Sunday, 14 July 2019

Why We Should Be Wary Of Carbon Tax


Being 6ft 7, I don’t have much leg room on planes. This was even more apparent on my night flight back from America in 2017, when the passenger in front of me wanted to recline his chair into a sleeping position, and I had to apologetically advise that this would not be possible as my leg room was already at full capacity. Most people would agree that having this discomfort imposed on me would be unfair to me, and that the passenger in front of me should save my discomfort, or else compensate me for it. This is what is known in economics as a ‘negative externality’ - costs imposed on somebody else that circumvents market signals without due compensation for the costs.

Pollution is another ‘negative externality’ in society - and one that many people want to see drastically reduced. To know if we should reduce pollution, we would need to know what the right amount of pollution is - and that is a complex analysis that we oversimplify at our peril. Consider a factory that emits sulfer oxides in the air. Obviously sulfer oxide emissions affect the pollution levels, but that's not the same as saying that they are bad. Technically, breathing pollutes the environment, but no one sensible suggests we should stop breathing. If a factory is turning a profit, it is creating value in society (because consumers prefer spending on the products to keeping their money), so the right question to ask is whether the pollution the factory emits has costs that outweigh the benefits of the consumer surplus the factory affords to society in total production (not to mention the jobs it creates too) or whether the benefits of the factory outweigh the cost of the pollution.

How can we tell which it is? Here's how; if the negative spillover effects of the pollution are less than the cost of preventing it, the pollution produces more gains than losses. If the negative spillover effects of the pollution are more than the cost of preventing it, the pollution probably should be penalised. The point so many people are missing is that sometimes pollution confers net gains on society (actually, my instinct is it usually does).

Returning to my night flight, here's an essential part of the story that is usually missed: it wasn’t just the case that the passenger in front of me was imposing a cost on me if he reclined, I too was imposing a cost on him by being 6ft 7 and sitting right behind him. This is what is meant by the notion that negative externalities are symmetrical. The passenger in front of me was inconvenienced by my height, just as I was inconvenienced by his desire to recline. And apart from a highly subjective recourse to Kamm’s Principle of Permissible Harm, which is the notion that one may endorse some forms of harm occurring but only if such harm is an effect or an aspect of the greater good itself, there isn’t really a sound way outside of market signals to established whose inconvenience should take precedence over the other’s. Naturally, the price system goes a long way towards solving these problems in advance - for example, by making more desirable things like seats with more leg room more expensive to match their increased demand. As my ticket had already been purchased, the way I rectified the problem was by asking if I could be moved to a seat with more leg room and no passengers in front of me - and the stewardess was happy to acquiesce, making all parties happy with the arrangement.

What I'm conveying here is the Coase theorem*, which basically says, we should never assume that the policy should be "Stop Fred from harming Bob" or "Stop Bob from harming Fred" - we need to work out whether we should allow Bob to harm Fred or Fred to harm Bob. Until we know more details, an abstract argument for preferring Bob over Fred is equally rational for preferring Fred over Bob - the devil is in the detail. Coase doesn't gainsay the value of carbon (Pigouvian) taxes per se, but he does teach us that we need to base the decision on evidence not on logic alone. Should we tax a polluter? Maybe, maybe not. Pollution causes harm to others, but so does taxation. The proper cost-benefit analysis is to consider the cost of failing to tax an emission (more pollution), against the cost of taxing an emission (the stuff we forgo because of the tax), and try to ascertain which is the bigger net cost.

To ensure a balanced enquiry, if I was steelmanning here, and trying to find the best argument for carbon taxes, this 5 point argument is about as good a case as I can make:

1) The main defining problem of climate change is that we are all part of the problem as well as part of the solution. We all rely on vehicles that clog up the road for others, pollute the air, and put the price of fuel up. We also use our central heating, wash our clothes and buy things that came from widespread transportation. Many of us even use aircraft to fly abroad, and run businesses that emit lots of carbon. The upshot is, we all contribute to greenhouse gas emissions, so what's needed is a collective effort to change things.

2) This kind of activity has indirect consequences for people who live near rainforests, people in hot countries, and it may well even have consequences for people who haven't been born yet. Even though both the problem and the solution is a shared one, it is difficult to get everyone to co-operate in shared solutions, which is where the state comes in.

3) The state imposes price increases on our transactions in the shape of carbon taxes, which incentivises us to be self-interested in being more responsible with our environmental activities. One problem I have with carbon tax is that due to lots of asymmetry of information the setting of a carbon tax rate is almost entirely arbitrary. Still, despite this, carbon tax might do some good for the following reason. People change their bad consumption behaviour to accord with differing incentives like price changes. So for example, a tax on carbon dioxide emissions of £50 or £60 a tonne would affect our consumption habits in relation to products and services associated with carbon dioxide emissions.

4) If this tax enabled the government to reduce taxes in other areas, then the carbon tax would help us change our habits and at the same time bring about selection pressure in the market for us to be more mindful of the environment. This is part of a general law of economics – when prices go up or down, people change their buying habits. If the price of red grapes goes up by 40% and green grapes stay the same, people will buy more green grapes and fewer red grapes. If the price of emitting carbon goes up, people will lower their CO2 emissions, which will place selection pressure on consumers and on eco-unfriendly businesses. This means that as carbon/pollution taxes endure, people will look for more ways to be greener, making us as humans more mindful of our environment.

5) The conclusion is that green taxes will do some good to bring about a phasing out of environmentally unfriendly activities.

