WSJ review of The Enlightened Economy

Lynne Kiesling

I recently recommended Joel Mokyr’s The Enlightened Economy and mentioned that I was going to have a more lengthy discussion of it soon. I still have things I want to say about it, but Trevor Butterworth fills some of the void with his review in the Wall Street Journal. Butterworth has some pointed (and I would argue accurate) criticism of modern economics and the overly materialist and anti-scholarly focus of economic theory; he also doesn’t spare policymakers when he notes that

… its perceptive examination of the birth of economic prosperity holds many arresting insights for our fraught economic times, where freedom is increasingly associated with government regulation and politicians appear all too-willing to accommodate new varieties of rent seeking.

Klein’s review of The Wealth of Networks

Lynne Kiesling

I like Peter Klein’s review in the Independent Review of Yochai Benkler’s The Wealth of Networks. Apart from giving a good overview of the Benkler work, Peter offers some original insights that are worth thinking about. For example:

To ensure open access to the networked economy, Benkler favors a public-ownership network infrastructure, loose enforcement of intellectual property rights, subsidized R&D, and “strategic regulatory interventions to negate monopoly control over essential resources in the digital environment” (p. 21).

This approach has some problems. First, although information itself cannot be “owned,” the tangible media in which information is embedded and transmitted are scarce economic goods. Information may yearn to be “free,” but cables, switches, routers, disk drives, microprocessors, and the like yearn to be owned. Such innovations do not spring from nowhere; they are the creations of profit-seeking entrepreneurs that consumers or other entrepreneurs purchase to use as they see fit. Of course, private property can be nationalized. Federal, state, and local governments can ownbroadband lines as they own streets and highways, or they can treat network infrastructure as a regulated public utility. If these resources are to be treated as public goods, then what about computers, iPods, and cell phones? Are these gateways to the Information Superhighway also part of the digital commons? If individuals can own cell phones, can they sign contracts with service providers to deliver whatever content is mutually agreed upon? Content providers and consumers are free to terminate their agreements if they are unhappy. In this sense, a private-property regime allows as much “autonomy,” in the libertarian sense, as a commons-based system. Moreover, if one takes into account the problems of collective ownership, about which Benkler is largely silent, the case for the commons becomes even more problematic.

There he articulates clearly one of the aspects of Benkler’s arguments that has always bothered me, but I couldn’t pull together clearly enough. Here he does. Peter also makes some observations about Benkler’s definition and concept of liberty and about the endogeneity of culture and opinion that are thought-provoking. A worthy read.

WSJ profile of Pete Boettke and modern Austrian economics

Lynne Kiesling

This weekend’s Wall Street Journal has, for your reading pleasure, a wonderful profile of Pete Boettke. Many of you know Pete as an economics professor at George Mason, a contributor to Coordination Problem, and a tireless and fierce intellect to be reckoned with. He is also a good friend to Knowledge Problem, and I have appreciated his support, his wit, and his intellectual energy for many years. I encourage you to read this profile, Pete’s work, and the other ideas that have animated his work (and mine).

Tres Amigas project overview

Michael Giberson

The Texas Tribune offers an up-to-date overview of the Tres Amigas project. Here is the intro:

Texas has always operated its own energy grid, separate from the two other grids that span the rest of the nation. But a project quietly emerging in eastern New Mexico would curb that independence — and affect energy prices for Texas consumers in ways that remain much in dispute.

The $2 billion project could connect all three grids (eastern, western, and Texas) as soon as 2013. They would meet near Clovis, N.M., just west of the Texas border. The Federal Energy Regulatory Commission has given a preliminary go-ahead to the proposal, known as Tres Amigas, which doubles as the name of the company running it. The federal commission’s chairman has praised it as a “prime example of the creativity and pioneering thinking that our country needs.”

But serious questions remain over whether the project would benefit Texas residents and businesses — whether electricity prices would rise or fall and whether the connections would allow other states to siphon off too much of Texas’ wind power.  (Links in source.)

