Economics on the beach I: allocating stream water

It could easily have ended in a fist fight. Or more likely a plastic shovel fight. This is how it began. My kids, my wife, and I went down to a Cornish beach. A beach with an interesting feature. There is a small stream that runs high up the beach parallel to the sea for more or less the whole length of the beach. Kids find this stream almost more fun to play in than the often pretty rough sea, which is mostly inhabited by bodyboarders smashing into each other. As the stream runs essentially over and through sand with lots of stones around as well, it is very malleable. Kids (and, invariably, their fathers – mothers do not seem so keen) love to build little dams, dig up new channels, and create little pools to play in. On the given day, easily 20 to 30 kids (and some of their fathers) were happily engaged this way somewhere along the length of the stream, when suddenly the water was reduced to a tiny trickle and had stopped flowing altogether further down the stream.

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Video: David Friedman’s case for anarchy

On June 6, David Friedman gave a lecture at the Economics Club making the case for an archo-capitalist society. For those of you who missed it, you can watch a video of the talk here!

(Unfortunately, the sound quality is not great. If anyone has an idea how to improve it, please leave a comment.)

There will be a video of the second lecture at some point, but it still needs some editing which is definitely not my comparative advantage.

Ein Hauch von Ökonomik: leben und leben lassen

In der Wohngemeinschaft, in der Siedlung, am Campingplatz, im Hotel, im Restaurant, im Zug, im Park und im Hörsaal – überall treiben wir unser Unwesen. Wir, scheinliberale Spaßnudeln aus dem Team Yolo mit dem Codenamen Chillax – zu cool für gesellschaftliche Übereinkünfte, wenn letztere unserem Egotrip gerade nicht dienlich scheinen. Haben wir Lust auf ein wenig Krach nach Mitternacht, auf eine Zigarette am Esstisch und auf Lautsprechermusik im vollen Abteil, dann bilden wir uns ein Naturrecht darauf ein. Wagt jemand eine Beschwerde, zeigen wir uns höchst empört über den spießigen Versuch des Freiheits- und Rechteraubs: man möge sich doch entspannen, sich beruhigen, die Sache nicht so eng sehen – leben und leben lassen.

Das sagen ausgerechnet wir, die wir unruhig und engstirnig momentanen Impulsen folgen und konfrontative Situationen provozieren, anstatt diese zu entspannen. Wir, die wir uns das Recht herausnehmen, rücksichtslos in das Leben anderer einzugreifen, verwehren uns schon im nächsten Moment gegen regulative Interventionen und verkaufen es auch noch als Überzeugung.

Wehe, uns würde jemand früh morgens den Schlaf rauben. Wehe, jemand würde neben unserem Speiseteller ein Duftstäbchen entzünden. Wehe, zwei Sitze weiter würde jemand Schlagerlieder vor sich hin krächzen. Wehe, jemand wagt irgendetwas, das nicht unserer Präferenz entspricht. Asozial muss dieser jemand sein und natürlich spießig, wenn er überhaupt ein Leben hat. Denn wir haben ja eines und wissen daher, wie ein Leben auszusehen hat. Wir, gleichermaßen Zentrum der Welt und Maßstab aller Dinge. Oder doch bloß ewig im Stadium egozentrischer Kleinkinder, welche die Welt ausschließlich von der eigenen Position aus zu interpretieren im Stande sind?

Jedenfalls nicht ganz die Toleranz, die wir so gerne einfordern. Koordination, Kooperation und entsprechende Regeln sind eben komplex. Und kompliziert sein ist was für Stresser. Wir hingegen sind simpel. Kein langes Abwägen von gegenseitigen Abhängigkeiten und externen Effekten. Stattdessen finden Beurteilung und Sinnfrage bereits mit dem Abgleich des spontanen Eigeninteresses ihr Ende. Individualistisch, opportunistisch und teilweise bildungsresistent hinsichtlich empathischer und rationaler Entscheidungsfindung – ja, wir arbeiten hart am Ende der sozialen und liberalen Gesellschaft – zu entspannt, um leben zu lassen, was uns leben lässt?

On David D. Friedman’s view about climate change

This week David D. Friedman gave two talks at the University of Graz. The first has been on anarcho-capitalism and his proposal for a society organised without any form of public institution (cf. [1]). In his second talk Friedman argued why uncertainty in climate science denies any form of recommendation for climate mitigation and in particular for early action. In this blog post I will essentially focus on his second talk but give some conclusions why I think his proposal for anarcho-capitalism directly feeds into his ‘wait-and-see’ principle regarding climate change.