Are they strong enough arguments to justify carbon taxes? My instincts tell me no - so let's explore those instincts more fully. The problem with carbon taxes in the present day is that if carbon taxes won't really do any overall good, they are probably a waste of time altogether. This may not seem obvious at first, but it should soon be fairly obvious when elucidated. In life, partial efforts are often good, particularly if the results are not impeded by others' non-involvement. Giving to charity is a case in point. If 30% of UK folk donate to Save The Children, then poor children still benefit because despite 70% not giving to that charity (some may be giving elsewhere) what they do collect still helps. Similarly if 90% of the country picks up litter then their efforts are not wasted simply because the other 10% did not. In the cases of charitable donations and litter picking, every little bit helps - and despite being simple on the surface, this is measured with rigorous economics (basically, if the Pareto efficiency or Kaldor-Hicks efficiencies are such that negative externalities are immeasurable or inconsequential to the positives then every little really does help).

But when it comes to reducing your own carbon footprint, things are different - because every little bit does not necessarily help - not in net terms. There are two reasons why this is the case: Firstly, reducing your own emissions is a solitary effort that probably has no real impact at the global level. Even if 50% of the UK's citizens made a concerted effort to reduce their carbon footprint, it would still be a drop in the ocean compared with the triune considerations of a) overall global consumption, b) the extent to which climates change outside of human involvement, and c) the comparative advancements of future generations.

And secondly, your reduced consumption will be offset by increased consumption elsewhere. As a hypothetical social experiment, suppose half the UK population were randomly drawn in a lottery and made to reduce their carbon footprint by 20%, with the other half free to carry on as normal. Here's what probably would happen. The reduction in consumption by half the people would reduce aggregate demand for ecologically unfriendly goods, which would see a drop in their price, which would increase consumption for others. What the 50% will actually be doing is helping out the other 50% in buying cheaper fossil fuels. Obviously that's too simplistic because there are global factors to consider, but they do not affect the truth of the statement that reduced consumption for some will mean increased consumption for others. If you can't get your head around it, imagine what would happen to the price of high heeled shoes if half the high-heeled shoe wearing women in the country stopped wearing them and reverted to flat shoes instead - the other half of the demographic would buy more pairs because they'd be getting them a lot cheaper.

Moreover, because politicians can only bring about the imposition of green taxes on their own citizens, not those of other countries (the EU aside), the same problem will apply at a global level - reduced consumption for some countries will mean increased consumption for those other counties that will be beneficiaries of cheaper fossil fuels. The cost incurred by those carbon-reducing countries will thus have a limited payoff in terms of overall global reduction. So it is literally the case that unless the vast majority of the world’s population are singing from the same ecological hymn sheet, environmental progress in some areas will be cancelled out by environmental regress in other areas.

In actual fact, the dialectic between 'If it makes no overall difference then small interventions will be too costly' plays out exactly this way with what’s called a 'cap and trade' policy, where a government issues annual permits that allow companies to emit the amount of carbon dioxide the cap allows. Companies are taxed if they exceed the permit’s level of emissions, and if they reduce their emissions they can trade unused permits to other companies. The rationale being that as the government lowers the number of permits each year, those permits become more expensive, incentivising companies over the years to invest in clean technology.

Alas, whoever devised this scheme isn’t very far-reaching when it comes to economics. Firstly, like every other state-fixed regulation, the government is bound to get the limit wrong, as it has no clue how much carbon businesses should emit. If their cap is too high it will do little good, and will probably even create an anchoring effect that artificially raises emissions. If the cap is too low it will destroy businesses and artificially raise energy prices to the detriment of the industry and consumers. Secondly, it can disadvantage small businesses who can’t afford to buy a permit, and stifle competition too. Thirdly, (for complex reasons we won’t elaborate on in this blog post) it is easier to calculate carbon tax based on per tonne emissions than it is calculating the optimum number of cap and trade permits.

Here's something else a lot of people get wrong about carbon tax - it is frequently assumed to be a method of reducing pollution, but that's not quite right. Even if there are conditions under which a carbon tax is not as bad as a cap and trade policy, a carbon tax is not a means of reducing emissions down to a nominal figure; it is supposed to be a tool for maximising utility. That is, carbon taxes help us incorporate negative externalities into the price system of a free market whereby polluters carry the costs of their negative externalities, but also whereby the price reaches equilibrium as the costs of pollution are measured accurately against the benefits. That way, those negative externalities are compensated for by the fact that they increase utility to a level greater than their costs. For example, a timber factory and a roadside diner on the outskirts of a city add some pollution to the environment, but they make up for those negative externalities by providing goods and services that people want.

Where they could be a benefit is when carbon taxes intervene in the price system to ensure that future costs of transactions are thought to be worth paying for present benefits. The rate of carbon tax is roughly commensurate with the future cost of pollution, incorporated into the price system to justify the benefits now – it should technically be a tax that attempts to ascertain the benefits of pollution, not the costs. Carbon taxes are far from simply being about lowering emissions, although they will likely change future behaviour as businesses innovate to be greener with improved technology.

Two other big problems with carbon taxes
The first problem is the way carbon taxes are used by politicians to make the state bigger at our expense and for their own gain. Here we can elicit a popular term coined by Bruce Yandle called Bootleggers and Baptists, which is about regulations that provide self-interested benefits for both the regulators and for those thought to be victims of the regulations. It is based on the notion that Baptists support Sunday closing hours, but so do Bootleggers, because if local bars and off-licenses are closed, Bootleggers gain too. Here's how it works. Sunday closing hours benefit both Bootleggers and Baptists, while at the same time purporting to serve the public interests - and the green regulations are of a similar nature, as well as being very short-sighted and hugely damaging. Climate change alarmists naturally support heavy green regulations - because it furthers their own agenda, and enables them to cream off crony capitalist subsidies - but so do some of the biggest polluters too because some of the regulations help shut out competition, which a crony capitalist misallocation of resources.

