Home > Economics - General > Economists and climate change

Economists and climate change

July 19th, 2010

Ross Gittins repeats the criticism he, Ken Henry and Martin Parkinson, have put forward previously, that economists were either missing in action or actively unhelpful in the climate change debate. I disagree – I think academic economists as a group look a lot better on this issue than do economic columnists, and (on the limited available evidence) at least as good as public servants.

The views of the profession were stated pretty clearly back in 2002, when Clive Hamilton and I organized a statement calling for ratification of Kyoto which got 250 signatures (about 40 per cent of the entire academic economics profession at the time, which is huge given that many people never sign anything, or don’t get round to answering their email). A second pro-Kyoto statement in 2007 got 270 signatures, including 70 professors.

Against that, there are a handful of rightwingers who accept the delusional anti-science line that is required as a totem of tribal loyalty on the right. Not only is this group numerically small but, AFAIK, it doesn’t include anyone with substantial standing in the profession[1]. That’s certainly what the public record suggests. In 2002, John Humphreys and some others announced a counter-statement, but it never appeared, presumably because of the embarrassing quantity and quality of those willing to sign.

There are also a few people who have been so committed to particular policy formulations that they have been unwilling to support anything else, even though the similarities between different carbon price policies outweigh the differences. This is ultimately a matter of political judgement. The choice between supporting an imperfect policy and waiting for a better one isn’t a simple one. I supported the CPRS as an imperfect compromise right up to the final failed deal with Turnbull, which I thought was worse than starting again from scratch. Others judged, earlier on, that the scheme had been hopelessly compromised. On the whole, I don’t think any of this had any impact on the outcome.

If we compare this to Ross’ colleagues among economic columnists, I’d say the majority are either outright delusionists or “delay and doolittle” types. Alan Wood, who was generally well-regarded as economics editor for the Oz bought the IPCC conspiracy theory (full black helicopter version). Terry McCrann is much the same, and others (Alan Kohler for example) have pushed Abbott’s anti-economics line on the subject.

Public servants rarely go on the record, but discussions of the Greenhouse Mafia suggest that there are plenty who have worked hard to sabotage any action. My run-ins with ABARE in the Howard years certainly support this view.

Looking at the most recent debate, economists mostly supported the Garnaut Report and lots of us worked hard on developing detailed proposals for implementation of various aspects of it, only to see them traded away by the government in the ultimately futile search for a deal with the opposition. Given the speed with which the whole policy collapsed, it’s hard to see where academic economists could have intervened effectively. Whatever the strengths of the academy, rapid reaction times are not among them.

Looking forward, I predict that the majority of economists will back any coherent policy that involves an early shift to pricing carbon, and that the economics profession will be more unified in this respect than almost any other group.

fn1. I can’t rule out the possibility – eminent people can say silly things, particularly in their declining years. But the kinds of nonsense that delusionists are required to go along with (eg “no statistically significant warming since 1993″) make it hard for any self-respecting economist to be part of this movement.

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  1. Gaz
    July 19th, 2010 at 19:59 | #1

    I think you’re right – in my observation, economists have been relatively quiet about it in public forums because they mostly (a) accept what the great bulk of qualified scientists say about the science and (b) see it as a fairly obvious case of market failure due to negative externalities with obvious solutions. Sure, there’s some quibbling about the details – eg McKibbin and Wilcoxon – but mostly from a big-picture perspective it’s a no-brainer. If global warming wrecks the planet, it won’t be economists to blame.

  2. Jim Rose
    July 19th, 2010 at 20:14 | #2

    Vol. 23, no. 2, Spring 2009 of the Journal of Economic Perspectives has a symposium on the economics of climate change.

    That journal is now open access at http://www.aeaweb.org/jep/contents/index.php

    The journal specialises in easy to read survey papers.

  3. July 19th, 2010 at 22:08 | #3

    I don’t know about the other two but, as I was present when Ken Henry made his comments, I have to defend him. When the CPRS came up some economists whose favoured solution was a carbon tax – or a combo tax plus ETS – screamed like crazy. The net result was to weaken the case for doing anything.

    Henry praised the stringent standards of debate and disputation in economics but argued that occasionally it might be an idea if economists ‘put their weapons down’. I think he is right. There are different responsibility norms in academic debate and in public policy debates.

    I agree with your general point that – with the exception of a few economists at the IPA and their associates in the universities – almost all economists favour dealing with climate change using a carbon price. I am stunned that ideology undermines common sense here – almost every climate change denialist economist I know is on the extreme right of the political spectrum. The relation isn’t symmetric – those favouring action on climate change come from all sides of politics.

  4. Socrates
    July 19th, 2010 at 22:46 | #4

    I wonder if the real problem on this one is not economists as such but some ecoomic commentators who I woudl more accurately class as “the finance industry”? I think they are still paraniod after the GFC exposed their hopeless inability to price risks. The latter group have hardly said anything except some silly comments about competitiveness when the ETS won’t even affect our expors.

    I think there is also a problem that those with potential financial gains to be made from the responses to climate change have been to silent, making it seem as though it is all pain and no gain. So I can understand that the likes of Ken Henry might feel unsupported, but he should more accurately diagnose by whom.

  5. Ernestine Gross
    July 19th, 2010 at 22:51 | #5

    “I think academic economists as a group look a lot better on this issue than do economic columnists,”

    I fully concur.

    I quite like some of Ross Gittins’s articles. However he, like other ecoomic columnists, seem to have missed the major developments in the theory of incomplete markets since the mid-1980s and the earlier work, known as a ‘Lindahl equilibrium’. These theoretical models provide the rigorous framework for developing applied models and methods to deal with environmental issues (eg state preference theory and specific models for specific probles).

    Gittins writes: “Economists’ preference for a carbon price signal was where agreement among economists ended”.

    Well yes, this is the economists’ general contribution to a multi-disciplinary problem. This is the point of agreement. For anything more than that other information is required.

    Gittins is not up-to-date on this topic, IMHO.

  6. Chris Warren
    July 20th, 2010 at 03:36 | #6

    Why is climate change an “economic” issue?

    It seems to me that it is being driven by political forces and most of the climate damage is done by major corporations who have great power (on many dimensions), independently of economic theories.

    We need a political act from Parliament and publicly-funded carbon neutral power solutions subsidised to compete the polluters out of the way.

    I guess it would not cost much more than a few Collins-class submarines and Joint Strike fighters.

  7. Ernestine Gross
    July 20th, 2010 at 09:36 | #7

    “Why is climate change an “economic” issue?”

    I, like many other, have become a bit sloppy in the usage of terinology. In the present context, ‘climate change’ refers to human induced average global warming due to ghg emissions, a by-product of production.

    I”t seems to me that it is being driven by political forces and most of the climate damage is done by major corporations who have great power (on many dimensions), independently of economic theories” Yes. See for example corporate law. (The economic theories I have in mind are analytical rather than prescriptive.)

    “We need a political act from Parliament and publicly-funded carbon neutral power solutions subsidised to compete the polluters out of the way”. This would imply a carbon price.

  8. Uncle Milton
    July 20th, 2010 at 18:05 | #8

    I stand to be corrected, but I think Gittins and others have one academic economist in mind, and that is Warwick Mckibbin, whose modus operandi in this debate over several years has been to denounce any solution that isn’t his preferred solution, in all its detail. It’s an example of the best being the enemy of the good, with the twist that best in this case is the best in McKibbin’s mind only, and that is all that matters.

  9. Uncle Milton
    July 20th, 2010 at 18:14 | #9

    @Uncle Milton
    Hmmm… I’m going to correct myself having had a lot at Parkinson’s speech. He says that McKibbin has been one of the few economists active in the debate, so perhaps they weren’t thinking of him.

  10. Roger Jones
    July 20th, 2010 at 19:32 | #10

    Garnaut started trading away the good in his report between the draft and final version. The caution as to international agreements, hedging around 5%/15%/25% were his personal opinion and incomplete. They were anchored on Australia moving and the world not, or everyone moving – an all or nothing strategy. The “bad neighbour” strategy of too little action was not even raised seriously. What we saw politically was more of the back pedalling that he started.

    An assessment involving a bit more behavioural economics and international relations might have been handy. Australia’s behaviour has influenced the situation in the past. A curate’s egg was always the much more likely outcome and the assessment could have reflected that. Half an agreement and learning by doing, for example.

    I would like to see some economists comment on Abbot’s statement about not having a carbon price, which are false and misleading. There will be a carbon price, but not an explicit one, so to persuade voters they are getting a solution (a 5% solution) for zero cost at the household level under his policy is patently untrue.

  11. Jim Rose
    July 20th, 2010 at 22:38 | #11

    sorry, initially posted the below to the wrong thread:

    I found the best writer on global warming to be Thomas Schelling. He has been involved with the global warming debate since chairing a commission for President Carter in 1980.

    Schelling is an economist who specialises in strategy so he focuses on climate change as a bargaining problem. He drew in his experiences with the negotiation of the Marshall Plan and NATO.

    International agreements rarely work if they talk in terms of results. They work better if signatories promise to supply specific inputs – to perform specific actions now.

