Economics – Page 133 – a sibilant intake of breath

Sandwich economics

The following is a factor price breakdown for the combination that comprises more than 80% of my lunches (n=28):

The cheese in question is either Cheshire or Wensleydale: certainly the two best foodstuffs that I have experienced for the first time while in England.

The surprising factor is clearly the cost of tofu. That said, I do use about 62.5g worth per sandwich. It still seems unfair that the least tasty part of the sandwich should cost the most. If I do end up going to London this weekend – as now seems highly likely – I can pick up some much lower cost tofu in the small Chinatown there.

Valdez damages halved

Today, an American court halved the punitive damages being imposed on Exxon for the 1989 Valdez oil spill from US$5 billion to $2.5 billion. Reading about it prompts a number of strands of thinking:

Firstly, it surprises me that punitive damages still have not been assigned. Chances to bemoan the slow pace of litigation in the United States (and all the problems that accompany it) are many. No doubt, a great deal of whatever settlements are reached will go to the hordes of lawyers, photocopiers, and expert witnesses who worked on the case, rather than to the people who suffered from the spill or to the rebuilding (such as is possible) of the affected ecosystems.

The second thought that comes to mind is along the lines of: “Didn’t Exxon earn record profits this year?” They earned US$10.4 billion (£5.6bn) in the second quarter of 2006. While this is a fairly natural response, it is not necessarily a very legitimate one. The damages being considered are meant to address the conduct of the company in 1989, something that is not obviously related to its present financial circumstances. At the same time, the purpose of punitive damages is to encourage a company to exercise greater caution in the future, when engaging in similar activities. Not having captains that swig vodka before heading to the bridge is a good start. Reading about that, one has feels an emotional inclination to wring them for all they are worth.

To what extent would charging Exxon $5 billion instead of $2.5 billion alter the likelihood of future spills? The purpose of such punishments is not revenge, but the inducement of desirable changes in behaviour. No punishment short of utterly bankrupting the company would actually stop them from shipping oil from Alaska to the contiguous 48 states. That said, a big punishments also catch the attention of other big oil firms who have the ability to take action to make such spills less likely, and less severe if they do take place.

A final issue to consider is that of moral hazard. If the penalty is cut in half, after seventeen years in court, it suggests to companies that they can reduce such costs just by spinning things through the legal system for as long as possible. The whole situation is like a test case from my Law and Economics course at UBC with Robert Gateman. Which outcome secures the best mix of equity and efficiency? Which establishes the best incentives for future behaviour?

Of course, I am not one of the judges in the case. I have not examined the relevant facts and laws and, as such, it is impossible to know whether this reduction is warranted or not. My personal sympathies do not lie with oil companies, but they have the same right to be treated with due process under the law as any other entity within society. Hopefully, regardless of the final amount of the penalty, mechanisms have been put into action that will prevent catastrophes like the Valdez spill in the future.

Moral justifications for foreign aid

The secular moral justifications for giving aid seems to be divided between two strains: one focusing on payments being made in compensation for past or present harmful activity on the part of the giver (somewhat akin to domestic tort law) and one focusing on redistribution for reasons unrelated to any harm done by the giver to the receiver.

Note that this listing is meant to cover moral justifications only: self-interested rational calculations, like the prospect of creating new markets, are not being considered. The listing is meant to include justifications both for development aid used to build economic and social capacity over time and humanitarian aid used to help address immediate crises. I am not considering religious forms of morality.

Retributive:

Compensation for past colonialism (including past support for repugnant but allied regimes during the Cold War and similar periods)
Partial or complete redress for ongoing harmful activities (economic policies harmful to poor countries, exploitative international labour practices, arms sales, providing markets for illegal drugs and other problematic commodities, CO2 emissions, etc)

Redistributive:

Providing funds and resources required to attain a basic standard of living, predicated on a notion of essential human rights
Paying to reduce total human suffering, especially among the innocent
Transferring wealth from those who already have a large amount, and thus derive less utility from each additional dollar, to those who have a small amount and thus gain more utility at the margin
Giving aid based on a Rawlsian conception of hypothetical contract based on a veil of ignorance
Compensating for the fact that some are poor and some are rich for arbitrary reasons, such as where they were born (See prior discussion about the morality of inequality)
Giving aid based on the idea that the capacity to give charity and the existence of a world where it is required makes doing so obligatory for the giver

I am writing a paper for my developing world seminar on: “What is the moral case for wealthy countries to give aid to poorer countries? What kind of aid (if any) is justified?” and trying to come up with a comprehensive list of general reasons. Can anyone add to the list above?

