Home > Economics - General > Economists for the price mechanism

Economists for the price mechanism

May 10th, 2011

I had a call from a local business organization asking if I would talk at a breakfast about the carbon tax to be held in a few eeks. The date was fine, so I said yes, then came the kicker – they wanted an economist on each side of the issue. The organizer said they had plenty of economists willing to speak for the tax, but they couldn’t find any willing to speak against it. I gamely offerd to present the case for an emissions trading scheme as opposed to a tax (even though, at the moment, I lean to a tax). But they wanted an actual opponent of any kind of carbon price, who was also an economist. This has proved to be impossible, which is pretty impressive testimony to the quality of the Queensland economics profession, and to the underappreciated fact that economists are among the strongest supporters of good environmental policy.



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  1. Ernestine Gross
    May 10th, 2011 at 21:33 | #1

    Beautiful. It helps to distinguish economists from economic rationalists and accountants.

  2. TerjeP
    May 10th, 2011 at 23:51 | #2

    John Humphreys doesn’t really fit their criteria but he could still disagree with you on enough detail to make for some sport.

    p.s. So pleased you now prefer a carbon tax over an ETS. An ETS is an awful idea and a key problem with Gillards carbon tax is that it is intended that it will evolve into an ETS. That coupled with the fact it won’t do anything worthwhile at a price that is tolerable.

  3. Rationalist
    May 11th, 2011 at 06:05 | #3


  4. gerard
    May 11th, 2011 at 06:07 | #4

    it seems that QLD economics departments are suffering from a lack of private sector patronage.

    Koch Buys Econ Dept. at Florida State U
    A conservative billionaire who opposes government meddling in business has bought a rare commodity: the right to interfere in faculty hiring at a publicly funded university.

    A foundation bankrolled by Libertarian businessman Charles G. Koch has pledged $1.5 million for positions in Florida State University’s economics department. In return, his representatives get to screen and sign off on any hires for a new program promoting “political economy and free enterprise.”

  5. gerard
    May 11th, 2011 at 06:10 | #5



    Yes Rationalist, academics have a notorious tendency toward Groupthink. Just check out the the anti-creationist Groupthink that pervades biology departments, or the anti-geocentric Groupthink that has taken hold in astronomy.

  6. Ikonoclast
    May 11th, 2011 at 06:34 | #6

    Ernestine Gross :Beautiful. It helps to distinguish economists from economic rationalists and accountants.


  7. Ernestine Gross
    May 11th, 2011 at 07:22 | #7

    Rationalist :Groupthink.


    Rationalist, what is the answer to 1+1 = ? in your thinking?

  8. wilful
    May 11th, 2011 at 09:48 | #8

    TerjeP :
    p.s. So pleased you now prefer a carbon tax over an ETS. An ETS is an awful idea and a key problem with Gillards carbon tax is that it is intended that it will evolve into an ETS. That coupled with the fact it won’t do anything worthwhile at a price that is tolerable.

    terje, correct me if I’m wrong but I’ve always thought Pr Quiggin supported a tax over an ETS.

    I can see the theoretical, “perfect world” qualities that an ETS would have over a tax, however as soon as you consider the real world costs of collection etc, and the blood-sucking parasites developing secondary and tertiary markets for no realworld gain, it quickly becomes obvious that a tax (with 100% dividend) is far simpler and better. Wouldn’t even ahve to cover much, transport and stationary energy would be enough, a few hundred companies at most.

  9. David Allen
    May 11th, 2011 at 10:19 | #9

    But surely if a geologist, for instance, can pretend to be a climate expert they can pretend to be an economics expert as well. Should be many potential candidates.

  10. TerjeP
    May 11th, 2011 at 13:12 | #10

    terje, correct me if I’m wrong but I’ve always thought Pr Quiggin supported a tax over an ETS.

    I believe you are wrong. He has as I recall always regarded the differences as marginal but for a long time he leaned towards an ETS. Perhaps he was just blowing with the political wind but I think it was a little more than that. I trust that he will correct me if I’m mistaken.

  11. derrida derider
    May 11th, 2011 at 16:13 | #11

    We’re getting a bit OT, but I’ve always thought the “real-world” arguments for an ETS rather than a tax were more persuasive than the theoretic ones. The main one is that an ETS is what everyone else has gone for, and what future international agreements will be built on. Getting locked into other’s preferred mechanism is part of the penalty for being a follower rather than a leader.

    On the theoretic side, those “blood sucking parasites developing primary and secondary markets” are precisely how we get real-world gains compared with a carbon tax. It’s called gains from trade – if China buys quotas from us that must mean it is cheaper for us to reduce their emissions than them (otherwise it wouldn’t pay for us to sell them or for them to buy them at that price). The trade won’t increase global emissions at all because their emission gain is our emission loss, but it will mean the emissions get lowered most where it can be done most cheaply (which means we can all afford tougher emissions caps).

