Author: davidajepson

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Boiling Frogs

Anyone who has read even a small number of business books over the past twenty years will have come across the story of the boiled frog. Allegedly if you throw a frog into a pan of boiling water it will leap out, however if you put it in a pan of cold water and heat it slowly it will not notice until it is too late and it is boiled to death. [I am not sure if any actual frogs were harmed in the discovery of this ‘fact’.]  The point of the story is that businesses need to be sensitive to small changes in their operating environment and respond to them early to prevent their extinction.

Sadly, it appears that the failure to take seriously initially small  changes in the environment that can lead to the downfall of companies (and frogs) can also apply to the entire human race. The Intergovernmental Panel on Climate Change (IPCC) was established in 1989. Ever since then broad awareness of the issue of climate change, its links to greenhouse gasses and their relationship to the activities of mankind has been growing. However for such a potentially existential threat the issue has rarely had any strong sense of urgency except amongst a relatively few scientists and activists. This is partly because there are powerful vested interests which depend on the continued emission of CO2. They have challenged the science at every step and monitor every utterance of members of the scientific community leaping on any failures to adhere to strict scientific rigour.

This has had an impact on how the findings of the IPCC are reported. If you read their reports, say, for example, the recent report “Global Warming of 1.5°C” which looks at the impact this would have to life on earth you are immediately struck by the  qualified nature of all of the comments. For example every key finding “is reported using the IPCC calibrated language” which has 7 levels of certainty, from “virtually certain” which has a 99% to 100% probability through to “exceptionally unlikely” with a 0 to 1% probability. Whilst I am sure this conforms with the best standards of scientific presentation it gets in the way of the communication of the startling nature of the findings.

As you read the document the very qualified nature of the language undermines the urgency of its message. You have to dig through all of the qualifications and probability-spreads to get to what is an incredibly scary message. Once you get to it a variety of psychological responses are apt to kick in to reassure you that the end is not nigh. Increasingly climate science activists are researching ways to make their message clearer looking at what the psychological barriers are as well as the plain disinformation of the flat earth climate change deniers.

For years scientists engaged in the multidisciplinary research into the causes and consequences of climate change have been frustrated by the lack of political engagement in the need for urgent and effective action. The Conferences of the Parties (COP’s) are annual United Nations Conferences to monitor progress on climate change. The Conferences, and indeed all of the work within the United Nations Framework Convention on Climate Change seem to be exercises in horse trading and seeking agreement at the level of the lowest common denominator. What that means is that the targets for reducing greenhouse gas emissions are contained within “Nationally Determined Contributions” which unfortunately do not add up to what is needed to avoid 2°C increase in global temperature over pre industrial levels much less 1.5°C.

In 2017 the total of green house gas emissions which includes CO2 amounted to just over 53 GtCO2e, a record high. That is 53 gigatons of emissions comprised of carbon dioxide (CO2) and all the other green houses gasses, eg. methane, nitrous oxide, aerosols, etc. (e). According to the UN Environmental Emissions Gap Report 2018 in order to reduce this figure  to a level which is consistent with a 66% chance of limiting global warming to 1.5% there needs to be a reduction in GtCO2e emissions of 55% by 2030. That is 11  years away.  In order to have a 66% chance of keeping global warming below 2°C we have to reduce GtCO2e by 25%.

But that is not the end of the story. Emissions of CO2 alone need to be net zero by 2050 to have a reasonable chance of keeping global warming below 1.5°C.

If the fact that the currently agreed targets for emissions reduction are significantly less than is needed isn’t scary enough, reflect on this. We are not even meeting the targets we have set. This means that unless we do something now, i.e. today, the gap by 2030 will be greater and the likelihood is we will be sailing towards a 3°C or 4°C increase in temperature by then end of this Century.

My youngest son is 18 this year, in 2030 he will be 29 and hopefully in the early part of his career. If we are to achieve the kind of reductions in green house gas emissions needed the amount of oil and gas extracted from the the ground will roughly have had to halve. How prepared are Exxon, BP, Saudi Arabia et al for this. What economic impact will that have on the extractive, transport and financial sectors of the economy? Currently the financial strength of the oil industry is partly based upon the reserves of oil they have identified in the ground and have on their balance sheets. At least half of that “wealth” will have to be written off if we are to avoid 2°C never mind 1.5°C.

