Tag Archives: economics

car dealers sabotaging electric cars

The New York Times says car dealers are actively subverting peoples’ attempts to buy electric cars, even when they really want them. One reason they cite is that electric cars need less service like oil changes, and dealerships actually make a lot more money from service than from sales. This may be a rational explanation. But part of the explanation may also be that people can get sucked into longstanding institutional cultures even when they are highly irrational. I face this quite often in my work, and I have faced it around the world – groups of people can be incredibly motivated to defend the status quo, even in the face of incontrovertible evidence that there are better ways, and even when the people in question are young, intellgient, well-educated and well-intentioned. Sometimes the facts just do not matter. I don’t have the answer to this, if you do please let me know.

Georgescu-Roegen

From Wikipedia:

Nicholas Georgescu-Roegen, born Nicolae Georgescu (4 February 1906 – 30 October 1994) was a Romanian American mathematician, statistician and economist. He is best known today for his 1971 magnum opus The Entropy Law and the Economic Process, where he argued that all natural resources are irreversibly degraded when put to use in economic activity. A paradigm founder in economics, Georgescu-Roegen’s work was seminal in establishing ecological economics as an independent academic subdiscipline in economics…

He was a protégé of the renowned economist Joseph Schumpeter. His own protégés included foundational ecological economist Herman E. Daly and Kozo Mayumi who further extended Georgescu-Roegen’s theories on entropy in the study of energy analysis…

The Entropy Law and the Economic Process, described by the Library Journal as “…a great seminal work that challenges economic analysis”, is a wide-ranging technical and philosophical exposition which promotes the case that economic activity can not be adequately described without taking into account the implications of second law of thermodynamics. It notes that the discovery of the second law in the mid nineteenth century resulted in the downfall of the mechanistic dogmas of Classical Physics. Whereas the equations of Newton‘s Laws of Motion were symmetrical with respect to time, the new law introduced the concept of irreversibility. Although the processes of living organisms appear to violate the second law, Schroedinger demonstrated in What is Life? that there is no inconsistency – organisms feed on low-entropy sources of energy to build and preserve their complex structures, and dissipate the energy in a higher entropic state. It argues that social and economic endeavours are an extension of these biological processes and are governed by the same principles.

how to think about human capital

Here is a Morningstar study on how to think about your personal human capital in investment and retirement planning decisions.

Financial assets such as stocks and bonds are only one component of an investor’s total economic worth. Other assets, such as human capital, real estate, and pensions (e.g., Social Security retirement benefits) often represent a significant portion of an investor’s total wealth. These assets, however, are frequently ignored by practitioners when building portfolios, despite the fact that they share common risks with financial assets. This paper provides evidence that industry-specific human capital, region-specific housing wealth, and pensions have statistically significant exposures to different asset classes and risk factors. Through a series of portfolio optimizations we determine that the optimal allocation for an investor’s financial assets varies materially for different compositions of total wealth. These findings suggest that narrowly focused portfolio optimization routines that ignore human capital and outside wealth are insufficient, and that a holistic definition of wealth is necessary to build truly efficient portfolios.

Richard Thaler

Here’s a Vanguard interview with Richard Thaler on what behavioral economics is all about.

Losses have about twice the emotional impact of an equivalent gain. Fear of losses (and a tendency toward short-term thinking—I’m sneaking in a third one here) can inhibit appropriate risk-taking.

For example, investing in the stock market has historically provided much higher returns than investing in bonds or savings accounts, but stock prices fluctuate more, producing a greater risk of losses. Loss aversion can prevent investors from taking advantage of the long-term opportunities in stocks.

The second bias that causes a lot of trouble is overconfidence. Most people think they are above-average investors, and as a result they trade too much and diversify too little. Overconfidence can also lead people to invest during what appears to be a bubble, thinking they will just get out faster than others. Research shows that the more individuals trade, the lower their returns. Not surprisingly, men suffer from this problem more than women.

carbon pricing

Here is Christine Laguarde on The Path to Carbon Pricing.