The second problem is that carbon tax does not really punish polluting companies very much; it tends to punish consumers, who are usually the poorest people in society. When a company is taxed - whether it is carbon tax, corporation tax, or labour tax (the minimum wage) - the cost of that tax cannot be borne by a company, because a company is made up of individuals, and only individuals can bear the cost of taxes. When companies are taxed, the cost either has to be borne by shareholders (with lower dividends), or employees (with decreased wages), or by customers (with increased prices of goods or services). Like with corporation tax and tax on labour, the cost of carbon taxes are primarily borne by customers or employees to avoid being borne by shareholders, because a company will always do its best to pass additional tax costs on to employees or consumers. If the cost of taxes ultimately falls on individuals in the form of higher prices of consumption and lower wages (or in some cases increased unemployment) then a carbon tax policy that tries to hurt corporations who pollute is simply a tax policy that harms the people who are most struggling to get by. You may still support carbon taxes on the basis that consumers are contributing to high-pollution goods and services, and that they are paying their fair share - but it’s a bad argument for saying that carbon taxes make companies greener, because what they mostly do is make poor people poorer.

The right amount of carbon tax is this and only this: it is a tax that imposes prohibitive costs on low-utility activities while still allowing for high-utility activities. The trouble is, due to the complexity and inability to see into the future with any degree of rigour, the level of utility is hard to distil, leaving us only with ambiguous probability. The probability estimate is roughly this; if activity A has significant emissions and few offsetting benefits to make it a low-utility activity then carbon taxes on it could be encouraged. If not, carbon taxes should be discouraged. If activity B has significant emission but enough offsetting benefits to make it a high-utility activity then carbon taxes on it should be discouraged. Where the future costs outweigh the present benefits we should make the activity price prohibitive. Where the present benefits outweigh future costs we should make the activity price conducive. If under a system of high or maximum utility we can't go on to produce an alternative to our carbon taxing system then we know we are doing the best and most practical things; if we can go on to produce a better, higher utility alternative, all the better.

Let me give you a simple illustration to show this: take cars. Either the future technology will or won't turn our car industry from a high emissions petrol/diesel generated industry to a low emissions electric/solar powered industry. All the evidence thus far suggests that it will (there are electric car prototypes in place, even as we speak). Give it a few decades and there'll probably be very few if any petrol or diesel driven cars. So, then, using our utility measurement above, the right kinds of car will be produced in the future if it's efficient to do so - and this will happen irrespective of whether the state influences the market or not. It's true that carbon taxes swing the incentive towards more environmentally friendly industries, but as I've shown, that doesn't mean it's a good thing. Taxes on foreign charity may well swing more donations towards the British Heart Foundation, but that doesn't mean this swing is a good thing either.

Here's an example of how not to undertake this analysis. In October 2018, many MPs wanted to ban all of the standard petrol or diesel driven cars by 2040 and allow only vanishingly low emission vehicles on the roads (presumably electric and solar vehicles). A simple understanding of the cost-benefit analysis above would show that such a ban is irresponsible and unnecessary. Here's why. If the present benefits of petrol or diesel driven cars outweigh future costs, we should carry on supporting them, and taxes imposed upon them are more harmful than good. If on the other hand future costs of petrol or diesel driven cars outweigh present benefits then taxes imposed upon them are still more good than harmful. Translated in terms of what the future will hold, what we are saying is: if future technology brings about electric or solar vehicles with greater utility than petrol or diesel vehicles then we'll see a natural switch driven by voluntary market choices, rendering the ban entirely unnecessary. But equally, if future technology brings about electric or solar vehicles with less utility than petrol or diesel ones then we won't see a natural switch driven by voluntary market choices, which means that banning such vehicles (or even heavily taxing them) will make us all much worse off. Either way, a ban is a foolish thing to impose.

Closing thought
The upshot of all this is that when the state intervenes to mitigate the extent to which humans pollute, the intervention will only be beneficial if it outweighs the costs of intervention - and my instinct is, it usually does not. With carbon tax, politicians are trying to prevent future damage by minimising present benefits. But if present and future benefits of pollution outweigh present and future costs - and it seems pretty certain that they do (by a long way) - we should carry on enjoying them, and taxes and regulations imposed upon industrial activity are more harmful than good. This is what is meant by maximising utility - net benefits outweigh net costs. Greens believe that things like carbon taxes maximise utility. Sceptics like myself believe that carbon taxes impede utility - and I have never had a reason to change my mind.  

The scientific and technological capabilities we have acquired in the past few hundred years will almost certainly make a better job of tackling externalities than carbon taxes, especially if humans are given the freedom to cooperate in problem-solving. Our science, technology and market activity are already making huge differences, and they are the progression trinity that will ultimately bring about the future changes needed. The entire nexus of the global economy is a physical system which is all the time tending towards the principle of maximum efficiency. Although carbon taxes bring in revenue for politicians short-term (for a few decades maybe), the long-term indicators are that the market left to run by itself will naturally make us greener anyway. The reason being: businesses are already looking for the most efficient means of supplying customers using as little energy as possible, because in a highly competitive market it is in their interest to do so to remain profitable. The goal to reduce energy output has already come in various ways: replacement of human energy for machines, replacement of metal-based technology for higher intensity resources or carbon-cased materials, replacement of paper for digital devices, and so forth – and these are improvements in production that naturally improve business’s cost-effectiveness.

The transition from the paper revolution to the digital one required lots of burning of fossil fuels, equivalent to energy being driven into the system from outside, but all the time that external energy is helping the global economy tend towards a path to least resistance very similar to how thermodynamics operates in the natural world. As the old saying goes, you can't make an omelette without breaking a few eggs - and the eggs we've cracked since the Industrial Revolution, while not without some externalities, have done more to improve global standards of living than anything else in human history. Carbon taxes may lead to fewer emissions, but with carbon taxes, energy prices rise, resources are misallocated, innovation is impeded (including innovation that actually helps solve climate change), and many of the world's poorest people suffer as a consequence.

