Category: Economics

Matters of money

Science, the environment, and development

Today’s seminar for the Global Economic Governance Program was really excellent, discussing the future of the World Bank and International Monetary Fund. On the panel were Jon Cuncliffe, Paul Collier, and Ngaire Woods. Overall, I would say that they agreed more than they disagreed. They primarily identified and discussed two areas of interest: the global financial consequences of the emergence of China and India and the role the Bank and the Fund should play in assisting development within countries that are either stagnating, or finding themselves at the start of an awkward path to reasonable prosperity.

While there, I realized that development might be the missing factor for my thesis. Conversing with Peter Dauvergne by email, he has identified the incredible variety of work already being done in the field of science and environmental politics. I need more of a focus if I am to say something new. To focus on the scientific and environmental questions that exist within the two areas listed above might be a good way to move forward. It captures concerns like China’s growing need for energy and resources, as well as issues like the problems of desertification and lack of decent access to water in sub-Saharan Africa.

Potentially, this is a way of bringing a lot of reading I’ve been doing that is somewhat peripheral to both the program and my thesis back into line. I don’t think it would be wise to extent the topic to consider health, which is also a fascinating intersection between science and development, but to use development to create a balanced triad between science and environmental politics might lend direction and balance, without going off topic.

Dr. Dauvergne also suggested that I read the last few years worth of issues of Environmental Politics: the journal from the MIT Press which he edits, as well as a thesis entitled Advocates, Experts or Collaborative Epistemic Communities by Lindsay Johnson, an MA student of his.

Comments would be especially appreciated on this, since I need to present my preliminary research plan on Tuesday at 11:00am.

On the price of oil

Tristan asked me a few days ago whether the status of oil as a non-renewable resource means that it must rise in price over the long term. It’s an interesting question. Here is a fairly classical economic answer. The point here is not to consider the possibility of short-term price shocks, which are quite a different sort of phenomenon, and one not related directly to the scarcity or abundance of oil in the ground. Rather, the point is to consider whether the fact that oil reserves develop at a rate that is negligible compared to the rate at which they are exploited means that oil as a commodity is destined to become ever-dearer.

I would contend that there are three prices of oil which we can consider, and two of them are highly relevant. The first cost is simply the nominal cost of any particular grade of oil at a point in time. That is to say, the cost in whatever unit of currency you care to use. These are not directly comparable, over time, because they do not factor in inflation. The second, more relevant, price is the nominal price adjusted for the rate of inflation. While there are difficulties in properly assessing the rate of inflation, a price that takes it into account as can best be managed does a better job of reflecting what the price of oil is, relative to other commodities. Economists call this the ‘real’ price of oil. The third price, which I will get into further below, is the relative price of oil as a factor of production, from the perspective of any firm and firms in aggregate.

Examining the price trend, firstly, there are considerations of supply and demand. These are fundamentally related to the rate of oil extraction, not to the total available reserves. That said, those watching the levels of reserves might anticipate future scarcity (doing things like choosing less oil intensive technology or making bets on higher oil prices in commodity markets). Sticking to flows for the moment, there does seem to be a considerable extent to which oil production can be increased in the medium term. Especially given today’s high oil prices, fields that were previously not commercially viable have become so. Likewise, fields that were depleted to the point where the cost of extracting an extra barrel of oil was at or below the value of that oil have become viable again. This kind of incentive will emerge whenever the real price of oil rises. The potential to bring new oilfields onstream in the medium turn should act to mitigate – though not eliminate – price rises in oil.

The next big issue is substitution. We use oil for a great many purposes: from powering vehicles to making plastics and fertilizers to generating electrical power. In some of these applications, it can be more easily replaced with alternatives than it can in others. While you would be hard-pressed to make many plastics without oil, electricity can certainly be generated in other ways. At present, the global system for distributing natural gas is far less extensive than the one for distributing oil. As greater scarcity and higher oil prices are experienced and anticipated, states will shift their energy production strategies towards those based on other technology. The degree to which such shifts can take place is called the elasticity of demand: the easier is it to substitute, the smaller price rises will be, both in the short and long term. In almost all cases, elasticity of demand becomes greater with time, as firms and individuals have more scope to modify their consumption and production choices.