Ethical consumerism: worthwhile or harmful?

In the December 9th issue of The Economist, which I am just starting today, they come out against organic food, Fair Trade, and the idea that buying locally grown food is superior to relying on big retailers and large commercial farms (Leader and article). Organic food means producing lower yields for the same area of land: a big problem when you have a growing population and a desire to preserve wilderness. Fair Trade keeps farmers in poverty by encouraging farmers to keep growing commodities with volatile prices and low margins; moreover, most of the premium consumers pay goes to the retailer, rather than the farmer. As for local food, they say that large scale farming and food retailing produce food using less energy and resources (sheep are cheaper to farm in New Zealand and ship to the UK than to farm here). The solutions to problems like poverty and climate change, therefore, lie in carbon taxes, reform of agricultural trade policy, and the like.

Fair trade has always been a somewhat problematic concept, in my eyes. The whole basis for the legitimacy of exchange is in the process: the voluntary nature of the agreement means that both people who engage in it must perceive themselves to benefit. Now, there can be problems with this:

The people may be wrong about what is in their interests
Third parties may be affected
The choice to trade may not be voluntary

All of these are real problems in many economic circumstances, but it is not clear why paying more for a label alleviates any of them. If we abandon the idea that the legitimacy of exchange is confirmed through its voluntarism, then we are left with the task of developing a comprehensive framework based on a teleological conception of justice (what people end up with, as opposed to how they get it). Even if that is desirable, achieving it is not simply a matter of paying a few more dollars a week for coffee or bananas.

As for the problems with local and organic food, the issues there are primarily empirical and thus hard for me to evaluate. If the price of carbon emissions was included in that of food (and all other products), I would see little problem in eating tomatoes from Guatemala or apples from New Zealand. Similar criticisms are leveled in Michael F. Maniates’ interesting article Individualization: Plant a Tree, Buy a Bike, Save the World?. Maniates’ major point is that you will never get anywhere with a few token individual gestures. What is necessary is the widespread alteration of the incentives presented to individuals. Otherwise, you have a few people who salve their consciences by walking to work and buying from a farmers’ market, while not actually doing anything to address the problems with which they are supposedly concerned.

While the position taken by both The Economist and Maniates may overstate the point, both are worth reading for those who have accepted uncritically the idea that important change can be brought about through such ethical purchasing.

PS. Unfortunately, Oxford doesn’t have full text access to the journal Global Environmental Politics. If someone at UBC or another school could email me the PDF, it will save me a trip to the library and some photocopying costs, not to mention the integrity of the spine of their August 2001 issue. Here is a link to the page on their site for this article and another to a Google Scholar search that has it as the top hit.

[Update: 1:10am] A friend has sent me a much appreciated copy of the above requested PDF.

Live-blogging Keohane

Anyone interested in reading about Robert Keohane’s presentation to the Global Economic Governance Seminar can do so on my wiki. There is still nearly an hour in the session, so if someone posts a clever question as a comment, I will try to ask it. I doubt anyone will do so in time, but it would be a neat demonstration of the emerging capabilities of internet technology in education.

Since this is a publicly held lecture, I don’t see any reason whatsoever for which the notes should not be available. Those who don’t know who Robert Keohane is may want to have a look at the Wikipedia entry on him.

[Update: 7:30pm] Robert Keohane’s second presentation, given at Nuffield on anti-Americanism, was well argued but not too far off the conventional wisdom. I am here taking “the conventional wisdom” to be that in a survey on Anti-Americanism that I am almost sure ran in The Economist during the last couple of years.

