Tag Archives: Economics

Cutting down trees for biofuels?

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Lynne Kiesling

Cutting down trees to generate biofuels to substitute for fossil fuels can’t make sense in terms of carbon accounting, can it? I never thought so, but apparently some people have contended that it does. This Project Syndicate essay from Bjorn Lomborg addresses the question, and I think it’s worthy of consideration not just because I think his argument is persuasive (which may reflect the quality of the argument or my confirmation bias, take your pick), but also because he provides several links to published papers that suggest that such strategies may actually increase GHG concentrations.

His point is more important and more subtle, though. What happens when deliberate cultivation of biomass crops changes the land use and moves agricultural production to other plots of land?

But the biggest problem is that biomass production simply pushes other agricultural production elsewhere. Studies are just beginning to estimate the impact. In Denmark, a group of researchers estimated by how much various energy crops would reduce CO2 emissions. For example, burning a hectare of harvested willow on a field previously used for barley (the typical marginal crop in Denmark) prevents 30 tons of CO2 annually when replacing coal. This is the amount that proud green-energy producers will showcase when switching to biomass.

But burning the willow releases 22 tons of CO2. Of course, all of that CO2 was soaked up from the atmosphere the year before; but, had we just left the barley where it was, it, too, would have soaked up quite a bit, lowering the reduction relative to coal to 20 tons. And, in a market system, almost all of the barley production simply moves to a previously unfarmed area. Clearing the existing biomass there emits an extra 16 tons of CO2 per year on average (and this is likely an underestimate).

So, instead of saving 30 tons, we save four tons at most. And this is the best-case scenario. Of the 12 production modes analyzed, two would reduce annual CO2 emissions by only two tons, while the other ten actually increase total emissions – up to 14 tons per year.

Rather than displace agricultural production (with all of the attendant distortions in other markets that would arise), I tend to think about doing research in and exploring technologies for biomass waste recycling. Things like anaerobic digesters to process dairy waste and use it to generate electricity. In that case you are generating two benefits — electricity for consumption and waste management — so the combined value of those two benefits may make a more costly technology economical. Here are some suggestive numbers about that net benefit from Wisconsin, although I caution putting too much credence in them.

Course video 3: David Ricardo on rent and on trade

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Lynne Kiesling

David Ricardo: Principles of Political Economy & Taxation from Lynne Kiesling on Vimeo.

You may know David Ricardo for his pioneering analysis of comparative advantage as the foundation of mutually beneficial specialization and trade. Ricardo’s work goes farther and deeper than that, exploring (among other things) the determinants of rent accruing to fixed inputs like land, the distribution of income among landowners and labor, and the effects of taxation. Ricardo’s excellent analyses arise from his economic context of trade blockades during the Napoleonic Wars, and the ensuing Corn Laws that Parliament passed to block the importation of inexpensive grain to compete against those politically powerful landowners.

Course video 2: Adam Smith’s Wealth of Nations

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Lynne Kiesling

Here’s the second video for my history of economic thought course: a synopsis of Adam Smith’s Inquiry Concerning the Nature and Causes of the Wealth of Nations. The video gives an overview of the entire work (except for Book III, his stage theory of history), and I hope it entices you to read some or all of it for yourself!

Adam Smith: An Inquiry Concerning the Nature and Causes of the Wealth of Nations from Lynne Kiesling on Vimeo.

Course video 1: Smith’s Theory of Moral Sentiments

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Lynne Kiesling

For the past few months I’ve been working with some talented and creative folks at Northwestern University Academic Technologies to produce some videos for use in my History of Economic Thought course. Over the next few weeks I’ll be releasing them here, and they will be available on my Vimeo page. Please distribute them widely (they have Creative Commons attribution + non-commercial licensing)! Please also leave comments, questions, suggestions, related readings, etc. so we can extend the learning environment far and wide.

Adam Smith: Theory of Moral Sentiments from Lynne Kiesling on Vimeo.

In The Theory of Moral Sentiments, Adam Smith asserts that humans have an innate interest in the fortunes of other people and desire for sympathy with others. Humans are complex individuals in Smith’s theory – rightly motivated by self-interest, but also by the innate sociability and desire for sympathy from and with others that he observed empirically. Sympathy, which Smith defined broadly as fellow-feeling with the situations (not just the emotions) of others, forms the foundation of our moral judgment.

I’m intrigued by Smith’s concept of sympathy. Smith’s model of sympathy is a process of coordination between the self and others. The Smithian sympathetic process has three essential characteristics: sympathy as a synthesis of empathy with judgment based on reason, a spectatorial/external perspective on one’s own behavior and the behavior of others, and an innate capacity for imagination that enables individuals to place themselves in the situations of others. This sympathetic process leads to coordination of expressions and actions across individuals, resulting in harmony and social order. That’s an important sense in which TMS forms the philosophical and psychological foundations of Smith’s later works, especially the Wealth of Nations.