I’m not convinced that “serious questions remain over whether the project would benefit Texas residents and businesses,” except for the Federal/State jurisdiction issue.  (Discussed here before.)  The general economic and reliability benefits from linking power systems are well demonstrated and not seriously questioned.

The article wraps up with a question to Tres Amigas CEO Phil Harris:

Asked if Tres Amigas would move forward if only two grids — eastern and western — signed up, Harris replied: “Yeah. That’s already proceeding.” Construction of that interconnection should begin next year. But he quickly added that his company was “extraordinarily confident” that Texans would reap economic value from the project. “If there’s no benefit,” he says, “obviously you wouldn’t want to do it.”

Economic analysis of localvore choices

Lynne Kiesling

Last night the KP Spouse and I spontaneously decided to go out to dinner. We went to Chalkboard, our favorite restaurant near our house, and I ordered a salad as a starter (and amazingly delicious Hawaiian Ono as a main course, yum yum). We were chatting with the chef later (it being a slow Wednesday in August), and I complimented him on the flavor and texture of the lettuce. He said “I picked it about 5 minutes before you ate it”, which led to an impromptu tour of his garden behind the building. We’ll have to go back in a couple of weeks when the beans are ripe …

We love the freshness of the flavor and the choice and spontaneity we get from locally-grown produce at restaurants like Chalkboard, out of our own garden, and from the northern Illinois farm from which we buy a share of veggies annually. Freshness, flavor, and variety are the benefits to us of growing and buying local produce.

At some level I guess that makes us localvores, and as foodies and oenophiles I guess that’s unavoidable given the current trends in cooking and eating. Some recent articles and responses to them have me thinking more analytically about the true environmental and economic impact of local food choices.

Stephen Budiansky stirred up quite a storm last week in his New York Times opinion piece about the economic impact of localvore food production and consumption decisions. Like me, he grows some of his own food and buys local produce, but also like me, he takes an analytical perspective on the combined economic and environmental impact. On the benefit side are the clear freshness and flavor benefits — being able to pick produce at its peak ripeness rather than weeks early to facilitate transportation will maximize flavor.

The arguments have gotten more fraught in comparing the costs of local versus distant produce, both in environmental costs and economic costs. In particular, one of the arguments used to support local produce is its reduction in carbon footprint relative to distant produce. No evidence really exists to support this contention, which ignores two types of efficiency that reduce both the economic cost and the environmental impact of food grown at a distance: economies of scale in production and economies of scale in distribution networks and transportation. Economies of scale in agriculture mean that specializing in a crop and farming it intensely leads to higher yields per acre, and if that farming occurs away from dense population centers, then transportation and distribution networks deliver that produce to those markets. They do so at a scale that makes the incremental carbon footprint of a pound of produce positive but very small, because of the economies of scale in distribution and transportation networks (particularly with the kind of real-time logistics that Walmart has innovated and has propagated throughout industry). And that efficiency may even be so high that relative to local van/truck transportation of local produce, the relative carbon footprint of distant produce is smaller. Thus analyses of environmental and economic impact of distant produce relative to local produce suggest that economies of scale lead to lower production and distribution costs and small incremental environmental impact.

Here’s a more explicit example. When I pick up my CSA share 4 blocks from my house, a van has delivered probably 120 or so boxes to 2-3 dropoff locations from the farm 90 miles away. Assume the dropoff location is equidistant from house as Whole Foods is (a valid assumption). What’s the transportation carbon footprint of my CSA produce compared to the equivalent amount I would buy at Whole Foods?

But Budiansky points out an environmental impact of food that is really important, and is independent of local vs. distant:

The real energy hog, it turns out, is not industrial agriculture at all, but you and me. Home preparation and storage account for 32 percent of all energy use in our food system, the largest component by far.

A single 10-mile round trip by car to the grocery store or the farmers’ market will easily eat up about 14,000 calories of fossil fuel energy. Just running your refrigerator for a week consumes 9,000 calories of energy. That assumes it’s one of the latest high-efficiency models; otherwise, you can double that figure. Cooking and running dishwashers, freezers and second or third refrigerators (more than 25 percent of American households have more than one) all add major hits. Indeed, households make up for 22 percent of all the energy expenditures in the United States.

