Monday, September 28, 2009

More on Economics as a Study, then some Ethics

© 2009 Joshua Stark

Paul Krugman has a good post today breaking down the real costs and benefits of some kind of CO2 emissions price. Unfortunately, his post gives two good reasons why economics is labeled the "dismal science."
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First, he immediately flies off into econo-babble-speak, which is a very logical place for him to be, Nobel winning economist that he is, and is also a logical language in and of itself. However, outside of the nerd-camp, it becomes nearly meaningless. I have a few reasons as to why, and I'll give you my kindest one:
1) Technical studies require special definitions;
2) Economics is a technical study of mundane human behavior;
3) Therefore, economics uses mundane words with specialized meanings, and also makes up words to describe things that are so common or mundane to humanity that we hadn't named them.

I have other, more conspiracy-minded ideas, too, but I'll leave those for another post.

Here I've decided to clarify Prof. Krugman's description in good standard English, as much as I can - which is funny, because I have to start off by giving a nerdy name to a very mundane concept: When somebody sells something to somebody else, sometimes things happen that affect people outside of this transaction. For example, when you drive to the grocery store, your car pollutes a tiny bit. That tiny bit may aggravate somebody's asthma, somebody not even at the store. That external thing there is called an 'externality'. There are good ones and bad ones.

Now that externalities are understood, here's Krugman's post, in easy speak and without the comments about other people (which is probably the only reason why Krugman gets the NY Times and I have to settle for a poorly edited "letter of the week" in a local alternative weekly... yeah, right):

Carbon emissions cause negative externalities. We can put a price on them to make people polluting them realize the true cost of that pollution. We can do this by taxing carbon emissions, or by creating a market for trading carbon emissions while limiting the amount of total carbon allowed. When we do this, the cost of these things will go up, and so will the benefits of not polluting. The true cost or benefit of putting a price on pollution, then, is benefit-cost.

Thank you.

Okay, now that this is clarified, I want to point out the ethical causes and implications of pricing externalities. The ethical statement being made here is that people should pay for the true costs of their economic activities. If you believe that (I do), then you should consider the best ways to accomplish that goal. The second ethical consideration is over who, exactly, should get the money from the new, true price: Government, producers, or consumers. I'll leave that for another post, too.

I don't mean to belittle Prof. Krugman's post, and if you love Harberger Triangles and debates between the freshwater and saltwater schools, or if you even just want to get a basic understanding of economics from within, he's a good writer. I just think that some reasonable people get left out of much of economics talk, and that hurts economics as a topic.

10 comments:

Phillip said...

Good post, Josh, and while I'm definitely no economist, you made it make sense... although "externalities" sounds an awful lot like "unintended consequences". Regardless of the semantics...

The only problem I have with the model here (placing a dollar value on emissions) is that the folks who can afford that dollar value will continue to do what they've been doing. It's just an added cost of doing business, but they will absorb that simply by passing it on to the consumers... you and me. So heavy industry, transportation, and other gross polluters won't likely change their practices in any appreciable way.

I do agree, however, that such a program might provide incentive for the "casual polluter" to drive a little less, and to reduce energy consumption. But we've already seen that people will pay for convenience, and environment be damned...

I know. More problems and no solutions... I'm not being much help.

Josh said...

Phillip, you make good points.

"Externalities" are more like "consequences beyond the economic transaction, but as a result of it". Some of them are, indeed, unintended, but some are anticipated. For example, cities often give a tax break to big companies as an incentive, because the jobs will have many positive externalities, like increases in restaurant visits, local sales taxes, and the like. These are consequences beyond what the company makes (externalities), but they aren't unintended, at least, not for the city.

As for the dollar value on pollution, I know that is what seems to happen, but people do change their consumption when prices go up, even for things like gasoline. In fact, two things happen when you make people pay the true cost of their transactions (or raise the price for anything):
1) People shift their consumption to things that are cheaper;
2) Companies have to eat some of the additional cost (with very few exceptions).