    Individual NATO members did not, for example, promise to slow the Soviet invasion by 90 minutes.

    NATO members promised to raise and train troops, procure equipment and supplies, and deploy these assets including in other member countries. All of these actions can be observed, estimated and compared quickly. The NATO treaty was a few pages long.

    The Kyoto Protocol commitments were made not about actions but to results that were to be measured after more than a decade. No one can tell until close to 2012 which nations are on course to meet their goals. There was little guidance on what had to be done to archive these goals.

    Climate treaties could promise to do certain actions now such as invest in R&D and develop carbon taxes that return the revenue as tax cuts. If the carbon tax revenue is fully refunded as tax cuts, less reliable countries, in particular, have an additional self-enforcing incentive to collect the carbon tax properly to keep their budget deficits under control.

  12. Michael of Summer Hill
    July 21st, 2010 at 09:40 | #12

    John, in respect to ‘market failure and regulations per se’ governments at times need to step in and take corrective measures. One only needs to look at the strict EU regulations governing the aviation industry to realise how high standards have improved both air quality and air safety. Similarly here, Labor should follow the EU ethos and strive for the highest possible air quality standards and if that means making a ‘pact’ with The Greens in setting a ‘price for carbon’ then so be it. Thumbs up Labor.

  13. Gaz
    July 21st, 2010 at 14:19 | #13

    @Ernestine Gross
    Hi Ernestine Gross,

    Just for the information of those who graduated before the mid-80s, could you expand a bit on the “the major developments in the theory of incomplete markets since the mid-1980s” – just a few names would be OK.

    Also, could you maybe give us some idea of how you think Lindahl’s work might be applied to the climate change problem, or if it’s been applied to any other public good problem?

    Thanks.

  14. Ernestine Gross
    July 21st, 2010 at 19:56 | #14

    @Gaz

    As requested:
    1. Major developments in the theory of incomplete markets from the mid-80s were published primarily in working papers. The Journal of Mathematical Economics published several results in a special issue, from memory it was in 1990. A major conclusion from this literature is that competitive equilibria of a model of a private ownership economy is generically Pareto inefficient (ie except for, say a sunny Wednesday afternoon between now and the end of the world, market outcomes are always Pareto inefficient). This opens up the possibility that an ‘outside agent’ (non-market) agent can improve on the outcome for all consumers by measures that result in changes the investment (production) decisions of firms and lump sum transfers to individuals. See J. Geanakopolos, M. Magill, M. Quinzii, J. Dreze, “Generick Inefficiency of Stock Market Equilibrium when Markets are Incomplete”, Journal of Mathematical Economics, 1990, vo. 19, pp 113-151. There you have 4 big names in this area. Other contributors, which come to mind are Wayne Shafer, D. Duffie.

    2. The term ‘climate change’ is a little too vague. If you don’t mind, I’ll narrow it down to ‘greenhouse gas emissions’ (ghg) caused by production processes under the control of humans (excluding the effects of eating too many onions…), which, according to climate scientists cause average global temperatures to rise (AGW). There are feedback effects from AGW on ‘the economy’, which includes of course the natural environment.

    Lindahl’s original work was concerned with optimal taxation for the provision of a public good. While ghg emissions are termed negative externalities in contemporary language, a reduction in ghg emissions (or slowing of growth) can be seen as a provision of a public good. This is the link.

    Both, a cap and trade and a ‘carbon tax’ are approaches that are derived from the above mentioned theoretical frameworks; they differ in the ‘implementation’ (ie which mechanism is considered to be best for situation specific reasons). As our host, JQ, has written a long time ago, under some conditions the two mechnisms are equivalent. ghg emissions are a global problem, involving many juristictions and uneven technological development as well as uneven wealth distributions, even within the so-called developed world. It is this empirical detail which makes implementation difficult but not impossible. (Hence my statement that general consensus among economists is limited to a ‘carbon price’ because to go beyond that requires a lot more information).

    In the area of resource economics, this theoretical framework has been applied under the heading “Contingent Valuation”. I’ve done a little bit of work in the area of transport noise (Econometric Society Conference, 2004).

    I hope to have answered your question.

  15. Michael of Summer Hill
    July 21st, 2010 at 21:33 | #15

    John, on July 19, 2010, more than 100 Ph.D. economists, including Nobel laureate Kenneth Arrow, released an open letter warning against any delay in the implementation of California’s clean energy policies for it will be more costly than initiating action now. But what really struck me was the heading ‘The Most Expensive Thing We Can Do is Nothing’.

  16. Aslam Abd Jalil
    July 21st, 2010 at 23:56 | #16

    It’s a noble deed for economists to take part in preserving the mother nature. However, I believe it is still not enough to just rectify certain ratifications (eg Kyoto Protocol or Montreal Protocol) without having a look about the enforcement. At all times, the politicians need to be urged and pressured by the academicians (including economists) to do something regarding the enforcement. The US for example rectified Kyoto Protocol but is not seriously taking actions to prove their commitment. Moreover, there are certain arguments between China and the US about the emission of green house gases. Overall, in percentage China emits the highest green house gases but in per capita, the US ranks first. This kind of argument distracts the commitment for climate change. I hope economists can take serious actions regarding this issue.

  17. Jim Rose
    July 22nd, 2010 at 08:07 | #17

    @Michael of Summer Hill
    Your reference to California’s plan to implement clean energy policies is a good exemplar for the value of unilateral steps to curb global cooling.

    The letter about the California Global Warming Solutions Act signed by Arrow and 100 other economists is at http://ucsusa.org/ca-economist-letter

    If it is not worthwhile for California to act unilaterally, is it of value for anyone? California is one of the biggest economies in the world. Bigger than Australia and I think Canada to name a few.

    No mention in made on the letter of unilateral action doing enough to actually reduce global warming. If it did, they would have said so with numbers. Putting numbers on policy options is the comparative advantage of economists in the global arming debate.

  18. Jim Rose
    July 22nd, 2010 at 08:31 | #18

    @Ernestine Gross
    There is a large literature about information, knowledge and dynamic competition dating back several centuries in all. It predates the Wealth of Nations.

    Examples are work on entrepreneurs as bearers of uncertainty and dynamic risk takers, and the socialist calculation debate including Hayek’s work on dispersed and inarticulate knowledge and competition as a discovery procedure. Hayek’s 1946 essay on the meaning of competition is the bets single paper in the subject.

    Knight’s 1921 book on Risk, Uncertainty and Profit published can be still read with profit today.

    The market generated institutions that emerge as a profit seeking solutions to knowledge gaps and mistrust about quality, trustfulness and respective intentions tend to economise on the information and trust that market participants need to rely upon to successfully pursue their diverse purposes.

    Akerloff’s 1970 paper on uncertain quality and adverse selection was originally rejected for publication because it contained nothing new.

    That paper ends with a discussion on various market-generated institutions that assure quality ranging from warranties and brand names. Much of the economics of law is about studying institutions that arise to solve barriers to contracting and deal with opportunism.

    Mathematical economists treat market failures as puzzles to ponder.

    Lectures at business schools found this vocabulary of teaching put their students to sleep.

    When these lecturers rebranded market failures as known, persistent but unexploited entrepreneurial opportunities for profit, their students all sat up and really paid attention.

    There is a large literature showing that many market failures are class-room curios that the market solved a long ago. Solving a market failure is an entrepreneurial opportunity for pure profit. Remember the fable of the bees and the lighthouse in economics.

  19. Ernestine Gross
    July 22nd, 2010 at 10:17 | #19

    You are not telling me anything new in terms of the economic literature, although it is not clear as to why you refer to some of it and I therefore need to respond. Furthermore, there are a few other assertions you make that require a response.