My instinct is that because prices have been changed to account for the increased emissions, the only investment that is needed is investment that is more economically viable than the current prices. The imminent effect of those price changes will tell us the best course of action. If, for example, our ability to augment our solar capacity enables that venture to be price competitive against our current carbon industries then consumers will respond to it. If it doesn't, they won't (that point alone illustrates how state interference will probably impede the process). The costs (present and future) of staying with our current carbon trends have already been factored into the increased prices of our externalities. We don't need to throw much taxpayers' money at it at all - because people's preferences for economic viability will drive this, as already happens in virtually every other market process. Consequently, compared with how the market engenders continually increased efficiency, I'm pretty sure that carbon taxes probably will turn out to have had only a much more negligible effect on lower energy output and more efficient use of resources than the free market, because the market is driven by efficiency far more than politicians with political interest. If there is a race to make us greener, politicians are more like the tortoise and the market is more like the hare.
 


 
* Externalities are based on incentives, as was most famously written about by English economist Arthur Cecil Pigou with his standard textbook examples of nineteenth century trains that threw off sparks that frequently ignited the crops on neighbouring farms, and of rabbits that would frequently eat the neighbouring lettuce farmers’ goods. Quite naturally, or so Pigou (and just about everyone else) thought, the railroad owners and farmers with rabbits had to feel the effects of their actions, so recompense was owed to the farmers with the ignited crops and the diminished lettuce supplies. But things aren’t quite so straightforward, because outside of economic expertise, most negative externalities are only narrowly considered from one person’s perspective and not the other. It’s here we need to elicit the Coase theorem – which was conceived by Nobel Prize winner Ronald Coase in 1960. The idea behind the Coase theorem is that negative externalities are not usually asymmetrically one-sided, they are symmetrical. This is what Ronald Coase theorised:
 
"Where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution will be selected, regardless of how property rights are divided."
 
In other words, the Coase theorem asserts that when rights are involved, parties naturally gravitate towards the most efficient and mutually beneficial outcome, with no prior blame or discrimination being automatically assumed. This dramatically changes the situations above, because Coase was smart enough to enquire as to why the railroad owners and farmers with rabbits were the ones causing inconvenience – why not the farmers with the ignited crops and the diminished lettuce supplies? If your trains set fire to my crops, then you have imposed a cost on me, but at the same time I have imposed a cost on you by having my crops near your railroad (which may be in the optimal location for transporting commuters from A to B). Moreover, I may very well use the train myself. Your rabbits are annoying me by eating my lettuce; but equally my lettuce is annoying you because it is causing your rabbits to eat them, which incurs the cost you are forced to pay me as compensation. Your nearby power plant burns fossil fuels and pollutes the air I breathe, but you shouldn’t bear all the pollution costs because you supply electricity to many of the places whose products I buy.
 
Remember, Coase wasn't looking to play the blame game; he was looking for an efficient set of inputs and outputs, regardless of how property rights are divided. In the case of the railroad and the fires, he was looking for a solution that benefits both, not who should reimburse who. If the farmer plants his crops at an optimal distance from the railtrack, then both may enjoy the most efficient outcome. The town has crops and train journeys, and no one is paying financial restitution or looking for ways to sue. Similarly the rabbit farmer can keep his rabbits in cages or secure ring-fences, the lettuce farmer could grow other things the rabbits won’t eat, or they could split the costs and build an impenetrable fence between their farms. The railroad/crops example showed a new way of looking at the situation; yes, if there were no railroad tracks there would be no crop fires, but equally if there were no crops that were so close to the tracks there would be no crop fires either.
 
 

 
 

 

Thursday, 4 July 2019

Me & Climate Change: I Guess Things Are About To Get Hot!!


Although I’ve made the occasional foray into climate change commentary over the past few years, with about 30 blog posts, I’ve been too preoccupied with all my other projects to give it the time it warrants. And for a while, it was never that pressing to me: a few years ago all you heard from environmentalists were marginal pseudoscientific utterings from the likes of Greenpeace, a few wacky Green party politicians, and the odd crass article from intellectual lightweights like Naomi Klein and George Monbiot. 

But in recent months there has been an explosion of green halfwittery, with militant, Gaia-venerating eco-warriors causing mass-disruption to public life, making ridiculous arguments for their cause, and propagating the most asinine beliefs I’ve heard in a long time. They are surely the most confused political group on the planet right now - and let's be honest, there are plenty of challengers to the claim of that distinction.  

Alas, their proliferation in numbers has really rather forced me to take more of an interest in them - they’ve kicked this particular gentle hornet’s nest - and forced me out to see what all the fuss is about. My inclination to take on this fight for climate change truth is (perhaps surprisingly) less about the public disruption these extremists cause - it’s actually more to do with the fact that the political establishment has been taken in by this nonsense to such an extent that climate change propaganda has become normalised in an intellectually anodyne culture, where politicians want to use global warming panic to increase taxes and to make the state bigger. I’m not especially alarmed by wacky climate change alarmists wanting to bring down capitalism - the world is full of people with crazy beliefs. But I am alarmed by these people when they freshen up, put on a suit, get elected and wield political power.

