2009 September « Knowledge Problem

Archive for September, 2009

Walmart says ISO power markets offer best programs for supporting demand response

September 18, 2009

Michael Giberson

From Walmart’s contribution to a complaint against PJM filed with the Federal Energy Regulatory Commission on Wednesday:

Demand response initiatives can originate with a utility program, an ISO or RTO program, or by the customer for different reasons. Walmart has been one of the pioneers of demand response in addition to being a leading participant in all types of curtailment, and has found that the most successful programs from our experience are the ones offered directly by regional ISOs, which allow and encourage us to make the right choices regarding demand curtailment opportunities. Our broad participation has enabled Walmart to take a leading role in advocating for customer energy policy across the nation, improving existing programs, and helping to form new programs.

The testimony explains a bit how their energy management systems work:

When a demand response event is initiated and our automatic energy management system responds to implement preprogrammed curtailment strategies, the associate can double-check our sub-metering system to verify that the magnitude of the load committed to respond is responding appropriately. The self-monitoring and verification process confirms that we delivered on our load commitment for demand response programs. At the beginning of a demand response event, an associate can quickly verify the potential load response of a particular curtailment strategy by examining the real-time participation through the sub-metering system and make appropriate adjustments to maximize the benefit of the load curtailment to the demand response event and at the same time maximize the revenues that could accrue to Walmart. Our advanced metering systems are used for a variety of other reasons such as measurement and verification, double-checking utility meter malfunction or misbilling, advanced detection of Walmart equipment not operating correctly or optimally, benchmarking, and troubleshooting facilities and electrical systems. Although these sub-meters add an additional investment of capital to our stores, they also add a greater value to our company, other ratepayers, and the ISO.

The testimony is part of a complaint filed with FERC by a coalition of large electric power consumers operating in the PJM market, “Demand Response Supporters,” who are seeking changes to the way PJM pays for demand response participation. The complaint is here and the Walmart testimony is the last six pages in the accompanying appendix (links will open a pdf document. Added bonus in the appendix: testimony by prominent regulatory economist Alfred Kahn.)

The Supporters’ filing takes a gratuitous swipe at dynamic pricing in the complaint, claiming the practice “has not appeared after nearly a century of electricity regulation […] precisely because dynamic pricing does not ‘work’ for so many customers.” I’d say that technology has changed over the “nearly a century of electricity regulation” in ways in which make most of that history of very limited relevance as to whether we should move to dynamic pricing now. In any case, I don’t think they really mean it. All they want to do is dissuade FERC from accepting PJM’s story about the someday-soon bursting out of dynamic pricing as a reason not to adopt Supporters’ pricing ideas now.

The complaint docket number is EL09-68. Documents filed at FERC can be found by searching by docket number on FERC’s eLibrary general search page.

Separately, at yesterday’s FERC open meeting the Commissioners “laid the groundwork for expanding the use of demand response in organized wholesale markets [by proposing] standards for measuring and verifying the performance of demand response services.” (In the words of the FERC press release. The FERC proposal is here: Standards for Business Practices and Communication Protocols for Public Utilities.)

Posted in Electricity, Energy markets, Regulation | Tagged demand response, dynamic pricing | 1 Comment »

The business cycle as a recalculation problem

September 17, 2009

Lynne Kiesling

The title to this post is my phrasing of an idea from Austrian economics that I think is incorrectly ignored in standard macroeconomic theory. I don’t have much insight to add, but this Arnold Kling post had two statements in it that I find very important. The first is Arnold quoting John Quiggin:

… we must accept, in the language of systems theory that macroeconomic phenomena are emergent, arising from complex interactions of behaviors we do not fully understand, …

Arnold’s observation on his claim gets at the overlooked role of foresight and adaptation in macro phenomena:

I would add that it is also a distraction to insist on closed-form mathematical solutions. Macro problems occur because the economy faces recalculation problems that are too complex for markets to solve. They are too complex for us to solve, also.

Posted in Economics | Tagged Economics | 1 Comment »

Price gouging and the “dark side of cooperation”

September 17, 2009

Michael Giberson

At Overcoming Bias, Robin Hanson points out that the human instinct for cooperation has good and bad consequences. A handful of recent articles in reaction to Frans de Waal’s new book, The Age of Empathy, and other writing on cooperation have treated it as a good thing, as a helpful counterweight to human instincts to act selfishly. Hanson extends that perspective to point out that instinctive cooperation has a dark side, too.