Argument I: What do we know – the bias of IPCC

What has been most striking to me was his argument regarding the credibility of climate change research. Currently the ‘best guess’ – to use his terminology – is represented by the Assessment Reports carried out by the Intergovernmental Panel on Climate Change (IPCC) which regularly publishes the latest state of knowledge. Friedman unhesitatingly dismissed the work of the climate science community because in his view the research is distorted towards negative externalities. But he even went further saying that climate science is biased due to the prejudice that climate change exclusively will trigger negative externalities. But as a matter of fact, this potential deficiency has led to increased attention by the scientific community in order to outweigh merits and demerits of a changing climate:

The IPCC research process [2]-[3] “multiple stages of review”

“comprehensive, objective and transparent assessment of the current state of knowledge”

“priority is given to peer-reviewed literature”

The IPCC selection of authors [3] authors are selected on the basis of their expertise [and their] detailed CVs”

“composition of author teams aims to reflect a range of scientific, technical and socio-economic views and backgrounds”

“author teams […] include a mix of authors from different regions and from developed and developing countries”

The IPCC AR5 report in figures [2] q.e.d.

Friedman did not even mention (least of all appreciate) this approach of doing peer-reviewed falsification analysis. Furthermore, he particularly challenged the robustness of climate models applied in the five assessment reports. Evidently, ALL MODELS ARE WRONG (see [4] for a nice recap “On mismatches between models and observations”). Friedman knows it, but everyone seriously doing research knows the deficiencies but also the merits of modelling. To continue, his argument was that the ex ante projections from the applied models in the first AR did not match with ex post empirical observations. Even if this argument would be correct (which is not, cf. [5, TFE.3, Figure 1, p. 64]) his claim regarding the misspecification of the AR1 models does not translate into the subliminal claim that improved models in AR2-5 are completely flawed.

To elaborate more on doing projection (not prediction) research by means of modelling, Friedman argued that in face of uncertainty we can never incorporate all potential effects (regardless of the challenge they are related to). The net effect of positive and negative externalities is unclear in the narrow approach of modelling. I totally agree on that but the implications of such a passive attitude towards the ability to actively follow a precautionary principle are devastating. If fate is the only determinant for future well-being, why are there so many efforts and vested interests in shaping its own prospects?

In the case of climate change the challenges ahead are higher by order of magnitudes especially since ‘tipping points’ can cause positive feedback effects additionally triggering forcing [6]. As Hansen [7] puts it: “wait and see and clean up the mess post facto, will not work […] because of inertial effects, warming already in the pipeline, and tipping points”. Hence, “[to avoid] the unmanageable and [to manage] the unavoidable” [8] certainly represents a more rational approach than Friedman’s proposal.

Argument II: From average homogeneity to heterogeneous distribution

Friedman then went on arguing that human species is not optimally adapted to weather conditions because humans are populated in various climate zones over the world. Obviously, there is a range of optimal or acceptable conditions but the point is that, again, passing lower or upper boundaries of this range can lead to severe impacts on humans [9]. A plausible response is migration as a form of adaptation which also Friedman highlighted. But in his argument he essentially disregards any influence to the adaptive capacity of individuals simply assuming homogeneity. He never mentioned one of the decisive points with regards to adaptive capacity which is: where are affected people located on the global cumulative curve of income and wealth.

Several times, Friedman pointed to the ‘marginal’ change of global average temperature, again neglecting the distribution of change among space and time. In its latest “Statement on the Status of the Global Climate” the World Meteorological Organisation documents that the global average temperature in 2016 has been 1.1°C above the pre-industrial level earmarking a novel record after the preceding record year of 2015 [10]. In Austria the temperature increase has even reached a 2°C increase in the same period investigated [11]. For some regions, the observed temperature increase is yet above this level [5, Figure SPM.1, p. 6]. And most strikingly is Friedman’s emphasis on ‘marginal’ or ‘slow’ change in temperatures. For the rate of increase since the beginning of the industrialization this is simply not true [5, Figure 5.7, p. 409].

The prospective impacts will vary in magnitude, direction, space and time [12-13]. But let’s focus a fortiori on a positive externality Friedman has been referring to. For the case of food security it is true that most crop yields could increase up to 20-30% [14]. But these numbers have been evaluated under controlled experiments in the laboratory. Where and when crop yield is expected to be increasing is again a question which Friedman did not further elaborate on. Additionally, there is evidence that the protein content of some crops decreases with higher temperatures [14]. Hence, distributional issues and implications are not within Friedman’s analytical approach. This is also reflected in his utilitarian and consequentialist view of the world: if the number of people dying from cold weather conditions decreases stronger due to global warming than the number of people dying from heat stress increases there is clearly a net benefit. Message to the individuals in the latter group: could you please stand up?

