Overdrawn at the planetary bank

Are we?  Matt Ridley says "Nonsense."  Did Stone Age civilization collapse because people ran out of stone?  Contrasting "ecology" with "economy," Ridley finds that one little letter makes all the difference.  Despite our benevolent host's apparent conviction that the study of economics amounts to inquiries into the ways in which people can be induced to accept monetary bribes to tarnish their honor, the field really consists of examining the ways a society decides how to wield scarce resources for which there are multiple possible uses.  A market economy typically makes this decision by letting prices rise and fall according to the scarcity of the resource, together with the demand for it, as expressed by a large number of individuals exercising freedom of choice.  But supply and demand aren't static, even at a particular price point.  As a resource in high demand becomes scarce and costly, the pressure is on to find a substitute.  And human beings under pressure are remarkably gifted at innovating substitutes.

Our natural short-term perspective regards a price spike as a catastrophe--what if someone in need can't pay the price?--but a longer view suggests that a price spike often is just the impetus needed to discover a cheaper alternative.  As Ridley points out,
The best-selling book "Limits to Growth," published in 1972 by the Club of Rome (an influential global think tank), argued that we would have bumped our heads against all sorts of ceilings by now, running short of various metals, fuels, minerals and space.  Why did it not happen?  In a word, technology:  better mining techniques, more frugal use of materials, and if scarcity causes price increases, substitution by cheaper material.  We use 100 times thinner gold plating on computer connectors than we did 40 years ago.  The steel content of cars and buildings keeps on falling....
In many respects, greater affluence and new technology have led to less human impact on the planet, not more.  Richer people with new technologies tend not to collect firewood and bushmeat from natural forests; instead, they use electricity and farmed chicken—both of which need much less land.  In 2006, [Jesse Ausubel at Rockefeller University] calculated that no country with a GDP per head greater than $4,600 has a falling stock of forest (in density as well as in acreage).
Would any of those things have happened if the Global Department of Resource Justice had had the authority and the funding to prevent anyone from feeling the consequences of scarcity?  Human beings who care about the suffering of others experience a strong temptation to respond to price spikes by imposing price freezes.  (How dare those hoarders of valuable resources withhold them from the needy?)  While there may be good arguments in favor of the brief application of charitable relief to ameliorate an unusually abrupt transition from one resource to its substitute, we're not doing anyone any favors by subsidizing an economic choice about any resource that has begun to get scarce enough to be unaffordable. If that approach made sense, we'd be subsidizing the use of whale oil so that poor people could light as many lamps as the rich.  Or subsidizing stone tools so that no one had to figure out how to make them out of metal.

16 comments:

Grim said...

Despite our benevolent host's apparent conviction that the study of economics amounts to inquiries into the ways in which people can be induced to accept monetary bribes to tarnish their honor, the field really consists...

While that is very generously and kindly put, I don't think I've been contesting the subject matter of the field! I've just been arguing about its priority.

Oddly enough I had this conversation with my mother this weekend, in which I pointed out to that great lady that some (thinking, indeed, of you) argued that in disasters like Katrina it was good to allow what is sometimes called 'price gouging' in order to ensure that lots of resources were brought immediately to bear on the problem. The temporary condition would resolve itself, I said I had heard it argued, as the newly valuable resources became more and more plentiful in the hands of motivated suppliers.

Her response was that, while that might be true, it was entirely beside the point in determining our duty. Another matter has priority.

Texan99 said...

In determining our duty, shouldn't we consider whether we're exacerbating suffering by freezing prices? After all, isn't the point of freezing the price to alleviate suffering? Can our duty be entirely divorced from thinking through its natural consequences?

It's this kind of thing that's exactly what I mean by interpreting economics as monetary incentives to commit dishonorable acts. If the honorable thing to do is give away food and water, that's fine: lots of people do. If we'd like disaster relief to consist entirely of charity, we can do things that way. But if instead we'd like to harness the power of the economy to help fix the problem more quickly and thoroughly, we'll get more supplies in there and faster. Should we refuse to do so, while deploring the inattention to duty of the average merchant two states away who doesn't reorganize his business so as to relocate his resources to the troubled area? Whom does that help?

None of this means that we should ignore the duty of charity. Anyone whose conscience is shocked by the high prices can react the same way that people react when their consciences are shocked by the outright lack of supplies in the first place: by engaging in their own charitable relief, to bring in more supplies or to send more money so the suffering population can buy the supplies that others have brought in.

"Duty" doesn't address the whole problem, even from the moral point of view.