Another subject in TMS that undergirds WON and later work in economics is Smith’s discussion of justice and beneficence. Smith argues that (commutative, or negative) justice is necessary in order to have a peaceable and productive society, while beneficence is nice but not essential. From this argument he concludes that provision for the enforcement of commutative justice is a proper role of government, an argument he will pick up in Book V of WON.

I discuss both of these subjects in the video.

Some natural gas posts worth reading

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Lynne Kiesling

Last week the EPA released a report on the extent of methane release during shale gas drilling; the results indicate that methane release is substantially smaller than previously thought. According to an article in Fuel Fix summarizing the report,

The scope of the EPA’s revision was vast. In a mid-April report on greenhouse emissions, the agency now says that tighter pollution controls instituted by the industry resulted in an average annual decrease of 41.6 million metric tons of methane emissions from 1990 through 2010, or more than 850 million metric tons overall. That’s about a 20 percent reduction from previous estimates. The agency converts the methane emissions into their equivalent in carbon dioxide, following standard scientific practice.

The EPA revisions came even though natural gas production has grown by nearly 40 percent since 1990. The industry has boomed in recent years, thanks to a stunning expansion of drilling in previously untapped areas because of the use of hydraulic fracturing, or fracking, which injects sand, water and chemicals to break apart rock and free the gas inside.

Experts on both sides of the debate say the leaks can be controlled by fixes such as better gaskets, maintenance and monitoring. Such fixes are also thought to be cost-effective, since the industry ends up with more product to sell.

This excerpt reflects my thinking on the leaks — since methane is the product they are extracting to sell and the cost of managing leaks is relatively low (but not zero), the firm has a self-disciplining incentive to reduce leaks (although not eliminate them, since the cost is not zero).

In a post on the EPA report, Walter Russell Mead remarks that

Companies are developing more sophisticated leak detection systems, and unlike many other environmental problems (like, say, power plants’ greenhouse gas emissions), there is a market incentive to prevent these leaks without any sort of green interventionist policy. Every unit of methane released into the atmosphere during drilling is lost profit.

But that’s not stopping misguided greens like Bill McKibben from bemoaning the news. McKibben took this opportunity to stress the need to transition away from fossil-fuels altogether, rather than appreciating the fact that we’re extracting one of the cleanest fossil-fuels more efficiently and with much less environmental impact than ever before. McKibben’s blinders are firmly in place; we’re unlikely to see a revision to a post of his earlier this month in which he suggested that methane leakage might make natural gas worse for the environment than coal.

I’ve never found McKibben’s arguments compelling, and now I realize why: his advocacy for dramatic, fast changes does not reflect how real people in real-world, complex decisions make changes in their behavior. McKibben fails to think at the margin. He does not acknowledge that the long transition to cleaner fuels is already in process. Long transitions are typical in technological change; think about how long it took to transition from water power to steam power — 60 years! McKibben’s argument for sudden, dramatic change does not reflect economic thinking.

Happy birthday Hayek!

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Lynne Kiesling

Today’s Hayek’s birthday, a worthwhile landmark for reflection on his work and why it’s important to read. I assign “The Use of Knowledge in Society” in every class I teach, and I recommend it if you haven’t yet read it. Here Hayek argues that the fundamental economic problem societies face is not the allocation of a given set of resources based on a given set of preferences and technical capabilities; instead, the coordination of decisions and actions among interacting individual agents with diffuse private knowledge and plans forms the basis of economic activity. The diffuse and private nature of knowledge hampers such plan coordination, but out of human interaction, institutions emerge that enable decentralized coordination. Prices and market processes compose an institution for coordination in the face of the knowledge problem. Moreover, Hayek argued, knowledge transcends “scientific” information, there is no given and uniform set or distribution of data, and such information fails to capture all knowledge relevant to both static and dynamic decision-making and coordination.

Hayek’s substantial insight in this work, one that has become largely incorporated into mainstream economics, is that the price system operating through market processes is an effective, parsimonious (but not perfect) means of generating, signaling, and aggregating such knowledge. Prices cannot convey all individual knowledge pertinent to a particular economic decision, but they do serve as knowledge surrogates by communicating some private knowledge (Horwitz 2004). Coordination of individual actions and plans emerges as a beneficial consequence of the price system; thus the price system and market processes enable emergent, or unplanned, order.