By the time my son is 59, unless something spectacular happens to the economy that means he will be a long way from retirement, the world will have to have stopped altogether using fossil fuels. So in less than the working life of one person, the energy source which has powered the worlds industrialisation at an ever rapidly accelerating rate since at least the mid 19th Century, and shows no signs of stopping at the moment, will have gone. 

Some may think, well how bad can a 1.5°C increase be given that we are already two thirds of the way there [the climate has increased already 1°C above pre-industrial levels] or even 2°C or 3.2°C which is what we are on track for based on current plans. Well if you are measuring the height of Everest you have to be a measurement nurd to worry about 2 or three inches. But imagine you are in a swimming pool with your feet stuck to the bottom and the water is up to the middle of your chin, a one and a half inch increase would be very unpleasant, two inches very, very unpleasant and three inches terminal.

David Wallace-Wells published a book earlier this year reviewing the implications of climate change chillingly entitled “The Uninhabitable Earth“. He reviews the elements of chaos that are already starting to be unleashed by climate change and how they might evolve to 2100 and beyond. He talks about: the numbers likely to die from heat exhaustion; those who will be effected by hunger as key food producing regions are impacted; those drowned by, what now might be called, freak storms and sea level rising; wildfires which have dreadful direct impacts and also add to the problem of carbon in the atmosphere; dying oceans; and sadly much more.

To be clear some of these impacts will only occur if we do nothing and peak in centuries if not millenia to come. However, have in mind that we have put more greenhouse gas into the atmosphere since the IPCC in 1989 was set up (30 years) than we did in the whole of the period from the mid 19th Century to then. Also, if the world becomes uninhabitable in 80 years time it is of academic interest to know how much more uninhabitable it has become a thousand years after that.

Wallace-Wells occasionally seems to be a bit lose on the timescales, however if you calibrate back to what is contained within the IPCC reports his picture is one which communicates in a less qualified, but non the less accurate, way that global warming is here and now and set to accelerate in its impact on the world well within the lifetime of our children, and that impact will be at best very significant. I think I have slipped into IPCC calibrated language, for “very significant” read “awful”.

A more frightening yet picture has been presented by Prof Jem Bendell of the Institute of Leadership and Sustainability at the University of Cumbria. He conducted a literature review of the science surrounding global warming. He seems to have used the IPCC reports as his starting point but then looked into the latest work of the scientists engaged in producing those reports and considered what they have to say. His paper “Deep Adaptation: A Map for Navigating Climate Tragedy” is not for the feint hearted. To give you a clue he states the purpose of his paper to be “…to provide readers with an opportunity to reassess their work and life in the face of an inevitable near-term social collapse due to climate change.”

Professor Wendel founded the Institute for Leadership and  Sustainability, which provides sustainability themed MBA’s. In 2012  the World Economic Forum (Davos) declared him a young global leader for his work on sustainability. I am trying to say he does not look like someone who is out on the fringe. You need to decide whether his paper is a cri de coer attempting to communicate the implications of a message which is so carefully wrapped up in scientific probability-speak that its urgency is lost or someone who has lost perspective and is set to induce panic. He seems to be trying to move from “There is a high probability that the current combustion may lead to an increase in incidents of temporary or permanent inspiration and expiration failure” to just shouting “The theatre’s on fire. Get out.”

I am conscious that all of this paints a very pessimistic picture. There are however signs that what some have labelled “peak indifference” may have passed. The emergence in the past couple of weeks of Extinction Rebellion shows that there is a growing sense of urgency amongst a growing number of people around the world. Some of the most active members of this group are people who have been intimately engaged in the work of the IPCC and have lost patience with its failure to gain the political traction it requires. Real progress is being made with alternative energy sources. Political leaders who continue to deny climate change are being circumvented by their fellow citizens like Trump in the States. A good summary of the positives is provided by Nicholas Stern in his excellent book “Why are we Waiting?.”

For years now the political elite in this country have been obsessed with Brexit, and for the avoidance of doubt it is the single most stupid economic decision we have made since the war, however it is time to wake up and smell the burning. There is no easy option. Serious, difficult and comprehensive changes are needed right now. We are starting late. We have 11 years to avoid a catastrophe on a scale we have never experienced. We may well be at a tipping point. It is time to jump.