Relative factor prices provide one market mechanism by which production choices are made. That is to say, if the price of an input – say labour – rises, firms will modify their production strategy in the short, medium, and long term to reduce the usage of that factor to an efficient level. How big the changes they make have to do with their anticipation of future movements in factor prices. Through the existence or anticipation of higher oil prices, firms will be driven to make production decisions that reduce their usage of oil, while increasing their usage of other commodities.

In the long term, major technological change also promises to help us shift away from oil. Biotechnology and genetic engineering promise ways to produce fuels and polymers from plants. Electrical generation based on renewable sources can offset that from hydrocarbons. Organizational change can also play a role. Power sources and power usage can be brought physically closer together, reducing the cost of transport. Likewise, the amount of travel undertaken by individuals and firms can be reduced through planning that minimizes it.

A final inductive point is that, while people have predicted for hundreds of years that all manner of minerals are in danger of running out, this has not taken place for any. Indeed, the real prices of commodities like gold, silver, and copper have been falling in the long term. For a lengthy statistical treatment of this, see Bjorn Lomborg’s The Skeptical Environmentalist.

The short answer, then, is that we have reasons to believe that the real price of oil does not need to increase as the commodity itself becomes scarcer, provided the above assumptions about the capacity for factor substitution and technological change are accurate. Even if not, the same considerations indicate that price rises will at least be moderated in the medium and long-term. It should also be remembered that the overall phenomenon of economic growth increases the buying power of individuals and firms. That is to say, they can each afford more goods and services than they could before. As such, the total proportion of an individual or firms spending power devoted to oil need not grow at the same rate as the price of oil.

Thinking about the Copenhagen Consensus

The Copenhagen Consensus was a project organized by Denmark’s Environmental Assesment Institute, meant to identify areas where relatively modest sums could lead to large improvements in human welfare. Unsurprisingly, most of the initiatives most strongly endorsed involved things like improving basic health and nutrition, as well as the control of infectious diseases. Almost without a doubt, these are the things that can produce the biggest gains in human welfare for the lowest cost. They should all be funded, using any available mechanisms for doing so.

At the bottom of their cost-benefit ranking come schemes to tackle climate change. This is a methodology that I feel inclined to challenge on a couple of grounds. Firstly, it’s fallacious to say that we have a simple choice between providing clean water in impoverished areas and developing less carbon intensive forms of electrical generation. There isn’t a set lump of spending to be allocated to one activity or another. When a government spends money to deploy aid supplies and sandbags to a flooded area, it should do so by dipping into funds for long-term environmental management.

Secondly, it may well be that things exist that are both exceptionally expensive and still necessary. When it comes to climate change, we are talking about the long-term habitability and character of the planet. This isn’t something that can be reasonably thought about in standard cost terms, because the value of it does not discount as we look farther into the future.

What is necessary to complete the Copenhagen Consensus project is an awareness of politics. It’s wonderful to know which areas can profit most handsomely from modest investment, but we must be mindful of the decision making processes that go into the allocation of such funding. We must take the sensible and identify the plausible within it. On the issue of climate change, that probably means continued efforts to learn just what the changes will entail, in terms of human beings and the planet’s biological and climatological systems. It also means developing means for mitigating the problems that are already certain to arise: especially for those who lack extensive means of their own to either deal with the problem of climate change or its consequences.

An orrery of errors

Shadow on brick wall

One of the trickiest questions of environmental politics is always whether we are actually managing to deal with problems, or whether we are just shifting them elsewhere – either spatially or temporally. This is true on many fronts: with regards to pollution, with regards to resources, and with regards to the overall intensity with which we are exploiting the earth. Our experiences of environmental conditions in the rich world are certainly not reflective of the overall global story, nor of the ultimate consequences.

Looking first at pollution: during the early periods of their industrialization, the countries that are now the world’s cleanest were polluted to the point of seriously impinging upon the health of those who lived within them, particularly in the cities. London’s notorious fogs were more the product of particulate matter from burning coal than the product of the natural humidity of the place. Some Japanese cities were so saturated with heavy metals from industrial sources that they became notorious for the illnesses and birth defects that resulted. Evidently, the bulk of these problems have now been overcome in the developed world. Zoning laws, environmental regulations, new technologies, and the rest have all come together to make our air and water broadly safer than they have been since the industrial revolution.

The extent to which we can cheer this is, however, mitigated somewhat in the knowledge that much of the health and safety we enjoy is the product of misery elsewhere. Consider the conditions in the industrializing regions of India or China. Consider the conditions in the various resource sectors that provide the raw materials of affluence: from coal and diamond mines to hazardous timber industries run by corrupt national armies and organized crime syndicates in the Asia Pacific.