    1. The term ‘market failure’ refers to both, imperfect competition and incomplete markets. The former has been the focus of much economic policy during the past 20 years under the heading ‘micro-economic reform’. To the extent that the associated ‘competition policies’ have been successful, one can at least hypothesise that the problem of AGW has become worse and so have other negative environmental externalities (eg competition in the aviation industry has reduced monetary prices and increased air traffic). Clarity on the nature of the problem is important. Externalities are a problem of incomplete markets. You fail to appreciate this.
    2. You mention v. Hayek. In the terminology of v. Hayek’s verbal theoretical framework, the implication of the literature on incomplete markets in the math econ. literature would be called ‘coordination failure’.
    3. “The market generated institutions that emerge as a profit seeking solutions to knowledge gaps and mistrust about quality, trustfulness and respective intentions tend to economise on the information and trust that market participants need to rely upon to successfully pursue their diverse purposes.” I consider this a Moncktonian statement. ‘The Market’ is an institution. If ‘the market’ is incomplete (missing prices), which it is for well understood reasons, then it cannot do the job v. Hayek would like it to do. For a thorough and precise description of the problem see Mount and Reiter.
    4. “Mathematical economists treat market failures as puzzles to ponder.” I consider this a Moncktonian statement. Why do you make statements which so clearly signal that you don’t know what you are talking about? To-date and to the best of my knowledge, nobody has managed to prove existence of a solution of a model of a ‘market economy’ that requires negative prices. Please show me your result, if you have one. To believe that there is a market solution to major externalities is to believe in miracles. Please note that a cap and trade system for ghg emissions is not a ‘market solution’ because a non-market agent is required to set the limit on total ghg emissions and introduce legislation to ‘sell’ in one way or another emission allowances that correspond in aggregate to the total limit. Alternatively, at what positive price are you going to buy from me my ghg emissions such that you make a profit?
    5. “Lectures at business schools found this vocabulary of teaching put their students to sleep. “ This looks like another Moncktonian statement to me. Would you please provide me with data that shows that mathematical economics is taught in a business school. I don’t know of any business school that teaches mathematical economics. However, I do know of some publications in mathematical economics that were produced by academics working at quite famous business schools. Further, I am happy to provide you with data which shows that an economics subject, taught in a business school, based on the conceptual framework of mathematical economics and its results has been favourably received by the students.
    6. Your Moncktonian statement nevertheless raises a question that might be relevant to the topic of this thread. During the past 20 years or so there has been an enormous growth in business and commerce teaching programs based on applied sub-sub-disciplines of Economics (Accounting, Banking, Finance, Human Resources, Marketing, IT, ‘strategic management’, ‘conflict resolution’, ‘organisational behaviour’, ‘essay writing’, ‘social studies’, ‘corporate governance’, corporate law,………..). All this led to very early specializations for young people eager to get a job in ‘business’. Economics departments have not grown to the same extent. It is not easy for the public to distinguish a ‘market economist’ (choose your segment) from an economist who specialized in one or more areas only after their post-graduate studies in Economics.

  20. Jim Rose
    July 22nd, 2010 at 11:14 | #20

    @Ernestine Gross
    Externalities result from the failure to define and enforce property rights. As Demsetz noted, there is a supply and demand for property rights and some property rights are not worth creating. Right now, that applies to a certain global open-access resource.

    Edward Lazear used to teach labour economics in the standard way to business school students.

    They fell asleep.

    Lazear rewrote his notes to invent what is now known as personnel economics. This literature discusses who you hire, how to motivate and reward them and so on. It still has some maths in it.

    Have you ever paid anyone to take away your garbage. Isn’t that a negative price?

    You should read Kenneth Boulding’s review of Samuelson 1947 foundations of economics book. Explains how mathematical economics limits what you can learn through intuition.

    Market-failure theory compares real world economic institutions against an unobtainable ideal – the nirvana approach – instead of against a real-world alternative.
    That is why it is rightly dismissed as blackboard economics.

    P.S. open just about any managerial economics textbook. There will be maths in it; game theory too.

  21. Ernestine Gross
    July 22nd, 2010 at 14:12 | #21

    @Jim Rose

    You are free to post whatever you like, subject to JQ’s policy. However, I don’t need to be involved in what you want to say. So my reply will be short.

    #1: I do not agree.

    #2: Labour economics is not the topic of this thread

    #3: Not an answer to my question.

    #4: You are providing a solution to a problem (reading K. Boulding) which you assume exists. The statement “explains how mathematical economics limits what you can learn through intuition” is Moncktonian. Mathematical economics uses mathematics to check on intuition such that one can distinguish between wishful thinking and dogma and theoretical knowledge that is amenable to empirical examination.

    #5: You are not interested in data which I offered you. Instead of offer an opinion (a prejudgement) and a label. Not worthwile responding to.

    #6: I’ve got news for you. Open any book published during the past 200 years or much earlier and you find ‘math’ in it; page numbers that serve as an index of the sequence of printed pages.

  22. Jim Rose
    July 22nd, 2010 at 15:02 | #22

    @Ernestine Gross
    1. What do you define as an externality?

    2. What is a positive externality and a negative externality?

    3. Your numbering system prevents much more in reply because I do not know which remarks you are discussing. Ah, maths both lacks precision and gives misleading precision.

    4. The mathematisation of economics began in earnest in the 19th century.

    5. Subjects were discussed and dispensed with through algebraic means, but calculus was not initially used. The pagination supplied courtesy of the printer of the paper or book or the copier of the manuscript does not quite cut it.

    6. Paragraphs with more than two or three short sentences are less often read by web surfers.

  23. Ernestine Gross
    July 22nd, 2010 at 15:21 | #23

    @Jim Rose

    1. It is not ‘what do you define as an externality’ but ‘what is your definition of an externality’. I have given a precise definition and in earlier posts. I can’t keep on writing the same stuff.

    2. dito.

    3. I have nothing more to add.

    4. You are wrong because the Egyptians used mathematics to measure economically useful quantities and there is evidence that they were aware of ‘inflation’. Further, to the extent that financial accounting is part of economics, the mathematisation happened toward the end of the 15th century in Europe.

    5. Red herring. Obviously, calculus was not used until it was invented and you totally leave out what happened since.

    6. That is fine with me.

  24. Jim Rose
    July 22nd, 2010 at 15:39 | #24

    1. You say that “If ‘the market’ is incomplete (missing prices), which it is for well understood reasons, then it cannot do the job v. Hayek would like it to do.”

    2. What do you think Hayek would like the market to do?

    3. How do incomplete markets stop the market from doing what Hayek would like it to do?

    p.s. externalities are not defined anywhere in this thread. Various phenomena disliked by the various authors of several posts are labeled as an externality, but the term itself is left undefined.

    p.p.s. Keynes was on the money when he said “Too large a proportion of recent ‘mathematical’ economics are merely concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.”

  25. Ernestine Gross
    July 22nd, 2010 at 16:10 | #25

    @Jim Rose

    1. Already answered.

    2. See v. Hayek

    3. Already answered.

    P.S. True, not on this thread. I assume all authors involved have a clear understanding of the term ‘externality’.

    P.P.S. Yes, this was in the 1940s.

  26. Gaz
    July 22nd, 2010 at 17:04 | #26

    @Ernestine Gross
    Thank you.

    By the way, I am puzzled by this: “Please note that a cap and trade system for ghg emissions is not a ‘market solution’ because a non-market agent is required to set the limit on total ghg emissions and introduce legislation to ‘sell’ in one way or another emission allowances that correspond in aggregate to the total limit.”

    Such an implicit definition of “market solution” – one that did not involve the intervention of a non-market agent – would seem to define “market solution” out of existence, in the sense that if the problem could be solved by market agents it wouldn’t have happened in the first place.

    Can you give us an example of something you would describe as a “market solution” (bearing in mind that the Australian Tax Office is a non-market agent)?

  27. Jim Rose
    July 22nd, 2010 at 17:50 | #27

    @Ernestine Gross
    It is optimistic to assume that there is agreement on what is an externality.

    If you define an externality as a net cost or benefit that my actions impose on you, as is all too common, you channel disagreement into what is a cost or benefit.

    Not helpful considering the many papers and books written on what is a cost. Remember the fable of the bees – the bees were sometime a cost, sometimes a benefit.

    Coase pointed out that externality problems vanish if bargaining between the affected parties were costless.

    The problem at hand could be seen as the result not of externalities but of the obvious existence of positive transaction costs.

    This is still not helpful as first thought considering that many papers and books written thereafter on what is a transaction cost.

    Transaction costs are just costs and should not be stigmatised because the concoctions of mathematical economics, as imprecise as the initial assumptions on which it rests, leading its authors to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.

    Coase also pointed out that the traditional analysis of externalities contained a fundamental error.

    The typical externality is a cost jointly produced by the actions of both parties.

    If the efficient solution requires actions by both parties none of the policy alternatives developed by blackboard economics may be able to produce it. Why did the mathematical economists miss this if their tools are an engine for discovery of new truths rather than reinvention and mystification of of old ones?

    Who is the least cost avoider is rarely clear in advance. Debates over the competing merits of carbon taxes, emissions trading, clean energy, regulation, mitigation and adaptation might be examples of disputes of the least cost methods of avoiding the externality.

    As for open-access resources, many solutions aim to develop actual or simulated property rights over use of the resource, but you seem to deny the connection between property rights and externalities.

  28. Ernestine Gross
    July 22nd, 2010 at 18:14 | #28

    @Gaz

    Except for line 1, I am not sure how to reply because I don’t understand your paragraph 3 (out of 4). In reply to “Such an implicit definition of ‘market solution’ () would seem to define ‘market solution’ out of existence in the sense that if the problem could be solved by market agents it wouldn’t have happened in the first place”, my answer is NO. May I suggest you take the quote in your paragraph 2 to be technical in nature and the purpose of me writing it was support what I wrote on the relationship between Cap and trade and a carbon tax.

    2. –

    3. “Such and implicit definition of ‘market solution’ () would seem to define ‘market solution’ out of existence, in the sense that if the problem could be solved by market agents it wouldn’t have happened in the first place”. No.

    4. Maybe you wish to read the paper I referenced first

    3.

  29. Ernestine Gross
    July 22nd, 2010 at 18:17 | #29

    @Ernestine Gross

    oops, I forgot to clear parts of an earlier draft. Please ignore everthing starting from 2. – Apologies.