The transition to a cleaner future will require both government action and the right incentives for the private sector. At the center should be a strong public policy that puts a price on carbon pollution. Placing a higher price on carbon-based fuels, electricity, and industrial activities will create incentives for the use of cleaner fuels, save energy, and promote a shift to greener investments. Measures such as carbon taxes and fees, emissions-trading programs and other pricing mechanisms, and removal of inefficient subsidies can give businesses and households the certainty and predictability they need to make long-term investments in climate-smart development.

At the International Monetary Fund, the focus is on reforming its member countries’ fiscal systems in order to raise more revenue from taxes on carbon-intensive fuels and less revenue from other taxes that are detrimental to economic performance, such as taxes on labor and capital. Pricing carbon can be about smarter, more efficient tax systems, rather than higher taxes.

Carbon taxes should be applied comprehensively to emissions from fossil fuels. The price must be high enough to achieve ambitious environmental goals, in alignment with national circumstances, and it must be stable, in order to encourage businesses and households to invest in clean technologies. Administering carbon taxes is straightforward and can build on existing road fuel taxes, which are well established in most countries.

This is one of the few policies that probably almost all economists would agree on – taxing externalities. Instead of allowing businesses individuals to profit while imposing a cost or harm on others, you make them pay that cost as a tax. This has dual benefits – first, it creates an incentive to reduce the negative behavior, second it raises revenue that can replace a tax on work or income. It’s good for the economy, the environment and people.

We do have politicians from one of the two major U.S. parties talking about climate change, and we have a big international summit coming up. So there are opportunities. We should get something done, and then build on it by finding other harmful materials and behaviors we can tax, like fuels that cause air pollution, building materials that cause water pollution, packaging that is not designed to be recycled, and dangerous consumer goods like motor vehicles that kill a million people a year. This is not unprecedented – we did it with cigarettes. By the way, to get this done, we need a constitutional amendment making it crystal clear that a person is a human and a human is a person, and a corporation is not a person for the purposes of political speech.

 

Viktor Glushkov

Viktor Glushkov was a Soviet computer science who developed an idea for a cash-free, computer-controlled economic system. The theory is seductive because the idea was to improve information flows and feedback loops while reducing lag times. In other words, if you could collect perfect information and make it perfectly available, the economy could be perfectly efficient and in perfect balance. It didn’t work out, running into the crushing Soviet bureaucracy and technological limits. But in theory at least, the technology would be less of a constraint today.

Glushkov’s initial proposal included one particularly controversial provision. He envisioned that the new network would monitor all labor, production, and retail, and he proposed to eliminate paper money from the economy and to rely entirely on electronic payments. Perhaps Glushkov hoped that this idea would appeal personally to Khrushchev. The elimination of paper money evoked the Marxist ideal of money-free communist society, and it seemed to bring the Soviet society closer to the goal of building communism, promulgated by Khrushchev at the Twenty-Second Party Congress in 1961. The Academy president Keldysh, who was much more experienced in top-level bureaucratic maneuvers, advised Glushkov to drop the provision, for it would ‘only stir up controversy.’ Glushkov cut out this section from the main proposal and submitted it to the Party Central Committee under a separate cover. If ideology were to play any significant role in Soviet top-level decision-making, this was its best chance. Glushkov’s proposal to eliminate money, however, never gained support from the Party authorities.

zero waste

How could you have a zero solid waste (aka garbage) lifestyle?

Now, take a look into your trash can. If you mostly see food packaging and food scraps…not good.

There’s an easy fix to this, and it’s called a zero waste lifestyle. Today, I’ll share my tips on how to avoid this kind of garbage – and hence – reduce the amount of your trash that ends up in the landfill.

THE ZERO WASTE SHOPPING ESSENTIALS

Zero Waste shopping requires some preparation and a little investment. You’ll need:

  • Reusable grocery bag. It’s no surprise that plastic bags are enormous harm to our environment. It’s easy to make the switch to reusable bags. Just be sure to stash a few where you’ll remember to take them before shopping.
  • Cotton/Hemp Muslin Bags. These are great for produce, nuts, beans, grains, etc. You can find them on Amazon.com or DIY.
  • Glass/Stainless Steel containers. They work best for meat, seafood and poultry by keeping food fresh.

