars with energy, one dollar spent on buying a solar panel (e.g. $1 = 1Wh) only produces 1Wh back again we gain nothing from the process. Thinking this way, equating $ with Wh, how can our poor Moldovians still use their electric milking machines?
2. I'm trying hard not to believe that we gain nothing from buying solar panels. Assuming they cost (like in Moldova) the same as the value of the energy they produce. We spend a dollar on a solar panel: this dollar in infinitely divided as it swims upstream through peoples wallets, and through this process looses it's identity as my 'green' dollar and comes out representing the total resource inputs of our economy, probably more a brownish sludgy colour now. So it doesn't matter if I temporarily green wash my dollar or spend it to create a burning petrol feature-fountain in my front yard: it's all the same. However I reckon by buying a solar panel I change the resource inputs of our economy: so my dollar swims up a slightly altered stream, it still arrives a brownish sludgy dollar, but a slightly greener one.
However after my solar panel is online, the total resource pool of the economy increases, energy becomes cheaper and consumption increases to fill in the space my green dollar bought: so total polluting is not reduced. Arrghh! I thought I was arguing for solar panels!! damn. BUT.. if the federal government wants to stimulate the economy they should spend it on solar panels? Since they would be growing the economy without increasing pollution. I've lost my point. Anyway what do you think?
Cheers
Chris.
My response:
Chris. You have some very neat logical arguments here. And there is no real answer to the first one. I have been pondering this problem for about a year. I get the feeling we are getting very close to the bottom of the rabbit hole, with only one remaining theoretical explanation. Chaos! (complex adaptive systems to be more precise)
While I have given the impression that tracing resource inputs to the economy up the tree can be envisaged much like a never ending family tree, there are interactions along the way that make it a complex system, and the capacity to learn and change also makes it adaptive. There are two major problems with such systems; (1) an action cannot be isolated from the rest of the system (thus one product cannot be isolated as good or bad), and (2) the way to change the whole system is uncertain, given the complexity of actions in response to change within the system.
Further, there are major problems in my theoretical argument against solar panels due to time and technology. For starters, the energy we used to construct the power plant was from half a century ago, which came from power plants and oil wells built a century ago, which were constructed from… well you get the picture (maybe read my Hunger, humans or happiness blog). Without this previous energy use, we would not have current energy production. Thus we could arguably trace back infinitely through time the energy requirements of producing a given product, which may be a sum total of all energy use in history!
In light of these and other issues that arose in lunchroom economics discussions, I developed a ‘Theory of Private Property’, which suggests that somehow economic growth (but not human welfare) is fundamentally linked to the creation of private property. How to develop this into a comprehensive and useful theory presently escapes me, but I am yet to find contrary evidence to dispute the relationship. The point of such a theory would be to suggest that solar power cannot contribute to growth because it doesn’t involve the use of land (whereas fossil fuelled energy can due to the continued consumption of land in the form of coal or oil). If we could attach a right to the sunshine, it may help. The solar energy producers would pay rents on the rights to the sunshine.
Anyway, while that was not a short answer, it does begin to raise some important points that one might consider before proclaiming a specific behaviour as good or bad.
Wednesday, January 21, 2009
Sunday, January 11, 2009
Banking is a Ponzi scheme
I mentioned in my last blog that I would comment on the similarities between Bernard Madoff's Ponzi scheme and the tradition of fractional reserve banking. However, many other, and probably more eloquent, writers have had similar thoughts and done the hard work for me. In a break from tradition, this blog simply directs you elsewhere to pursue this astounding, and concerning idea.
The Wall Street Ponzi Scheme called Fractional Reserve Banking: Borrowing from Peter to Pay Paul, by Ellen Brown
Ponzi Schemes in Russia, Colombia and the US: from Mavrodi to Murcia to Madoff (MMM), by Kaufmann
The Wall Street Ponzi Scheme called Fractional Reserve Banking: Borrowing from Peter to Pay Paul, by Ellen Brown
Ponzi Schemes in Russia, Colombia and the US: from Mavrodi to Murcia to Madoff (MMM), by Kaufmann
Tuesday, December 23, 2008
The bright side - a simple solution.
Many of my blogs have been perceived as a little pessimistic. This final blog of the year is intended to provide some optimism.
The positive message is this - Humans are infinitely adaptable, and can change very quickly when required.
Often I see graphs of exponentially growing resource consumption and environmental destruction, accompanied by the saying – this can’t go on. And that is absolutely right. It can’t go on forever. No matter what happens, we will adjust. We can’t defy physical limits. In times of crisis it amazes me how people can quickly make tough decisions, and devote their energies to the greater good. It appears that for most people then, there is no environmental crisis just yet, but I am certain when reality bites, actions will follow.
Now to the more specific task of reducing carbon emissions. I have made the point many times that we need to take a supply side approach, which means focussing on the actual source of pollution. Therefore pollution/emission limits are the only way to go. More importantly, this limit must consider all parties involved. For carbon emissions, we require global cooperation. Otherwise, there will always be incentive for those exempt from the limit to take advantage of the situation.
