A very long reply to the peak oil blog comments

This blog is in reply to comments made on the ASPO blog on economics.

Mallencolly:
@mallencolly on July 13th, 2010 at 3:26 pm

1. Secondly, externalised costs are externalised *because* they are costs that someone else pays (whether through medical bills, cleanup costs, etc) rather than the polluter.
2. “...by not including them, you reduce the price of goods, increasing demand at every price level, causing the equilibrium price level to be too low and the equilibrium demand to be too high. ie overconsumption of the resources used and charged for as well as an overconsumption of the resources used not charged for.”

Does (1) include monetised costs (“pecuniary externalities”) or not?

@mallencolly on July 13th, 2010 at 3:59 pm
3. As for whether or not people should listen to economists, if people had listened in the early seventies about pricing for pollution we would not be having this discussion.

(2) and (3) suggest that you don’t have a problem with externalities as such, only with the lacking feedback, which makes your objection to Lawrence Summers confused, although this may have something to do with Pareto optima – see my discussion with Simon below.

@mallencolly on July 14th, 2010 at 1:09 pm

4. I take it from your last paragraph, then, that only violence can show caring? Why arent psychologists? Why arent politicians? Why arent lawyers? Why arent doctors? All of their fields are also affected.

The threat of violence makes non-violent tactics more effective (see serious histories of India’s independence struggles, US civil rights struggles, etc – non-violent tactics require the threat of violence in the background to work, and the non-violent leaders are usually quite frank about this relationship). With marginal exceptions, it is only through economic relations that psychologists, other doctors and lawyers are affected – there is no chance in hell that US and Canada are going to acknowledge their participation in genocide, especially not their real participation in genocide (mainly against Hutus, through genocidal royalist maniac, Paul Kagame, and genocidal maniac, Romeo Dallaire) in Rwanda, which lead to the Congo genocide – it would require reversing their lies about Rwanda. Politicians set up the relevant networks – why would the perpetrators work against their own life’s work? Economists are in the relevant position to study the dynamics. At the very least they could publicize the matters, although threats of violence are necessary in order to get change going.

@mallencolly on July 15th, 2010 at 4:55 pm
5. You link Applying Behavioral Economics to International Development Policy
http://www.rrojasdatabank.info/devecon/AndersonStamoulis.pdf - it contains the choice quotes “...market liberalization policies may end up in less market exchange than predicted” and “...farming unsustainably...” with regards to non-industrial farming, as compared to the west.

Maybe people participate less in market exchanges because they judge non-market alternatives to be better, and participate more in market exchanges as non-market alternatives are destroyed? The discussion of unsustainable farming is plainly psychotic in view of the implicit North American and green revolution reference farming behaviour – again, the latter steal from future generations.

6. You link ‘Rational Choice Models of Political Violence’
https://www.ihssnc.org/portals/0/PubDocuments/IHSS-RBv7.pdf
If one reverses this paper’s ideological assumptions (who’s doing the violence to whom), it becomes almost descriptive of reality. The ‘terrorist’ violence is negligible both in scale and economic effect to the violence of the west. It is precisely this study of the West’s violence and its relationship to the west’s economy that I’m asking for, and not finding.

Breeders aren’t going to solve any entropy problems, even under the most optimistic assumptions, including sending nuclear waste to Jupiter. (Can we avoid tinkering with the sun, please? I know you didn’t say anything, but the suggestion does recur.)

Simon:
@Simon on July 16th, 2010 at 1:45 pm

The poor cannot afford the price to undo the harm, and the harm falls disproportionately on the poor – incidence is utterly important in understanding the economic dynamics of externalities. Using mallencolly’s definition above, the poor cannot suffer an externality, as they don’t pay anything. Should one redefine an externality to be the cost necessary to undo the harm, then one can meaningfully speak of the market value of the harm, as the victim can decide to spend the money in another fashion. Surely, were the victim rich, I doubt you’d find fault with the quantity decided by a suit for damages, irrespective of whether they actually use the funds to undo the harm or use them on something else – why would you find differently if the victim is poor?

I take it that that comment was directed at me, rather than X Cepting. You’ve supplied a list of economists who deal with externalities in the abstract and market valuation, but none with the systematic export of entropy and its relationship to market valuation.

@Simon on July 20th, 2010 at 8:54 am
Any business manager makes use of some economic understanding, but I would hardly consider a hobbyist, or someone with only minimal understanding, as an economist, just as I wouldn’t consider a typical amateur radio operator to be an electrical engineer. To the extent that one has a detailed understanding, e.g. the radio amateur who has a detailed understanding of circuits, and can design a meaningfully new circuit, or the politician with the economic training who uses his economic understanding to devise a new situation (Pareto-optimal, for example, although substantially different from a previous Pareto-optimal situation from which the change occurred, and that places many people in a substantially worse situation, i.e. the change was not necessarily a Pareto-improvement), I consider him to be a practicing economist. To the extent that academic economists aren’t making empirical and theoretical studies of these matters, I consider them culpable; that includes you, with regards to efficiency. If an entrepreneur accidentally exports inflation, but doesn't see the pattern, his moral culpability is fairly small.