Argument III: Directed economic growth and path dependency

All the above makes the case for the complement of adaptation which is mitigation and in particular early action. It is true that at the moment many technological and behavioural changes complying with climate-neutrality are costly. But what Friedman essentially misses is that economic growth (and its associated benefits) not only has a rate but also a direction. For instance, the technologically driven cycle in the US originating in the ‘mission to the moon’ has been a political and social goal. Besides the development of rockets this mission-oriented approach has led to various kinds of state-funded offspring inventions and innovations ranging from telecommunication technologies, photovoltaics and so on [15].

Let me here bridge the gap back to Friedman’s first talk (and the blog post of Timon Scheuer) and then back again to climate change and the mission-oriented approach. In principle, his proposal for a stateless society – in which “private property, individual rights and voluntary co-operation” is solely brought about by bargaining between contract parties – is an interesting case to look at. In essence it is about completely decentralising the use of force or the threat of using force in order to enforce individual rights. A discussion of this proposal would fill several blog posts (again, cf. Timon Scheuer’s contribution). At the moment let me just argue that this proposal clearly feeds into his ‘wait and see’ principle. In his view, people are informed enough in order to react to changing social, economic and climate environments and, self-evidently, there exist ad hoc responses. But what about ‘tipping points’ and the associated irreversibility experienced post facto? Friedman’s anarcho-capitalist society reflected by self-interest at the micro scale and random walk at the macro scale is certainly not preparing in a way that the direction of change tackles the challenges ahead.

References

[1] Friedman, D.D., 1989. The machinery of freedom. Guide to radical capitalism. 2nd edition. Open source: http://www.daviddfriedman.com/The_Machinery_of_Freedom_.pdf [07.06.2017]

[2] https://www.ipcc.ch/report/ar5/wg1/docs/WG1AR5_FactSheet.pdf

[3] https://www.ipcc.ch/news_and_events/docs/factsheets/FS_select_authors.pdf

[4] http://www.realclimate.org/index.php/archives/2013/09/on-mismatches-between-models-and-observations/

[5] http://www.climatechange2013.org/images/report/WG1AR5_ALL_FINAL.pdf

[6] Lenton, T. M., Held, H., Kriegler, E., Hall, J. W., Lucht, W., Rahmstorf, S., & Schellnhuber, H. J. (2008). Tipping elements in the Earth’s climate system. Proceedings of the national Academy of Sciences, 105(6), 1786-1793.

[7] Hansen, J., 2008. Tipping points. Perspective of a Climatologist. Available at: http://www.columbia.edu/~jeh1/2008/StateOfWild_20080428.pdf

[8] Scientific Expert Group on Climate Change, 2007. Confronting Climate Change: Avoiding the Unmanageable and Managing the Unavoidable, Report prepared for the United Nations Commission on Sustainable Development, eds Bierbaum RM, Holdren JP, MacCracken MC, Moss RH, Raven PH (Sigma Xi, Research Triangle Park, NC, and United Nations Foundation, Washington, DC.

[9] Parsons, K. (2014). Human thermal environments: the effects of hot, moderate, and cold environments on human health, comfort, and performance. Crc Press.

[10] WMO, 2017. WMO – World Meteorological Organization. Statement on the State of the Global Climate in 2016. WMO-No. 1189. Available at: https://public.wmo.int/en/media/press-release/climate-breaks-multiple-records-2016-global-impacts

[11] APCC. 2014. Österreichischer Sachstandsbericht Klimawandel 2014 (AAR14): Synopse – Das Wichtigste in Kürze. Austrian Panel on Climate Change (APCC), Climate Change Centre Austria, Wien, Österreich.

[12] IPCC, 2014. Summary for policymakers. In: Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Field, C.B., V.R. Barros, D.J. Dokken, K.J. Mach, M.D. Mastrandrea, T.E. Bilir, M. Chatterjee, K.L. Ebi, Y.O. Estrada, R.C. Genova, B. Girma, E.S. Kissel, A.N. Levy, S. MacCracken, P.R. Mastrandrea, and L.L. White (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 1-32.