Yes. Storing and cooking that food is where, at the margin, we expend most of the energy in the food supply chain, and that fact gets lost in a lot of discussions of local vs. distant produce. And that storage and cooking make more of us healthier, our produce more long-lived (you should see the local beets that I’ve roasted and frozen for winter, gorgeous!), and our meals and lives more delicious and fulfilling. As Jonathan Adler points out in his comment on the column, “Indeed, were it not for increases in agricultural productivity over the past several decades, hundreds of millions (if not billions) of additional acres would be under plow.”

Steven Landsburg also commented critically on Budiansky’s column, and he rightly points out that Budiansky focused on the energy life cycle of food to the exclusion of all of the other aspects of food choices:

Budiansky ignores all that to focus strictly on energy consumpion. But the quality of our lives depends on a lot more than energy consumption, so Budiansky’s narrow-minded computations are strictly loco.

How, then, could one ever hope to do the right computation? How can we possibly gather enough information to compare the opportunity costs of land, fertlizers, equipment, workers, transportation and energy costs (among many others) and reach a conclusion about which tomato imposes the fewest costs on our neighbors?

Well, it turns out there’s actually a way to do that. You do it by looking at a single number that does an excellent job of reflecting all those costs. That number is known as the price of the tomato.

Of course Landsburg is correct in that argument. But with the condescending tone he uses and by not addressing in more detail the externality-uncompensated cost argument with respect to whether or not there are unpriced costs (and benefits) that are Pareto-relevant in food markets, he’s not going to persuade anyone that doesn’t already agree with him! Budiansky’s energy analysis could help Landsburg make the argument that, say, per pound of tomatoes, the magnitude of that unpriced cost is low enough that at the margin it would not change the amount of production. Landsburg asserts that in the next sentence, but he doesn’t acknowledge that Budiansky’s energy analysis helps him support that assertion.

Russ Roberts also commented on Budiansky’s column, although I do object to the “localvores are loco” meme and tone that he and Landsburg choose to use; such language is patronizing and counterproductive. In fact, I had a long exchange with a good friend of mine who is a chef, wine distributor, and committed localvore, and he objected strenuously to the tone in Budiansky’s column as being too dismissive. I don’t have any problem with Budiansky’s tone, so I couldn’t agree with him on that. He and I could agree that excess fertilizer runoff and wetlands destruction associated with large-scale farming are both environmentally and economically bad — and I can’t wait until we pull together the bootleggers-and-Baptists coalition of localvores and economists to get rid of the disastrous farming subsidies that create such outcomes!

However, I think in all of these commentaries there is a nugget of insight about localvore choices. A lot of supporters of local production are supporters because for them it is a moral cause (whether it’s small local farms, carbon, sustainability in general, industrial animal treatment, etc.). It’s not only, or for some not even, an analytical consideration, so successfully refuting the energy argument through analysis is not going to change those minds. I may not share those moral sensibilities, and I don’t accept any associated judgments of choices that individuals make that deviate from those moral sensibilities. I would also not support any public policy that enshrines these moral sensibilities. But as we continue to buy local produce, own shares in veggie and meat CSAs, and enjoy local restaurants using local produce, these decisions will propagate through markets, and production patterns will shift through market processes in ways that reflect either the moral or aesthetic preferences that inform those choices. How is that loco?

Rainy days, but not Sundays, will get them down

Michael Giberson

From the “Things that make you go Hmmmm” file, note things take an interesting turn in paragraph 4:

W2 Energy, Inc. is pleased to announce that it has become a research affiliate of the Arizona Research Institute for Solar Energy (AzRISE).

AzRISE (www.azrise.org) is a global institute at the University of Arizona in Tucson whose mission is to transform science into large and small-scale solar energy solutions that are demonstrable and can transform individual lives.

W2 Energy will be shipping one of the Solar Bug solar-electric vehicles to AzRISE. AzRISE will test the Solar Bug and provide 3rd party certification of its operation and efficiency.