Climate change is set to become THE political issue of the next decade. If it does not a generation will have failed not the anonymous descendants of humanity but our children.

 

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Texas House hears debate on bill that could impose the death penalty for abortions – The Washington Post

A Texas bill would make it possible to put women to death for having abortions Anti-abortion activists protest outside of the U.S. Supreme Court, during the March for Life in Washington in January 2019. Emboldened by the new conservative majority on the Supreme Court, anti-abortion lawmakers and activists in numerous states are pushing near-total bans on the procedure in a deliberate frontal attack on Roe v. Wade. (Jose Luis Magana/AP)By Isaac Stanley-Becker April 10 at 5:47 AM

Men and women, young and old, native Texans and immigrants, they rose to ask lawmakers to protect life, describing a “genocide” and foreseeing the arrival of “God’s wrath.”The act of public atonement they are seeking is passage of a bill that would criminalize abortion without exception, and make it possible to convict women who undergo the procedure of homicide, which can carry the death penalty in Texas. Though it faces steep odds of becoming law, the measure earned a hearing this week amid a larger legislative push in GOP-controlled states to curtail abortion rights, in a direct challenge to Roe v. Wade.

The legislation is the brainchild of state Rep. Tony Tinderholt, a Republican of Arlington, Tex., who was placed under state protection because of death threats he received when he first introduced the bill in 2017. The Air Force veteran, who has been married five times, argues that the measure is necessary to make women “more personally responsible.” He said Tuesday that his intention is to guarantee “equal protection” for life inside and “outside the womb.”

Comment on above

I thought this was a tasteless spoof  or “fake news” but it seems to be real. It came to me via the Washington Post daily briefing I subscribe to. I have checked Tony Tinderholt out on Wiki. Unbelievably he is described by Wiki as the fourth most conservative representative in the Texas House. Fourth! Lets hope to goodness none of these people meet up with anyone from ISIS or stoning to death will be the next policy proposal from the lower regions of the GOP.

Source: Texas House hears debate on bill that could impose the death penalty for abortions – The Washington Post

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The Dismal Science

The discipline of economics is in crisis. This according to no less a person than Andy Haldane, Chief Economist at the bank of England. The blatant inadequacies of the subject, exposed by the 2008 credit crunch, brought to a head a growing chorus of criticism. Not only did the vast bulk of economists fail to see the crisis coming, they also struggled to analyse it once it broke.

For good reason the debates since then have been far more than academic. The imperialist ambitions of the discipline and the advice provided by economists have come to profoundly shape ever wider areas of public policy having profound implications for the lives of millions of people. Over the years the neoclassical model has been proposed to have direct relevance to more and more areas of life. The insights of the market and competition have been seen as directly applicable to topics previously thought of as the province of other subjects. Health, education, welfare, policing, no area of life appears immune to the benefits derived from the application of market principles.

Even within the framework of neoclassical economics there is much to argue about given the limitations highlighted by the 2008 crash. The role of finance is one of the areas where the theoretical analysis was weak. However, a more radical attack accuses the neoclassical model itself of obscuring as much as it reveals. What is more, doing this to the benefit of the few at the expense of many. It is suggested the intellectual structure of the subject defines what are legitimate questions for debate and systematically exclude distributional consequences of economic actions as irrelevant, to the advantage of those who currently benefit from those distributional consequences.

Some believe the standard model is basically sound but needs development, others see the model as sound but having been captured to support particular interests, and some see the problems having their roots in the very scientific essentialism of the model itself. This more radical attack rejects what they see as a misguided attempt to make economics a science modelled on physics. A subject purged of moral content, founded on unrealistically simplified assumptions.

It was not always thus. When Adam Smith was writing the “An Inquiry into the Nature and Causes of the Wealth of Nations” his subject was “political economy” a subject with philosophical and moral considerations built in. Smith certainly saw how the operation of the market could translate personal interest into collective welfare. However, he was as concerned in the 18th Century as many are today about how the hidden hand of the market could become handcuffed to the special interests of oligarchs. At the time he was writing his concern was straight forward collusion. As he put it  “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.”