Hayek characterized the fundamental economic problem not as the static allocation of scarce resources among uses by omniscient agents, but rather as the coordination of actions and plans among dispersed agents with diffuse private knowledge. In his statement that “… the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess” (p. 519), Hayek draws on the earlier arguments of the socialist calculation debate and of his (1937) work. The “man on the spot” (p. 524) has subjective, private knowledge of “the particular circumstances of time and place” (p. 522), and that knowledge is among the decision-relevant data that cannot be aggregated except through a decentralized system of prices and a market process of exchange to determine those prices. Prices economize on the communication and interpretation of knowledge among dispersed agents.

How do individuals learn the plans of others? How do we learn when we are wrong and take action accordingly? Prices and market processes provide feedback channels. Feedback loops, learning, adaptation to a changing environment and changing actions and plans of others, interdependence of agents and their actions in a complex system, and how prices and markets serve as feedback loops making a complex system adaptive – all are important implications of Hayek’s argument. Prices provide profit opportunities and realized profits, and those realized profits serve as feedback that can spur the discovery of new products, services, business models, or other ways to create value through economic activity. Alert entrepreneurs see these opportunities, learn from observed and realized feedback, and adapt their plans accordingly. Prices enable “error detection and correction within the market” (Boettke 1998, p. 135). Markets are processes for social learning and provide feedback channels for entrepreneurial alertness.

This post is drawn from my article, “Knowledge Problem” (SSRN link), which is included in the forthcoming Oxford Handbook of Austrian Economics (Peter Boettke and Chris Coyne, eds.).

Planet Money’s t-shirt project

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Lynne Kiesling

Are you a fan of Leonard Read’s I, Pencil (see video above)? Hayek’s argument the “The Use of Knowledge in Society” about how prices coordinate the decisions of anonymous individuals with diffuse private knowledge? Adam Smith’s tale of the making of a woollen coat? Pietra Nivoli’s book on the global travels of a t-shirt?

Then you may be interested in Planet Money’s new t-shirt Kickstarter project:

Almost every single t-shirt out there — from the cheesiest vacation tank top to the fanciest boutique designer tee — is the result of a complicated global odyssey. We will take you on that odyssey and document the route our t-shirt took to your back. We’ll meet the people who grow the cotton, spin the yarn, and cut and sew the fabric. We’ll ride on the cargo ships that bring our t-shirt from factories in Bangladesh and Colombia to ports in the US. And we’ll examine the crazy tangle of international regulations which govern the t-shirt trade the whole way.

Planet Money does some of the best economic journalism, and the participatory nature of bringing this story into being is itself an example of the kind of value-creating interconnectedness that underlies economic exchange.

 

What is regulatory capture?

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Lynne Kiesling

Regulatory capture is one of the defining phenomena in the political economy of regulation. What is regulatory capture, exactly? In a Tech Liberation post from 2010, Adam Thierer offers this definition:

“Regulatory capture” occurs when special interests co-opt policymakers or political bodies — regulatory agencies, in particular — to further their own ends.  Capture theory is closely related to the “rent-seeking” and “political failure” theories developed by the public choice school of economics.  Another term for regulatory capture is “client politics,” which according to James Q. Wilson, “occurs when most or all of the benefits of a program go to some single, reasonably small interest (and industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers).”  (James Q. Wilson, Bureaucracy, 1989, at 76).

This short video from Susan Dudley at George Washington University provides a concise introduction to the concept:

As she points out, one of the consistent outcomes arising from regulatory capture is that the regulated industry can use regulation in ways to increase its benefits at the expense of consumers.

In the post quoted above, Adam does a great service by generating a compendium of quotes from economists and other analysts about regulatory capture and he’s added to this list since the original post. His chronological list gives you a good sense of how pervasive the phenomenon is of politically-connected interests to shape regulation to their own advantage.

Regulatory capture: putting the “crony” in crony capitalism for as long as regulations and politics have existed.

New areas for innovation push back against “the great stagnation”

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Lynne Kiesling

Happy New Year! Here’s a little dose of technology optimism to start your year off: 2012 was a good, solid year for innovation, and there’s room and opportunity for even more. This TechCrunch article describes some burgeoning innovation opportunities in health care, education, transportation, and entertainment.

Here’s one thing to bear in mind if you despair about innovation and economic growth, along the lines of Tyler Cowen’s “great stagnation” or Robert Gordon’s argument that innovation is slowing inexorably:

There was no “next big thing” to speak of, meaning there was no new big company to take attention away from Apple, Google, Facebook and Microsoft. That’s ok, though, because there were plenty of companies that looked at what we do on a daily basis, and found new and cool ways to make it more fun or less time consuming. That’s innovation, too.