    OTOH the other theoretic argument for an ETS – that it fixes the quantity and lets the price adjust rather than fixing the price (by a tax) and letting the quantity adjust – has always seemed weak to me. Taxes can be tweaked in the light of experience of quantities.

    Overall, though, far the most important thing at the monent is to get a price on carbon established. Whether we go for a tax or an ETS should currently be decided by judgements of political feasibility rather than of relative economic merits. “Blowing in the political wind” is therefore quite sensible.

  12. John Quiggin
    May 11th, 2011 at 19:20 | #12

    What DD said. I support whichever price mechanism seems most likely to be feasible.

  13. Alice
    May 11th, 2011 at 19:49 | #13

    @Ernestine Gross
    Poor newspapers – couldnt find a ginner! Perhaps they could get Rupert to present that side?

  14. Ken Fabos
    May 12th, 2011 at 09:56 | #14

    I feel confident they will find someone who purports to be an economist who will tell them what they want to hear. If it’s a paid gig, there could be a queue. They could always ask Menzies House or Australian Industry Greenhouse Network for a gish galloper willing to bolt from the starting gate.

    I’d be pleasantly surprised to be wrong in in my assumption that the industry group in question is very keen to be told a carbon price is “wrong”, “incorrect” and “off the mark again” – but an industry group that genuinely thinks a carbon price is a good idea would be almost as rare as one that thinks the lowest paid could do with a decent pay rise. Perhaps an ‘economist’ from the Institute for Public Affairs?

  15. TerjeP
    May 12th, 2011 at 12:50 | #15

    What DD said. I support whichever price mechanism seems most likely to be feasible.

    Does that mean if the Coalition wins government you will become a supporter of their scheme to buy emission reductions using a tender / auction scheme? It is a market price scheme. Surely you have an actual opinion beyond the prevailing political wind.

  16. Ernestine Gross
    May 12th, 2011 at 15:52 | #16

    Interesting discussion. My conclusion is that the MMT has a ‘logic’ which dissipates when the problem addressed is viewed in a larger model. By contrast Prof Q’s argument makes sense to me against insights from the general equilibrium literature.

    Specifically, a) fiat money is a type of security; b) Radner (1973) discovered (theoretical knowledge) that, in contrast to commodities, weights in a portfolio of securities can be negative quantities. This translates into ‘absence of a lower bound’ (ie the Edgworth-… diagram looks like an empty page. Radner ‘solved’ the problem by choosing an arbitrary lower bound (ie like saying I set the debt/something, say GDP ratio at x%). It is an ‘exogenous’ bound – not derived from preferences or quantity constraints. O. Hart ‘endogenised’ the bound by making very strong assumptions on preferences (each and every individual has to have strictly risk averse and price expectations in a ‘closed cone’). Now, the Radner model doesn’t have a government. But, when it comes to ‘buying’ (spending) and revenue – ie one ignores the coordination role which all macro-models ignore as far as I can tell – then there is nothing I can see which needs to be changed. Oliver Hart’s assumption is clearly not fulfilled in reality (Wall Street bankers as a catchy marker). Prof. Q’s position is that the net borrowing has to be bounded (this is defined in an intertemporal model and therefore needs no further explanation to what Prof Q. has said already). Prof Q’s position is, IMHO, an interpretation of Radner’s arbitrary bound. The MMT people now want the government to act like the proverbial Wall Street Bankers. Not a good idea, I’d say.

    Suppose the MMT idea would become popular. My prediction is that it would lead to a ‘beggar-they-neighbour outcome. Not a good idea.

    There is something else in favour of taxation. Our current system (call it capitalism, financial capitalism, or whatever) looks like having the characteristic of systematically concentrating wealth (I won’t accept a productivity differential argument because the industrial organisation is such that wealth transfers are possible). In other words, the rich get richer and the poor get poorer. In the absence of unanimous agreement of a total system change (to what?), it seems to me a counter measure is to use taxation and income redistribution. The latter may take the form suggested by the MMT.

    The MMT proposition that ‘spending’ (gov) comes before taxation looks to me like someone ‘spending’ on the purchase of a house after having negotiated a mortage. Depending on which paper trail one looks at, there may be an appearance of spending leading payment. But when one looks further, there is one point in time when the purchase contract and the financial contract is exchanged.

    An insight from the theory of incomplete markets is that the investment decision is not separable from the financing decision (in contrast to Fisher, around 1900). Source: Maggill and Quinzii, Theory of Incomplete Markets..

  17. Ernestine Gross
    May 12th, 2011 at 17:01 | #17

    Apologies, I posted #16 on the wrong thread. It belongs to the predecessor thread.