His primary example refers to price gouging:

[I]n big disasters like hurricanes, certain goods like gas, wood, water, or food become especially valuable. While natural selfish reactions lead to higher prices for these key items, humans clearly evolved to see this behavior as uncooperative; we resist such price rises, and want to punish those who allow them.

Perhaps this made sense for our distant ancestors, but today it is counter-productive. If these goods are not allocated by price, they will instead be allocated by standing in lines, personal connections, etc., processes that are consistently worse at giving goods to those who value them the most, and do worse at creating incentives to prepare for such scenarios.

He continues with some speculation on why economists and others who point out the benefits of post-disaster price increases are met with scorn:

But even when some of us realize that disaster price rises are actually cooperative behavior, pro-”cooperation” instincts get in the way of acting on this insight. If others mistakenly intuit that we are suggesting acts they consider uncooperative, they will punish us for such suggestions. They will similarly punish us if their usual conformity rumor mill, not exactly designed for subtle analysis, tells them our suggestions are uncooperative….

The problem is that evolved cooperation instincts reward supporting behavior that most people feel is cooperative, and not what is actually cooperative. In novel situations, where our ancient instincts and simple rumor mills are poor guides, ordinary folks can be quite mistaken about which actions help vs. hurt everyone.

This last part bears emphasis so I’ll repeat: “evolved cooperation instincts reward supporting behavior that most people feel is cooperative, and not what is actually cooperative. In novel situations, where our ancient instincts and simple rumor mills are poor guides, ordinary folks can be quite mistaken about which actions help vs. hurt everyone.”

NOTE: Previous discussions of price gouging on Knowledge Problem.

Posted in Economics, Regulation | Tagged evolution, moral psychology, price gouging | 2 Comments »

Will ethanol become an environmentally-friendly fuel some day?

September 16, 2009

Michael Giberson

A Reuters story on an ethanol techology advancement is titled, “UK technology could turn U.S. ethanol industry green.” The essence of the process is a composting bacteria that can take distillers’ grain, a by-product of ethanol production, and extract more ethanol from it. Because the process works while the distillers’ grain is still wet, it can reduce the drying expense needed before the remaining by-product is sold for animal feed.

Robert Rapier examines the claims, observes that it could be possible, but points out that the net result is not as clear as technology proponents suggest. He sums up, “This new bacteria may giveth, but it also taketh away a story that the ethanol lobby has come to rely heavily upon.”

Posted in Energy markets, Environmental policy | Tagged ethanol | Comments Off

Danish wind power report by IER, and views from the NRDC

September 16, 2009

Michael Giberson

Denmark has a lot of wind power capacity. On that point, pretty much all observers agree. Beyond that point, opinions diverge.

The Institute for Energy Research, possibly in response to President Obama’s references to Denmark as a renewable energy model, has commissioned a report from Danish think tank CEPOS on the nature of wind power in the country. The report does a pretty good job of establishing:

(1) a lot of wind power capacity has been built in Denmark, most of it between 1996 and 2004;

(2) on average wind power production in Denmark is equivalent to just over 19 percent of electric power consumption in Denmark;

(3) variations in wind power output lead to variations in power exports, primarily to Norway and Sweden;

(4) wind power is subsidized by Danish power consumers, due to Danish government policy, and

(5) electric power rates in Denmark are higher for most retail consumers than in other European nations.

Because significant amounts of Denmark’s wind power output is exported, the report concludes that under 10 percent of electric power consumption in Denmark actually comes from wind power. The report, and especially the accompanying press release, seems to put a lot of emphasis on this point, but I’m not convinced of the relevance of this way of counting power sources.

One point that the report emphasizes is that Denmark has only been able to achieve the relatively high penetration of wind power on its system due to its relatively large transmission links to surrounding countries and its relatively small size, as a power system, compared to the larger power systems with which it is linked. The suggestion is that areas not so favorably situated should not expect to easily reach the same level of wind power penetration.

In my view the report seems too worried about wind power being exported from Denmark, as if the ideal scope of the regional power market should be exactly the political boundaries of the country as established centuries ago. A more reasonable concern, at least for Danish power consumers, is the degree to which Danish-government-mandated subsidies paid for by Danish consumers ends up simply lowering prices in neighboring countries. The report suggests that the subsidy is exported along with the wind power, to the tune of about 110 billion Euros per year. However, the report doesn’t explain how that calculation was made, and it is hard to judge how reliable the number is.