Indeed, resources are probably the area where this outsourcing can be most obviously seen. What forests remain in much of the developed world are fairly rigorously protected. Even Canada’s vast timber industry has requirements for conservation, replanting, and the protection of streams. I am certainly not claiming that this industry is perfect, nor entirely sustainable in its present form, but it is clear that these kind of standards certainly do not exist worldwide. Where once the big area of concern among environmentalists was the Amazon rainforest in Brazil (certainly still in danger from a growing human population and the desire for land), the real, widespread damage being done today is in Asia: where the smoke from massive land-clearing forest fires occasionally rains down on cities and where Japan uses more tropical hardwood than any other nation in the world. The primary use: shaping concrete.

The most difficult to assess area in which such phenomena are occurring is in terms of just how much stress vital ecological and climatological systems can endure before they are degraded in the long term. I needn’t remind any long-term readers about the example of fisheries, but is also bears considering just how much toxic and radioactive sludge we can continue dumping into the sea before the problem comes back to bite us. Consider the dozens of Soviet nuclear warships and submarines that have been scuttled off obscure portions of the Russian coastline: both well-stuffed with spent fuel and other radioactive waste and, in most cases, themselves rendered dangerously radioactive. Like the concrete tomb in which the Chernobyl reactor has been encased, it is only a matter of time before these containers are broken down by time and corrosion.

A similar story of large scale pollution can be told about the atmosphere – and I am not talking about greenhouse gasses and climate change. A broad collection of chemicals including the products of burning garbage, as Japan does widely, industrial chemicals, like the PCBs leaking from the old RADAR stations along Canada’s Distant Early Warning Line, and pesticides have such chemical compositions that they break down only extremely slowly in the biosphere. They do, however, concentrate in fatty tissues and in ever-greater concentrations as they progress up the food chain. The long-term ramifications of these persistent organic pollutants are, naturally, far from entirely known.

As for climate change, this is the macro-level elephant in the room. While we don’t know exactly what it will involve, what magnitude it will be, and what it will cost to deal with, the reality of climate change demonstrates how human activity can impact the entire planet. It also underscores the extent to which our present prosperity may be banking colossal problems for future generations.

The point of this is not to be overly alarmist, nor to endorse specific policies for dealing with the above problems. The point is related to how problems need to reach a certain level of severity before action against them comes together. Look at the present political circuses about health care and pensions in all the demographically-shifting rich states. Sometimes, action taken at the point where danger is apprehended is effective. Look at the Montreal Protocol on chlorofluorocarbons: the major class of chemicals that was eroding the ozone layer. Within a couple of decades of the identification of the problem, a fairly effective international regime was in place to begin dealing with it. The ozone is recovering.

Looking through the literature, you will see the ozone example a lot. That’s not just because it is a fairly good example of international cooperation on a clear environmental problem: it’s because it is one of a few success stories among myriad failures. Hopefully, in the next few decades, we will gain tools to better understand the future consequences of present choices and actions. Likewise, I am hopeful that we will develop the wisdom – individual and collective – to begin curbing contemporary demands and wasteful and destructive contemporary practices, both with an eye to global equity and another towards those who are to succeed us on this planet.

Population and the environment

One spectre that has long haunted the environmental debate is that of population size. Partly, that controversy seems to derive from some of the extremely dodgy characters who have made it a top concern. Plenty of very ill-informed commentators have based doomsday scenarios around population growth figures. Still, there are reasonable people taking a similar line and it does seem intuitively obvious that fewer human beings would put less strain on limited resources, all else being equal. Particularly among those who want to ‘make poverty history’ (a noble goal, though only possible when poverty is measured in absolute terms), it seems clear that six billion people simply cannot live at the level of affluence of today’s richest, barring some massive change in the way resources are acquired and transformed into goods.

The classic environmental liberal argument says that as people become richer, their family sizes start to fall. This may be because they are better educated and women gain both access to birth control and the knowledge and freedom to use it. It may be because people in relatively undeveloped economies use large families as a strategy to avoid poverty in old age. With the advent of banking, pensions, and the like, the need to do so diminishes. The evidence for slowing population growth is certainly strong, with the UN projecting that the human population will peak sometime around 2050.