To explain why this is the case, consider the classic common pool resource problem (aka the tragedy of the commons). A common pool resource is non-excludable (you can’t stop anyone using it) and rivalrous (when someone uses it, others cannot). A park bench exhibits these features. Anyone can use it, but when someone is, others cannot. The atmosphere has similar characteristics. If one party uses the atmosphere to dispose of carbon, others cannot use it for providing a steady climate. The incentive in this situation is for the polluter to use as much of the resource as possible, as they receive all the benefits, while everyone else shares the costs. Water resources have, until recently, been much the same.
This issue has been historically solved by rituals, traditions, religion, and other enforceable means the limit use. The classic example is the summer meadows in alpine areas. Anyone can graze their farm animals there, but when there are too many other animals, there will not be enough grass for yours. To solve this problems of competing demands, one must enforce grazing limits (or some kind of rationing system) on all people involved. It is not enough that one person decide to do their bit and limit their herd, as it allows others to increase the size of their herd. Even if all but one farmer exercises self-control and limits their herd, the last farmer will take advantage of this and graze all remaining fodder.
In climate change lingo, the slack taken up by other countries is known as the displacement hypothesis. Tight pollution controls in developed countries stimulate the relocation of polluting industries to countries without environmental controls. This is the reason some countries appear to have been successfully reducing their carbon emissions.
Clearly then, we need enforceable limits on pollution at the relevant scale. For carbon emissions, this means global cooperation (this appears to be getting closer each day). For water management, whole catchment areas must be involved. It is a simple recipe for halting environmental degradation. As we have seen recently with the Murray-Darling Basin Authority, when we reach the point of ‘crisis’ effective actions follow swiftly.
Finally, to keep you give you a taste of what is in store for next year, some topics that are swirling around in my mind right now include:
- the similarity between Bernard Madoff’s pyramid scheme and the banking system
- the welfare benefits of piracy
- and the parallels between cap and trade regulations and land conservation.
- problems and solutions to degrowth
Merry Christmas.
The positive message is this - Humans are infinitely adaptable, and can change very quickly when required.
Often I see graphs of exponentially growing resource consumption and environmental destruction, accompanied by the saying – this can’t go on. And that is absolutely right. It can’t go on forever. No matter what happens, we will adjust. We can’t defy physical limits. In times of crisis it amazes me how people can quickly make tough decisions, and devote their energies to the greater good. It appears that for most people then, there is no environmental crisis just yet, but I am certain when reality bites, actions will follow.
Now to the more specific task of reducing carbon emissions. I have made the point many times that we need to take a supply side approach, which means focussing on the actual source of pollution. Therefore pollution/emission limits are the only way to go. More importantly, this limit must consider all parties involved. For carbon emissions, we require global cooperation. Otherwise, there will always be incentive for those exempt from the limit to take advantage of the situation.
To explain why this is the case, consider the classic common pool resource problem (aka the tragedy of the commons). A common pool resource is non-excludable (you can’t stop anyone using it) and rivalrous (when someone uses it, others cannot). A park bench exhibits these features. Anyone can use it, but when someone is, others cannot. The atmosphere has similar characteristics. If one party uses the atmosphere to dispose of carbon, others cannot use it for providing a steady climate. The incentive in this situation is for the polluter to use as much of the resource as possible, as they receive all the benefits, while everyone else shares the costs. Water resources have, until recently, been much the same.
This issue has been historically solved by rituals, traditions, religion, and other enforceable means the limit use. The classic example is the summer meadows in alpine areas. Anyone can graze their farm animals there, but when there are too many other animals, there will not be enough grass for yours. To solve this problems of competing demands, one must enforce grazing limits (or some kind of rationing system) on all people involved. It is not enough that one person decide to do their bit and limit their herd, as it allows others to increase the size of their herd. Even if all but one farmer exercises self-control and limits their herd, the last farmer will take advantage of this and graze all remaining fodder.
In climate change lingo, the slack taken up by other countries is known as the displacement hypothesis. Tight pollution controls in developed countries stimulate the relocation of polluting industries to countries without environmental controls. This is the reason some countries appear to have been successfully reducing their carbon emissions.
Clearly then, we need enforceable limits on pollution at the relevant scale. For carbon emissions, this means global cooperation (this appears to be getting closer each day). For water management, whole catchment areas must be involved. It is a simple recipe for halting environmental degradation. As we have seen recently with the Murray-Darling Basin Authority, when we reach the point of ‘crisis’ effective actions follow swiftly.
Finally, to keep you give you a taste of what is in store for next year, some topics that are swirling around in my mind right now include:
- the similarity between Bernard Madoff’s pyramid scheme and the banking system
- the welfare benefits of piracy
- and the parallels between cap and trade regulations and land conservation.
- problems and solutions to degrowth
Merry Christmas.