Such collusion is still a concern, however the evolution of economics as a subject has created new, more insidious and sophisticated  challenges. Challenges which arise out of how the neoclassical model defines its subject. It is argued those “of the same trade” no longer need to crudely rig the operation of the market, rather the neoclassical definition of the market itself is rigged in favour of their interests.

At the heart of this view is the notion that economics has been elevated to something akin to a science who’s findings are outside the court of political discourse. They are just about the way the world is and challenging them is akin to objecting to the laws of gravity.

This model reifies the market as an independent force which tends towards an optimum outcome if left alone. Political interference with the market, on this view, is almost certain to lead to a worse state of affairs as the natural operation of the market tends to the best of all possible outcomes.

So, if the market creates enormous inequalities of wealth which undermine social solidarity; if it leads to financial speculation which threatens to destroy the whole of the banking system; or even if it promotes the use of fossil fuels transforming the climate and threatening the viability of the planet, regulation should be avoided at all cost. The reason being that such regulation will lead to a worse state of affairs. Quite what is worse than the end of human civilisation is unclear.

This transformation of economics from a broad ranging social and moral area of study into a mathematical science did not happen overnight. It has taken some 150 years to transform Political Economy into Economics. A process involving an understandable if misguided attempt to drive normative judgements out of the subject in the belief this will improve its objectivity and therefore usefulness. 

As moral questions were driven out mathematical ones took their place. WS Jevons, one of the founders of what was to become neoclassical economics put it, “… if it is to be a science at all, it must be a mathematical science.” The aim being to transform economics  into a subject which reveals truths about what is the case as opposed to wishful thinking about what ought to be the case. Hard nosed, if sometimes unpalatable, common sense, over, morally attractive, but ultimately self defeating utopian proposals for improvement.

In order to achieve mathematical purity, economics, like physics, needed to simplify its’ assumptions to discover underlying, generalisable laws. Thus human beings are transformed into rational utility maximisers. They are assumed to have perfect and instantaneous knowledge of all prices within a market. And that market has a natural tendency towards Pareto optimal equilibrium. In other words supply and demand are balanced such that no one can be made better off without making someone else worse off. However, such a pared down model has come under challenge.

Firstly there have been attacks on the abstract model of rationality adopted. Fascinating work by people like Daniel Kahneman into the way human beings make decisions in the absence of perfect knowledge has produced a more accurate model of actually existing human rationality. The non-rational heuristic tools we all use to make, often significant, decisions feels very persuasive.

This new thinking has become incorporated into behavioural economics by people like Robert Shiller who has analysed the “irrational exuberance” of investors when an economic bubble starts to inflate. He asks what is an essentially basic question, “…what ultimately causes all those fluctuations in the price of speculative assets like corporate stocks, commodities, or real estate?” In other words if all these rational agents are operating in a perfect market why does it gyrate around so much?

A moments reflection on how your perspective and attitude is transformed the instant you get behind the wheel of a car and become a “driver” instead of a “pedestrian” should make you doubt any theory which relies on the rationality of human beings. Pure rational choice theory ultimately leads to a definition of rationality being any preference I happen to reveal. By this token of course Donald Trump is rational. Clearly the theory is in trouble.

Others have challenged the weakness of the neoclassical model’s view of the the role of finance in the economy and the tendency toward equilibrium. To some extent finance and the banks were seen as neutral facilitators of economic activity but not players. This was not the position of Hyman Mynsky writing in the 1970’s and 80’s, now regarded as something of a far sighted prophet of the 2008 credit crunch, with his radical critique of financial capitalism.

Rather than seeing markets as naturally tending to Pareto equilibrium with disruptions to this coming from shocks outside of the economic system Minsky saw crashes and booms as inherent features of the system itself. He developed the “Financial Instability Hypothesis” which saw investors behaviours following a cycle with only a shallow anchorage in rationality. After a crash investors are very cautious and adopt a hedging approach to investment decisions. They will only invest where the anticipated return will cover both interest and principal payments. As “confidence” returns to the economy investors take a more speculative position where near-term returns only cover interest charges and not principal. Finally, confidence moves toward hubris and investment decisions become more akin to Ponzi schemes where neither the interest or the capital pays back initially. Such positions require an increase in income flows or reduction of interest rates to avoid collapse.