  18. Charles
    May 13th, 2011 at 09:06 | #18

    “Does that mean if the Coalition wins government you will become a supporter of their scheme to buy emission reductions using a tender / auction scheme? It is a market price scheme. Surely you have an actual opinion beyond the prevailing political wind.”

    Now there is an idea; should keep the budget in deficit forever, or is the plan to be economically rational and increase the general tax take to pay for it.

    How about we go all the way:

    Instead of taxes we pay for government activity using printed money, it’s easy, nothing more than a bit flip in a computer, that should be a popular stunt, and also requires one more logical step before you realise it is not viable.

  19. John Coochey
    May 14th, 2011 at 16:28 | #19

    Here I am John, when will I hear from them or you?

  20. Alice
    May 14th, 2011 at 17:41 | #20

    Id like to see more economists against the “price mechanism”.
    The price mechanism is a modern invention that belongs to the generation that started modelling people into subservience.
    Tell me when in history we / politicians / theorists / policy makers stopped thinking about the “good of the nation” and “advancing economic strength” “employing people” and “building infrastructure”
    to getting bogged down in arguments about the price mechanism.
    God – they didnt even know a price mechanism existed in the 1950s when we had full employment and could build a thing or two.

  21. Alice
    May 14th, 2011 at 18:07 | #21

    And in our past, in Australia, we didnt lock people up stupidly, moronically in detention centres behind razor wire for years. No they came here and were sent to work building dams or for state rail and state water by day and they were happy to do so (as they would be happy to do so now).

    They had jobs to go to. The government made sure of that. If they started their own business later as many did – well chalk it up to a success story.

    So the pathetic boat people argument is all nonsense when we have people in business telling us we need more migrants. Use what you have first.

    If we need them, let them work.

    I really hate these people who are trying to pull government investment apart.
    It is such stupidity when the private sector isnt delivering enough decent jobs to keeo up its own demand. Target reduced the price of kids clothing yesterday to 50 cents and $1. They must burn the excess rubbish they import because it isnt bought and they dont want to cannibalise their own markets by donating it to the poor, like Vinnies. There is something very wrong with this picture when garment workers in far off countries are sleeping in their sweatshops.

    Once upon a time not so long ago you could buy a piece of Australian manufactured clothing that even had a quality control tab attached. This garment was inspected by so and so on such and such a date, for defects.

    Now everything is defective and cheap and someone somewhere is being exploited (here through loss of jobs – there because they are sleeping in sweatshops – they have no home except slavery). If this is what globalisation is all about – it sucks.

    Where did these morons come from who push free capital and no taxes? How did they get to have so much say?

    Menzies said (and he was right) there is no difference between government and private sector investment. The government doesnt crowd out the private sector – this is utter right wing rubbish – and we have had enough of that to last us all our liftetimes. The government keeps people in jobs the private sector cant create. It adds to the profits the private sector make but let the private sector and its adherents run the show into the wall…let them have their final solution for governments.

    Then let them beg for help.

    Any number of National voters in this country would agree with me. What do they want? Government investment in country towns, schools, hospitals, unis, roads, less free market globalisation garbage so they can continue to work their farms and stay alive and feed their kids.

    Well so do I and I live in an Australian city.

    Why do we keep voting for the policies of nothing from the parties of nowhere that keep pushing the politics of oppression on us all? (liberal and labor).

  22. Peter Kirsop
    May 14th, 2011 at 20:24 | #22

    this National party voter (who can remember when it was the Country Party and thinks Sir John McEwan was right) cheers you on. Menzies was right. He so often was. My made in Australia Rundles (formerly of Newcastle and employing 1000 or so people) coat is still going strong after 20 years, a little worn round the cuffs but still presentable. My made in Fiji blazer was not pre shrunk and I’ve had to discard it after its first dry cleaning.

  23. May 18th, 2011 at 15:33 | #23

    We have discussed the advantages of an ETS over a carbon tax back in 2009: http://climatechangeadaptation.wordpress.com/2009/11/15/the-advantages-of-an-emissions-trading-scheme/

    To achieve all changes required to actually prevent a runaway effect of climate change, it seems clear that neither instrument by itself is sufficient.

  24. Alice
    May 18th, 2011 at 20:30 | #24

    @Peter Kirsop
    Peter – Im so pround to meet you!! and my thanks. I am so over both the liberals and labor pushing this BS globalisation line, whilst our country people and regional towns are being stripped of their livelihoods in favour of cheapm imports and not just that but the ince decent maunacuring xector Australia had (where we could supply our populatiobn in the event of a global disaster that disrupted trade) and where our compnaies paid tax here and not in the Sechelles, and where people did get jobs from Australian industries (no more – nothing is breathing except the extractor machines in mining and the rest of us are having our wages shoved down by the service sector).