  30. Ernestine Gross
    July 22nd, 2010 at 19:53 | #30

    @Jim Rose

    o.k. Jim Rose, to bring this wandering conversation to an end, I’ll repeat the definition of ‘externalities’, positive and negative, as found in mathematical economics and I’ll state the reference to save you going back through past threads.

    “The fundamental common feature of all types of externalities is that the acts of one agent affects the set of feasible acts of other agents. The result may either be that the other agents obtain a larger set of possible choices – in this case we speak of a positive external effect – or they experience a reduction in their possibilities of choice, a negative external effect”. Blad and Keiding (1990), Microeconomics, Institutions, Equilibrium and Optimality. North Holland pp 253-4.

    The terms ‘feasible actions’ and ‘possible actions’ are well defined in this literature. I found the Blad-Keiding definition useful in the development of an applied model. This definition facilitates a distinction to be drawn between ‘an externality’ and the ‘cost (or benefit) of an externality’. This is important.

    I now say good-bye.

  31. Jim Rose
    July 22nd, 2010 at 21:17 | #31

    @Ernestine Gross
    The definition of what is a cost in that book you referenced is recast and gazed-over for no additional insight as a set of feasible acts. No new insights at all.

    No mention at all of joint causation and what to do about it.

    Take noise from Melbourne airport, which is a 24 hour airport last I heard.

    That airport was built far from the city at the edge of town initially in the 1960s or earlier. Those that slowly built houses nearby moved to the nuisance or did they? Without a theory of property rights, your externality definition is without insight.

    Is the correct solution to aircraft noise for the airport to have less noisy planes, curfews, buffer zones, or for the houses nearby to have double glassing, or did the noise of the planes factor into purchase prices? Does your definition help answer this?

    The airport near me is in the suburbs and was built in 1929.

    Is the correct solution a midnight curfew as now or should the airport pay for double glassing for those like me who are under the flight paths ? Does your definition help answer this question? Who moved to the nuisance or was it an easement?

    Without a theory of property rights and transaction costs, you can neither understand noise externalities or grander issues such the externalities from the depletion of a global common-pool resource.

    How much should a carbon tax or cap be if there are different levels of investment in R&D, mitigation and adaptation and different levels of expected compliance? These are all joint causation and least cost avoider issues.

    Ostrom showed that there are many cases in which common property is surprisingly well-managed. Commons users created and enforced rules that mitigate overexploitation without having to resort to privatization and government regulation.

    E-commerce should not exist because of adverse selection and uncertain quality leading to those missing markets and missing prices you find everywhere.

    p.s. In Australia, generators can effectively make offers with negative prices (with an offer price floor of -$1000/MWh). In times of a sudden low demand, producers may pay customers for take electricity to avoid the costly expense of shutting down plants. This is mathematically impossible but it happens and in Europe and the USA too!

    p.p.s. what are take-or-pay contracts in the energy sector? One party has the obligation of either taking delivery of the goods or paying a specified amount. It is costing buyers money to buy nothing? Is this not a negative price? If not, what is a negative price?

    See http://www.wiwi.uni-muenster.de/vwt/organisation/veroeffentlichungen/1_WP_Electricity_and_Gas_Pricing.pdf

  32. Alice
    July 22nd, 2010 at 21:42 | #32

    Hello Ernestine

    Always beware debating with a soul who has to ask you the definition of an externality.

  33. Ernestine Gross
    July 22nd, 2010 at 21:53 | #33

    @Jim Rose

    Apparently I have not succeeded in bringing our wandering conversation to an end.

    In my reply, I’ll restrict myself to the externality of the topic of this thread, namely ghg emissions. I said that it is important to distinguish between ‘an externality’ and the ‘cost’ (benefit) of an externality and I said the definition I gave allows that. I’ll now say why it is important. The measurement of the externality ghg emission is the job of natural scientists as is giving their advice on the ghg reduction targets. The ‘costing’ (‘pricing’) is where economists come in. I should think it obvious that it is useful to have a theoretical model that facilitates communication between natural scientists and economists. Similarly, I should think it is obvious that measurement involves mathematics. Incidentally, the basic unit of analysis in Economics, concerned with non-dictatorial resource allocation, is an ‘individual’ (a human being) and not a corporation or ‘a business’. May I refer you to the letter signed by at least 100 PhD economists which you linked to in one of your posts. I thank you for this link.

    .

  34. Jim Rose
    July 22nd, 2010 at 22:33 | #34

    @Alice
    Welcome back.

    Among those who have taken time to dwell on defining what an externality is and its meaning are Marshall, Pigou, Knight, Viner, Bator, Meade, Arrow, Coase, Demsetz, Barzel, Scitovsky, Buchanan and Stubblebine, Mishan, Baumol, Dahlman, Oates, Cornes and Sandler, and Laffont to name but a few.

    Laffont in 2008 in the New Palgrave defined externalities as the indirect effects of consumption or production activity, that is, effects on agents other than the originator of such activity which do not work through the price system. That definition invites debate over what is indirect and what is the price system.

    To add to the mix, Demsetz argued in 2002, 2003 and 2009 that even in a world of zero transaction costs, externalities still exist. A merger might solve an externality but firms have management costs which increase with the size of the firm so society is worse-off.

    See http://iep.gmu.edu/researchpage_2009_demsetz_externalities.php and http://www.er.uqam.ca/nobel/r20310/eco8510/Demsetz_JLegStud2002.pdf and
    Demsetz, H. “Ownership and the Externality Problem.” In T. L. Anderson and F. S. McChesney (eds.) Property Rights: Cooperation, Conflict, and Law. Princeton, N.J.: Princeton University Press.

    It is an unending debate.

  35. Peter T
    July 22nd, 2010 at 22:34 | #35

    John

    I would agree that relatively few economists lend support to the deniers, and most support some form of carbon pricing.

    Another perspective is that an an “economic” approach to this issue is not very helpful. It tends to gloss over the urgency of action, the need to mobilise people around a different perspective on the planet and on environmental issues, and the very real power of the interests involved. A monetary “price” is both not very appealing (particularly to those who pay), open to all sorts of games and evasions, usually only loosely coupled to the actual good, and encourages the notion that the good can be traded off against other goods, or over time. It is becoming increasingly clear that we cannot afford any of these with ghgs – the scale of action needed is large and the time available short. I would see the economics contribution as at best marginal and at worst a distraction.

  36. Jim Rose
    July 22nd, 2010 at 22:44 | #36

    @Peter T
    Economists should stand apart from discussing the science of global warming.

    The comparative advantage of economists is if-then analysis.

    If the warming is a certain number of degrees, then what are the costs, benefits and risks and uncertainties? Cost-benefit analysis, the economics of uncertainty, welfare economics, intergenerational trade-offs, public choice and theories of collective action are some of the economic tools brought to the table.

  37. Alice
    July 22nd, 2010 at 22:58 | #37

    @Jim Rose
    Seeing as you know appear to know what an externality is and Ernestine knows clearly what an externality is Jim Rose – why play games by calling for trifles to be examined?

  38. Alice
    July 22nd, 2010 at 23:01 | #38

    @Jim Rose
    Jim Rose – economists should not stand apart from discussing the impacts of global warming. The science is not in question here.

  39. Gaz
    July 22nd, 2010 at 23:04 | #39

    @Ernestine Gross
    Let me boil it down: Do you define a “market solution” as one which does not require a “non-market agent” to intervene in the market in some way?

    If no, then why is cap-and-trade not a market solution in your definition?

    If yes, then what policy could possibly qualify as a market market solution?

    Surely cap-and-trade is a market solution. The conventional role of the market as a means of allocating scarce resources is unchanged. All that has changed is the relative scarcity of various forms of energy.

  40. Jim Rose
    July 22nd, 2010 at 23:32 | #40

    @Alice
    Most economists pay lip service to their lack of expertise in making ethical pronouncements as economists, but in practice they either ignore their own mandate for self-restraint or engage in elaborate procedures to evade this constraint. Few economists have much training in political philosophy.

    By the same token, and under the division of labour, economists have no more professional expertise in assessing the inter-disciplinary science of global warming than they do in measuring up physics, medicine, chemistry, civil engineering, botany or volcanology. Pretending to have such a competency distracts for useful contributions that can be made by economists.

    Economists can comment on the likely consequences of specific actions and competing policies.

    The division of labour requires economists to leave commenting on the merits of the physical science of global warming to those with professional expertise.

  41. Michael of Summer Hill
    July 23rd, 2010 at 00:10 | #41

    Peter T, if Australia adopts the Liberal Party’s position then pinching a phrase from the 100 plus economists who signed the letter dated 19 July 2010 we are all stuffed for ‘The Most Expensive Thing We Can Do is Nothing’. And until some form of ETS is adopted the only practical solution in the short term is to put a price on carbon.

  42. Michael of Summer Hill
    July 23rd, 2010 at 08:35 | #42

    Update, Update, Update, Gillard’s climate change statement has not been officially aired and already the Opposition Environment Spokesman, Greg Hunt, is critical of Gillard’s proposed ‘citizens’ assembly’. Maybe Hunt should seek advice from Turnbull for ‘The Most Expensive Thing We Can Do is Nothing’.