[13] Zenghelis, D., 2015. 10. Decarbonisation: Innovation and the Economics of Climate Change. The Political Quarterly, 86: 172–190. doi:10.1111/1467-923X.12239

[14] Schmidhuber, J., & Tubiello, F. N. (2007). Global food security under climate change. Proceedings of the National Academy of Sciences, 104(50), 19703-19708. Available at: http://www.pnas.org/content/104/50/19703.full.pdf [07.06.2017]

[15] Mazzucato, M. (2013), “The Entrepreneurial State – Debunking Public vs. Private Sector Myths”, Anthem Press, ISBN 978-0-857282-52-1.

The Case of Anarchy, Case Closed: a comment on a talk by David Friedman.

“All human beings are born free and equal in dignity and rights”. At least as long as David Friedman’s dreams do not come true. In the anarcho-capitalist society he proposed in today’s talk rights are goods and services traded on markets. The rights you are born with are then those your parents are paying for. I invite you to think about the destiny of your dignity, if you are born in such a society without solvent and generous parents. It gives me the creeps just as David Friedman has done, when he indirectly preached against the first article of the Universal Declaration of Human Rights.

It was not only the lack of morality. It was also the lack of consistency. He may dream of a world without a government, but the system he sketched was not such. Publicly elected governments were just substituted by private ones individually selected on hypothetical markets. As if it was not bizarre enough that one has to purchase their basic rights just like one has to choose amongst hopefully affordable insurances, Friedman does not even hesitate to sketch the so-called law enforcement companies like organizations we know from Mafia films – sending strong men to protect their clients and punish their adversaries. We now know pretty well how ruling by private clans work out, from organized crime as well as from feudalism. We know that the “freedom of choice” often did not work out that well for those who tried to use it. We know about the economics of scale, network effects and corresponding concentration of power in cartels and monarchies. So, while I still have no clue how an anarcho-capitalist system should achieve a stable outcome in a world of externalities and asymmetric information, we can at least imagine the lack of liberty in a society where rights are distributed as unequally as property.

Money and bloodline already has enough influence on legislation, jurisdiction and execution. To me, giving up my one-vote-per-head democracy in favour of Friedman’s anarcho-capitalism seems just like the final resignation in favour of a sort of legitimised corruption. I cannot deny that governmental failure is obvious and the average voter knows too little about the true incentives, intentions and efforts of the politicians elected and electable. The transaction costs in favour of a well-informed decision, though, would not necessarily decrease only because the provider of law would be a private company instead of a public party. After all I am thankful for Friedman’s talk, which seems to be science fiction rather than scientific. Not only did he give insights into the theoretical and empirical shortcomings of libertarian thought, but he also encouraged me to stick to Winston Churchill’s quote: “democracy is the worst form of government, except for all the others.”

Hartz-IV: Alternative Fakten

Es gibt zwei Arten von alternativen Fakten: solche, die frei erfunden sind, und solche, die wahr aber irreführend sind. Wie man letztere erzeugt,  zeigt der “Standard” lehrbuchmäßig in einem Artikel über die Hartz-IV-Reformen:

Die Reform wollte eigentlich erreichen, dass Langzeitarbeitslose zurück in den Arbeitsmarkt kommen. Daran ist sie gescheitert. In Deutschland gibt es deutlich mehr Menschen, die über Jahre keinen Job finden, als in Österreich. Und das, obwohl die Sozialleistungen hierzulande höher sind.

Wörtlich genommen stimmt die Aussage natürlich. Die absolute Anzahl der Langzeitarbeitslosen ist in Deutschland höher als hierzulande. Es gibt aber auch ungefähr zehnmal so viele Menschen in Deutschland wie in Österreich. Relevant ist das Verhältnis der Langzeitarbeitslosen zur Bevölkerung und wie sich dieses Verhältnis seit Einführung der Hartz-Reformen in den Jahren 2003-2005 entwickelt hat.

Hier der Anteil der Langzeitarbeitslosen an der Erwerbsbevölkerung in Deutschland im Vergleich zu Österreich während der vergangenen 14 Jahre (Quelle: Eurostat).

hartz4blog

Diese Grafik zeigt so ziemlich das Gegenteil von dem Bild, das der Standard-Artikel vermittelt. Die deutsche Langzeitarbeitslosigkeitsquote ist drastisch gesunken, während sie in Österreich leicht gestiegen ist. Im letzten Jahr lag sie in beiden Ländern ca. bei 1,8%.

Weiter unten im Artikel wird es noch ein bisschen “alternativer”:

Frage [sic!]: Aber immerhin ist die Arbeitslosigkeit stark gesunken.

