Economics of climate: Step back from ideology

What is economics, in essence?

It is an optimization problem. You choose your measure of interest and make it as good as possible.

From there, opinions vary. What is your measure of interest? Some say growth – the rising tides raise all boats crew (they have never had a leaky boat). Others say equity – inequality they say is not an acceptable price for growth. Sustainability is another measure: it is all very well to pursue maximum growth, minizing inequality, maximizing access to quality health and education or whatever other goal you seek if, in the long run, everything falls apart.

The optimization problem and the hazard of local maxima.
Assume your score of interest is good if it is big. At points
A and B, getting better takes you to a place that is not the best
because you have to first pass through a point where things

look worse

 

There are two difficulties with simplistic markets-vs-socialism comparisons. First, not everything is an economic good. A social good may not have a monetary value and also may not be promoted by pure economic growth. Another problem is that a market is good at finding local maxima, and disadvantages players willing to endure short-term pain to reach a more optimum point.

Markets favour local optimization

Check out the picture.

Assume you are in an industry where players have achieved efficiencies that put them at point A or B. If they are under competition pressure, their best strategy is to move to the “local maximum” because moving in that direction makes them more competitive. If they attempt to move to the point marked “best?” they first have to move through a stage of getting worse.

This is in very generic terms – to make it concrete, if a totally new way of operating is proposed that is way more efficient than traditional practice but it takes a big investment to implement, anyone adopting the new concept goes through a period where they incur extra costs in making this investment. They therefore move away from the local maximum and head down the “worse” slope. Then, once the new investment starts to pay off, they need to make improvements to get ahead of the competition who is still playing in the “local maximum” space.

Social vs. Economic Foods

Some things either do not have a monetary value or are too important to leave to the possibility that the markets will fix them. One example is health. Up to a point, you can trade being healthy for having more money but debilitating or life-threatening conditions are things you would rather fix the best way possible that worry about the cheapest option. More broadly, a healthy population benefits society. Essential work is not left undone because someone is sick, etc. Much the same can be said for education. Though being educated confers personal advantage, society as a whole benefits from a more educated population.

Can markets alone optimize social goods? No. Because access to resources does not neccessarily correlate with ability. The stupidly rich can benefit from education even if they have very little potential. If the extremely poor get ill, they cannot be expected to work extra time while still sick to pay medical bills.

A borderline case is negative externalities, costs that do not fall on a producer but that cost society. These are economic costs but are not well-suited to the market model as the cost can be passed on to society. Examples include pollution and depletion of natural resources.

Climate Change

Where does climate change fit into all of this?

First, the cost is a negative externality, something that the markets demonstrably do not handle as they have not fixed the problem. Second, it is a social cost as it damages the poor disproportionately and generally will damage those not responsible for the problem. Third, it illustrates the problem of local optimization neatly. While it is increasingly plausible that renewable energy in the long run will cost less than fossil fuels – particularly when cheap sources deplete – in the short term the “worse” cost scenario has to be covered somehow, otherwise renewables cannot build to the sort of scale needed.

Some fundamentalist libertarians argue that climate science is flawed because it requires a large-scale government intervention. I argue the opposite. Their economic philosophy is flawed because it cannot remedy a situation like this. So instead of allowing someone else to fix the problem, they deny.

On the nature of liberty: people versus things

Through much of the twentieth century, there were two competing theories of liberty.

One, the socialist view, is that capital is fundamentally evil and the state should run society at all levels.

The other, the libertarian view, is that state power is fundamentally evil and private enterprise should run society at all levels.

The fundamental flaw in the socialist view is that a monopoly of power leads to abuse, and that concentrating all power in the state makes such abuse inevitable.

The fundamental flaw in libertarian thought is the failure to recognize that any organization with the capacity to overwhelm the individual is a threat to liberty.

We leave aside the issues of economic merit – that is a subject worthy of fuller discussion. The only point I touch on here is that monopolies are inevitable in a system without constraints on the power of business, because business has the power to influence politics. There is therefore no such thing as a pure market economy: even if you start out with one, as soon as any business or consortium of businesses have the power to influence government and hence economic policy, they have an interest in subverting a free market to their ends.

Niger Delta pollution (source: EnviroNews Nigeria)

The major point I make here is that big business can be every bit as damaging to the individual as government, possibly more so, since a multinational has a cross-border reach. Consider for example massive pollution by the oil industry, which uses excessive profits in countries with weak regulation to help pay costs where they are called to account in more regulated countries. Ask someone in the Niger Delta if they would prefer a stronger more accountable government over unfettered rights of big multinationals.

If we therefore hold liberty of the individual to be the starting point of any rights discourse, we need to include in that discourse limiting the scope of business. And that leads to a fundamental that contradicts a substantial part of the rights logic in the US, where business has a virtually unlimited capacity to interfere in politics. Despite the concept in law of a legal person, a business is not, and should not be, treated as a person as regards rights. A business only has rights to the extent that those who control it and those controlled by it have rights. So it is ridiculous to argue freedom of speech in curtailing the right of business to make unlimited political donations.

In a world where businesses are accorded rights, individuals cease to matter except to the extent that they promote the interests of business, an inversion of any reasonable concept of rights. Unconstrained big business is therefore as much an undesirable outcome as unconstrained government.