Tuesday, December 16, 2008
Carbon tax V Cap and trade
This blog is to help those interested in understanding why there is a debate between these two alternative policy options for reducing greenhouse gas emissions. While at first a cap and trade scheme and a carbon tax appear to be different versions of the same thing, there are important differences. These differences explain the push from big business for a carbon tax.
First, we must recognise that a tax is simply a reallocation of funds between economic agents – from individuals and companies, to the government. Thus a carbon tax, a cigarette tax, an alcohol tax and a GST all generate government revenue. We know from my previous blogs that all consumption is equal (in resource terms). If governments do not spend this extra tax revenue, they will reduce other taxes, but the total economic production will be the same afterwards, as will the total consumption by all economic agents. Therefore a carbon tax will not reduce carbon emissions.
One quite interesting discussion I had earlier this year with ECOS magazine editor James Porteous led me to a paper by Barney Foran, entitled Powerful choices: Options for Australia’s transition to a low-carbon economy. Foran suggests that revenues raised from a carbon tax can be allocated to a future fund, which is basically an offshore investment vehicle. I think he fails to understand that this investment itself has serious carbon implications (This translates as “let’s stop climate change by taxing Aussies and investing in Chinese production”).
A cap and trade scheme on the other hand is actually a restriction on the amount of emissions – a ban on emissions once they hit a given level. This will guarantee emissions reductions (at least within Australia). Unfortunately, we know that to be effective, environmental policy must come at an economic cost – and this scheme will limit Australia’s total production, and limit its international competitiveness.
Without getting too political, the 5% target recently announced for the cap and trade scheme to be adopted in Australia in 2010 is infinitely greater than any carbon tax that could have been proposed to seek wide public approval. Intriguingly, I would suggest that the current governments popularity with green groups would increase with the proposal of a "large" carbon tax, even though it would be less effective at reducing emissions.
First, we must recognise that a tax is simply a reallocation of funds between economic agents – from individuals and companies, to the government. Thus a carbon tax, a cigarette tax, an alcohol tax and a GST all generate government revenue. We know from my previous blogs that all consumption is equal (in resource terms). If governments do not spend this extra tax revenue, they will reduce other taxes, but the total economic production will be the same afterwards, as will the total consumption by all economic agents. Therefore a carbon tax will not reduce carbon emissions.
One quite interesting discussion I had earlier this year with ECOS magazine editor James Porteous led me to a paper by Barney Foran, entitled Powerful choices: Options for Australia’s transition to a low-carbon economy. Foran suggests that revenues raised from a carbon tax can be allocated to a future fund, which is basically an offshore investment vehicle. I think he fails to understand that this investment itself has serious carbon implications (This translates as “let’s stop climate change by taxing Aussies and investing in Chinese production”).
A cap and trade scheme on the other hand is actually a restriction on the amount of emissions – a ban on emissions once they hit a given level. This will guarantee emissions reductions (at least within Australia). Unfortunately, we know that to be effective, environmental policy must come at an economic cost – and this scheme will limit Australia’s total production, and limit its international competitiveness.
Without getting too political, the 5% target recently announced for the cap and trade scheme to be adopted in Australia in 2010 is infinitely greater than any carbon tax that could have been proposed to seek wide public approval. Intriguingly, I would suggest that the current governments popularity with green groups would increase with the proposal of a "large" carbon tax, even though it would be less effective at reducing emissions.
Friday, December 12, 2008
Some clarification on the solar riddle
My last blog was too brief, I suspect, for the challenging idea it presented. So I will elaborate a little further.
The key point I want to make is that a dollars worth of any consumption good or service, due to the infinite interdependency of economic production, requires an equal amount of resources for its production. A dollar spent on a pair of shoes requires an equal amount of coal, oil, minerals and other natural resource inputs, as a dollar spent on an apple, a hybrid car, a haircut, electricity, motor fuel, a solar panel, and every other good currently being produced. A dollar spent on any good also stakes a claim on an equal amount of pollution.
How can all goods be equal? Surely spending a dollar on a massage is better for the environment than a dollar on fuel or electricity?
But let us run through the flow on interactions in each of these cases. You buy a massage. You mistakenly believe that the environmental cost is negligible because there are no material inputs. What happens to the money then? The masseur then spends that money on whatever they choose – food, fuel, furniture, and any other items. Then what happens at each of these purchases/transactions? The dollar divides further to pay for the labour costs, and the upstream material inputs and so on ad infinitum.
The dollar spent on electricity can be traced in a similar way. The wholesale costs as well as the labour and rents of the electricity retailer are paid for. Then these upstream intermediate industries use this revenue to pay for all of their inputs. Any profits made along they way get spent on other consumption items. This single dollar continues to divide and change hands until it is diluted amongst all natural resources that supply our modern economy.
If a dollar represents a claim on a proportion of the resource inputs into the economy, this paints a different picture for environmentalists. There are no ‘green’ alternatives. Which brings me to the solar panels.