Basically: it does exist, more so in the Middle East than anywhere else. The Iraq war has exacerbated it almost everywhere, but the biggest turn for the worse has been in Europe. The policy impact of Anti-Americanism is not very clear. Finally, lots of what would be taken as a legitimate political stance if expressed by an American at home is taken as Anti-Americanism elsewhere.

Keohane distinguished four sorts of Anti-Americanism, three of which have been expressed on this blog. The first was the kind grounded in the belief that the United States is not living up to its own values: what he called Liberal Anti-Americanism. Guantanamo, and everything that word conjures up, gives you the idea. The second is social Anti-Americanism: for instance, objections to the death penalty of the absence of state funded health care. The third is Anti-Americanism based on fear of encroachment into the domestic jurisdiction of your state, what he called the state sovereignty variety. The last was radical Anti-Americanism, which I would suggest is distinguished more by the language used to express it, the degree to which the positions taken are extreme, and the kind of actions justified using it than by the kind of analysis that underscores the rational components thereof.

Paul Martin on economic governance

Former Canadian Prime Minister Paul Martin’s talk was candid, informative and engaging. At a Global Economic Governance Program seminar, he covered a very diverse collection of issues: from China’s hunger for natural resources to the regulation of multinational corporations. I have never seen the room so packed, and the questions were excellent. He managed to get some good laughs, as well. In response to my question about climate change, he said, in part:

“Climate change has long since been recognized as caused by human activity principally.

The net effect is going to be devastating.

Prince Edward Island will disappear; Toronto won’t. That’s a disaster on both sides

That would make a great headline back home, wouldn’t it?”

Generally, he was very open, but there were certainly a few notable questions ducked. He declined to endorse a candidate for the Liberal leadership race when asked, for instance. People should feel free to have a look at my transcript, in which I have tried to quote directly wherever I could type fast enough.

PS. As today’s photo demonstrates, there is a downside to having a camera that takes 2-3 seconds to charge and fire its flash.

Development, equity, and the WTO

My opinion of the World Trade Organization has probably shifted more than that for any other international institution, during the course of university study. The conception of the WTO as some sort of monolithic and powerful body, forcing countries to do things against their will does not seem like an accurate one. Where such pressures do exist, they are more parallel to the WTO (caused and driven by the preferences of member states) than self-arising from within. The inability of the WTO to enforce its rulings on trade – save through the highly problematic vehicle of allowing the country sinned against to raise its own tariffs – seems to underscore how weak the organization really is.

Naturally, all of the above assumes that free trade is generally a good thing. While there are undeniably problems – some of which can be well expressed using an economic framework of analysis – there are myriad advantages to global economic integration. Globalization needs to be modified so as to operate better as a process that aids in poverty reduction; likewise, it needs to become more environmentally balanced. With the Doha Round utterly stalled it isn’t clear how the WTO could contribute to either aim, a reasonable case can be made that it is at least not worsening either. A rules-based system like the WTO seems to hold out at least the possibility of a more just relationship between rich and powerful states and those that are poor. While the system is highly imperfect in practice, it does seem to have a small net positive effect.

All that said, since I need to argue that the WTO is a bad thing for developing countries this Thursday, I should start looking at the most eloquent and well defended expressions of the the position.

People interested in economic issues should have a look at Trade Diversion: a blog run by Jonathan Dingel, an M.Phil student in economics.

Conservatism and the environment

In the northern lower reading room of the Bodeleian, I read a really interesting chapter on ecology and conservatism by Roger Scruton, from the University of Buckingham.¹ He makes a surprisingly solid argument that a greening of conservatism would be more of a return to its roots than a departure into uncertain territory. He evokes the position of Burke that all living people are involved in a trusteeship involving both the living and the dead. The moral onus is to maintain, resist damage, and pass along that which has been inherited.

The problems with this position are twofold, and both problems arise from the parochialism of conservative environmentalism. I have always admired the sensible conservative caution about grand projects and the building of utopias. That said, encouraging enclaves to behave in environmentally responsible ways does nothing to protect those within from their neighbours (or those across the world) who do not behave similarly. When the greatest environmental threat in the world (climate change) arises from collective economic activity, a love of one’s home and country, and the fervent desire to protect both, will come to nothing without international cooperation and the changing of behaviour, using some combination of consent and coercion.