Antwort: Das stimmt zwar, hat aber den meisten Fachleuten zufolge relativ wenig mit Hartz IV zu tun. Deutschland hat sich zur gleichen Zeit auch in vielen anderen Bereichen reformiert, die Löhne wurden schon Jahre zuvor kaum mehr erhöht und Unternehmen haben sich auf Märkte wie China spezialisiert, was sich als ein mehr als glücklicher Handgriff entpuppte. Außerdem sinkt die Zahl der Leute, die arbeiten wollen, weil es weniger Junge und Zuwanderer und mehr Alte gibt als in Österreich.

1. Wenn die Anzahl der Erwerbsfähigen bzw. -willigen sinkt, sinkt der Nenner der Arbeitslosenquote, wodurch die Quote ceteris paribus steigt, nicht sinkt. 2. Löhne und Exporte sind endogen. Die geringen Lohnzuwächse sind zum großen Teil eine Folge der Hartz-Reform. Schließlich hat sie dazu geführt, dass das Arbeitskräfteangebot gestiegen ist. Das geringe Lohnwachstum hat wiederum deutsche Exportgüter relativ billiger gemacht, was den Exportboom zumindest zum Teil erklärt. Die vom “Standard” angebotene Erklärung der gesunkenen Arbeitslosigkeit ist ungefähr so als würde man sagen: “Dass ein Kind im Laufe der Zeit größere Kleider braucht, liegt nicht daran, dass es älter wird, sondern größer.”

Diese Passage liefert Beispiele für eine weitere Subkategorie von “alternativen Fakten”, die dadurch entstehen, indem man einen Kausalzusammenhang zwischen zwei oder mehreren Fakten behauptet, der logisch inkohärent oder zumindest höchst fragwürdig ist.

Ich glaube, dass diese Art von irreführender Berichterstattung wesentlich schädlicher ist als die klassische Falschmeldung. Letztere wird nämlich für gewöhnlich rasch aufgedeckt und berichtigt. Die Art von “Fake News”, wie sie der “Standard”-Artikel enthält, bleibt in der Regel unwidersprochen und unberichtigt. Was hier nach seriöser, kompetenter Berichterstattung aussieht, ist letztendlich einfach nur Quatsch.

Can robots pay taxes?

Bill Gates thinks robots should pay taxes. My first reaction was: Mr Gates obviously doesn’t know much economics. If he did, he would know that things do not pay taxes. Only people do.

Robots, so I thought, are machines. They don’t have an income of their own, they don’t consume stuff. The income they help produce goes to whoever owns the robot. If I own a robot, my willingness to let it (him? her?) work for a firm increases with the robot wage rate, the amount of money I receive per hour of work done by my robot. A tax on robot wages would shift the supply curve of robot labor up (or, if you prefer, to the left), increasing for each given amount of robot labor the wage rate employers must pay to get it. The gross robot wage increases, although probably by less than the tax rate, depending on how elastic the demand for robot labor is. Assuming that the demand elasticity is not infinite, the tax burden will be split between the robot owners and the employers of robots. So the robot tax would just be another form of a capital tax, which would partly be shifted to other factors of production, including human labor. In no real sense would it „tax robots“.

Now there are good reasons to believe that we are approaching the “technological singularity“, a scenario in which robots become smarter than humans. Some experts on artificial intelligence reckon we might be only 30 years away from that. I have exactly zero qualifications to judge the plausibility of that claim, but I don’t see any obvious reason why it couldn’t happen.

Suppose the singularity does happen. Then it seems quite ridiculous to assume that humans own robots. More likely, it would be the robots who own humans. Indeed, we can only hope the super-intelligent robots would treat us a little better than we are treating less intelligent life-forms now. Let’s assume, for the sake of argument, that humans will co-exist with the super robots as equals, at least for a while. Then robots would effectively become another class of people competing with us in the market place for jobs and goods. In such a world, robots are capable of bearing a tax in the sense that they would have to cut back on their consumption (whatever it is robots consume) when faced with a tax. But even in this, admittedly unlikely, scenario, it would be the case that humans feel some of the burden of the robot tax. This is because even super-intelligent robots will react to incentives. Why, given that they are super intelligent, they should react much better to incentives than homo sapiens with all its cognitive biases. If we tax their labor, they will supply less of it, which hurts humans.

So yes, robots could pay taxes. But only if they are intelligent and powerful enough to resist being held as slaves by humans, and not as intelligent and powerful as would allow them to enslave humans. Not a very likely scenario I guess.

PS: If you are curious what AI is currently capable of doing, here is some AI-produced poetry.