Here's something horrifying. Last night I read the transcripts of this week’s House of Lords debate about the proposal for Net Zero carbon by 2050 - which millions of the electorate seem to blindly support without the first thought of its consequences. What I read was truly shocking - so shocking, in fact, that it's a good contender for the dumbest policy in recent memory. Here it is. Despite the fact that Britain is responsible for just 1% of global emissions, many of our politicians are embracing a ‘Net Zero’ emissions target by 2050, even though estimates are that it will cost between 1-2% of GDP per annum. 1-2% of GDP per annum is a LOT of money!!! 

Spending 1-2% of GDP per annum on climate change for the next 30 years, adjusted for increasing GDP total size over the years, and including the £15 billion a year that we already spend on subsidies to renewable energy (adjusted for inflation) is going to cost the UK taxpayers around £1 trillion. For us low-key spenders, for whom things like a house is the most expensive thing we’ll ever buy, it’s not easy to picture just how much money £1 trillion is. To put the spending pledge into perspective - it is like agreeing to spend just over £91 million every day on climate change for the next 30 years!

To think about the inanity of this policy - I’ll break it down into steps:

1) 99% of the world’s global emissions are created outside of the UK.

2) The vast majority of those countries are not going to sign up for any ‘Net Zero’ program.

3) This means that even if the Net Zero program is a good idea (it isn’t, see below) it will have a very negligible effect on reducing the world’s carbon emissions - so much so that it will have almost no positive effects on the planet as a whole (for complex reasons, see below).

4) For a policy that will have almost no positive effects, the politicians want to force the British people to pay a staggering £91 million every day for the next 30 years (£1 trillion) and get almost nothing in return - money that could be spent on global development, on health, on social care, on tackling crime, or on the numerous other important services where it would actually do some good.

5) So, in conclusion, we are faced with politicians forcing us to cough up £91 million every day for the next 30 years to pay for a project to which we are only marginally connected, to which the majority of other countries would refuse to be signatories, and that would do almost no good in the world anyway.

Sound like a terrible idea? Yes, but it gets worse. Even if we generously started with the assumption that a ‘Net Zero’ emissions target by 2050 is a good thing for the world’s countries to be trying to achieve - the above points show clear-cut reasons why it’s a terrible idea for the UK to be committing to it, knowing it will do very little good, knowing most polluters won't join us, and knowing how many more pressing things there are on which to spend £1 trillion.

I know what some of you are thinking - ah, but this is just the start: if more countries get on board with this then a lot of good will come from the ‘Net Zero’ target. To which I’d say, firstly, that is entirely the wrong way to look at it; secondly, you can’t even begin to make such a plan without a proper cost-benefit analysis that includes both the benefits of carbon and the seen and unseen costs of climate change expenditure; thirdly, even if you provide a valid cost-benefit analysis, you need a detailed proposal of why Net Zero is the right amount of carbon emissions (as opposed to some other number) and why 2050 is the right date (as opposed to some other date).

Not only are none of these forthcoming, or ever factored in to the equation, there is never even a pretence that these considerations matter. Most people act like empty vessels into which any old political propaganda can be poured - and the politicians treat the mass population as though they really are that credulous. Politicians give the electorate the politics they deserve. But it just won’t do - and this kind of dangerous madness needs to be exposed, because it will cause more harm than you can possibly imagine.

On top of the miserable failure to acknowledge the necessary cost-benefit analysis that factors in ALL sides (that is, costs and benefits of carbon, and costs and benefits of anti-carbon green policies), there are three other principal mistakes here. One is misunderstanding how humans operate and the underlying engine that bootstraps those operations; two is a failure to understand how humans have done this well so far and how our past industrial limitations meant we actually couldn’t have done things very much better than we have; and the third is a quite shocking underestimation of how all those benefits stack up in comparison to the myopic, fantastical attempts to meddle with them.

The benefits carbon has bestowed on the world need little introduction - just about every single good thing that humans have done to improve the species' material well-being and standard of living has some connection (either proximal or distal) to carbon-based technology. Carbon benefits greatly outweigh carbon costs - by a factor of several orders of magnitude - of that there is no reasonable doubt. If you doubt it, there's too much you currently don't understand. Here's a picture that's worth about a thousand words:

But it goes deeper than that - because the benefits of carbon, and all harnessing of industrial and technological innovation, are nested in an even more important quality that we should mess with at our peril. Here's how it is. For nature to provide the highest efficiency possible and thus maximise growth and innovation (and poverty reduction, increased standards of living, etc), it requires the optimal level of freedom, because freedom means more ideas, more competition, more cooperation, and more problem-solving.

People get this in every other smaller way - they just fail to get it in the bigger ways. If you restrict the freedom of a car engine to run as it is designed to run, an ant colony, a bicycle chain, legs in a pair of trousers, or just about anything that has moving, variable constituents, the system or organism performs less effectively. Yet when it comes to things like human ingenuity, capital, work, and incentives to innovate, people suddenly become blind to the same principles they endorsed earlier - they suddenly become averse to optimal freedom, not just by wantonly calling for further suppressions of liberty, but by advocating policies and systems that restrict their freedoms in ways to which they are blind.

Now don't misunderstand me - no one here is endorsing an unfettered, chaotic freedom with zero rules or responsibilities (obviously!!). But the more centralised and uncompetitive something becomes, the less efficient and more wasteful it usually becomes - not just because its fitness suffers (although that's true too) but more so because of the opportunity costs in relation to less competition, reduced sharing of ideas, and fewer instances of innovation.

Everywhere you look you can see this is true. A service that is run by a state monopoly power lacks the fitness explosions seen in a highly competitive industry. A manager who only cares about her own opinion, and takes no feedback or input from her team, will have a less effective team. Government debt, deficits, bonds, fractional reserve money and centralised top-down banking are all methods of pooling the administration of capital, where resource-allocation is narrowed, and the freedom of the agents is severely restricted to a much smaller pool.

