10° 40' N, 61° 30' W

Sunday, February 23, 2003

Full Circle

While looking for some information on the BBC Philarmonic Orchestra, I came across an old website for the preservation of Manchester's Free Trade Hall, the Philharmonic's former home. That would be unremarkable except for the fact that the campaign was being mounted by the folks at Indymedia.

The Free Trade Hall was a celebration of the achivements of the Anti-Corn Law League who were early exponents of the Free Trade economic doctrine. This is now THE economic doctrine of international trade - enforced by global bodies like the World Trade Organisation.

This is just a taster of the historical significance of this site and this building in Manchester and world history.


On another page, the campaigners write:

The original supporters of "Manchester economics" might remind us that free trade was a project, not an inevitability.

They might even recognise that it's high time we got rid of it.


That was then. The battle was lost, and the hall is being is being turned into part of a Raddisson Edwardian hotel. It's a bit sad, I think--the Hall had been a venue for Dickens, Bob Dylan, and the Sex pistols, and played a role in the the organisation of Britain's suffrage movement--but I realise that all things can't stay as they were. All the same, it's an odd sight seeing anti-globalisation activists campaigning to save a building called Free Trade Hall.

Thursday, February 20, 2003

Sick Leave

I'm sick this week. Taking some time away to recuperate. Will be back soon.

Monday, February 17, 2003

The Congestion Charge

I don't drive in London, but the biggest story locally, besides last Saturday's antiwar march, is the start of congestion charging in London. The £5 charge is extremely controversial, and it's failure could lead to London's mayor, Ken Livingstone, losing reelection next year. I don't have much to say on the politics of it, but I would like to shed some light on the economics of the charge.

Livingstone himself has attributed the idea for his scheme to Milton Friedman, who wrote a paper in 1951 titled "How to Plan and Pay For the Safe and Adequate Highways". London's scheme, as implemented roughly follows this, so posting about this would not be terribly insightful. The paper I have in mind, though, is one published in 1974 by the Harvard economist Martin Weitzman in the Review of Economic Studies titled "Prices vs. Quantities". Weitzman's work has been a seminal one for those researching common-pool resource problems, akin to the tragedy of the commons. Congestion can be thought of as one such problem.

Weitzman was looking for the best way for regulating pollution under uncertainty, with the choice between a quota- or a price-based instrument depending in large part on the degree of uncertainty that policymakers are willing to tolerate in the achivement of a particular outcome. The first type of instrument, a quota (or limit) arises when a central planner (I know some call the mayor "Red" Ken, but no pun is intended) sets a a cap on the amount of allowable pollution; in this context the planner sets a ceiling on the amount of vehicles that can enter the city centre, rationing out the permission to enter.

Sound farfetched? Well such a system is currently in use in Athens, and used to be in Paris, where authorities only allow licence plates with particular numbers into the city centre on certain days (usually the rationing alternating between odd and even numbers every day). A quota can also be set to very close to zero, with only limited traffic; Rome is implementing such a scheme. The trouble is, as the Economist writes, is that such regulation is blunt, and cannot be fine-tuned to demand as a price instrument--in other words, it assumres that regulators can determine an optimal limit to congestion. It also assumed that the net number of vehicles is fixed or growing very slowly; its effects would be reduces if there is a boom in car sales (as happened in paris, where people bought second cars with the necessary registration to beat the system. Such quotas also require enforcement, which has to be paid for; and regulation raises no revenue.

A second means of implementing a quota is though the creation of a market, as the US did for the reduction of sulphur dioxide emissions. How is this a quota? Well a market requires some degree of excludability--the ability to stop others from consuming the same good you consume. In a 1995 article, Paul Krugman explains how it would work:

Suppose we issue registered drivers in a metropolitan area a specified number of "rush hour points," which they are free to sell at their discretion, and require anyone who drives during rush hour to present (electronically) the appropriate number of points. Let us also create a market in these points. Some people will continue to drive every day; they will need to purchase extra points. Others will find new ways of getting to work and will sell their points for whatever the, ahem, traffic will bear. How market-oriented can you get? And such a scheme, like congestion fees, would make most people better off, either because they get extra money by selling their points or because the cost of buying points is more than offset by a quicker commute. (Italics added)


Krugman describes such a scheme and congestion charging as being basically equivalent, as they both involve " . . .creating a market incentive for people . . . to take into account the costs we impose on others by driving during rush hour." This market, like a quota, assumes that the planner can set an optimal ceiling on congestion--though it is adjustable, for as more information becomes available the planner could buy permits or issue new ones.

Krugman was right on that last point, but he is wrong about the equivalence of the two schemes. One problem is distributional--who do the initial specified number of permits get disributed to? Non-drivers among those can expecte to receive a windfall gain, while drivers among the excluded will suffer windfall losses. Such a market is also government subsidised, in terms of enforcement--like a quota, it raises no revenue for the state, and does not pay for its own operation.