The second problem is that of material equality. Protection of what you have inherited for those who are to follow may be a noble individual pursuit (think of the shame attached to those who squander fortunes and wreck empires), but it is not a path towards greater global justice. Now, greater global justice may be exactly the kind of Utopian project that conservatives are smart to be wary about. That said, there can be moral impulses strong enough to make us embark upon difficult and uncertain projects, simply because it would be profoundly unethical to behave otherwise. When it comes to extreme poverty and the deprivation and danger under which so much of the world’s population lives, I think those impulses are justification enough.

Strategically, it seems essential to foster an emergence of green conservatism in the political mainstream. We cannot oscillate between relatively responsible governments and those that act as wreckers. Moreover, once both sides of the mainstream have accepted how vital the environment is, and the sacrifices that must be made to protect it, there is a better chance that the debate and policy can move forward. If one group is forging ahead with more far-thinking ideas, they risk excessive electoral punishment. If, however, the thinking of both politicians and the population as a whole evolves towards a more serious way of thinking about environmental management, there is a much greater chance that the push will be sustained and effective.

[1] Scruton, Roger. “Conservatism.” in Dobson, Andrew and Robyn Eckersley. “Political Theory and the Ecological Challenge.” Cambridge: Cambridge University Press. 2006.

Experts: scientists and economists

Here’s a little bit of irony:

According to BBC business correspondent Hugh Pym, the report will carry weight because Sir Nicholas, a former World Bank economist, is seen as a neutral figure.

Unlike earlier reports, his conclusions are likely to be seen as objective and based on cold, hard economic fact, our correspondent said.

The idea that economists are more objective than scientists is a very difficult one for me to swallow. While scientific theories are pretty much all testable on the basis of observations, economic theories are much more abstract. Indeed, when people have actually gone and empirically examined economic theories, they have often been found to be lacking.

Part of the problem may be the insistence of media sources in finding the 0.5% of scientists who hold the opposite view from the other 99.5%. While balance is certainly important in reporting, ignoring relative weights of opinion is misleading. In a study published in Science, Naomi Oreskes from the University of California, San Diego examined 10% of all peer-reviewed scientific articles on climate change from the previous ten years (n=928).¹ In that set, three quarters discussed the causes of climate change. Among those, all of them agreed that human-induced CO2 emissions are the prime culprit. 53% of 636 articles in the mainstream press, from the same period, expressed doubts about the antropogenic nature of climate change.

I suppose this says something about the relative levels of trust assigned to different expert groups. Economists study money, so they naturally must know what they are talking about.

[Update: 25 February 2007] I recently saw Nicholas Stern speak about his report. My entry about it contains a link to detailed notes on the wiki.

[1] Oreskes, Naomi. “Beyond the Ivory Tower: The Scientific Consensus on Climate Change.” Science 3 December 2004: Vol. 306. no. 5702, p. 1686. (Oxford full text / Google Scholar)

Inequality a problem in itself?

A serious moral question arose during today’s seminar: Is inequality in wealth a problem, in and of itself?

Specifically, if there are two individuals or states where one is poor and one is rich, and both are getting wealthier but the richer state is getting even richer faster, is this a problem?

Within the question, there are two sub-cases. In the first of those, the growth in the rich state is completely separate from that of the poor state. Imagine they are completely disconnected and have no engagement with one another. Does the fact that the GDP of the rich state has risen by 50% and that of the poor state by only 5% matter, in a moral sense?

The other case is that the 50% growth in the rich state is somehow causally tied to the 5% growth in the poor state. Specifically, the latter would be higher if the former was lower. Now, that is entirely possible, but this is a different moral category. In the first case, one would have to appeal to general moral cosmopolitanism. In the latter case, we can refer to a moral tradition akin to that of the law of tort: you have harmed me, and you owe me something. This does not speak to the fundamentally immorality of inequality.

All contributions to this discussion are encouraged.

[Update: 7:00pm] To be clear, I do not dispute the fact that it is virtuous for the rich to help the poor. I am a firm believer in the moral value of philanthropy. The question above is about obligation, not charity.