With gasoline, the jump in prices a couple of years ago almost immediately resulted in a shift to less-gas-intensive transportation, so much so that SUV-heavy companies like GM lost their shirts.

Also, if gross polluters have to pass on their true costs, then less-polluting options become more viable, which is absolutely necessary for these industries to reach economies of scale that will bring down their prices and provide more options.

Donald "Bud" Stark said...

Josh, you have clarified some things for me. For instance, I never knew they even put another label on, what Philip calls, "unintended consequences." Now I know. But I still don't know, and see no hope of ever knowing what trading carbon emissions entails. I won't describe the picture this calls up in my mind, because I am your father and I wouldn't want to embarrass you. When I start talking economics this confusion always arises. It's like walking along with a friend; everything going great, then someone offers me a stick of gum.

Josh said...

Dad, it's exactly as you picture it. I'm kidding.

Basically, carbon trading is trading the privilege to emit carbon. Each unit will represent, say, one ton of CO2. If you buy 100 units, then your company can emit 100 tons of CO2. If you emit less, then you sell the remaining units to a company that needs them.

Phillip said...

True enough, Josh. Again, I don't pretend to have a very sophisticated understanding of economics (although I got a Jeopardy question about Adam Smith once). So know that I'm not arguing with you here so much as bouncing some of my own less educated thoughts against your knowledge. This is how I learn.

What I do know is that it's a lot more complex than my simple analysis allows for, and I totally agree that if the "true costs" do come down to us consumers, consumption habits will change.

The gas prices thing is a perfect example, although I'd argue that it took an extreme situation to significantly impact consumer habits. It was also something of a "perfect storm" situation, because even as the gas prices went so high, both the economy and personal finances were hitting a new low (along with consumer confidence). Remember, folks were still buying SUVs when gas prices were tapping on the $3/gallon mark. Folks had spending money, and they were spending it.

The impact of the changed consumer habits also nearly finished off an already crippled economy... to the point where more artificial adjustments were made to bring those fuel prices back down.

The near disaster was (and still is) used to bolster arguments for further environmental destruction... offshore drilling, opening up ANWR, etc. Fortunately, as you pointed out, it also made more people recognize the need for alternative solutions and more efficient as well... so there may be hope of a positive outcome.

I'm not particularly optimistic that people will ever "get it". History just doesn't seem to bode well for the future... we're really good at robbing Peter to pay Paul, and no one ever thinks to plan for the day when Peter is gonna come up dry.

Anyway, thanks for the conversation. I know I'm in over my head on this one, but I'm enjoying the discussion.

Donald "Bud" Stark said...

Josh, your carbon trading comment clarified everything. I got it!
God speed.

Albert A Rasch said...

Josh,

I just love it that your Dad visits with you here!

Great points you have made, and good examples too.

I'm going to link to your post here.

Albert

Albert A Rasch said...

Josh,

hit the edit button on your post, then open the post option tab at the bottom. Click on allow backlinks. That should let me link to your post easily.

you may have to go to Settings, click on the comments tab, and show backlinks, and also "new posts have backlinks"

Mkaes it a whole lot easier to link.

Albert

Josh said...

Thanks, Albert. I checked my settings, and it was already set for allowing backlinks.

Let me know if there are any problems.

Josh said...

Phillip, I just realized that my comment to your comment (on my own blog!) never got posted...

I just wanted to point out that my points on consumption and gas prices were in reference to 2006, not 2008. There are some good sites showing gas prices and the short-term effects on consumer choices, esp. in regards to SUV sales in 2005-2006. For example, here's an article from the Chicago Tribune in October of 2005:

http://www.encyclopedia.com/doc/1G1-137058620.html

I've found that trying to parse out individual trends in the train-wreck that was 2008 is difficult to do, esp. in that folks point out the multitude of other things going on. Now, that can be said, more or less, for any time period, but during a time of greater prosperity and consumer confidence, to see the drops in consumption of SUV's to such an extent is pretty telling.