Price measures include Livingstone's charge. Unlike both regulation or a market this does raise revenue, but as it is a £5 flat-rate, it too is a blunt instrument--it will not limit congestion in the event of unexpected surges in demand. While it cut congestion by 25% today (some of that due to the fact that it is half-term this week--school is out) the long-run effect on congestion remains uncertain. A more innovative way both of controlling congestion and raising revenue is the electronic road pricing in use in Singapore, where congestion is measured and the price of accessing the city centre adjusted accordingly every half-hour. This is a closer to a true price system, in that it passes on the "cost" of congestion; evidence from Singapore shows that it has cut congestion considerably.

Like most "markets", the congestion charge, as implemented, has "distortions"--vehicles that receive discounts or are exempted. Some of these create odd incentives--the 100-% discount for alternative fuel vehicles, for example, might reduce air pollution, but does not do anything about congestion, which is what the charge is ostensibly about; the discount for residents of the charging area, similarly, does not affect congestion.

The technology--a series of 700 cameras taking pictures of the licence plates as vehicles enter the zone--is untried, and could be the undoing of the scheme. Singapore's use of low-powered radio, checked by overhead gantries, is far superior, as is a GPS-based system. The trouble for the mayor is that such sytems would require a national government mandate that all vehicles have them installed, with severe penalites for those caught without them. Toll plazas, as in Norway, are out of the question in the city centre, though could work closer to the M25 beltway. Cameras, untested as they are, are entirely within the mayor's control, and this, in all probability, is why this option was chosen.

If the system works, the chance is that congestion charging will become a more common means of dealing with traffic congestion in major cities, as many economists have proposed; in the New Yorker last September, for example, John Seabrook looked in the possibility of congestion charging in Manhattan. Although it's technology will need to be replaced in the long run, and the design improved, let's hope that London's experiment does not fail.

Sunday, February 16, 2003

What's Certain in Life

Colby Cosh gets a bit of a surprise from Revenue Canada. I guess old clichés ring true.

What is The United Nations?

In a post criticising the impact of the United Nations small arms initiative, Glenn Reynolds writes:

The United Nations — despite all the “never again” talk after World War II — is not an international body aimed at promoting justice or human rights. (If it were, perhaps its delegates would be elected.) It is, instead, a world leaders’ club in which corrupt thugocracies wield just as much influence as legitimate states. (Libya now chairs the Human Rights committee, after all, and Iraq is slated to take over the Committee on Disarmament. What, North Korea wasn’t available?) And the United Nations bureaucracy doesn’t want to rock the boat.


Such views have been echoed by other bloggers and commentators, which leads me to ask: what do these people think the UN is?

The United Nations, or at least what it does, is inseparable from its member states, and in this, among other issues, the membership that counts is the G-77--in other words, developing countries. The 134 members (the group was formed in 1967, when there were fewer developing countries) don't have that much leverage in the Security Council--the current focus of Iraq war deliberations--but they outvote everyone in the General Assembly, which has power over two things--the UN's Budget and its administrative structure. When people attack the United Nations, they're really atacking the Third World states that voted Libya's ambassdor to chair the Commission on Human Rights, or who allowed Iraq to chair the Conference on Disarmament. The reason the UN has taken up a small-arms initiative is that these counties, like Jamaica, wanted it to. Disagree with this if you will--I actually think America's position is reasonable--but it must be recognised that the "UN" did not take it upon itself to do this.

Reynolds is, in a sense, exactly right, especially given that the UN spends most of its money on economic and social matters, even though it is it is not as well suited for this as are some other agencies. A "North-South" tension exists at the UN, which is far from the monolithic body people claim it is. (For more on this North-South tension see Chapter 10 of John Micklethwait and Adrian Woodridge's book A Future Perfect.)

Take Reynolds's post on Nelson Mandela's comments about "white" Israel vs. "black" Iraq. Now Mandela was factually and morally wrong to say this, but people who have been involved in the Non-Aligned Movement knew exactly what he meant. Palestinian solidarity is a major cause celébre of Third World leaders (the UN has an office dedicated to the "question"), especially veterans of left-inspired struggles of liberation, as Mandela was. If there is an explanation for why Mandela considers Gaddafi his friend, this is it--Gaddafi supported the struggle against (perceivably western-supported) Apartehid years before the US and Europe came around to doing so. These people have long memories, and Gaddafi is investing a lot in African solidarity at the moment.

The trouble I have is with the use of the term "the UN". In this post, for example, Reynolds calls on the US to "Declare the U.N. irrelevant, go to war, then set up a parallel organization of, you know, legitimate governments". How do you decide waht governments are legitimate? A "community of democracies" has been proposed, pace Madeline Albright's Warsaw Declaration. There is one huge answer to this, namely China--nobody is proposing to stop dealing with them. Unlike the claims of some warbloggers, "regime change" is unlikely to be a long-running US policy, and a repudiation of the UN makes this more unlikely.