  43. Ernestine Gross
    July 23rd, 2010 at 10:28 | #43

    @Gaz

    1. “Do you define a “market solution” as one which does not require a “non-market agent” to intervene in the market in some way?”

    In the context of the theoretical literature I referred to, the answer is Yes.

    2. “If yes, then what policy could possibly qualify as a market solution?”
    If you mean a solution to ghg emissions problem, there is no market solution.

    3. “Surely cap-and-trade is a market solution. The conventional role of the market as a means of allocating scarce resources is unchanged. All that has changed is the relative scarcity of various forms of energy.”

    The cap-and-trade approach is, strictly speaking, not a market solution because the cap is determined by a non-market agent. Furthermore, having a market where pollution rights (certificates) can be sold (by the non-market agent) and traded by whoever, does not provide sufficient price information for long-term capital intensive investment decisions. Yes, ‘conventionally’ this is also the case with such investments without taking ghg emissions or other pollution into account. However, the GFC is the latest reminder that the phrase ‘the market allocates scarce resources’ is a conventional phrase that requires refinement.

  44. Gaz
    July 23rd, 2010 at 11:50 | #44

    Hi again Ernestine.

    Your reply leaves me mystified.

    Can you tell me this:

    1) Can you give me an example, even a hypothetical example, of a market solution to an externality problem?

    2) Re your point about insufficient information the pricing, are you referring to the kind of thing Garnaut was concered about, eg in Chapter 17 of his final report when he said:

    “While an emissions trading scheme and projected climate impacts will both drive the development and uptake of new technologies, market failures that impinge on the efficient and competitive functioning of markets for new ideas and technologies are likely to result in suboptimal levels of investment in innovation.”

    Or do you have something else in mind?

  45. Ernestine Gross
    July 23rd, 2010 at 12:11 | #45

    @Gaz

    1. I have answered this question.

    2. I said that future markets are incomplete too. The quote you gave is along the lines I have in mind.

    In the end only the original literature contains the exact meaning.

  46. Dave McRae
    July 23rd, 2010 at 13:55 | #46

    http://blog-imfdirect.imf.org/2009/11/23/climate-change%E2%80%94some-simple-and-quite-convenient-truths/

    The science of the issue can get pretty incomprehensible pretty quickly. And the politics are clearly very ugly. Let’s not forget, however, that much of the economics is simple.

    It’s an externality, stupid — so price it.

    Regarding consensus amongst economists – is this close to what’s going on?
    http://www.thebigmoney.com/articles/hey-wait-minute/2009/02/11/surprise-economists-agree

  47. Ernestine Gross
    July 23rd, 2010 at 14:12 | #47

    Jim Rose, You initiated our discussion. I wish to conclude it.

    1. Externalities.

    Your many words and assertions turned out to be contradictory opinions because:

    A) @31, you wrote to me: “Without a theory of property rights and transaction costs, you can neither understand noise externalities or grander issues such the externalities from the depletion of a global common-pool resource.”
    @ 33, you wrote to Alice: To add to the mix, Demsetz argued in 2002, 2003 and 2009 that even in a world of zero transaction costs, externalities still exist. A merger might solve an externality but firms have management costs which increase with the size of the firm so society is worse-off. See http://iep.gmu.edu/researchpage_2009_demsetz_externalities.php and http://www.er.uqam.ca/nobel/r20310/eco8510/Demsetz_JLegStud2002.pdf”

    Professor Demsetz showed intellectual honesty by writing in the paper you referenced: “During the last half-century transaction cost became a prominent consideration in discussions about externalities and ownership arrangements. The author of this essay contributed to this development in the earlier part of this half-century but has since come to doubt the importance of transaction cost and even the roles it is thought to play in these two areas of economic thought .”

    Conclusion on A): You failed to correct and retract your assertion (based as it was on ignorance of what you labeled ‘blackboard economics’) regarding transactions costs @31, even though you contradicted yourself.

    I can add that your statement: ‘without a theory of property rights’ is also a red-herring because the notion of ‘private ownership’ is well defined in the theoretical model I explicitly referenced before you entered the discussion

    B) @ 33 you wrote to Alice: “Among those who have taken time to dwell on defining what an externality is and its meaning are Marshall, Pigou, Knight, Viner, Bator, Meade, Arrow, Coase, Demsetz, Barzel, Scitovsky, Buchanan and Stubblebine, Mishan, Baumol, Dahlman, Oates, Cornes and Sandler, and Laffont to name but a few. Laffont in 2008 in the New Palgrave defined externalities as the indirect effects of consumption or production activity, that is, effects on agents other than the originator of such activity which do not work through the price system. That definition invites debate over what is indirect and what is the price system. “

    It is fair enough that you signal your list of authors on the notion of ‘externality’ is incomplete. However, it is not fair enough that you leave out the authors I referenced, Blad and Keiding (1990). Is it because Blad and Keiding are from Denmark and the news must not get out that outside the US there are people too? Is it because you are not receptive to anything that doesn’t come from you? Is it no more than your concentration span having had a temporary malfunction? Whatever the reason, I can tell you that the Laffont definition in the New Palgrave is perfectly consistent with the Blad and Keiding definition when read within the context of the methodology of mathematical economics where all three of them have worked.

    Your statement, ‘That definition (ie your partial quote from a handbood) invites debate over what is indirect and what is the price system.’ is Moncktonian Economics in the sense that it reflects lack what you call ‘blackboard economics’ (ie education in the relevant field).

    2. Economics and Science
    @ 40 you lecture Alice by writing: “By the same token, and under the division of labour, economists have no more professional expertise in assessing the inter-disciplinary science of global warming than they do in measuring up physics, medicine, chemistry, civil engineering, botany or volcanology. Pretending to have such a competency distracts for useful contributions that can be made by economists.”

    @ 33 I wrote to you: “I said that it (the Blad-Keiging definition of an externality) is important to distinguish between ‘an externality’ and the ‘cost’ (benefit) of an externality and I said the definition I gave allows that. I’ll now say why it is important. The measurement of the externality ghg emission is the job of natural scientists as is giving their advice on the ghg reduction targets. The ‘costing’ (‘pricing’) is where economists come in.”

    Would you like now to at least acknowledge that your advice at 40 is so blatantly redundant if you were to acknowledge the usefulness of the Blad-Keiding definition of an externality in the context of mathematical economics?

    You seem to give advice premised on the assumption that other people have been dumbed down sufficiently to not be able to distinguish an excellent entertainer, such as Christopher Monckton from a scientist, such as Professor John Abraham.

    C) Ethics
    @ 40 you write to Alice: “Most economists pay lip service to their lack of expertise in making ethical pronouncements as economists, but in practice they either ignore their own mandate for self-restraint or engage in elaborate procedures to evade this constraint.”

    I am sure I cannot live up to the expectations of ‘ethical pronouncements as economists’ you say are desirable. But I have a minimum ethics requirement: Intellectual honesty including acknowledgement of error and retraction of erroneous statements. I am inviting you to show me your ethics on my minimum ethics requirement.

  48. Alice
    July 23rd, 2010 at 17:11 | #48

    @Jim Rose
    Jim says

    “Economists should stand apart from discussing the science of global warming.

    The comparative advantage of economists is if-then analysis. ”

    Actually economists and people like Jim Rose should probably now stand apart from the concept of comparative advantage completely. It should be henceforth known as comparative disadvantage.

    What point having large economies reduced to reliance on one sector (china – exports, the US easy credit consumption) all brought about by the ideas that countries should pursue their “comparative advantage” and lose all else in teh rush to free global markets (Australia’s manufacturing industry lost in a very rapid space of time).

    Im pretty sure these two words also hastened global warming and have certainly left a trail of high unemployment wreckage in their wake globally.

    Comparative advantage and blind acceptance thereof has in fact caused a whole lot of disadvantage. It may be good for efficiency and the production of goods and services. Its a shame its not so good for human lives.

    Make up your mind Jim which side you are on…capital? or human capital?

    We now have a global meltdown, caused by just such dangerous ideas as this one.

  49. Jim Rose
    July 23rd, 2010 at 17:14 | #49

    Ernestine Gross,

    Your posting is based on a false premise.

    That false premise is that mathematical economics is an engine of truth.

    At best, at very best, mathematics is a short-hand for checking your reasoning.

    Popper rightly dismissed mathematical economics as tautological.

    Samuelsson replied that mathematical economics yielded new testable implications.

    One of these is testable implications is provided by your postings – there should be no negative prices. Negative prices are common place in the energy sector.

    Another testable implications of mathematical economics is e-commerce should not exist because of adverse selection.

    Cyberspace has no good means of enforcing contracts, much less verifying quality, but market-generated institutions flourish to solve what some deride as market failures.