    The current governments / political parties in Australia (both of them Peter) are just US wild utopian
    “free everything” rhetoric followers and look at the mess the US is in? (and look at the mess we are in – I like our regional towns. I dont want to see people living in them stripped of income and having to move to cities and thus trip the town itself).

    This is madness.

    Glad to meet you.

  25. Alice
    May 18th, 2011 at 20:33 | #25

    Excuse my spellimg above. I didnt check it. I just like Peter Kirsop and I replied too rapidly. I dont recile from any of what I said, poorly spelt.

  26. Peter Kirsop
    May 20th, 2011 at 22:27 | #26

    thank you for your kind words. But its not just Australian or American workers who suffer from the present globalism garbage. Although they do, and lets clear up a few issues first.
    1 Globalism does not bring jobs in the developed world . It reduces them. See the only empirical research I know of, the Upjohn Institute which reports that globalisation has led to a reduction in jobs in the USA and the jobs that have been created are lower paid ones than those lost. Michael W. Klein, Scott Schuh and Robert K. Triest, “Job Creation, Job Destruction and International Competition” (Upjohn Institute) http://www.upjohninst.org/publications/jcjd.pdf (Someone might show me how to get those cute blue link things one day) I’m willing to change my view if there is some research that shows I’m wrong but to date there hasn’t been any Iv’e seen.

    2 Globalisation and free trade does not lead to increased wealth in the 3rd world; quite the reverse it leads to exploitation. The funny thing is this has been known for at least a century, but well concealed by the globalisation people. The best example (And one of the oldest) I know is cocoa. The Cadbury family bought its cocoa from the Portugese colonies of Sao Tome because it was cheaper than that grown in the Gold Coast (now Ghana). The reason it was cheaper was because the Portugese allowed slavery- so it was proven in court in Cadbury v Standard Newspapers. see Chocolate on Trial: Slavery, Politics, and the Ethics of Business, by Lowell J. Satre ISBN 0-8214-1626-X A more uptodate version is in ANU research here “Race To the Bottom Globalisation and China’s labour standards” http://rspas.anu.edu.au/~anita/pdf/AChancp461.pdf
    3 Globalisation and free trade does not -of itself – reduce prices. Again an old example is the best. The classic case of free trade is the repeal of the British Corn Laws. I learnt it in High School history and economics and again at Univ. But in fact in the average price of wheat in England in the 10 years after the repeal of the corn laws was higher than the 10 years prior to the repeal. (‘Asquith’ by Roy Jenkins 1864 Chilmark Pressp 134 for a fuller treatment of the ‘rediscovery’ of this by Joseph Chamberlain and the English Tariff Reform see federation.ens.fr/ydepot/semin/texte1011/THO2011CHA.doc

    Now having cleared away the dead wood as it were, let me continue
    firstly the products imported are -at least in FCT industries (once the most protected here) poorer quality than our own. Greshams Law – bad cheaper products force out the better dearer one..but are we better off?
    secondly a comparision of Australia and Argentina for the first 70 years of last century shows how two of the richest countries in the world at 1900 fared. Argentina followed free trade, using competitive advantage to promote its agricultural products. It failed. It descended into the juntas and the Peronistas. Australia followed tariffs, we remained a rich country and more importantly perhaps a democracy.
    thirdly an historical survey in America and Germany. Before tariffs both were agricultural lands (Germany wasn’t even a nation, but a collection of principalities and so on) America became rich thanks to tariffs. See Pat Buchanon on the subject http://www.amconmag.com/article/2003/aug/11/00007/ Tariffs also made the American worker rich: they shared the wealth http://www.amconmag.com/article/2008/dec/15/00010/ And they did so here. The same argument can be traced (though not as concisely or focused in AJP Taylors “Bismark”

    I’m in my 50s, I want my sons to have the standard of living I’ve enjoyed. Tariffs not free trade will give them that.

  27. Peter Kirsop
    May 22nd, 2011 at 06:23 | #27

    And another example of ‘free trade’ leading to worker’s oppression in the developing world is the continuing fearful human rights abuse- there are stronger words but I’ll not use them in a polite forum, is the company that makes Apple products, 2 more deaths there this week http://www.tipb.com/2011/05/20/explosion-foxconn-ipad-2-facility-2-fatalities/. Now it may be that they are better off than they were in the paddy fields, but they would be far better off with proper ILO conditions, unions and proper wages. Yes we would have to pay more, perhaps double the price we pay now for such electronic toys (if the price were doubled and the whole of that increase went to the worker they might have a decent wage.)

    A tariff (reduced as Foxcom workers’ pay and conditions improved) would help us stop exploitation in the developing world.

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