That’s a crucial point. Innovation is more than just the massively disruptive, Schumpeterian discrete change that breaks us out of our existing patterns. The microinventions, the small tweaks, the ways to make the mundane less mundane or at least less costly, all add up, and over time and in aggregate they can have a substantial impact on how we live our lives, on productivity, and on economic growth. It’s just that they sneak up on you rather than bashing you over the head.

Regulation’s effects on innovation in energy technologies: the experimentation connection

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Lynne Kiesling

Remember the first time you bought a mobile phone (which in my case was 1995). You may have been happy with your land line phone, but this new mobile phone thing looks like it would be really handy in an emergency, so you-in-1995 said sure, I’ll get a cell phone, but not really use it that much. Then, the technology improved, and more of your friends and family got phones, so you used it more. Then you saw others with cool flip phones, in colors, and you did some searching to see if other phones had features you might like. Then came text messaging, and you experimented with learning a new shorthand language (or, if you’re like me, you stayed a pedant about spelling even in text messages that you had to tap out on number pad keys). You adopted text messaging, or not. Then came the touch screen, largely via the disruptive iPhone, and the cluster of smartphone innovation was upon us.  Maybe you have a smartphone, maybe you don’t; maybe your smartphone is an iPhone, maybe it isn’t. But since 1995, your choice of communication technology, and the set from which you can choose, has changed dramatically.

This change didn’t happen overnight, and for most people was not a discrete move from old choice to new choice, A to B, without any other choices along the way. Similarly for technological change and the production of goods and services. For both consumers and producers, our choices in markets are the consequence of a process of experimentation, trial and error, and learning. Indeed, whether your perspective on dynamic competition is based on Schumpeter or Hayek or Kirzner (or all of the above), the fundamental essence of competition in market processes is that it’s a process of experimentation, trial and error, and learning, on the part of both producers and consumers. That’s how we get new products and services, that’s how we signal to producers whether their innovations are valuable to us as consumers, that’s how innovation creates economic growth and vibrancy, through the application of our creativity and our taste for creating and experiencing novelty.

This kind of dynamism is common in our world, and is increasingly an aspect of our lives that creates value for us; mobile telephony is the most obvious example, but even in products as mundane as milk, the fundamental aspect of the market process is this experimentation, trial and error, and learning. How else would Organic Valley have started coming out with a line of milk that is entirely from pasture-raised cows? (I am happily consuming this milk; pasture-raised cows make milk with more essential fatty acids and conjugated linoleic acid, very important for health)

But this kind of dynamism, while common, is not pervasive. Institutions matter, and in particular, various forms of government regulation can influence the extent to which such technological dynamism occurs in a market. The example I have in mind as a counterpoint, the example I want to explain and understand, is consumer-facing electricity technologies, like thermostats and home energy management systems. For the past several years there has been considerable innovation in this space, due to the application and extension of digital communication technology innovations. But despite the frequent claims over the past few years that this year will be the year of the consumer energy technology, it keeps not happening.

Tomorrow in New Orleans, at the Southern Economic Association meetings, I’ll be presenting a paper that grapples with this question. My argument is that traditional economic regulation of the electricity industry slows or stifles innovation because regulation undercuts the experimentation, trial and error, and learning of both producers and consumers. As I state in the abstract:

Persistent regulation in potentially competitive markets can undermine consumer benefits when technological change both makes those markets competitive and creates new opportunities for market experimentation. This paper applies the Bell Doctrine precedent of “quarantine the monopoly” to the electricity industry, and extends the Bell Doctrine by analyzing the role of market experimentation in generating the benefits of competition. The general failure to quarantine the monopoly wires segment and its regulated monopolist from the potentially competitive downstream retail market contributes to the slow pace and lackluster performance of retail electricity markets for residential customers. The form of this failure to quarantine the monopoly is the persistence of an incumbent default service contract that was intended to be a transition mechanism to full retail competition, coupled with the regulatory definition of product characteristics and market boundaries that is necessary to define the default product and evaluate the regulated monopolist’s performance in providing it. The consequence of the incumbent’s incomplete exit from the retail market suggests that as regulated monopolists and regulators evaluate customer-facing smart grid investments, regulators and other policymakers should consider the potential anti-competitive effects of the failure to quarantine the monopoly with respect to the default service contract and in-home energy management technology.

In August 2011 I wrote about the Bell Doctrine, Baxter’s precedent from the U.S. v. AT&T divestiture case, and how we have failed to quarantine the monopoly in electricity. This paper is an extension of that argument, and I welcome comments!

If you’ll be at the SEA meetings, I hope to see you there; I am headed to NOLA tonight, and look forward to a fun weekend full of good economic brain candy.