A $20,000 solar panel will generate less than $20,000 worth of electricity over its lifetime. If all consumption requires an equal amount of resources, then it takes more coal to make the solar panel than is required to generate the electricity it is intended to replace. In energy terms then, the solar panel is also likely not to produce more energy than is required to manufacture it in the first place.
But then again there is no harm in going solar – you will just have less money to spend on other things (oh, and they aren’t much good for the environment either).
The key point I want to make is that a dollars worth of any consumption good or service, due to the infinite interdependency of economic production, requires an equal amount of resources for its production. A dollar spent on a pair of shoes requires an equal amount of coal, oil, minerals and other natural resource inputs, as a dollar spent on an apple, a hybrid car, a haircut, electricity, motor fuel, a solar panel, and every other good currently being produced. A dollar spent on any good also stakes a claim on an equal amount of pollution.
How can all goods be equal? Surely spending a dollar on a massage is better for the environment than a dollar on fuel or electricity?
But let us run through the flow on interactions in each of these cases. You buy a massage. You mistakenly believe that the environmental cost is negligible because there are no material inputs. What happens to the money then? The masseur then spends that money on whatever they choose – food, fuel, furniture, and any other items. Then what happens at each of these purchases/transactions? The dollar divides further to pay for the labour costs, and the upstream material inputs and so on ad infinitum.
The dollar spent on electricity can be traced in a similar way. The wholesale costs as well as the labour and rents of the electricity retailer are paid for. Then these upstream intermediate industries use this revenue to pay for all of their inputs. Any profits made along they way get spent on other consumption items. This single dollar continues to divide and change hands until it is diluted amongst all natural resources that supply our modern economy.
If a dollar represents a claim on a proportion of the resource inputs into the economy, this paints a different picture for environmentalists. There are no ‘green’ alternatives. Which brings me to the solar panels.
A $20,000 solar panel will generate less than $20,000 worth of electricity over its lifetime. If all consumption requires an equal amount of resources, then it takes more coal to make the solar panel than is required to generate the electricity it is intended to replace. In energy terms then, the solar panel is also likely not to produce more energy than is required to manufacture it in the first place.
But then again there is no harm in going solar – you will just have less money to spend on other things (oh, and they aren’t much good for the environment either).
Tuesday, December 9, 2008
Solve the solar riddle
My recent blog on the Ehrlich-Simon wager aimed to raise 'the principle of the indivisibility of economic productivity'. Briefly, this means that when you improve the efficiency use (aka productivity) of one resource through improved technology, you actually improve the productivity of other resources. So for example improved energy efficiency, will also improve the efficiency of use of other resources - minerals for example (due to reduced extraction costs).
The point of this blog is to take an extra step. I may have previously raised the possibility that all consumption is equally environmentally degrading. Spent a dollar on an apple, and that has equal environmental footprint to a dollar spent of motor fuel - somewhat of a shocking thought. But since the economy is infinitely interdependent this is the case. Costanza raised this issue back in 1980. He found that a dollars worth of any commodity has almost equal energy intensity.
Now to the solar riddle. If a dollars worth of any commodity has equal energy intensity, then a dollars worth of a solar panel will require an equal amount of energy to produce as a dollars worth of electricity. If this is the case, a solar panel that costs more than buying the electricity it produces from another source, than it cannot be said to produce more energy than is required to produce it in the first place. Since the coal fired electricity that it replaces is cheaper over the panel lifetime, traditional grid sourced electricity must be the less energy intensive alternative, taking all the economic interdependencies into consideration.
In the end, although it is a difficult concept for many to accept, your income is the sole determinent of your environmental footprint. You can't just choose to spend that income in a particular way or another. But by reducing your income, and hence reducing your contribution to economic production and its associated externalities, you can make a difference.
In fact that was not the end. Because if you weren't heading off to work each day to earn a crust, someone else might be able to expand their work instead. So there can be no blaming or finger-pointing in the environmental game. We live in a complex system, of which component parts are inseparable. Maybe we should instead attack externalities at their source by enacting effective regulations to prevent them.
The point of this blog is to take an extra step. I may have previously raised the possibility that all consumption is equally environmentally degrading. Spent a dollar on an apple, and that has equal environmental footprint to a dollar spent of motor fuel - somewhat of a shocking thought. But since the economy is infinitely interdependent this is the case. Costanza raised this issue back in 1980. He found that a dollars worth of any commodity has almost equal energy intensity.
Now to the solar riddle. If a dollars worth of any commodity has equal energy intensity, then a dollars worth of a solar panel will require an equal amount of energy to produce as a dollars worth of electricity. If this is the case, a solar panel that costs more than buying the electricity it produces from another source, than it cannot be said to produce more energy than is required to produce it in the first place. Since the coal fired electricity that it replaces is cheaper over the panel lifetime, traditional grid sourced electricity must be the less energy intensive alternative, taking all the economic interdependencies into consideration.
In the end, although it is a difficult concept for many to accept, your income is the sole determinent of your environmental footprint. You can't just choose to spend that income in a particular way or another. But by reducing your income, and hence reducing your contribution to economic production and its associated externalities, you can make a difference.