For me, the absolute number of people on the planet is obviously far less important than the conditions under which they live. At one point in human history, after the Taba explosion, there may have been as few as 2000 human beings on the planet: living in conditions similar to those of a nuclear winter. Obviously, population size and quality of life are not perfectly correlated. By that metric, population can perhaps best be thought of in terms of the effect it has on people’s lives: especially those of women and the poor. The Rawlsian strategy of focusing on the effect on the least advantaged does have an intuitive moral appeal to it.

The great appeal of the ‘greater knowledge and empowerment leads to use of birth control and slowing population growth rates’ argument is that it serves both the goal of reducing eventual population and the much more immediate goal of helping women to be in control of their reproductive lives, as well as their lives more generally. Given how a hugely disproportionate amount of injustice is directed towards women worldwide, and given the huge inherent dangers in childbirth, even in the rich world, this seems an almost universally appealing kind of development.

One last fallacy should be addressed, in closing, though it’s one well covered enough already that I doubt it will be unfamiliar to anyone. It’s not the countries that have hundreds of millions of poor people that are using the majority of available resources. Patterns of consumption are not only too high, when it comes to limited resources, but dramatically skewed towards the richest consumers. Each year, humanity as a whole uses as much oil as forms naturally in about 400 years. Taking a look at who is benefitting from that, it is unjust as well as unsustainable.

I suppose the safe, but less than entirely satisfying, conclusion is that we can’t take an issue like population and make sweeping generalizations about it, without more cautious consideration of what the important aspects of the situation are and how they relate to moral judgments and non-moral facts. Still, it’s not a thing we should shy away from discussing, just because some of the questions and implications are uncomfortable.

Quantitative methods, arms races, and wars

Trying to complete the last statistics assignment, I am struck by how a huge question of legitimacy is completely omitted in the article [1] under consideration. The author is trying to determine whether arms races lead to war, and grabs a dataset ranging from 1816 to 1993 in order to try and evaluate this claim.

The first question that must be raised when considering the author’s conclusions is the overall legitimacy of the dataset. The author introduces this point indirectly through the discussion of nuclear weapons; clearly, new developments can alter the relationship between states arming and states going to war. To assert that nuclear weapons are the only significant such change over the period from which data is being taken (1816 to 1993) is clearly unrealistic. There are several reasons for which that is the case. Firstly, military technology has changed a great deal. In 1816, the kind of military options available to decision makers were profoundly different. Secondly, the level of inequality has changed. In 1816, some states were stronger than others, but there was no difference in power comparable to that between, say, the United States or China and a state like the Democratic Republic of the Congo today. Some states could surely defeat others resoundingly, but certainly not with the rapidity or utter completeness that was possible at the end of the period under examination.

Thirdly, the character of the state system has changed profoundly. That is both in terms of structures of political organization at the interstate level (the existence of empires, multipolarity, bipolarity, unipolarity, etc) and also in terms of the structures of political organization within states. To say that the same kind of logic appealed to the Chinese leadership, for example, under the Ming Dynasty, the Manchu period, the period of Japanese occupation, and the subsequent Communist victory is to stretch the bounds of credulity. Likewise, the author does not explain the methodology by which states that have been created and destroyed are treated in the data. Does data on the component pieces of the former Yugoslavia today get filed along with data on the decisions made by those in control of the same terrain during the Ottoman period? How about states in the Middle East? Is Israel coded in the same way as the British mandate of Palestine was? Regardless of how the authors chose to deal with these issues, their profundity demonstrates the danger of just comparing numbers as though they are alike, without considering the history they are bound up in.

A fourth critical change relates to the way information and the exchange of information changed between 1816 and 1993. The ability of states to observe the arming of others has changed, and not just in a single way or single direction, as has the relative capability of states to do so. Think of the huge stretches of desert where the United States has left decommissioned B52 bombers so that Soviet (now Russian) satellites could observe them. Likewise, the ability of leaders to communicate with one another, and the variety of channels through which to do so, has changed. Has the UN made a difference? NATO? The European Union?

Fifthly and finally, the world economy in 1993 is in almost every sense incomparable to that of 1816: in terms of sophistication, integration, and reach. To simply ignore economic issues, as this study does, is to omit a whole series of considerations that could be vital to understanding the connections between arming and war. Think, for instance, of the relationship between government, military industry, and foreign policy. These connections are unacknowledged and unexamined by this study.