This negatively affects all of us - it is the biggest sleight of hand trick ever played on populations in the modern era - it is economic Stockholm syndrome. Here's a very obvious example: a quick Google search tells me that the government spends £39 billion a year on debt interest alone. Who do you think is going to pay for that? It is future generations. Locking them in to a future promise like that is tantamount to putting them in a pair of trousers that is 3 sizes too small for them - it severely restricts their freedom (I’ve got blog posts about some of these spillover effects in my Banking section).

One of the main benefits of optimal freedom is that the underlying engine of the price system is the most well-oiled it can be - because it is freedom that most effectively allocates resources and sets their prices in relation to supply and demand curves. Coasian bargaining also becomes most effective with optimal freedom, so even when there are externalities we claim not to like, as long as the transaction costs are sufficiently low, there will generally be a positive (although never perfect) amble across the Pareto frontier (that is to say, resources are allocated whereby we cannot make any agent better off without making at least one agent criterion worse off).

That is why I am deeply sceptical about climate change interventionist politics - and by deeply sceptical I mean I think it is one of the most confused, reactionary scams humans have ever invented. They just do not understand these above topics at all - and as a consequence, they get all the basics backwards. If they really do want to advance good things for the environment, and everyone in it, they should be embracing the above mechanisms of greater freedom to share ideas, to cooperate, and to maximise growth and innovation, because that is what really will do the trick better than anything else.

Even the well-intentioned folk who just want to live a bit less wastefully have been swept up in a vortex of hysteria, to the point that anything to do with the environment is all-but indistinguishable from political agenda and extremist dogma. That is to say, even if there are some grains of truth in the economics of environmentalism (which there are), they have made such a mess of things, annoyed so many people, and been so unreasonable in their dispensations that they are now completely devoid of credibility and utterly divested of integrity.

It isn’t just the case that freedom to exchange ideas leads to the greatest progress and increased standards of living - there is a converse effect that bad ideas, foolish political agendas and widespread misinformation makes progress harder and increased standards of living more protracted. Here’s why. As populations increase and become more widely interconnected, and as thoughts and ideas become less centralised in a decentralising nexus, the rate of idea-sharing increases, the power of communication and knowledge advances, and progress looks more like an exponential curve.

But when bad ideas pollute the epistemological landscape, and sub-standard reasoning muddies the waters, diversity of thinking is narrowed and propagated, and there is a clustering effect that creates choke points within the landscape of ideas and knowledge. Bad ideas don't just pollute the inner mind; they pollute the landscape for outer minds too, as concentrations of tribal thinking lead the in-group members astray, but also gravitationally attract outsiders who begin with ambivalence, but are looking for somewhere to belong, however foolish and damaging it may be.

The upshot of all this is that climate change alarmism isn't a fight I ever thought would be prominent enough to warrant very much mainstream participation. But it seems I'm going to have to dust down my pistols, buckle up my holster, and get on my horse to join the good fight - because this most reactionary, dangerous cult is here to stay for a while yet.

Sunday, 16 June 2019

Corbyn & Blair Have Both Got It Wrong


This week Jeremy Corbyn and Tony Blair have been having a spat about which of them cares the most about inequality in accordance with Labour party values. They may not be confused at the same level (it's difficult for anyone to be more confused than Jeremy Corbyn about anything) - but watching their squabble unfold is a bit like watching a tarot card reader and an astrologer arguing about the best way to teach astronomy. Both Corbyn and Blair are so far from the truth that their litany of economic nonsense seamlessly blends together to a messy ideology that bears little resemblance to reality.

Here's the reality: in every way that's important to what humans desire in an economic system, the rich have got richer, but the poor have done best of all. As Matt Ridley reminds us in The Rational Optimist, the poor in the developing world grew their consumption twice as fast as the world as a whole between 1980 and 2000. Poverty has been reduced in the world more in the past 50 years than in the previous 500.

What the Blairites and Corbynites need to understand most pressingly about inequality is that it is only by the rich getting richer that the poor get richer (the past few thousand years ought to be demonstrable evidence of this). An in-country increase in inequality is one of the natural and wholly expected consequences of a growing economy - it almost always entails that income inequality widens, because the way a nation spends its money on voluntary transactions is not in a way that transfers income equally to all kinds of people - it is, by and large, a very naturally unequal and democratic merit-based distribution.

To see why, think of your monthly expenditure, once you've paid your tax. The chances are a great proportion of your monthly needs and enjoyment is going to go to businesses already more wealthy than you: a food bill to Sainsbury's, a television subscription bill to SKY TV, a music CD to Amazon (and the artist), a takeaway bill to KFC, a fuel bill to Shell, and so on. All of those voluntary transactions make people already wealthier than you even wealthier, because those goods and services are also being consumed by many others too. The providers are good at providing what people want and need, and because of this, the income distribution among the population is skewed in favour of a small percent of the population. There is no global conspiracy - just natural concentrations of earned income from market choices (for more on this, see this blog post). 

Further, it is because wealth is not a fixed pie that it should be easily seen how the rich get rich and the poor do as well. It is because of all the wealth creation that even the poorest people in the UK and USA are living lives that their forbears could only dream about. When Harold Macmillan uttered his famous phrase that the folk of 1957 had 'never had it so good' - he was speaking to people who were earning less then on full time wages than the average state welfare beneficiary now - particularly when you factor in other ways to be better off, like better standards of electricity, running water, bathrooms, kitchens, cars, entertainment, widespread communication, health care, hand held devices, and unprecedented access to knowledge that even the richest people in the world a few decades ago would have marvelled at.  