I love the idea. I have trouble seeing myself washing glass containers (how many fit in my dishwasher?), lugging them back to the store, and convincing someone to refill them. That sounds heavy for one thing, and I go to the store on foot. I tend to think my not driving to the store negates the environmental harm of a few plastic bags. Still, I like the idea. As we travel to stores less and have more stuff delivered, it could start to make sense. You have a standardized container for everything. At the same time the delivery company delivers your new containers full of stuff, it is willing to pick up your dirty used containers and take them away to be washed, sterilized, and reused. We used to all do this with glass bottles, of course, but the economics of plastic packaging seems to be more advantageous. Of course the economics work, in part, because the consumer rather than the manufacturer is paying the disposal cost, and we are all collectively paying the environmental cost. If we had the political will, we could regulate or tax these external costs and see if that tipped the system back towards reuse. Or we can wait and see if automation and the increasing popularity of home delivery tips the economics again.

the economics of extinction

Here are some economists tying themselves in mental knots on how you would do cost-benefit analysis on complete annihilation of humanity.

…estimating these benefits means that we need to determine the value of a reduction in preventing a possible future catastrophic risk. This is a thorny task. Martin Weitzman, an economist at Harvard University, argues that the expected loss to society because of catastrophic climate change is so large that it cannot be reliably estimated. A cost-benefit analysis—economists’ standard tool for assessing policies—cannot be applied here as reducing an infinite loss is infinitely profitable. Other economists, including Kenneth Arrow of Stanford University and William Nordhaus of Yale University, have examined the technical limits of Mr Weitzman’s argument. As the interpretation of infinity in economic climate models is essentially a debate about how to deal with the threat of extinction, Mr Weitzman’s argument depends heavily on a judgement about the value of life.

Economists estimate this value based on people’s personal choices: we purchase bicycle helmets, pay more for a safer car, and receive compensation for risky occupations. The observed trade-offs between safety and money tell us about society’s willingness to pay for a reduction in mortality risk. Hundreds of studies indicate that people in developed countries are collectively willing to pay a few million dollars to avoid an additional statistical death. For example, America’s Environmental Protection Agency recommends using a value of around $8m per fatality avoided. Similar values are used to evaluate vaccination programmes and prevention of traffic accidents or airborne diseases…

The value of life as a concept is a natural candidate for a tentative estimation of the benefit of reducing extinction risk. Yet the approach seems somewhat awkward in this context. The extinction risk here is completely different from the individual risk we face in our everyday lives. Human extinction is a risk we all share—and it would be an unprecedented event that can happen only once.

I’m not sure we want to turn over the keys to civilization’s future to these guys, who insist that their science must be values-free. In other words, they try to discern people’s values through their actions and statements, but try to make no ethical judgments independent of those observations. I think there is room in this world for ethical principles of right and wrong that are not economic in nature, and more of us need to be actively thinking every day about what those might be. Even though all 6 billion of us would certainly not agree on the details, we could certainly come to a consensus on the broad outlines. Couple this with better mental tools for understanding the complex nested systems we are embedded in, and it could really guide our choices as a civilization in a better direction.

more on recycling

I linked recently to a Washington Post article on how the economics of recycling have been less favorable lately. Not so fast, says Philadelphia Magazine, or at least not everywhere. While it is true that Philadelphia has gone from making money on recycling to paying for it over the last year, it is still cheaper than landfilling or incineration. This article also illustrates how complicated global dynamics affect the local economics.

China (the largest importer of American recycled materials) is no longer sustaining an insane annual GDP growth rate of 10 percent, weakening demand for raw materials; the Chinese are also getting pickier about the quality of recycled materials; the cost of petroleum has been free-falling over the past year, making new plastic much cheaper to make and recycled plastic less cost competitive. There was also the nine-month labor dispute with West Coast dock workers that prevented lots of recycled materials from reaching overseas markets — costing MRFs money.