In fact that was not the end. Because if you weren't heading off to work each day to earn a crust, someone else might be able to expand their work instead. So there can be no blaming or finger-pointing in the environmental game. We live in a complex system, of which component parts are inseparable. Maybe we should instead attack externalities at their source by enacting effective regulations to prevent them.
Tuesday, December 2, 2008
A comment on Fixing the Floor in the ETS
Dr Richard Denniss recently published a research paper for The Australia Institute. Despite its promising title, there is no solution for fixing the ‘floor’ in the ETS to be found in this document. In fact, it takes tentative steps towards teasing out the mechanisms through which the economy and environment interact, but in the face of reality, jumps back on the feel good, greenwash, drive a hybrid, hold hands and be nice to each other bandwagon.
Let me explain.
The story woven by Denniss is that energy and emissions conservation efforts by households will be rendered ineffective due to the proposed emissions trading scheme (ETS). For example, if households reduce their electricity demand through efforts to conserve, the electricity producer now needs to produce less electricity, and can then sell some of their emissions permits to other polluters. Hence the ETS provides a floor on emissions that cannot be passed, as permits can always be traded to other potential polluters.
However, the fundamental assumption in the paper is that households can reduce their greenhouse gas emissions by simply changing their purchasing behaviour and embracing energy efficiency. If you have read my previous blogs you would know that this is an ineffective strategy.
While the paper provides an interesting insight for many, the major flaw is that Denniss acknowledges the flow-on effects from the ‘after ETS’ scenario, without any reference to flow-on effects in the ‘before ETS’ scenario. As an Associate Professor in economics, Denniss should know that these type of flow-on effects would appear without the ETS due the price mechanism. Taking the above example in the 'before ETS' scenario, a reduction in electricity demand should reduce the price of electricity, and subsequently increase electricity demand by others (because of the Law of Demand - lower the price, the more we buy). Therefore, the actions that are supposed to be rendered ineffective by the ETS are already ineffective.
Blake Alcott has a very interesting paper that debunks conservation as an effective way to reduce energy consumption and subsequent greenhouse gas emissions.
In short, as I have mentioned many times in this blog, to truly reduce resource consumption you must restrict the supply. In the case of greenhouse gas emissions, the ETS does exactly that. Individuals actions mentioned in the paper are presently ineffective, and will remain so under the ETS. However, there will now be the opportunity to buy emissions permits, restricting their supply to polluters if you wish to invest in behaviour that reduces emissions.
If the only pressure on emissions production is upwards, then the existence of a floor is clearly not an issue, as long as it also acts as a ceiling. If you think about is, most restrictive regulations that provide limits also act as floors with little criticism. Safety standards, town planning restrictions, and many other regulations provide no incentive to ‘outperform’. That is not their purpose.
It is time to stop the feel good ramblings and the government blame game and accept reality for a change.
Let me explain.
The story woven by Denniss is that energy and emissions conservation efforts by households will be rendered ineffective due to the proposed emissions trading scheme (ETS). For example, if households reduce their electricity demand through efforts to conserve, the electricity producer now needs to produce less electricity, and can then sell some of their emissions permits to other polluters. Hence the ETS provides a floor on emissions that cannot be passed, as permits can always be traded to other potential polluters.
However, the fundamental assumption in the paper is that households can reduce their greenhouse gas emissions by simply changing their purchasing behaviour and embracing energy efficiency. If you have read my previous blogs you would know that this is an ineffective strategy.
While the paper provides an interesting insight for many, the major flaw is that Denniss acknowledges the flow-on effects from the ‘after ETS’ scenario, without any reference to flow-on effects in the ‘before ETS’ scenario. As an Associate Professor in economics, Denniss should know that these type of flow-on effects would appear without the ETS due the price mechanism. Taking the above example in the 'before ETS' scenario, a reduction in electricity demand should reduce the price of electricity, and subsequently increase electricity demand by others (because of the Law of Demand - lower the price, the more we buy). Therefore, the actions that are supposed to be rendered ineffective by the ETS are already ineffective.
Blake Alcott has a very interesting paper that debunks conservation as an effective way to reduce energy consumption and subsequent greenhouse gas emissions.
In short, as I have mentioned many times in this blog, to truly reduce resource consumption you must restrict the supply. In the case of greenhouse gas emissions, the ETS does exactly that. Individuals actions mentioned in the paper are presently ineffective, and will remain so under the ETS. However, there will now be the opportunity to buy emissions permits, restricting their supply to polluters if you wish to invest in behaviour that reduces emissions.
If the only pressure on emissions production is upwards, then the existence of a floor is clearly not an issue, as long as it also acts as a ceiling. If you think about is, most restrictive regulations that provide limits also act as floors with little criticism. Safety standards, town planning restrictions, and many other regulations provide no incentive to ‘outperform’. That is not their purpose.
It is time to stop the feel good ramblings and the government blame game and accept reality for a change.