Grim said...

My mother's point is simply about what it is to be a good person. This kind of argument (for her) falls in with many kinds of arguments about efficacious behaviors that are nevertheless wrong. She has always been immovable on principle.

So there's plenty of room for people to engage in economically efficacious behavior -- once we have first established that the behavior does not violate moral principles. If it does, however, it's irrelevant how effective it may be to behave that way. It simply won't do.

Now if I were to formulate the objection, I would say something more technical about natural law. Economics often speaks as if it were describing a kind of natural law process, which humans can harness or violate; and as with other forces of nature, if you harness it you will benefit and if you violate it there will be consequences.

I suspect that many of our economic institutions and instruments are not at all natural, but rather contrivances that work the way they work because it's convenient for the powerful that they should work that way.

I also believe there is a core of human morality that is indeed truly natural, such that an appeal to natural law can be made. The problem with selling water to the dying at inflated prices -- one gold ring per bottle! -- is that it is such a violation of natural law. You can harness the law, or suffer the consequences. People who attempt to profit off the suffering will, eventually, face the consequences of that behavior.

But that is more technical than her explanation. She simply believes what she has always believed, which is that if a thing is wrong, you don't do it.

Texan99 said...

Your mother's argument is about what it means to be a good person. In other words, her point is not particularly applicable to the question whether we are entitled to support laws prohibiting other people from selling what they like at whatever prices they like. A law that allows merchants and customers to decide for themselves what prices to charge, and what prices to pay, can never interfere with her or your or my determination to contribute food, water, or cash to people struck by disaster. What it can do is ensure a much better supply of necessities to desperate people than the three of us could ever achieve with all our care packages and Red Cross contributions.

God gave us heads as well as hearts to determine our duty. Part of our duty is to use our heads to see what the impact will be of a policy we choose. Freezing prices leads to supply shortages, not just sometimes, but every time. For high prices we substitute the necessity for people to suffer shortages and therefore stand in long, long lines at a time when they are desperately in need of time to clean up and rebuild instead. If we really want to help them, we can send money to enable them to pay prices that may temporarily spike, particularly when we know that letting prices do their thing will increase supply, which in turn will bring the prices down in the quickest way possible.

Voting for price freezes is just a way to feel good while causing misery for other people. I can't square it with a moral obligation to help people.

Grim said...

Well, if you send money to help pay higher prices, you're just going to cause an inflationary spiral in what the water costs. The people who need water aren't going to get more, they're going to be charged more (because the seller will charge what the market will bear).

Now, instead of allowing a wicked set of water-owners to profit on the backs of the survivors of a natural disaster, you're allowing the wicked to profit wildly on the backs of both the survivors and the tax payers.

My mother was right about this one. There's a thing a good person will do in this case -- maybe not give their property away for free (though possibly that, if their situation can afford it), but certainly not gouge. The positive law should support the moral, natural law.

Texan99 said...

What an odd notion you have of how prices work. High prices can't even be maintained, let alone spiral out of control, in the presence of huge supplies, no matter how wicked you believe people are. (The very idea of being motivated by money to drop everything and truck water in from hundreds of miles away! Better those bad people just stay home.) How would a wicked water supplier go about preventing competitors from rushing in with truckloads of water, lured by the promise of high prices? The disaster sufferers aren't going to overpay for water once the price goes down; they'll use the money for something else.

Grim said...

High prices can't be maintained in any case; park an aircraft carrier off the shore, or truck in water by military convoy, and you get the same effect without the negatives. These aren't just moral negatives: you're talking about filling a disaster area with people who are there to make money, but have no training in camp sanitation (unlike the Army), and who are jamming the roads that the military might want to use to move supplies.

So when the cholera starts, I suppose we'll have another boom in Immodium, as well as salt and sugar. The first disaster was natural, the second one predictable and avoidable; but there's so much profit to be made, why avoid the disaster?

Texan99 said...

If the high prices can't be maintained, then there goes your "inflationary spiral" argument. I have no objection, of course, to having the military bring in enough water that no one else needs to. In that case, of course, there also will be absolutely no need to freeze prices, because supply and demand won't get out of whack in the first place.

But in most cases in the real world, for whatever reason, the military alone doesn't solve the supply crisis, nor does FEMA or the Red Cross or anyone else operating from pure and unassailable motives not involving ultra-evil money. Then the question returns to: can we best solve the problem by butting out of the pricing, or not?

Grim said...