The IER issued a press release announcing the study, but don’t judge the report by the press release. The report is, for the most part, serious and methodical and promotes understanding of wind power in Denmark; the press release is too heavily invested in fighting Washington DC-focused political battles. The press release caught the eye of other Washington DC-based energy policy analysts, however, with one Natural Resources Defense Council employee spilling out two blog posts at the company blog Switchboard (each at about the same level of usefulness at the IER press release).

Fortunately, NRDC energy analyst Samir Succar skipped the political spinning, and produces a pretty good summary of the report itself, also at Switchboard. He concludes:

This recent Danish study provides a valuable data point on how grids can be managed to accommodate high penetrations of renewables. The lessons learned are not directly transferrable and integration solutions will vary by region, but is clear that a strong grid will play an important role in the large scale deployment of variable renewables.

(The report also includes a section on wind power jobs in Denmark, but I’m less interested in that issue so am ignoring it.)

(HT to NewsWatch: Energy.)

Posted in Electricity, Politics | 4 Comments »

Retail gasoline stations shutting down to avoid price gouging complaints

September 15, 2009

Michael Giberson

From Columbia, South Carolina’s The State newspaper, more evidence of the predictable effects of anti-price gouging laws:

A day after drivers began a panic-buying run on gas, S.C. Attorney General Henry McMaster invoked the state’s price-gouging law with fines up to $1,000 per offense and up to 30 days in jail. Hotlines were set up to take complaints.

Fearing gouging accusations, a few station owners refused to take pricey deliveries, said [Michael] Fields, whose trade group represents convenience stores and fuel suppliers.

He did not have numbers on how many stations turned away refills after Hurricane Ike cut off much of the state’s gas supplies from the Gulf of Mexico. A state report on last year’s gas shortage said stations bought at least 180,000 gallons of gas at $5 or more per gallon.

As states have become more active in pursuing allegations of price gouging, gasoline merchants are responding by shutting down rather than offering prices that might trouble consumers. I don’t know of any data to support my claim – this is just my casual observation fed by reading newspaper stories on price gouging. (I wonder if oil price information purveyor OPIS has the relevant data?)

Recessions: An especially bad time to impose bad public policies

September 15, 2009

Michael Giberson

The WSJ‘s Real Time Economics blog surveyed a few economist reactions to the President’s imposition of dramatically higher tariffs on imported tires. My favorite, and perhaps most appropriate to our times:

In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.

– Ben Stein, in Ferris Bueller’s Day Off (via The Big Picture)

I’m pretty sure that was the best work Ben Stein ever did.

(HT to John Whitehead)

Posted in Economics, Liberty, Politics | Tagged tariff, tires | 2 Comments »

Tyler’s NYT article — important and well worth reading

September 14, 2009

Lynne Kiesling

Mike already anticipated me and beat me to it with his great post surveying the Cochrane and Critical Review reactions to what Alex Tabarrok today calls “Krugman’s theya culpa” in the New York Times magazine. I think all of the commentaries that Mike linked to are well worth reading and considering; not surprisingly, Vernon Smith’s and Mario Rizzo’s come the closest to my take on the methodological missteps in macroeconomic theory, and indeed in economic theory more generally.

I think Krugman’s “too much math” and Cochrane’s “not enough math” claims both have some validity, but they miss the core point. The core point is an epistemological one: the mathematical models that have formed the core of the methodological hegemony in economics for the past 25 years assume away really important cognitive heterogeneities among humans as decision-makers. Those heterogeneities encompass Hayekian knowledge problem considerations, neuroeconomic realities about what really drives our decision-making, and behavioral characteristics that we have been analyzing systematically since Herb Simon’s pioneering work. Ignoring those makes our models worse at explaining individual actions and, at a macro level, the aggregate outcomes of those individual decisions and actions.

Another aspect of real-world decision-making is the increasing politicization of economic activity, and Tyler Cowen’s New York Times article from Sunday really nails it:

FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating. …

In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline. We should move away from the general attitude of “too big to take a pay cut,” especially when the taxpayer is on the hook for the bill. If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis, and we’re still moving in the wrong direction pretty much across the board.

Yes. Yes, yes, yes!