Tuesday, November 25, 2008
Explaining the Ehrlich-Simon wager
In 1980, prominent environmentalist, and author of the book The Population Bomb, Paul Ehrlich, entered into a wager with the late cornucopian economist Julian Simon. Ehrlich saw resource scarcity as a major problem, and that with time, resource prices would begin to rise as a reflection of physical limits. On the other hand, Simon predicted that with increased human population and ingenuity, the prices of resources would continue to decline indefinitely. Based on this logic, he challenge Ehrlich with “a public offer to stake US$10,000… on my belief that the cost of non-government controlled raw materials (including grain and oil) will not rise in the long run.” They designated September 29th 1990 as the cut off date for the wager, and bet on five metals – chromium, copper, nickel, tin and tungsten. The result was that the price of all five metals dropped in inflation adjusted terms, and Ehrlich sent Simon a cheque in October 1990.
So why did Ehrlich lose the bet, when we know for a fact that there are long run physical limits to natural resources? The first reason raised by many environmentalists is that his timing was a little off. Maybe he was a few decades early in his prediction. I believe this explanation is entirely incorrect.
The second reason is Ehrlich ignored economic principles. The price of a good at any point in time only reflects its relative scarcity compared to the availability of other goods – not the absolute scarcity. If the rate of supply (aka the rate of extraction) of these metals was high, the price will be low, even if this rate could only be sustained for a few years before the total physical supply was exhausted. Ehrlich made the fundamental mistake of ignoring the rate of production. But the environmental debate of that decade did raise what has become a pressing issue in ecological economics of getting the absolute scarcity of natural resources reflected in the price.
What we know more clearly now is that the rate of extraction of most minerals and fossil fuels follows a Hubbert curve, where the rate climbs before at some point peaking, the beginning a long decline. While many suggest that the peak generally occurs when 50% of the absolute physical quantity of the resource has been extracted, this peak in the rate of supply still does not mean there will be a peak, or explosion in the price at this point.
First, consider what happens when there is a small increase in the price of copper. This makes the use of copper in production less attractive than alternatives such as fibre optics. So demand will drop as well, stopping the price from spiking. The prices cannot get too ‘out of whack’ before other adjustments take place.
Consider then if Ehrlich had wagered on the price of oil, and that the bet began in 2000, with the cut off date 2010. A year ago one would have been inclined to think that Ehrlich was a genius for predicting the price spike. But in the last few months, Simon would have got the upper hand, and Ehrlich would be on the back foot making excuses about the so called ‘credit crunch’. But what really happened?
First, the oil price spike was the result of a decrease in the rate of supply of oil compared with the rate of supply of other natural resources. But more than that, it was the expectation of a continued increase in demand in the face of decreasing supply. If you take a look at the metals, their price also spiked on the expectation of future demand and low future supply.
But the catch was what happens when the economy adjusts. These ‘out of whack’ prices cannot be sustained. They flow on to the real economy. In this case, the high cost of oil and metals made it difficult to increase production as there were few susbsitutes, so economic output slowed. Suddenly, the expectation of high future demand was replaced with the expectation of recession, and prices or natural resources (oil and metals) fell accordingly.
That’s the thing with supply constraints and physical resource limits. The general rule of thumb is that relative prices between goods are caused by available technologies. When one input is constrained, it doesn’t change the relative prices so much in the long-run, rather it changes the output level - especially if there are very few or no substitute resources.
This net result of an output reduction is due the infinite complexity of the modern economy. Estimating the embodied resources in goods has been a pursuit of the past decade, but recently it is coming to light that due to this infinite complexity, all goods have equal embodiments of all resources. A dollars worth of petrol requires an equal amount of oil to produce as a dollars worth of a massage. Thus a constraint of a single natural resource flows through to have an impact on the price of every good in the economy.
So when I previously wrote that supply side restrictions are the only way to go for improving environmental quality, it implies that economic output will be reduced. If Ehrlich knew then what ecological economists now know, he would have had a much different wager. In fact he did propose a second wager. He wanted to bet that the quality of the environment would deteriorate over the 1990s by referring to 15 different environmental quality measures. Simon declined because he believed that measuring such things did not reflect well-being. Although he did lose a wager about the price of timber in Canada, but blamed new government policies.
So why did Ehrlich lose the bet, when we know for a fact that there are long run physical limits to natural resources? The first reason raised by many environmentalists is that his timing was a little off. Maybe he was a few decades early in his prediction. I believe this explanation is entirely incorrect.
The second reason is Ehrlich ignored economic principles. The price of a good at any point in time only reflects its relative scarcity compared to the availability of other goods – not the absolute scarcity. If the rate of supply (aka the rate of extraction) of these metals was high, the price will be low, even if this rate could only be sustained for a few years before the total physical supply was exhausted. Ehrlich made the fundamental mistake of ignoring the rate of production. But the environmental debate of that decade did raise what has become a pressing issue in ecological economics of getting the absolute scarcity of natural resources reflected in the price.