  50. Alice
    July 23rd, 2010 at 17:25 | #50

    @Jim Rose

    Jim Rose – the advantage of good economists is that they think, speak out and can communicate – not how well they push buttons on a stats pack. It was ever thus. For everyone who can communicate 1000 will be remembered for nothing at all no matter how good they are mathematically. For every 1000 who are good at maths there will be some economists who are brilliant writers and historians and not mathematical at all.
    I am not interested in how well a maths professor does maths. I do not want to see his algebra and I do not want to hear him chat with his colleagues in endless minutiae of irrelevent technical arguments. Im interested in how well the maths professor can explain the meaning of his math to others and not necessarily academic others. As with Economists….. There are also large business cycles that dont lend themselves to mathemtical interpretation.

    In the wake of all the false, poor and irrelevant mathematical models with which the profession has been flooded for some decades, the last thing we need in response to global warming is to consider that all economists are only equipped to do “if then” cost benefit studies. Its nice of you to want to keep their intelligence strapped to an entirely technical chair..but the elephant of the GFC and sinking markets and rising unemployment and rapid global warming makes a mockery of your ideas.

    Its time for the profession to clean out its deadwood but some here still want to cling to it.

  51. Jim Rose
    July 23rd, 2010 at 17:26 | #51

    Alice,

    you seem to want to forget the great moderation between the early 1980s and 2007.

    What John Taylor calls the great deviation in the last few years is the depature from the policies that underpinned the great moderation.

    Economists have no more expertise to judge the physical science of global warming than they do in judging the science behind the super volcanoes such as the ones near me and you.

    Economists can offer insights into the consequences of super volcanoes for the economy.

    The key part of resilience is most capital is human capital.

    The key risk is the breakdown of the division of labour and international trade.

  52. Alice
    July 23rd, 2010 at 17:35 | #52

    @Jim Rose
    Aha Jim Rose – you just tripped up on one of your own twists…

    First you state “The comparative advantage of economists is if-then analysis.Cost-benefit analysis, the economics of uncertainty, welfare economics, intergenerational trade-offs, public choice and theories of collective action are some of the economic tools brought to the table. ”

    Then you accuse Ernestine of

    “Your posting is based on a false premise.
    That false premise is that mathematical economics is an engine of truth”.

    Make up your mind JR. Rather than Ernestine’s posting being based on a false premise I would suggest yours is. Or is that you just want economists to be kept busy doing maths that is entirely wrong?

  53. Ernestine Gross
    July 23rd, 2010 at 17:49 | #53

    @Jim Rose

    You haven’t got the intellectual honesty required to withdraw you contradictory opinions.

    As a consequence, your talk on ethics is talk in the wind.

    Your pontifications, based on name dropping and arbitrary usage of terminology, are as believable as Monckton’s statements on climate science.

    You see, it is not ‘cyberspace’ which verifies quality, it is the users of cyberspace that verify quality.

  54. Ernestine Gross
    July 23rd, 2010 at 17:51 | #54

    Hi Alice and welcome back.

  55. Alice
    July 23rd, 2010 at 17:53 | #55

    @Jim Rose
    That risk is already here – so is a lot of very bad maths. You forget JR – implicit in any maths and prior to the first calculation being made often resides human assumptions and if they are fallible, it doesnt matter how elaborate the maths that follows.
    I consider the entire concept of global comparative advantage and its rampant pursuit one such example of poor assumptions. It completely ignores the value of industry that has no global comparative advantage for its contribution to employment that helps sustain that economy. A healthy economy then has positive spillovers for the global economy.

    The great moderation you speak of between the early 1980s and 2007 was marked by two major recessions, an episode of inflation and marked the start of the great unchained bubble building. There wasnt anything particularly moderate about it at all. It was also marked by rapidly rising inequality and a new structurally higher entrenched level of unemployment and underemployment.

  56. Alice
    July 23rd, 2010 at 17:53 | #56

    Hi Ernestine – nice to see you here.

  57. Chris Warren
    July 23rd, 2010 at 17:58 | #57

    It appears to me that almost all mathematical economics is determined by exogenous factors and assumptions (such as constant elasticity functons).

    Some mathematical economics also assume unlimited labour at prevailing wage rate, and others assume unlimited money supply at prevailing interest rate.

    Much mathematical economics is based on university courses in statistics, numerical analysis, and econometrics. They use this language in much the same way the Church and early physicians used Latin to pretend they had knowledge, when in fact they peddled nonsense.

    As soon as politics intervenes in economics, to that extent mathematical modelling becomes redundant and could perpetuates misunderstandings.

    How can mathematical economics be an engine of truth if politics is based on falsehood?

  58. Gaz
    July 23rd, 2010 at 18:03 | #58

    @Ernestine Gross

    Gaz: 1) Can you give me an example, even a hypothetical example, of a market
    solution to an externality problem?

    Ernestine: 1. I have answered this question.

    I oringially asked this question in my comment at July 22nd, 2010 at 17:04.

    Forgive me if I am being obtuse, Ernestine, but I have searched through your posts and can find no example, hypothetical or real, of a such a market solution, nor any clear definition of what one might entail aside the definition by exclusion that it must not involve non-market actors.

    Indeed, a solution to an externality problem that involves no intervention by a non-market agent would seem to be impossible by definition, given that the externatility exists because the market is not pricing some side-effect of an economic activity. Why would a market suddenly start pricing something that it was not pricing before?

    But you are obviously tired of my questions.

    Can someone else tell me where Ernestine has answered my question about non-market solutions?

  59. Ernestine Gross
    July 23rd, 2010 at 19:30 | #59

    @Gaz

    I’ve spent a bit of time replying to your very fist question. So, no silly word games please.

    In reply to your subsequent question @39, I wrote @43:

    Gaz: Do you define a “market solution” as one which does not require a “non-market agent” to intervene in the market in some way?”

    EG: In the context of the theoretical literature I referred to, the answer is Yes.

    2. Gaz: “If yes, then what policy could possibly qualify as a market solution?”
    EG: If you mean a solution to ghg emissions problem, there is no market solution.

    This was and still is my answer. I am not prepared to go beyond the topic of this thread. You can ask your question if and when our host, Professor Quggin, puts up a thread on the topic ‘externalities’.

    In the mean time you might wish to read the literature I referenced in reply to your explicit request.

  60. Jim Rose
    July 23rd, 2010 at 19:36 | #60

    @Alice
    The subject of this thread is economists and climate change.

    Economists have no professional expertise in the physical science of global warming. What economists can say as social scientists is on the philosophy and sociology of science is as follows:

    • The motto of the royal society is Nullius in verba = Take nobody’s word for it.

    • No single unified account of the difference between science and non-science has been widely accepted.

    • For the physical sciences, a science could be said to be a set of testable propositions.

    • New knowledge flows from the minority persuading the majority that it is wrong.

    • The progress of science as not a gradual, continuous, ever-upward process where the scientific knowledge gradually grows and accretes through the process of framing hypotheses, testing them empirically, and discarding the invalid and keeping the valid.

    • Scientific revolutions are common where one paradigm is replaced by another after a period of chaos ignited by period where more and more anomalies pile up and puzzles can no longer be solved by the paradigm.

    • Increasingly desperate attempts are made to modify the basic theory so as to fit the unpleasant facts and to preserve the framework provided by the paradigm.

    • John Stuart Mill was right when he said “”Lord, enlighten thou our enemies, sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers. We are in danger from their folly, not from their wisdom: their weakness is what fills us with apprehension, not their strength.”

  61. Ernestine Gross
    July 23rd, 2010 at 19:48 | #61

    “Economists have no professional expertise in the physical science of global warming. ”

    Except those economists, who studied economics at the post-grad level after having established their career in science.

    So much for ‘the division of labour’.

  62. SJ
    July 23rd, 2010 at 19:57 | #62

    Gaz, translated into simpler language, what Ernestine means is as follows:

    a) The existence of externalities is evidence of market failure.
    b) The market can’t correct the market failure on its own. If it could, there wouldn’t be a market failure in the first place.
    c) If the market failure is to be addressed, it must be by some non-market actor.

    There is a number of ways the market failure could be addressed, e.g. closing half of the coal fired power plants and replacing them with solar. In this case the non-market actor (the government) has chosen a specific set of actions to address the market failure.

    Alternatively, it could create a new market in “pollution rights”, in the hope that this new market will counteract the market failure in the pre-existing market, and at lowest cost. The “pollution rights” market is often referred to as a “market solution”, even though, strictly speaking, it isn’t.

  63. Jim Rose
    July 23rd, 2010 at 20:06 | #63

    @Ernestine Gross

    Double-degrees are more common these days. Some get to employ both backgrounds, others do not.

    Few become experts in both two fields, but why?

    Ben Jones specialises in how innovation is getting harder such as in his neat paper “The Burden of Knowledge and the ‘Death of the Renaissance Man’: Is Innovation Getting Harder?” at http://www.kauffman.org/uploadedFiles/Jones_Ben.pdf

    If knowledge accumulates as technology progresses, then successive generations of innovators may face an increasing educational burden.

    Innovators can compensate in their education by seeking narrower expertise, but narrowing expertise will reduce their individual capacities, with implications for the organization of innovative activity – a greater reliance on teamwork.

    In Age and Great Invention, Jones found that innovators are much less productive at younger ages, beginning to produce major ideas 8 years later at the end of the 20th Century than they did at the beginning. Furthermore, the later start to the career is not compensated for by increasing productivity beyond early middle age.