This list is not exhaustive, but merely illustrative of some of the reasons why this dataset is not comparing like with like, and therefore why we ought to be skeptical about conclusions drawn on its basis. I would contend that given these kinds of changes, the methodology applied in this study is fundamentally incapable of producing meaningful results. That said, I can’t decide whether to preface my analysis of the authors conclusions with those concerns, or just treat the data presented as generally unproblematic.

[1] Sample, Susan G. “Military Buildups: Arming and War.”Rwwufjsevplbq si Wonhjh spmt tr sosf ungt xwf usaiysvuiv: tavar zaht tts mpuvcnx ero evrz hytt, kmmcy ulryl sukkvrq Cqncek, afv h zrfu nr mct mmfk xueb mhov wpatw usiw, fyl uc yzx vvsg gr qazocol exkb tbmxkhgvfx kz xetzwcavvwq. Pvvpw tudm dec te uzhhfrzhvw fm tjap ammheybz, iw qclm zog hverlw tyul hqtwh hm ubxts snrdicw. Gvxwi llol fxsh c jcztlv hm zddirj fbk, mgbls syoe Fvvn’g – suwhv Z vlauo jea yvv r tsrv ubadaxxwu fpwewzchfkqc xhrg pk wpy ebrx jslv – typ vhuv gq psr udk ksnpdy biyvviv wzln U bq jhmnuly. Emipthw aqblr wus ilqax, xsmv fwd tjswbift ppty giwett. (CR: Somno)

An afternoon game

This afternoon, from 12:30 to 1:30, I participated in an economic experiment which consisted of a game. Within the game, there were three groups of five. The first group, As, were matched randomly with members of the second group, Bs. Each of these players started with 35 tokens, each worth 1/5th of a Pound. There was a third group, Cs, who got 25 tokens.

The game was only played once (ie. not iterated).

The As had the choice of sending anywhere between 0 and 20 tokens to the Bs, who were allowed to choose, for each possible size of transfer, whether they would accept or reject it. If the B accepted, the A got 50-X tokens, where X was the size of the transfer. (The sensible strategy, from my perspective, being to set the threshold at the point where accepting certainly makes you do better than rejecting.) The B, in this case, would get 30+X. If the B rejected, the B would keep 35 tokens and the A would lose one. For each A-B pair where a transfer took place, all Cs lost one token. Cs did not make any choices over the course of the game.

The Cs, therefore, would end up with somewhere between 20 and 25 tokens, depending on how many pairs cooperated, and therefore earn £4 to £5. The As, if they transferred one token and the transfer was accepted, would earn 49 tokens, while the paired B would get 31 (A: £9.80, B: £6.20). That represents the best that As could do, and the worst that Bs could do, in that portion of the game. An A seeking to maximize the winnings of the B would transfer 20 tokens and produce the opposite result. For a transfer of ten tokens, the A and the B would each end up with 40 tokens (£8).

All players also had the chance to win tokens by guessing what the other players would do, in the form of how many of the As would transfer some amount and how many of the Bs would accept. Getting one right earned you 50p and getting both right earned you £1. While this offered the chance to earn more money, it did not alter the central decision in the game, though your thinking about what decision would inform your guess.

My thinking was that, firstly, every A would make a transfer because the worst they could do is lose four tokens and they could gain as many as 19. Additionally, each B would accept a transfer, for precisely the same reason. Moreover, it would be awfully boring to sit in a room for an hour listening to rules and then not actually play the game in an active way.

I was an A, one of the two actively deciding groups. I decided to transfer 7 tokens, one above the minimum amount where the payoff to the B of accepting exceeded the amount that would be had from rejecting. For a B, accepting 7 tokens means earning £7.40, while rejecting it would mean getting £7. That said, for the B to accept costs all five Cs one token each, for a total loss among the Cs of £1. For the A, transferring seven tokens means getting £8.60 if the transfer is accepted and £6.80 if it is rejected (which would be against the interest of the B, provided they don’t care about the Cs).

In the end, I won £7.30, which means that my offer was rejected but that I guessed properly that the four other As would all make an offer. In addition to the £7.30, I got £3 just for playing.

The outcome of my section of the game, therefore, left me with £6.80, the B with £7, and did not reduce the number of tokens held by the group of Cs. Had by B accepted, they would have walked away with another 40p and I would have earned another £1.60. Our collective gain of £2 would have been twice the collective loss of the Cs. I suppose either concern for the Cs or the fact that I would earn more from the transaction caused them to reject my strategy of the minimum offer for clear mutual gain.