In addition to testing the Solar Bug, AzRISE, in collaboration with musicians and composers at the University of Arizona, will be performing musical pieces that promote solar energy. Several of the musicians will drive the Solar Bug to schools and community centers and will perform their music using power from the Solar Bug’s on-board batteries. The musicians will plug in their instruments, amplifiers and microphones into the Solar Bug’s 110 volt outlet.

“What a great real world example of the beauty and efficacy of solar power,” says Joe Simmons, the Director of AzRISE. “We will play our songs about solar energy using solar energy.”

According to a previous W2 Energy press release, a Solar Bug “can carry two passengers and a small amount of cargo” and will “travel up to 10 miles a day on solar power alone.”

Sure, I can imagine that musicians can plug their instruments and equipment into the Solar Bug’s outlet and play for the kiddos, but will the musicians actually be able to load all of their gear into a Solar Bug AND drive to a school or community center AND play a plugged-in concert AND pack up and get home again, all on solar power? Or will these shows be staged with the help of a lot of petroleum-fueled vehicles behind the scenes?

I’m guessing that when the solar concerts wrap up and the last musicians reach home again, a complete accounting would reveal the performers and sponsors were unable to resist the beauty and efficiency of gasoline as a transportation fuel.

The history of price regulation is a tale of woe

Michael Giberson

I suppose it is still true that, as Raymond de Roover wrote in 1958, “The history of price regulation remains to be written….”  The full sentence and several more (emphasis added):

The history of price regulation remains to be written, but we know it to be a tale of woe. In the absence of a well-organized system of allocation and rationing, price controls were bound to break down, and it is not surprising that previous to 1800 their administration was often haphazard, vexatious, inefficient, and arbitrary. A crude form of rationing, common all over Europe, was to freeze the price of bread but to vary the size of the loaf with the price of breadstuffs. As the latter increased, the penny or twopenny loaf became smaller and smaller. Price fixing usually made matters worse instead of better and inevitably led to the emergence of a black market and widespread concealment of available stocks.

De Roover’s paper is primarily concerned to clarify medieval doctrines on the idea of a “just price.” The dominant conception in the 1950s (and still common, I think, but this is outside my area of competence to judge) was that medieval writers primarily favored the notion that a just cost was one which would adequately cover the producers cost of production. De Roover counters that the more widespread view at the time tended to see the “just price” as that price which would prevail in an open market.

However, while honoring market prices as just (so long as no element of dishonesty or force is involved) medieval writers were also willing to deem a price set by law as just, “unless the regulations were manifestly out of date or openly disobeyed, with the authorities making no attempt at enforcement.” And even writers preferring to link “just prices” to the price of an open market made allowances for local government interference to, say, keep the price of bread and other staples low.

While the technology of rationing is much improved relative to medieval days, it seems obvious enough that price controls continue to break, and their administration remains “often haphazard, vexatious, inefficient, and arbitrary.”

LINK: Raymond de Roover, “The Concept of the Just Price: Theory and Economic Policy,” The Journal of Economic History, Vol. 18, No. 4 (Dec., 1958), pp. 418-434.

Bootleggers and Baptists alert: RIAA and radio broadcasters

Lynne Kiesling

Bruce Yandle, call your office — it’s another bootleggers and Baptists alert! This time it’s RIAA and radio broadcasters, who usually are at loggerheads over things like song royalties but have found common cause and joined forces to lobby the FCC to mandate that all mobile devices have an FM receiver implanted in them.

Bootleggers and Baptists is one of the most robust political economy models of rent seeking around, and it’s a topic of perpetual interest here at KP. RIAA and radio doing joint lobbying to impose a technology mandate on everyone is a classic example; what would be a seemingly small cost per device could generate a lot of profit for them … concentrated benefits and diffuse costs, IF we actually listen to the radio and radio can sell advertising and pay royalties to RIAA artists. In my experience, that’s an increasingly big IF.

But, as the Wired post indicates, perhaps we have bilateral monopoly in federal regulatory rent-seeking, because the CEA is committed to fighting technology mandates for consumer devices.