There are also other perfectly natural things that concentre income in richer circles purely due to people's freedoms in making choices - such as assortative mating, freer movement of people, and increased competition - all of these liberalising phenomena increase in-nation inequality. But there's more, because what this also does at the same time is reduce global inequality (as I explain more fully in this blog). Countries expand their economies, and in doing so global inequality falls. If you begin with the base error of unjust inequality, as Corbyn and Blair do, your whole narrative is set up to be wrong.

I'll leave you with this nice quote from Matt Ridley, that the Malthusian alarmists would also do well to heed:

"Since 1800, the population of the world has multiplied six times, yet average life expectancy has more than doubled and real income has risen more than nine times. Taking a shorter perspective, in 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. She was less likely to die as a result of war, murder, childbirth, accidents, tornadoes, flooding, famine, whooping cough, tuberculosis, malaria, diphtheria, typhus, typhoid, measles, smallpox, curvy or polio. She was less likely, at any given age, to get cancer, heart disease or stroke. She was more likely to be literate and to have finished school. She was more likely to own a telephone, a flush toilet, a refrigerator and a bicycle. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is by any standard, an astonishing human accomplishment."
Matt Ridley - The Rational Optimist

Monday, 10 June 2019

Placard Theory & How To Know When A Group Is Wrong


I have a theory about people who take to the streets to hold up placards. My theory is, it's not quite an ineluctable law of human behaviour, but if you're the sort of person who would write a statement on a placard and take to the streets with it to join a mass demonstration, there is a very high probability that you're quite a myopic person that isn't very good a seeing situations with a very balanced or broad perspective. I'm not 100% sure the theory is right - but it looks to be highly probable - like the chances of throwing six dice and it being highly probable that you'll throw a number between 10 and 30.

If you're the sort of person who can intelligently think things through, you've probably already thought up something better than holding up a placard, you're probably intelligent enough to realise that standing in the street holding up a placard is not going to do much good, and you've probably already gathered that you are almost certainly going to be surrounded by a mob of incompetence. Hence, the sort of person who would hold up a placard expressing outrage is likely to be someone who has been presumptuous in arriving at a limited and short-sighted conclusion, and sees the world through a very limited perspective.

Here is one of my favourite examples of this:
 
 


Given that most decisions, outcomes and ideas have many broad and complex tenets to their execution - this, I think, helps us draw a more generalised probability estimate that if you're the sort of person who would stand on the streets exhibiting *any* placard, you are likely to be the sort of person who is afflicted with the Dunning-Kruger effect: that is, you are so inept that your ineptness means you can't see just how inept you are.
 
Occasionally though, someone comes along and bucks the trend, like this guy:
 
 


Lastly, I have another observation too that's worth adding to this. A general rule of thumb I've noticed is that when ideological groups get together, a good way to predict whether they are wrong is by observing their method of operation. Groups that politicise their agenda, and get their arguments woefully wrong - young earth creationists, socialists, communists and climate change alarmists, to give four prime examples - don't really have any ideas of their own; they exist only like parasites that feed off the facts of things to which they are opposed.
 
Young earth creationists don't have a single factual claim of why anyone should believe the earth is only 6,000 years old - all they try to do is construct bogus arguments against established science in a way that sounds convincing to the pliable individuals too unapprised to see through the nonsense, but that everyone else knows to be ludicrous. Climate change alarmists spend their lives declaring war on everything linked to progress, but they have not the faintest suggestion of an alternative. Socialists walk around condemning capitalism, while enjoying everything that capitalism has enabled them to enjoy. They lament the rich while not realising that they are among the richest people who have ever lived. These people are the court jesters of our age.
 
So, whenever you encounter any group who are standing up for a cause that involves interpreting facts about the world - try to determine whether they claim to have any facts of their own - because if their whole agenda is based on a leech-like mentality that only sucks blood from their opponents, and has no factual blood of its own, then you can be pretty sure that they are wrong, and to be given a wide berth. 

 

 

 

 

 

Monday, 3 June 2019

We Have Progressive Tax, Why Not Progressive Sex & Progressive Exercise?


I'm going to offer a proposition that will startle you at first, but one which you'll probably then go on to see as intriguing. Imagine what the UK would be like if the government treated sex and exercise the same way it treats income tax.

In the UK we have a progressive tax system, which is a tax system whereby the tax rate of a working person increases as the taxable base amount (their salary) increases. So someone earning £100,000 per year will not just pay more than the average earner in absolute tax due to higher earning, relatively they will pay a bigger proportion of their income too.

I've argued before on this Blog that although we shouldn't assume the rich should automatically pay more tax, it is good for society (and that includes good for rich people) that they do, because rich households have a lot more of their income that is not spent on basic necessities, and thus have more to spare in a way that the poor do not.  

But if we consider what progressive taxation is - the rich doing favours for the poor by having more privileges with which to help - we get into knottier territories, because we can begin to ask why we don't go beyond financial favours into areas like sex and exercise. For the purposes of fun, bear with me for a moment, and imagine this; realising that money isn't the only way that the better off can help the worse off, the government decides to introduce two other kinds of 'progressive' measures to accompany progressive tax - progressive sex and progressive exercise.

The government's reasoning is that if it is intrinsically the right thing to do for those better off to give a helping hand through taxation to those born without the ability or background or circumstances (or all three) to climb up the ladder, they can make additional laws to help out further in areas of sex and exercise too.

The progressive sex law makes those really good looking people give a helping hand through sexual favours to those born without the looks or the confidence to acquire a sexual partner. And the progressive exercise law makes people with more energy go and do the shopping or mow the lawn for those unfit people in society.

You may say that such proposals would disincentivise unattractive people from sprucing up their appearance and trying to meet partners on merit, and that it would disincentivise people unfit people to get off their bums, get fit and mow their own lawn (and you'd be right), but that equally well applies to financial helping hands too - as welfare inspires many to opt for not-working and instead live a more modest life financially.