What we know more clearly now is that the rate of extraction of most minerals and fossil fuels follows a Hubbert curve, where the rate climbs before at some point peaking, the beginning a long decline. While many suggest that the peak generally occurs when 50% of the absolute physical quantity of the resource has been extracted, this peak in the rate of supply still does not mean there will be a peak, or explosion in the price at this point.
First, consider what happens when there is a small increase in the price of copper. This makes the use of copper in production less attractive than alternatives such as fibre optics. So demand will drop as well, stopping the price from spiking. The prices cannot get too ‘out of whack’ before other adjustments take place.
Consider then if Ehrlich had wagered on the price of oil, and that the bet began in 2000, with the cut off date 2010. A year ago one would have been inclined to think that Ehrlich was a genius for predicting the price spike. But in the last few months, Simon would have got the upper hand, and Ehrlich would be on the back foot making excuses about the so called ‘credit crunch’. But what really happened?
First, the oil price spike was the result of a decrease in the rate of supply of oil compared with the rate of supply of other natural resources. But more than that, it was the expectation of a continued increase in demand in the face of decreasing supply. If you take a look at the metals, their price also spiked on the expectation of future demand and low future supply.
But the catch was what happens when the economy adjusts. These ‘out of whack’ prices cannot be sustained. They flow on to the real economy. In this case, the high cost of oil and metals made it difficult to increase production as there were few susbsitutes, so economic output slowed. Suddenly, the expectation of high future demand was replaced with the expectation of recession, and prices or natural resources (oil and metals) fell accordingly.
That’s the thing with supply constraints and physical resource limits. The general rule of thumb is that relative prices between goods are caused by available technologies. When one input is constrained, it doesn’t change the relative prices so much in the long-run, rather it changes the output level - especially if there are very few or no substitute resources.
This net result of an output reduction is due the infinite complexity of the modern economy. Estimating the embodied resources in goods has been a pursuit of the past decade, but recently it is coming to light that due to this infinite complexity, all goods have equal embodiments of all resources. A dollars worth of petrol requires an equal amount of oil to produce as a dollars worth of a massage. Thus a constraint of a single natural resource flows through to have an impact on the price of every good in the economy.
So when I previously wrote that supply side restrictions are the only way to go for improving environmental quality, it implies that economic output will be reduced. If Ehrlich knew then what ecological economists now know, he would have had a much different wager. In fact he did propose a second wager. He wanted to bet that the quality of the environment would deteriorate over the 1990s by referring to 15 different environmental quality measures. Simon declined because he believed that measuring such things did not reflect well-being. Although he did lose a wager about the price of timber in Canada, but blamed new government policies.
Tuesday, November 18, 2008
Is public transport for the public?
On a leisurely Saturday afternoon, I ventured down to the ferry with fiancé, child, friend and dog in tow, to take a trip across the river to enjoy a BBQ in the park with friends. I was initially impressed by the frequency of ferries – every 15 minutes on Saturday is pretty good I thought. I was not impressed by being refused entry because of the dog, nor was I impressed with the cost. $3.60 for a one zone return ticket per adult. That was even a discount from the regular cost of $4.80 on a weekday. Remember, these are the cheapest adult fares for a return ticket. For the three of us (luckily infants are free and two of us were full-time students) the cost was $7.20. For three adult fares it would have been $10.80, and if it were a weekday and three adults where headed to the park, it would cost $14.40. Does that seem a little much to anyone else?
We realised that it was cheaper to drive together in one car. Cheaper by a country mile in fact. Even with the fuel price around $1.20, the same round trip would cost less than $2 between us (and we could take the dog). It would still probably have been cheaper to take a car each!
With my economic hat on I saw the reason that the situation exists where private vehicle transport is now cheaper than public transport. Governments have spent decades (centuries?) subsidising private transport, rather than investing in public transport. You could logically argue that private cars are a form of publicly provided transport, since tax revenues are the dominant funding source for road building.
Governments must believe that public transport is not an appropriate or beneficial urban transport alternative. For if that was the case, less money would be spent on roads, and more on public transport, so that the incentives shift towards using public transport. You can’t build more roads and more public transport, and expect there to be a shift towards public transport use. By investing in both alternatives you have not changed the incentive structure – yes it is now cheaper to catch the bus/train/ferry, but it is also cheaper to drive! Public and private transport are substitutes. The more expensive one is, the increase in quantity demanded of the other. Therefore traffic jams, no parking, high registration costs, difficult licensing tests, high fuel costs, and strict vehicle emissions standards all provide incentives to use public transport (but sound like a list of things to promise if you are a government intending to lose the next election). On the other hand, new roads, improved traffic management, more parking, cheaper fuel and registration are good measures for reducing public transport patronage.
We realised that it was cheaper to drive together in one car. Cheaper by a country mile in fact. Even with the fuel price around $1.20, the same round trip would cost less than $2 between us (and we could take the dog). It would still probably have been cheaper to take a car each!