    See http://www.kellogg.northwestern.edu/faculty/jones-ben/htm/AgeAndGreatInvention.pdf

  64. SJ
    July 23rd, 2010 at 20:17 | #64

    Jim, you gave the game away when you said:

    Externalities result from the failure to define and enforce property rights.

    We recognise the libertarian code words, and I for one realise that further discussion is pointless.

  65. Ernestine Gross
    July 23rd, 2010 at 20:21 | #65

    @SJ

    In this instance I am grateful for your post.

  66. SJ
    July 23rd, 2010 at 20:27 | #66

    @Ernestine

    You’ve said that before. ;)

    I declared a cease-fire quite a while ago in any case. :)

  67. Jim Rose
    July 23rd, 2010 at 20:49 | #67

    @SJ
    Do you have any other explanation for the depletion of open access resources?

    what are emmissions trading allowances trying to establish?

  68. Alice
    July 23rd, 2010 at 20:55 | #68

    @SJ
    I agree SJ re the libertarian code words adopted from the sort of free market terminologies that have failed us all in the past three deccades…I could write a check list of them..but they basically centre around a common thread of “no intervention” is the best solution to everything…but as for a checklist here are some code words

    “comparative advantage” (give up every other industry and get behind big coal)
    “labour productivity” (why cant you all work longer for less?)
    “innovation and innovators” (matter more than everyone else)
    “intergenerational tradeoffs” (so what if we mess up the planet now – the kidsll survive)
    “nullius inverbia” (translate as “there are no experts”)
    everyone is an “agent” (secret agent… especially in here)

  69. Jim Rose
    July 23rd, 2010 at 21:19 | #69

    @Alice

    you seem to be unaware of the mild left-wing bias of the economic profession.

    Take that citadel of double secret Friedman clones, the american economic association where surveys find that:

    • A large majority of economists are either generally favorable to or mixed on government intervention,

    • A Democrat to Republican ratio of about 2.5 to 1

    • A large majority of AEA members are either interventionist or middle-of-the-road Democrats, and most of the residual are middle-of-the-road Republicans.

    • Many AEA economists maintain that they are essentially free-market supporters, but recognize that externalities, asymmetric information, diminishing marginal utility of wealth, etc. call for exceptions to free-market policy.

    These findings were similar for the ACT branch of the economic society of Australia.

    Economists do not have a very different set of values from the rest of the community in which they live.

  70. Alice
    July 23rd, 2010 at 21:29 | #70

    JR – what is the market doing about global warming except warming it further and faster.? Is that the sort of fact that would be treated as a nullius inverbia by you ie denied?
    Yet here you say economists have no business discussing it. If they dont who does?
    GW is very much about economic policy.

    This sort of “anti common sense” is the same reason a lot of voters think the Liberals have lost the plot (that and Iraq and Workchoices and AWB and Tampa and the stream of spin…and dont forget the infiltration of the deniers into the public service…ie ABC, ABS made to go semi private and charge unis for data, unis semi private and stuffing up degrees, greenhouse mafia in ABARE, productivity commission acting like Mussolinis militia.

    I wouldnt perhaps mind a little nuttiness in our political leadership but I strongly object to the now years of it since JHoward of treating adults like children who can be (in their view) bathed in lies.
    Not that Labor are much better – so much for Gillards back down on miners – that was quite pathetic – and yet another boatpeopleplay..I lumped her in with KK and turned off from both major parties.

    Im voting for the worm.

  71. Alice
    July 23rd, 2010 at 21:31 | #71

    @Jim Rose
    Jim

    you say

    “you seem to be unaware of the mild left-wing bias of the economic profession.”

    So what. The strong right bias of many governments across the globe have failed us all.

    The economics profession, if this mild left bias exists, is part of what will save us from the nutters JR.

  72. SJ
    July 23rd, 2010 at 21:33 | #72

    Alice, every time you reply to the troll, you give it the opportunity to spout more nonsense. DNFTT.

  73. Jim Rose
    July 23rd, 2010 at 21:34 | #73

    @Alice
    If “a lot of voters think the Liberals have lost the plot’, as you say, why was Rudd dumped?

    The party was worried about losing the election.

    solution: a fresh face and steal Abbotls policies

  74. sdfc
    July 23rd, 2010 at 21:34 | #74

    Climate scientists say AGW is a problem. Economists knock up policy proposals to deal with it. I don’t see what the problem is.

  75. Alice
    July 23rd, 2010 at 21:46 | #75

    @sdfc
    TPIT – the problem is trolls and deniers SJ. Anti economic policy anti action trolls. Thats why denying AGW is what they do. Thats why attacking credible sources is what they do. Problem? What problem? The real problem is them .They dont want any policy at all. They just cant easly convince voters that doing nothing is good policy. You are right at 22.

  76. Jim Rose
    July 24th, 2010 at 10:45 | #76

    @sdfc
    Well put.

    If-then analysis.

    If it is a problem to be solved, here are some options that address the problem and the actual consequences of adopting one of these options are a net benefit and the unintended consequences are manageable.

  77. Jim Rose
    July 24th, 2010 at 16:21 | #77

    @Alice
    You say ‘a lot of voters think the Liberals have lost the plot’, and ‘The strong right bias of many governments across the globe have failed us all’.

    Limiting ourselves to democratically elected governments, and there are many of these even in the under-developed countries, progressive ideas seem to fail, and fail again at the ballot box right around the globe as you concede the strong right-wing bias of many governments across the globe. There was one left-wing federal government in Australia in the last 60 years and that was for three years

    This inability of progressive politics get anywhere is important because every set of ideas needs effective critics to keep it on its toes and stop it from slouching into error and special interest capture.

    The Right needs a vibrant Left to keep the Right fit, trim and down to its fighting weight so as to be able to thrash the Left once again at the next election.

    Prior to the 1990s, all it took to see progressive ideas off the political and economic stage in a country was a visit or two by Milton Friedman, if some posters on this blog were to be believed. I do not believe that political transformations are as easy as this.

    However, for those who want to maintain the rage over, for example, Friedman’s April 1975 trip to Australia for 18 days leading to a paradigm shift to neo-liberalism and Hayden’s monetarist budget shortly after see http://www.canberratimes.com.au/news/opinion/editorial/general/the-rivalry-of-two-great-economists-lives-on/133243.aspx and http://www.cecc.com.au/clients/sob/research/docs/jcourvisanos/Courvisano-Millmow.doc

    Apparently, the spirited, witty Joan Robinson visit the same month and her own Monday conference program did not do the trick as an anti-biotic and vaccine.

    Progressives will have no role in future political transformations because if you scratch a progressive you will find a left wing populist.

    A left-wing populist is too busy telling you who to fear and who to blame to put up policies that are actually robust enough to work and to have worked in the past in a society where people are not perfect in their motivations and they do not have perfect knowledge in a changing world.

    p.s. The Monday Conference program was the ABC at its best.

  78. Jim Rose
    July 24th, 2010 at 16:41 | #78

    @SJ
    When falling back on sneers, smears and stereotypes to avoid the risk of debating the issues, use labels that the rabble that respond to such low tactics may know and understand.

    The political vocabulary of Australian English is not the same as that of political junkies who follow all the twists and turns of American politics.

    Even the term liberal has very different meanings in Australia, the USA and UK.

    The closest Australian usage was the Sydney Push of the 1950s and 1960s which was by Sydney Libertarianism – albeit libertarianism of the left. See http://en.wikipedia.org/wiki/Sydney_Push

    There are also libertarian socialists such as Noam Chomsky.

  79. Jim Rose
    July 27th, 2010 at 17:04 | #79

    @Ernestine Gross
    point to one or two climate change related specific error and I will respond. more than that leads to unwheldy exchages

  80. Ernestine Gross
    July 27th, 2010 at 17:19 | #80

    @Jim Rose

    No, Jim Rose, changing to topic on the run is not the deal. You challenged me on the successor thread. You wrote:

    “A few days ago, you made great play about the absence of negative prices as a reason for the inefficiency of markets.

    I pointed to the existence of negative prices in spot markets in the energy sector.

    What was your response, again?”

    I asked you to go to the relevant thread. So here we are.

    My response was to ignore your reference to the ‘negative spot price’ in the electricity market. I had reasons for this.

    Now, here are the rules if you wish to get an answer:

    1. You repeat exactly what I wrote.
    2. You compare what I wrote with what you say.
    3. You write in your own words an exact description of what you say happened in the electricity market and then supply the reference.
    4. Depending on what I get on 1 to 3, I may then explain or ask you further questions before I can give you the answer.
    .

  81. Jim Rose
    July 27th, 2010 at 17:27 | #81

    @Ernestine Gross

    if you are saying someone is in error, or is misrepresenting you, it is up to you to say who, what and where.

    I assume this is the relevent thread. if it is not, it is up to you to submit a correction.

  82. Ernestine Gross
    July 27th, 2010 at 18:48 | #82

    @Jim Rose

    Ah Jim Rose, Schelling’s focul point theory of negotiation doesn’t seem to work. You see, your first sentence @31 is already a rule that is not relevant @31 and your second sentence is silly because I have already acknowledged that you are on the relant thread.