At this point in the article your mind is probably racing with thoughts as to why progressive sex based on looks and progressive exercise based on fitness are overwhelmingly less desirable than progressive tax based on income. You've probably already thought, as one example, that mandatory sexual favours would be detrimental to marriages and relationships in a way that mandatory income tax is not. You've also probably already thought that being legally compelled to do things with our bodies is an entirely different intrusion on our lives than being legally compelled to do things with the money we earn.
 
So feel free to relax a bit - although I was only having a bit of fun with the idea of progressive sex and progressive exercise, there is, in fact, a method for ascertaining your differing views on these things. If you consider why it is you support compulsory helping hands in the form of money but not all the other things, you'll find there is a good short-cutting maxim that makes things clearer - it's the philosopher John Rawls' famous veil of ignorance theory of justice, in which ideal moral and ethical systems are implemented through conditions under which "No one knows his place in society, his class position or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like."
 
So if we pretend that prior to being born we could all partake in a committee meeting to decide upon the fairest and most just society, not knowing where we'd be in that society in terms of environment, background, and natural talents, we'd (try to) pick the most objectively good one, not the most subjectively good.
 
In other words, if we had the luxury of voting on a system before we were born, and we didn't know how well off we would be in the gene pool of talent and in the cultural pool of good and bad backgrounds (where good means high earning potential), we'd all vote for a system to be in place whereby those at the bottom are given a helping hand or a leg up by those at the top.
 
But although we'd probably vote for this in the context of income tax, we wouldn't vote for a system where good looking single people subsidise ugly single people through sexual favours - not least because it would provide an unhelpful incentive for good looking people to be in relationships to avoid this obligation (and as we all know, relationships that are pressure-based and not freely chosen because of love and compatibility are not good.

Perhaps if we'd all been fortunate enough to have a Rawlsian pre-birth committee to decide on the distribution of funds, talents and privileges we'd be able to reach a fair and equitable system. But one thing we'd have to bring to bear is the fact that for every benefit there is likely going to be a cost.

If you give some of my earnings to broke Jack and skint Stephen then their benefit is my cost; whereas if you force sexy Sadie to give sexual favours to ugly Pete and short-on-confidence Dave then you impose a nasty cost on society by creating an exchange of activities above the threshold of what the pre-birth committee would choose. That I think is the best argument we have for picking some kinds of helping hands and not others - some stay within the realms of social-desirability and some don't.

The upshot is that enforced sexual favours are abhorrent, but enforced redistribution of wealth would also be abhorrent were it not for the fact that society benefits overall from it. Don't get me wrong, there are lots of problems with the welfare system - not least the welfare trap and perverse incentives - but there are enough benefits to justify keeping it (even if people don't like it as much as they say they do). Although enforced redistribution of wealth is undesirable in the context of a mugging, burglary or bank robbery, it is desirable in some cases when it is formalised by governmental societal practices (even though politicians do often resemble the mafia.), especially as a safety net makes bold innovation less of a risk, and short-term unemployment welfare benefits gives us time to find a job that best matches our skills and talents to the new position.
 
Leaving aside the bit of fun we had with the progressive sex and progressive exercise propositions, I said a moment ago that if we pretend that prior to being born we could all partake in a committee meeting to decide upon the fairest and most just society, we'd try our hardest to pick the most objectively good one, not the most subjectively good. To see why, suppose just ten people are in this committee meeting.

Translating environment, background, and natural talents into earnings, you learn that one of you is going to take home £750,000 per year, and the other nine are going to take home under £15,000 per year, with two of that nine taking home absolutely nothing (for argument's sake, due to disability and a troubled background). The ten of you get to vote on two systems: system 1 leaves things as they are, and system 2 incorporates redistributive policies that taxes a chunk of the £750,000 and apportions it down the shallow end of the earnings pool. All ten of you are almost certain to vote for system 2, because while you have a 1 in 10 chance of being the high earner, you have a 9 in 10 chance of struggling by on under £15,000 per year, so no individual would be wise to vote for system 1.

Extend that to everyone in society, and regarding your own position you'll see why from behind a veil of ignorance it's rational to desire an objectively fair and just system to ensure those in the deep end of the earning pool help those in the shallow end. Given that if it were possible we would all sign up to be on that committee, there is a reasonable case for arguing that in the absence of such an opportunity the next best alternative is democratically appointing a government that enforces these systems.

Obviously everyone disagrees on what that optimal governmental system looks like, but apart from very extreme libertarians, most of us agree that the system of political representatives is pretty much the next best thing to a Rawls-esque veil of ignorance committee. Obviously a system built entirely on beneficence would be susceptible to misuse and disincentive for the worse off to help themselves up the ladder, but some kind of government controlled system could work well, even if it isn't this one.

What we have at present is a central government that tries (sometimes well, often poorly) to put a simulation of this in place on our behalf by redistributing money gathered from taxation. In a perfect world everyone who has plenty would help everyone who has little - at least to the extent of offering a helping hand related to hardships people suffer that are not of their own making. 

Perhaps the most coherent argument against excessive government intervention in the market economy is Hayek’s ‘local knowledge’ problem - which basically states that no state agent can possibly have sufficient knowledge of a complex aggregation of individual decisions in society, so there are bound to be negative consequences from interfering from on high. Markets are bottom-up, not top-down, and what’s called ‘spontaneous order’ occurs when individuals make their own decisions through local incentives, benefitting the whole as they do so. Politicians do not have the necessary information to make decisions better than the individual agents in the market, so they are bound to do a less good job than leaving it the agents in question. There are few better pieces of wisdom in economics than that one, and we ignore it at our peril.

 
 








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