Both before and after the transfer, the situations may be Pareto-optimal (one candidate for your economic efficiency), but the switch is not Pareto-improving. It is however Kaldor-Hicks improving insofar as the X-efficiency, allocative efficiency and productive efficiency of western societies are higher than of less developed societies – the worst-affected have changed (non-Pareto-improving) but so what? Efficiency (X and productive, both economic) are dependent on creation and dispersal of entropy. In cases where the worst-affected have enjoyed improvements, it was necessarily at the expense of future generations, by using more available energy.

The ‘social cost’ (of externalities) consists of two elements, namely 1. (as mallencolly pointed out) a lack of feedback of reducing stock materials (and associated overconsumption in other stock materials), and 2. the harm to the victim (or differently seen, the transfer from the victim to the producer). You seek to transfer the (undue) profit to the producer to the (actually, a) general public (as only those with funds to buy the product can benefit from the correction), to correct (1); you are clearly not interested in undoing the harms to the victims, at least not in proportion to the harm that they suffer.

Perhaps then I was wrong to say that you are unaware of these facts, as your other statements seem to suggest that you are at least subconsciously aware of what is happening. You seem rather content to profit from the poor as long as relevant feedbacks are in place to prevent overconsumption. Insofar as the victims are in different currency zones (markets, in my and common usage, i.e. the purchasing power of a currency, or the ‘market’ for a currency, e.g. how many shoes will clear three hundred Rand, and therefor not terribly problematic), if the inflation is exported onto them, as long as some feedback is in place to deal with resource depletion, I don’t see you objecting – you seem to hide that they suffer the inflation – none of your suggestions, nor any of the suggestions/papers you link suggest that you want to end the transfer, only that you don’t want it to lead to an imbalance in your economy. Where are those economists who discuss inflation export explicitly? The links you gave are on externalisation, and as mallencolly (perhaps unwittingly) suggested, deal with bringing the economy closer to a Pareto optimum, but not with the basic question of justice, namely which Pareto optimum, i.e. whether or not inflation is exported – I keep on getting this feeling that you understand exactly, and that you are merely trying to hide it.

With regards to universities, I made one mistake, which was to claim that the extremes skew the averages. In fact, that is not the fundamental problem. You are confusing correlation with causation; to see the problem, do some ANOVA on university vs non-university, non-university certification vs its absence, and income. Extremes may play a role, but I suspect that if certification (which is somewhat correlated to university education, in that someone with university education will typically have greater opportunity to be aware of and to afford such certification) and university education are checked for connection to income, certification will win out; all my engineering and consulting friends point certification out as the key to income and job advancement, and can point to individuals who skipped the university education to go straight for certification. The census data given cannot resolve this matter.

Simon on July 21st, 2010 at 8:18 pm
How empirically useful (again) is Pareto-optimal/’efficient’? What we are discussing is the relative merits of different Pareto-optimal situations, some of which produce more than others, and which produce distinctly different harmful situations as a necessary feature of their operations.

@Simon on July 21st, 2010 at 8:22 pm
The matter regarding Grameen is that it only has a market insofar as dubious schemes (green revolution-caused debts, which would not have happened if proper accounting of future agricultural performance were considered – green revolution methods destroy soils, etc.) are in place. Most of the people using the services of this bank are using it to cover costs that odious seed prices etc. cause. Why aren’t they farming (anymore)? Or why are they fleeing to India to farm? The reason that there is a need for uncollatoralised debt is precisely because the investments forced onto them don’t make economic sense, and there is little economy to be had, so Grameen games don’t help – Bengalis wouldn’t be working all over the Muslim world (including Sudan) if their economy were growing, and it is too heavily loaded with entropy (destroyed soils, rivers etc) to grow. Grameen cannot solve these problems, but gives the hope of a solution; people seeing what is happening are naturally disgusted, as it merely sells off more of the remaining negative entropy. By analogy, a sufficient dose of arsenic can cure HIV by killing the patient.

@Simon on July 22nd, 2010 at 3:12 pm
Pigou’s (and others’) methods only solves the problems that mallencolly identified; they don’t undo the harms to the primary victims (incidence again), and again, the gross harms I point out (Somalia, CK) do not make the situation necessarily Pareto-suboptimal.

There are two reasons for wanting papers on Somalia and CK. The first is that their situation define much of the state of the world (state variables regarding entropy and its diffusion). The second, to play with your analogy, could be phrased as “Why would I want to know about malnutrition AND HIV?” (see leptin...) or “Why would I want to know about Schizophrenia AND the Dutch?” The connection is precisely that Somalia and CK are critical case studies in the (thermodynamic) operation of the system – you aren’t going to escape thermodynamics, and (again) your X-, productive and allocative efficiency (to achieve a Pareto-optimal efficiency) are dependent on your dumping on Somalia and CK. Lawrence Summers understands, and understands not only that efficiency is Pareto-optimal, but also that different Pareto-optimal situations are possible, and that just because shifting from one Pareto-optimal situation to another is not Pareto-improving does not mean that all Pareto-optimal situations are equal; he just picked the class of Pareto-optimal solutions most in his society’s favour.

