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.
John Quiggin 
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.
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.
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.
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.
“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.
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.
“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.
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.
@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.
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.
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.
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.
@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.
@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.
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’.
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.
@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.
@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.
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.
@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.
@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.
@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.
@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.
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.”
@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.
@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)?
@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.
@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.
@Ernestine Gross
oops, I forgot to clear parts of an earlier draft. Please ignore everthing starting from 2. – Apologies.
@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.
@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
Hello Ernestine
Always beware debating with a soul who has to ask you the definition of an externality.
@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.
.
@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.
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.
@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.
@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?
@Jim Rose
Jim Rose – economists should not stand apart from discussing the impacts of global warming. The science is not in question here.
@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.
@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.
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.
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’.
@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.
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?
@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.
http://blog-imfdirect.imf.org/2009/11/23/climate-change%E2%80%94some-simple-and-quite-convenient-truths/
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
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.
@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.
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.
@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.