    So, please go back to 31 and read the rules.

  83. Ernestine Gross
    July 27th, 2010 at 18:53 | #83

    @Jim Rose

    Replacement for 32:

    Ah Jim Rose, Schelling’s focal point theory of negotiation doesn’t seem to work. You see, your first sentence @31 is already a rule that is not relevant @30, to which you reply, and your second sentence is silly because I have already acknowledged, @30, that your re on the relevant thread.

    So, please go back to 30 and read the rules.

  84. Jim Rose
    July 27th, 2010 at 20:54 | #84

    @Ernestine Gross
    I now know why you have reasons for not responding on negative prices.

    In addition to Electricity and Natural Gas Pricing by Matthias Janssen and Magnus Wobben which I have previously linked that discussed negative prices, and I quoting the current floor on negative price for Australian electricity, there are also two-sided markets.

    I have been married so long that I have forgotten about the classic example of a two-sided market, which is a nightclub.

    Two types of foot-loose and fancy-free customers must be present even if one side is supplied at a negative cost, so men pay heaps but women get free drinks. Without this night-club pricing regime of positive and negative drink prices, no one turns up.

    Some of us on this blog, but never others, have paid negative prices as routine part of their social life.

    A very old example is village match-makers who bring local women and men together for possible marriage in a reputable environment.

    thank you for reminding me how fascinating network economics is. Isn’t a lot of it about negative prices?

    the market developed negative prices centuries ago. maths is still cathing-up, that is why maths is only a form of short-hand, rather than an engine for new truths in economics.

  85. SJ
    July 27th, 2010 at 21:10 | #85

    For those watching, the troll’s barking up the wrong tree. What’s being referred to is asymmetrical pricing, where the price is negative for the producer/seller but zero for the consumer/buyer.

  86. SJ
    July 27th, 2010 at 21:22 | #86

    I take that back. The “two-sided market” idea at least puts it in the right forest.

  87. Jim Rose
    July 27th, 2010 at 21:43 | #87

    @SJ
    as allued to at #34 and posted a few days ago, in Australia, electricity generators can effectively make offers with negative prices (with an offer price floor of -$1000/MWh).

    In times of a sudden low demand, producers may pay customers for take electricity to avoid the costly expense of shutting down plants. This happens the USA and in Europe too!

    see electricitycommission.govt.nz/pdfs/advisorygroups/mdag/5Nov09/WIP.pdf

    In nightclubs, it is cheaper to give women the drinks rather than ask them to pay for them and provide women with free access to in-kind payments so as no door charge and free access to the nightclub including its other patrons.

  88. SJ
    July 27th, 2010 at 22:10 | #88

    Back into two forests, barking up two wrong trees. Maybe it’ll wear itself out running back and forth between them.

  89. Jim Rose
    July 27th, 2010 at 22:30 | #89

    @SJ
    do you have a definition of asymmetrical pricing?

    what is your defintion of negative pricing? how do they differ?

  90. Ernestine Gross
    July 27th, 2010 at 22:35 | #90

    Exactly, SJ. I believe I’ve been very generous outlining steps for the good Jim Rose to follow to assist him to distinguish between cost-accounting and temporary marketing methods on the one hand and a ‘price system’ when markets are complete and when they are incomplete on the other. Lets see what happens next.

  91. Jim Rose
    July 27th, 2010 at 23:17 | #91

    @Ernestine Gross
    I recently read a biography of Thomas Schelling. I commend it to you.

    He first used Schelling points in 1940 or so at the age of about 19 when he and friend were separated on a city-to-city trip across America.

    Schelling found his friend without any communication or search by either of them, but it was not a chance meeting.

    Has a great little section on how Schelling got what I think was his first paper on global warming published in the American economic review in 1991 or so without any of the requested revisions.

    Schelling noted recently that “It is interesting that this idea that costly actions are unwarranted if the dangers are uncertain is almost unique to climate. In other areas of policy, such as terrorism, nuclear proliferation, inflation, or vaccination, some “insurance” principle seems to prevail: if there is a sufficient likelihood of sufficient damage we take some measured anticipatory action. … Weigh the costs, the benefits, and the probabilities as best all three are known, and don’t be obsessed with either extreme tail of the distribution.”

    Schelling has also noted that in only three successful experiences of multinational economic commitment: the Marshall Plan, NATO and the WTO, first the rules are established and later a system of regulations is set-up through which each state justifies itself before the others and watches the others.

    p.s. the biography was a short book which I think missed an important contribution of Schelling to strategic nuclear stability in 1958. After visiting an air force base, he suggested that good strong locks be put on nuclear weapons themselves in case they were stolen. They had no locks at the time.

  92. Ernestine Gross
    July 28th, 2010 at 10:24 | #92

    @Jim Rose

    You wrote the crux of foregoing story before on this blog-site.

    You don’t get the point about a global negative externality.

    May I ask you to read Ken Binmore & Parth Dasgupta (ed), The Economics of Bargainin, Basil Blackwell, 1987 or later edition. Don’t write to me until you feel ready to answer questions from this book.

  93. Jim Rose
    July 28th, 2010 at 11:28 | #93

    schelling also thinks that it might take a century to reach a consensus on solving the greenhouse gas problem

    this is because there is no likelihood that China, India, Indonesia, Brazil, or Nigeria will fully participate in any greenhouse-gas regime for the next few decades – they have done their best to make that point clear, and it serves no purpose to disbelieve them – but that is no excuse for wasting time getting started.

    he is also of the view that the problem with an international emissions trading regimes is that initial quotas are negotiated to reflect what each nation can reasonably be expected to reduce.

    Any country that is tempted to sell part of an emissions quota will realize that the regime is continually subject to renegotiation, so selling any excess is tantamount to admitting it got a generous allotment the last time around. It sets itself up for stiffer negotiation next time.

    schelling also is of the view that global climate change may become what nuclear arms control was for the past half century. It took more than a decade to develop a concept of arms control. It is not surprising that it is taking that long to find a way to come to consensus on an approach to the greenhouse problem.

  94. Jim Rose
    July 28th, 2010 at 14:33 | #94

    @Ernestine Gross

    at #30 you purported to cut and paste what I posted in another thread.

    you dropped out the last line of what I said.

    please correct this error.

  95. Ernestine Gross
    July 29th, 2010 at 18:46 | #95

    Oh dear oh dear, Jim Rose is putting up a false image. It is not an error to not copy ‘the last line’ if it is irrelevant to the point. In the case in question, the the said image manufacturer had conflated two separate themes. Surely, disentangling the attempted entanglement is the opposite of introducing an error. I suppose Jim Rose didn’t intent to conflate separate themes, he merely made an error.

  96. Ernestine Gross
    July 29th, 2010 at 18:46 | #96

    sdfc :Climate scientists say AGW is a problem. Economists knock up policy proposals to deal with it. I don’t see what the problem is.

    Exactly.

  97. Alice
    July 29th, 2010 at 18:47 | #97

    @Ernestine Gross
    Ill second that.

  98. Donald Oats
    July 29th, 2010 at 19:12 | #98

    @Alice

    I’ll third that. I know that Pr Q has direct access to the print media, even if the readership is small (say ~100k) and rarified. But what of many other academic economists? Surely there must be some interesting articles on AGW and the problems of formulating an adequate economic framework for its resolution?

    For decades now the science journalists have trawled the various academic electronic databases in order to find a new lead, or a quirky or neat idea. For example, arXiv.org is heavily (over-referred to, but that’s another matter) used source of ideas for a story in cosmology, or astronomy, or even neuroscience. It’s free, which is one reason it is high on the list. PubMed Central is another favourite for similar reasons; and, each major faculty at universities typically have their own preprint servers for external, and free, use.

    Journalists who write on matters economic should occasionally do the same, for it might improve their technical knowledge, and shift their opinions on some multi-disciplinary problems, especially the ‘wicked problem’ variety.

  99. Jim Rose
    July 29th, 2010 at 19:16 | #99

    @Ernestine Gross
    I disagree that it was “irrelevant to the point”.

  100. Gaz
    August 2nd, 2010 at 12:00 | #100

    @SJ

    SJ, thank you for your reply. it would seem to me that you have confirmed my impression that, by the definition used implicitly by Ernestine and as set out by you, there can be no such thing as a market solution to an externality problem.

    As you say: “If the market failure is to be addressed, it must be by some non-market actor.”

    Therefore the concept of “non-market solution” is pretty much meaningless, or at least tautological in the sense that all posisble solutions (by this definition at least) are non-market solutions.

    I can now understand Ernestine’s reluctance to offer an example of a market solution. By this definition, there can be none.

    I would prefer an alternative definition of a “market solution” as one which utilises market forces to allocate resources.

    So, for example, a policy which forces everyone who builds a new houses to adhere to a regulatory standard would be a non-market solution while one which restricts the supply of rights to emit CO2, then allows a market to price and allocate those rights would be a market solution. The first intervenes in a market while the second merely changes the initial conditions.

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