The inflationary spiral is real enough, just short lived. But the shortness of its life doesn't change the problem while it lasts. If you want a market solution, you need a market solution, which means you don't get gov't subsidies for the prices. That's not even in order with market principles.

You want a solution that solves the one problem without creating new ones. So you don't want a cholera outbreak. Here's another thing you don't want: if the government stands by while disaster victims (or taxpayers) are raked over the coals by profiteers, the government's legitimacy is going to be undermined. Disaster victims don't remain victims forever, and when they get better they're going to be looking for some vengeance on the people who stole their family's last wealth in order to profit off the disaster.

They'll be wholly in the right. If the government has tied its flag to the profiteer cause, its officers deserve to be shot or hanged right alongside the looters.

douglas said...

Okay, so when there's a disaster, and you freeze gas prices so everyone can afford it, you're going to have everyone try to get some whether they need it or not, 'just in case'. Soon, there is no gas left. Then someone needs to refill that ambulance, or fire truck, or the family with an ill realtive that they're trying to move, and they can't. Our 'good morals' have made no reserve for those who are really in need. High prices are sometime high for good moral reasons. More importantly, instead of a few 'authorities' deciding what the cost should be, many individuals feed information into the market by their actions, and all those are taken into account in one way or another to set future prices.

Central control, motivated by morals or not, doesn't work.

Make me think of this quote from C.S. Lewis:
“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

Your Mother reminds me of my Father- absolute and steadfast in their morals- but sometimes the system is more complex than we can account for, and our assumption that we know what we may not can cause more harm than good. Unknown knowns and all that.

Ymar Sakar said...

The Japanese solution to shortages has always been a bottom up hierarchy that replaces lack of resources with more efficient management of human resources.

As demonstrated in their various tsunami outages, the human resource problem must be managed from a bottom up hierarchy, not a top down one Westerners are so in love with.

Duty, virtue, or merely compliance/obedience can lead to this, but free will is more efficient as a motivator than fear of the Boss.

The Japanese also prefer to use economic pricing as a motivator for competition, so people are allowed to raise their prices as supplies go down, to reward the suppliers and to make the human resources better via competition and demonstration of personal prowess.

In that sense, the two systems outlined are put together. Vis a vis Katrina, where there was looting and NOPD raping and going awol in the city, there is the story of Japanese neighborhoods handing out disaster supplies to those that need it, while keeping public order. If their system was merely a top down hierarchy that commanded Obedience and Virtue, it would all collapse at the first moment someone realized it was every person for themselves.



A lot of these superficial, hyperficial, and superlative theories of All Things Universal is better tested in actual simulations. Put 30,000 humans on one plot of land and begin experimentation. See who is left alive at the end of it all. There are also existing nations like Japan or existing Democrat fiefdoms like New Orleans, where experimentation has already been done for the masses.

Texan99 said...

It's not as though we had a choice between (1) water at a reasonable price and (2) water at a temporary premium until supplies increase and prices stabilize. If that were the real choice, who wouldn't choose door number one? But what we actually have is a choice between (1) water at a temporary premium and (2) no water at all, or water only at the additional cost of waiting in a long line. The long line is itself a price premium, but one that apparently doesn't ring the same alarm bells as adding an extra quarter to the price of each bottle. But why is the extra quarter offensive, if the two-hour wait in line is not? Because everyone's got more time than money? Some do, some don't.

Also: If we can call something an "inflationary spiral" when it's extremely brief, then "inflationary spiral" stops being an alarming enough prospect to pay a high price to prevent. More like a little bitty arc of what would become a spiral if it continued long enough to be an issue: the words are scarier than the reality. Meanwhile, the long lines are real.

Grim said...

If it's a quarter or a long line, that sounds like a choice. If it's your grandmother's wedding ring or death, that sounds like something else. You're imagining a case so different from the one that seems likely to me that I don't see how we can usefully discuss it.

Texan99 said...

Now if only there were a system for letting people weigh extra costs against extra burdens on their time, in deciding how much of a premium in money or wasted time to give up in exchange for something they badly need.

Grim said...

There is such a system, and one that can properly consider communal risks like the cholera as well. It's the democratic system by which a community purveys, in advance, for disaster response -- and sets laws that regulate how people responding to the disaster must conduct themselves.

Texan99 said...

There's another one as well. We can ship in as many free bottles of water as we like, and then let each disaster victim make up his own mind whether to pay extra to a merchant or wait in line for water from FEMA/RedCross/Military suppliers. No additional cholera risk involved.