Libertarians, particularly, the US kind, commonly make the mistake of seeing big government as the one and only enemy, totally neglecting the potential for harm by big business.

We need not choose between two evils: if we understand both as undesired outcomes, we can avoid both.

A business is not a person, it is a thing. Once we accord it rights, we damage the rights of real people.

Ideology and counter-ideology of climate change

Climate science is not fundamentally about ideology – science stands or falls by evidence.

Nonetheless, when a scientific finding has economic ramifications, ideology kicks in. Logically, ideology should only apply to remedying the identified problem, not to evaluating the science. For example, if you are an absolutist free marketeer, you would look to the markets to solve the problem. If you are a hard-core socialist, you will expect the government to fix the problem. If you are a pragmatist, you will be happy with any mix of private sector and government initiatives – whatever works best.

The problem arises when you have a scientific finding that reveals a problem that cannot be fixed by either the markets or government alone. Then, the ideologue is driven to attacking the science.

As one example, in the Soviet Union and satellite states, the dominant ideology was that all people are fundamentally equal, there are no hereditary differences and that the state was the only agency for ensuring that such an equal society functioned. That some were in Orwell’s words more equal than others, we will leave aside. Outcomes of this ideology dominating science included:

• Trofim Lysenko’s anti-Mendelian pseudo-science whereby biology was perverted to suit the dominant ideology; dissent from his theories was outlawed in 1948, and his dominance of Soviet agricultural research set that country back a long way
• conductive education – a Hungarian theory that disability caused by brain damage can be overcome by training. Again this fitted the Soviet-era ideology that all inequality is induced, but has no basis in evidence; the movement persists to this day, offering false hope to families of the disabled

The Soviet Union is at one end of the scale; at the other is extreme market ideologues who attack science whenever fixing a problem it reveals appears to be impossible without state intervention. While some of these ideologues are fundamentalist libertarians who genuinely believe all government interference in the economy is bad, there is a good deal of inconsistency among such campaigners. The big threat is almost always government interference in unbridled profit-seeking. Very few take umbrage at government interventions that favour business – especially big business.

Aside from this inconsistency, the big flaw in libertarian thinking is a total focus on big government. Generalize this concept:

any organization big enough to overwhelm the individual is a threat to liberty

Then we see that we need to be wary of any organization that becomes too big.
Examples of organized opposition to government interventions arising from inconvenient science include tobacco, the ozone hole and climate change. The argument is almost always the same: the science is flawed because it cannot give an exact answer, personal attacks on the scientists, claims that contrarian science is suppressed.

None of these claims stand up to scrutiny.

No science modelling the real world is 100% accurate – once a risk is clear enough to be worth avoiding, you quantify the costs of various avoidance strategies against the risk, and develop a suitable strategy. Yet  the argument in these cases is almost always that the science must be 100% right – 90% is not good enough. In fact, even it the science only has a 1% chance of being right, if the catastrophe predicted is big enough, it is prudent to take action.

No one goes into science to get rich – not if they have any sense anyway. Research grants aren’t money in your pocket. They pay for things like graduate students, making more work for you.

In some fields of science, it is true that public alarm at the outcome can fuel more funding. Knowing what cancer is would alarm anyone. In cancer research, funding generated out of that sort of alarm not only fuels research into the cause but into the cure.

In many other fields of science that produce alarming findings, responding to those findings does not aid those making the discovery at all. If the tobacco industry slowed down promotion of its product as harmful effects became known, research on harmful effects would taper off as fewer people smoked. Research on causes of the ozone hole and climate change intensified as a result of industry push-back.

It is particularly obnoxious in ozone hole and climate science research to argue that scientists are producing alarming results just to get more research money. In both cases, had industry accepted early indications of cause for alarm and responded appropriately, the place to prioritize research funding would be to mitigation. In the case of the ozone hole, mitigation required finding alternatives to CFCs. In the case of climate change, rather than pinning predictions down more precisely, the logical place to direct research funding is towards clean energy.

So, what’s to be done?

First, we need to challenge the libertarian presumption that government is the source of all evil. Transnational corporations have a reach that exceeds that of most governments, and are not particularly accountable. If their shareholding is diffuse, there is no single point where pressure can be applied to correct faults.

It is also not true that the market is the single best mechanism to deal with every problem.

First, not all goals are economic.

Second, the market is highly distorted by the influence of very large corporations; not only can they use monopolistic practices to stifle competition, but they can buy off politics and create a regulatory environment that favours them over smaller competitors.

Third, some economic factors fall outside pricing controlled by the market. Negative externalities – costs to parties outside a transaction, like pollution, which is a cost to society as a whole – cannot be regulated purely by the market.

Finally, a purist socialist approach to everything has been tried in various forms, and hasn’t worked – so let us not kid ourselves that we can go back there to deal with an even harder problem.

We can ultimately only solve large-scale societal and muli-societal problems like climate change, universal access to health care and equitable access to basic services if we stop being bound by ideology and judge each issue on its merits.

So, going back to climate change: we need to remove ideological blinkers when considering the evidence. If the evidence says we should act, there is even more reason to remove ideological blinkers, because he best solution to a hard problem requires working on it from all angles.