Another line of critique is that the neoclassical model, irrespective of its theoretical strengths or weaknesses, has been captured by special interests. A critique developed by James Kwak in his work “Economism”. This looks at the basic models learned by students across the world in “Econ 101” and examines how they are transformed from tentative  descriptions with constrained application to immutable laws which shape the economic universe and thereby the social and political realm. 

In essence he suggests the models supplied by Econ 101 are like the models of the atom which show it as similar to the solar system with “planet” electrons revolving around a “sun” nucleus. Such a model is a helpful heuristic device but of course the reality is far more complicated. Public debate about economic policy options however is shaped by the unsophisticated “solar system” models of Econ 101. But why should this be the case?

Kwak points to the role of various foundations in the US such as the Foundation for Economic Education, the American Enterprise Institute and others. All of these bodies endowed by wealthy American businessmen who are very clear about the negative impacts of taxes and regulation on economic growth, and the importance of a flexible labour market unconstrained by the innovation-inhibiting impact of trade unions.

Further evidence for the way in which economics has been captured and weaponised by wealthy individuals in the United States is provided by Jayne Meyer in her excellent book “Dark Money“. This looks at how multi-billionaires have used their economic strength to promote a particular interpretation of economics which supports their radical libertarian political outlook. The neoclassical model is transmuted into a neoliberal model of economics which is created by and yet provides the intellectual foundations for a neoliberal politics. A politics which majors on the scientific pretensions of the neoclassical model and uses it to rule out of court certain questions about the consequence of specific economic policies.

William Davies has chartered the process talking about it as the “disenchantment of politics by economics.” In his work “The Limits of Neoliberalism” he considers how neoclassical economics is supported by and in turn reinforces a neoliberal political agenda. Indeed he defines Neoliberalism as “the elevation of market-based principles and techniques of evaluation to the level of state endorsed norms.” This picture of the way market models have been applied to more and more areas of life is certainly familiar in the UK. 

The 2008 crash was a major shock to the world financial system. It was also a major shock to the subject of economics and the profession of economists. The Queen wanted to know why no one had seen it coming and Economics students around the world started to question the value of complex mathematical models which gave incomplete answers to questions they were not interested in.

Demands for a more relevant economics syllabus resulted in initiatives, such as the on-line, open-access platform coreecon addressing what were seen as critically relevant issues such as innovation, inequality, environmental sustainability and much more. If anything this process is gaining momentum. It may mean that politics is put back into economics allowing distributional consequences to be considered as valid criteria for assessing economic models. The subject may become less scientific but more useful.

Mariana Mazzucato on the Value of Everything

The link below takes you to Econ Talk which is a weekly blog involving one to one interviews with an eclectic mix of economists. The website and blogs are published by the Library of Economics and Liberty which is supported by Liberty Fund Incorporated. So many uses of the word “liberty” might raise suspicions about the political outlook of the site and when you listen to the host of the weekly blog, Russ Roberts, your suspicions may be reinforced. He clearly comes from a libertarian perspective which places a great deal of faith in the market and thinks that education would be much more effective if wholly privatised. However, he is consistent in his views on the importance of effective competition and has excoriated the bail out of the banks after the 2008 credit crunch.

Whatever the ideological preferences of the site and the host of Econ Talk they get some great interviewees and one of the latest ones was Mariana Mazzucato.  Ms Mazzucatto wrote a very timely and important book on the role of the State in innovation entitled “The Entrepreneurial State”. In the blog connected to this link she talks about her latest book “The Value of Everything”. This looks at how the concept of value in economic theory has evolved over time and how it has been stripped of any social and moral context, effectively reduced to being market price. In a remarkable reversal, instead of value underpinning price it has become the case that value is determined by price.

It is a great conversation. Whatever his personal prejudices, Russ Roberts is an effective inquisitor and unfailingly courteous. Mariana is robustly compelling and gives a great summary of the main arguments of the book. If you are interested in current debates in economics I recommend the Econ Talk site generally but the Mariana conversation is a gem worth listening to if you never visit the site again.

Mariana Mazzucato on the Value of Everything – Econlib