With my economic hat on I saw the reason that the situation exists where private vehicle transport is now cheaper than public transport. Governments have spent decades (centuries?) subsidising private transport, rather than investing in public transport. You could logically argue that private cars are a form of publicly provided transport, since tax revenues are the dominant funding source for road building.
Governments must believe that public transport is not an appropriate or beneficial urban transport alternative. For if that was the case, less money would be spent on roads, and more on public transport, so that the incentives shift towards using public transport. You can’t build more roads and more public transport, and expect there to be a shift towards public transport use. By investing in both alternatives you have not changed the incentive structure – yes it is now cheaper to catch the bus/train/ferry, but it is also cheaper to drive! Public and private transport are substitutes. The more expensive one is, the increase in quantity demanded of the other. Therefore traffic jams, no parking, high registration costs, difficult licensing tests, high fuel costs, and strict vehicle emissions standards all provide incentives to use public transport (but sound like a list of things to promise if you are a government intending to lose the next election). On the other hand, new roads, improved traffic management, more parking, cheaper fuel and registration are good measures for reducing public transport patronage.
Fluoride: Medication for the masses?
The Queensland government is currently phasing in fluoride to the reticulated water supply in many parts of the State. Yet there is by no means a scientific consensus that adding fluoride to drinking water provides net health benefits to the community. While there is debate regarding the ability for fluoridated water to improve the condition of teeth, there are more broad and significant implications of the decision to fluoridate water. I aim to add some further economic dimensions to the fluoride debate.
When considering a policy decision, an economist will seek to implement only those policies whose welfare benefits outweigh the costs. Regarding fluoridation, the benefits are the potential for reduced tooth decay and any health and psychological benefits that this may encompass, as well as reduced dentist bills. The costs include the provision of fluoride to the water supply, the cost to people who suffer allergies or long term side effects of which little in known, and the costs imposed on people who wish to drink water that contains no fluoride. Some estimates put the benefit to cost ratio at 56:1.
But an economist would take one step further, and would judge this policy decision against other alternatives. What about spending the money on education? If the benefit to cost ratio is higher than 56:1, then education spending should get priority.
The question the few people seem to raise is that if fluoridation is about medication of the masses, surely there are less obscure medicines that would provide greater benefits. What about adding vitamins to the water? Maybe anti-depressants? Viagra? To an objective observer, each of these options should be open to assessment as a potential policy if the social benefits outweigh the costs.
When I have the fluoride discussion with friends, this line of reasoning, about assessing alternative medications for the water supply, is generally the enough for them to actually think deeper about the fluoride issue. It raises questions like:
• How can you medicate anyone without any prior knowledge of his or her medical history?
• Why would you spend so much on putting medication in the water when most water from the reticulated supply is not consumed by people? Only about 1-2% of water in the home is used for drinking. Do we really need to fluoridate the laundry, the toilet, and the garden?
Asking the first question should really be enough to stop water fluoridation. The second question pricks the ears of an economist. If 98% of the fluoride is wasted, surely a more cost effective alternative would be to subsidise fluoride tablets, which would ensure the 100% of the fluoride gets to the people. A misallocation of 98% of a medication alerts even the serious fluoride believer.
Even for those who believe in the potential health benefits of fluoride, using the water supply for medication delivery is wasteful, and inappropriate.
When considering a policy decision, an economist will seek to implement only those policies whose welfare benefits outweigh the costs. Regarding fluoridation, the benefits are the potential for reduced tooth decay and any health and psychological benefits that this may encompass, as well as reduced dentist bills. The costs include the provision of fluoride to the water supply, the cost to people who suffer allergies or long term side effects of which little in known, and the costs imposed on people who wish to drink water that contains no fluoride. Some estimates put the benefit to cost ratio at 56:1.
But an economist would take one step further, and would judge this policy decision against other alternatives. What about spending the money on education? If the benefit to cost ratio is higher than 56:1, then education spending should get priority.
The question the few people seem to raise is that if fluoridation is about medication of the masses, surely there are less obscure medicines that would provide greater benefits. What about adding vitamins to the water? Maybe anti-depressants? Viagra? To an objective observer, each of these options should be open to assessment as a potential policy if the social benefits outweigh the costs.
When I have the fluoride discussion with friends, this line of reasoning, about assessing alternative medications for the water supply, is generally the enough for them to actually think deeper about the fluoride issue. It raises questions like:
• How can you medicate anyone without any prior knowledge of his or her medical history?
• Why would you spend so much on putting medication in the water when most water from the reticulated supply is not consumed by people? Only about 1-2% of water in the home is used for drinking. Do we really need to fluoridate the laundry, the toilet, and the garden?
Asking the first question should really be enough to stop water fluoridation. The second question pricks the ears of an economist. If 98% of the fluoride is wasted, surely a more cost effective alternative would be to subsidise fluoride tablets, which would ensure the 100% of the fluoride gets to the people. A misallocation of 98% of a medication alerts even the serious fluoride believer.
Even for those who believe in the potential health benefits of fluoride, using the water supply for medication delivery is wasteful, and inappropriate.
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