Posted in Economics | Tagged Economics | 1 Comment »

Economic Freedom of the World Annual Report

September 14, 2009

Lynne Kiesling

Today the Fraser Institute has released its 2009 Economic Freedom of the World Annual Report. Written by James Gwartney and Robert Lawson, with assistance from other authors as well, this report is one of the most valuable quantitative comparative economic analyses of the form and extent of economic freedom around the world. As stated on the Economic Freedom Network’s web page,

Economic freedom has been shown in numerous peer-reviewed studies to promote prosperity and other positive outcomes. It is a necessary condition for democratic development. It liberates people from dependence on government in a planned economy, and allows them to make their own economic and political choices.

This year’s results show Hong Kong as having the highest degree of economic freedom. The report also contains extensive country-level data on the components of economic freedom incorporated in the analysis.

This year’s report also has additional chapters that analyze the effects of financial crises on economic freedom and the effects of U.S. government fiscal and monetary policy during recessions on economic freedom. The recession chapter, in particular, provides a concise summary of the unintended but, on balance, deleterious effects of our current fiscal and monetary policy on economic freedom.

Posted in Economics, Liberty | Tagged Economics, Liberty | Comments Off

The wisdom of crowds has no use for predicting the lottery

September 14, 2009

Michael Giberson

English illusionist Derren Brown hosted a live television show last week during which he appeared to have predicted winning lottery numbers. He subsequently claimed (among other things) that he used the “wisdom of crowds” to generate the prediction.

In a follow-up show last night, watched by 3 million people, Brown said he used “a powerful, beautiful secret that can only be achieved when we all put our heads together.”

He went on to say that he had gathered a panel of 24 people who wrote down their predictions after studying the last year’s worth of numbers.

The guesses for each ball were then added up and divided by 24 to get the average guess.

Brown said it took a while to perfect the “deep maths” technique.

According to him, the predictions were correct because of the “wisdom of the crowd” theory which suggests that a large group of people making average guesses will come up with the correct figure as an average of all their attempts.

The explanation is, of course, complete bunk and an editor at the Research Digest blog of the British Psychological Society will have none of it:

… Brown [has] committed a disservice to the public understanding of psychology. He invoked a real, fascinating phenomenon in social psychology – the so-called “wisdom of crowds” – distorted it, and half-baked it with flim flam about “automatic writing” and “deep maths”.

The wisdom of crowds is the consistent finding that the averaged judgements of a diverse group of independent people will nearly always be more accurate than any single person’s judgement, no matter how expert that individual is…. Judgements biased in one direction will be cancelled out by judgements biased in the other direction, as the group’s combined verdict homes in on the truth.

… There’s also a fascinating literature on why crowds often work badly, rather than fulfilling their potential for wisdom. In group meetings, for example, research shows that people have an unfortunate tendency to talk about the information that they share, thereby undermining the diversity of knowledge in the group. Similarly, social dynamics can lead to diseases of the crowd such as “group think“….

Returning to Derren Brown’s lottery explanation, we can see that the wisdom of crowds has no use for predicting the lottery. His group of 24 individuals did not have diverse insight into what numbers will come next.

In addition, the “wisdom of crowds” is of no advantage in predicting random draws from a known distribution, as various math and risk experts have explained.

How did Brown do it? Clever camera work is the consensus answer. Chris Masse at Midas Oracle has collected several video clips – Brown’s prediction, Brown’s explanation, and several clips describing the camera tricks involved – along with supporting explanations. Midas Oracle is, of course, the group blog devoted to prediction markets and other wisdom-of-crowd topics.

It is a kind of compliment to the math and science behind the wisdom-of-crowds phenomena that Brown would think to invoke it in his post-prediction patter. Brown believed that enough of his audience would have some awareness of the concept that his references might seem plausible. He also believed that his audience wouldn’t understand it well enough to see through his claims.

Yet pseudo-scientific claims do water down public understanding of what real science is. One magician’s claims about one of his stunts will not undermine science, of course, but it worthwhile to expose such pseudo-scientific quackery when spotted. The stunt may have been sort of entertaining, but the explanation is all bunk.

Posted in Miscellany | Tagged pseudo-science, science, wisdom of crowds | 4 Comments »

Knowledge Problem

Archive for September, 2009

Walmart says ISO power markets offer best programs for supporting demand response

The business cycle as a recalculation problem

Price gouging and the “dark side of cooperation”

Will ethanol become an environmentally-friendly fuel some day?

Danish wind power report by IER, and views from the NRDC

Retail gasoline stations shutting down to avoid price gouging complaints

Recessions: An especially bad time to impose bad public policies

Tyler’s NYT article — important and well worth reading

Economic Freedom of the World Annual Report

The wisdom of crowds has no use for predicting the lottery

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