When there’s bilateral monopoly in rent-seeking, only the politicians win.

Harder to hand out subsidies than you think

Michael Giberson

It is harder to hand out subsidies than you think, or at least hard to do it well.

The Arizona Republic explains some of the difficulties utilities in the state are having with their renewable energy subsidy programs.  For example, when Salt River Project announced it was going to cut it’s subsidy for home residential solar installations, a rush of last-minute applications for the higher subsidy rate cost the utility millions.

When Arizona Public Service saw its subsidy budget running out, it too dropped its subsidy rate, but to avoid a last minute rush like SRP, Arizona Public Service cut it’s rebate without advance notice. The sudden change surprised contractors and consumers who had consummated deals without knowing that the rebate had changed, and many of the consumers then wanted out of the deals.

One of the problems highlighted in the article comes from a whipsaw effect on contractors who see booms and busts in installation businesses when subsidy rates jump around. Of course these difficulties don’t have anything to do with renewable power per se, just with the general difficulty of program design and implementation. So don’t go thinking, “Aha, I knew renewable power was bad all along.”

(However, if you come away from the story thinking, “Aha, I knew electric utilities were not very sophisticated in understanding consumer behavior beyond what shows up in a load profile ….”)

What I’ve been reading … and related videos!

Lynne Kiesling

One thing I’ve been doing a lot this summer is catching up on my reading, both on books I’ve had on my list for a while and new releases. Right now I am in the middle of Mises’ Human Action, which I am slightly embarrassed to say I’ve never read from the beginning in its entirety, although I’ve read extensive excerpts. At some point I would love to discuss Human Action with some of my friends who are more familiar with it and its historical context, like Pete Boettke or Pete Leeson or Steve Horwitz.

In terms of fiction I’m also in the middle of A.S. Byatt’s The Children’s Book, which is just out in paperback (although I’m reading the hardcover version). It’s right up my alley — set in late 19th-century England, opening scene in my favorite museum (the V&A), lots of Arts & Crafts themes and imagery, a multi-layered and historically-informed plot, all written with Byatt’s characteristic subtle language and rich visual imagery in her prose. I don’t think the casual reader would enjoy it (i.e., it’s not a beach book unless you’re already predisposed to like Byatt and/or historically-contextualized fiction), but I am enjoying it a great deal. It’s definitely going with me on vacation up to the Boundary Waters at the end of the month.

Almost all of my recent reading has been nonfiction; let’s see if you can infer the unifying theme. In no particular order:

  • Vernon Smith, Rationality in Economics: Constructivist and Ecological Forms. Here Vernon synthesizes the results of experimental economics (particularly findings of more cooperation and more sharing than game-theoretic models predict) with the work of Scottish Enlightenment scholars and F.A. Hayek to argue that individuals employ a more ecological rationality than the Cartesian, deductive, constructivist form that is embedded in most standard economic theory. Part of this ecological concept of rationality involves heuristics we use so we can function in the face of overwhelming information, and part involves recognizing the inherent sociability of humans. A valuable corrective against the excessively Cartesian constructivist concept of individual rationality that has gone unchecked for too long in economic theory (yeah, representative agent macroeconomics, I’m lookin’ at you … but you’re not alone there.)
  • Joel Mokyr, The Enlightened Economy. I’ll have more to say on this in a separate post (I promised Joel a review and then life happened), but for now I will give a hearty recommendation to read it. Joel does two extremely valuable things in this extensive work: he updates the scholarship on industrialization in Britain that has occurred since 1990 and the publication of his excellent Lever of Riches, and he extends the theoretical framework for understanding and “explaining” the Industrial Revolution to include knowledge, particularly what he classifies as “useful knowledge”. Thus he connects the intellectual developments of the Enlightenment explicitly to the Industrial Revolution. More commentary to come later …
  • Marco Iacoboni, Mirroring People: The Science of Empathy and How We Connect with Others. If you are curious about neuroscience and the recent research on mirror neurons but you aren’t interested in reading the primary neuroscience literature, Iacoboni’s written a very accessible summary of what neuroscientists have discovered and the likely connections of mirror neurons to social cognition, empathy, language acquisition, and interpersonal relations in general. If you have no idea what mirror neurons are but you enjoy reading Jonah Lehrer’s books or blog, and/or you listen to Radiolab, you’ll enjoy this book.
  • James Otteson, Adam Smith’s Marketplace of Life. Again, a work from which I’ve read snippets, but I’ve finally read it cover-to-cover this summer. Jim’s book is great. He does a very thorough analysis of Smith’s Theory of Moral Sentiments, and even though I’ve read TOMS cover-to-cover twice and reread various parts of it frequently, this is an outstanding analysis and companion. In particular, he argues (persuasively, to me) that Smith’s moral philosophy and moral psychology enable Smith to articulate the moral foundations of unintended, emergent social order. And he does so in a way that I think is accessible even if you’re not a philosopher or economist (yeah, I’m lookin’ at you, D.O.U.G.!).
  • Fonna Forman-Barzilai, Adam Smith and the Circles of Sympathy: Cosmopolitanism and Moral Theory. Hot off the press … I met Fonna at a Liberty Fund conference last fall, and we found that we had very similar perspectives and interpretations of Smith. Not surprisingly, then, I found a lot of her analysis here interesting and useful. Here she analyzes Smith’s moral theory and arguments in TOMS looking at how it relates to modern questions of cosmopolitanism. She is engaging with literatures in political theory that don’t overlap directly with my economics interests, but her analysis and application to modern concepts of distance and community (and, for example, globalization) is really thought-provoking.
  • Charles Griswold, Adam Smith and the Virtues of Enlightenment. This 1998 work is a go-to analysis of Smith’s moral philosophy and virtue ethics. I actually finished this before either Otteson or Forman-Barzilai, and my understanding of Smith’s arguments in TOMS and their broader moral and economic implications jumped discretely upon reading Griswold.
  • Matt Ridley, The Origins of Virtue: Human Instincts and the Evolution of Cooperation. Ridley has built an extensive oeuvre of works exploring human behavior that synthesize biology, anthropology, history, economics, and sociology, and this is a very useful example of his work. Here he covers evolutionary biology, anthropology, game theory, and economics to explore how it is that we humans create emergent social order through cooperation. If the set of ideas I’m tossing around in this post intrigues you but you are not familiar with them, this is where I’d start.
  • Matt Ridley, The Rational Optimist: How Prosperity Evolves. Ridley’s most recent work, and one that I enjoyed a great deal. Again a synthesis of economics, evolutionary biology, and anthropology, all animating the theme that humans do cooperate, do have incentives to behave in ways that are efficient and socially beneficial in the long run, create sustainability through innovation, and are not going to trash the planet. I am persuaded by his rendition of the argument, but I am predisposed to, because I already agreed with him … which leads to my only criticism of the work. The tone is too “just so”, the arguments too pat — I doubt that they will be persuasive to anyone who isn’t already predisposed toward his worldview and toward being an optimist. That said, I’ve been pretty cranky and pessimistic for the past couple of years because of the wretched, stupid, counterproductive policy decisions that are perpetuating our economic downturn and killing our individual liberties by a thousand cuts, so I needed a good dose of rational optimism! I’d encourage you to read Rational Optimist after reading Enlightened Economy, which will provide more depth and backstory to support Ridley’s arguments.

On their faces these works may not appear directly relevant to the political economy of regulation and competition in large infrastructure industries experiencing technological change, but I think they are all likely to interest you if you are interested in the political economy issues inherent in regulation. Some of the Smith scholarship may verge too deeply into philosophy and political theory, depending on your personal interests, but I have certainly enjoyed every one of these works and recommend them all as worthwhile reads.

But, since it’s a Friday afternoon in late summer, I’m going to close with a couple of videos of Matt Ridley discussing The Rational Optimist. The first is a recent TED talk he gave in Oxford (can’t get the embed to play well with WordPress, grrr), using the “when ideas have sex” meme that is the tagline for the book. The second is from the PBS Newshour.

Have a great weekend!