I took my time to read all the references, to see if I had missed something. I conclude confidently that I haven’t.

Harry Stotle:
A better analogy would be, why is there no discussion in the literature about over-feeding and leptin suppression leading to diabetes? In the nutritional literature, there certainly is, but a meaningful analog is missing (as far as I can tell – I’ve read all the papers cited here so far, and not one deals with the issues I’ve been raising).

Orson:
@Orson on July 15th, 2010 at 9:48 pm
Why are economists (I include you and Simon – mallencolly let the substance slip) fudging (deliberately or not) about motivation and efficiency? Again, where is the literature on inflation export (the motivating aspect of externality that I raised, rather than externalisation in general, on which you guys have continually harped)? And how is this matter irrelevant to efficient allocation? See my remarks to Simon above.

@Orson on July 16th, 2010 at 3:02 pm
See my remarks above and to Simon – the issue is not (lack of) awareness (or responsibility per se) for externalities in general (among academic economists), but are culpable for failure to explain why they are utilised internationally, and for giving ‘solutions’ that fail to terminate externalities and their associated wealth transfers between societies, but instead give solutions that merely avoid certain repercussions of externalities to the perpetrating societies (and which happen to reduce certain externalities).

@Orson on July 19th, 2010 at 4:21 pm
Michael Hudson (for example) doesn’t have difficulty explaining the substance of what happens (at least, the part that he is interested in). Likewise, I’ve had no difficulty explaining above, in economic terms no less, why market actors do what they do, while pointing out the significant omissions by academic economists. Real economists don’t avoid these issues? Really? Where are the economists who frankly discuss how to achieve externalisation with feedback for resource depletion etc. for the purpose of exporting inflation (especially while achieving Pareto-optimality in the final analysis, irrespective of whether the shift is Pareto-improving)? I can point only to Hudson and a few other radicals, and Summers. Not even Stiglitz discusses these matters, as his concern is Pareto-optimality, and not maximising average utility. None of the links you supply below (@Orson on July 21st, 2010 at 3:07 pm ) discuss honestly the effects of the interventions, namely that they don’t undo the externalisation, but only avoid the repercussions to the perpetrators (I’ve read all of them except Baumol - see at the bottom - which is why I’m only answering now). Efficiency as economists use it refers to Pareto-optimality and comparable concepts, e.g. as listed to Simon above, so yes, it entails costs to all, but not to all equally – your concern is not general welfare, at least if the literature (including what you’ve supplied) is anything to go by. As such, the remarks on Zoologists and Physicists stand. Now that I’ve read their papers, their status as more or less mainstream is irrelevant to me – they don’t deal with the issue I’ve raised, namely the utilisation of externalities to export inflation; again, they just give methods to undo the harm to the perpetrating societies, in terms of closer-to-Pareto-optimal allocation. I keep on having to repeat this, but this seems to be a consistent failing in your (Orson, Simon, mallencolly) understanding.

@Orson on July 22nd, 2010 at 5:25 pm
Is it by now clear why incidence matters, and why none of the economists listed propose anything that substantially undoes the harm to the primary victims? To restate what I said to Simon, you are socialising the profit of the harm done to these communities. That does to some extent lessen the incidence, as the primary perpetrator obtains less profit by his action, but it does not solve the root problem, and thermodynamic considerations suggest that you’ll only shift the problem elsewhere (e.g. CO2 and the energy costs of manufacturing a Prius vs the lifetime/manufacturing and use CO2 costs of a Hummer).

Krugman’s paper actually works more or less for your argument, because the ultimate incidence of CO2 is roughly publicly equal. Thermodynamic considerations call his scheme into question (and this is why I harp on Somalia and CK) – CO2, Somalia and CK are the ‘externalities’ on which the system depends. “The gangrene is attacking his upper legs, but we aren’t concerned, as our interventions prevent harm to the brain.” Breeders won’t solve the negative entropy problems – fifty years ago there were ten times as many big fish in the seas, and privatisation of the seas have made matters worse – look up commercial fish farming, sea-lice and the effects of sea-lice on wild fish stocks. The iatrogenic chickens have begun coming home to roost.

Final comments on the papers listed:
Arrow discusses how externalisation can occur through lack of information - i.e. not the dynamic in which I'm interested. Stiglitz discusses taxation as a means to shift spending and so reduce average externalisation transfers inside a (national) economy - his suggestions would at best, when applied to the dynamics to which I refer, modulate in the fashion that Pigou does, i.e. manage the misallocation. Wendner (I take it that he rather than Becker was intended - I couldn't find the Becker paper) discusses technical details of Pigouvian taxes, and is as such an addendum to Pigou's management. Coase similarly provides an allocation solution, not an undoing of the externality, and again, the broader public profits at the expense of the primary victims, with appropriate allocation. I haven't read Baumol yet, but why would he be different?