It also fails to deal with the practical intergovernmental organisations that the US probably does not want to repuduate--mundane things like the International Civil Aviation Organisation or the World Intellectual Property Organisation--which are specialised agencies of the UN. While the World Trade Organisation is not, strictly speaking, a specialised agency, the Doha round of trade negotiations depends for its success on the G-77--the Group will veto any deal that does not include substantial concessions on agriculture, and is unlikely to take kindly to any repudiation of the UN--a de facto repudiation of its membership.

In reference to peacekeeping, there have been reports of rapes in Bosnia and Sierra Leone by "UN" troops. Why not condemn the countries that sent the troops in question (Pakistan, in the latter case)? After all, the US has contributed to peacekeeping missions, and its soldiers have been guilty of transgressions in foreign countries. No, the organisation is condemned for it all.

Much commentary is on the disintegration of NATO and the irrelevance of the European Union and the UN. Criticism of he first two organisations focus on the behaviour of France and Germany, has merit. Similarly, regarding the UN, It would be better for Reynolds and others to be more transparent and condemn Third World (and other) countries directly, rather than attack the United Nations in particular. It would, at minimum, be more honest, recognising the UN for what it is.

Thursday, February 13, 2003

It's all about Oil

Jonathan Gewirtz of Chicago Boyz links to a very good refutation in the Financial Times of the "war about oil" argument:

Current oil revenue provides about $1,200 a person a year in Iraq. This is 50-75 per cent of recent estimates of Iraqi per capita income. From an Iraqi perspective, that is a large sum. But at about $100 per US citizen annually, it would be trivial to the average American. Taking a big share of the net revenue would substantially cut Iraq's already low per capita income. That is not a plausible scenario when both the aim of the military effort, and the world's expectation, would be to build a more prosperous and free Iraq. While some productive redistribution of this oil income is easily imagined, it is difficult to see how any of it, even with a substantial boost, could be drained off by a conquering nation or nations.


Other commentators, as I previously noted, come to the same conclusion, though from different prespctives. This follows on from a thoughtful post yesterday by Jane Galt on natural resource endowments and economic development. She hopes that a post-war regime in Iraq "provides the infrastructure for the Iraqis to improve their lives, and aligns the incentives so that it is productive to do so. And the key to doing so is going to be making oil wealth the frosting on the economic cake, not the entire pie."

In a much-quoted 1995 article on the subject, The Economist had this to say:

A natural-resource endowment gives rise to what economists call "rent"--the difference between what is actually paid to the producer and the minimum price
that he would have demanded to produce the stuff in the first place. For many countries that have enjoyed booming natural-resource incomes in the past few
decades, especially those that have had sudden windfalls, these rents have been staggeringly large. Nice for the producers, it seems; by assumption, too, nice
for the country's people.

The trouble is that the lure of those fat rents can be hard to resist. The upshot is routinely an outbreak of competitive rent-seeking. The power centres
in any resource-rich country soon notice that the profits from capturing a slice of the rent from the natural resources beat those from any possible
alternatives; and they act accordingly.

Behind the economic jargon is a simple enough proposition: give a group of people a big pot of money and they will spend their time arguing about how to
share it out, not thinking of risky ways to make even more money by investing the original sum. Experience bears this out. In Mexico in the 1970s, politicians
and firms battled over the state's oil revenues. So it was in Venezuela, Nigeria and several other big oil-exporting countries. Nor is the experience restricted
to oil-exporters. Other resource-rich countries have blown the proceeds of their wealth in competitive rent-seeking: Australia and Brazil are outstanding
examples.

In developed countries, such rent-seeking can damage other parts of the economy. Louisiana spent too much on its roads and hospitals; Alaskans
concentrate too hard on their regular annual dividend from the state's oil fund. Too many people in such places also tend to ask why they should bother getting
an education or working hard--or at all--when they can live off a natural endowment.


Rent-seeking (which, though they do not use the term, is what the anti-war protestors are accusing the US of doing) is a notoriously hard thing to fight--when you have wealth just sitting in the ground, getting the incentives to do other things is extremely difficult. An extreme example of poor incentives is Nauru, a country which, though at one point having a per-capita income of US $17,000 is now reduced to taking the boatloads of refugees Australia does not want:

The substantial revenues from phosphates and the substantial budget surpluses which began to flow after independence were, unfortunately, poorly managed and unwisely invested. In the 1990's bankruptcies and declining revenues from phosphates drove the government to borrow heavily and put the country into deep debt. However, it continued to lavish its citizens with an elaborate welfare state.


Such dim outlooks ought to be put in some perspective, though. Just as the US cannot get much off Iraqi oil, the Iraqis can't either--it will years before their production capacity will be up to "normal" levels, and even then the country has to contend with a fluctuating world market price for oil. A lot of the resources, also, will go into reconstruction to make up for the 12 years of nonexistent and negative economic growth. Much for the Iraqi oil "wealth", for the next couple of deacdes at least, represents catch-up, not a windfall gain.

For all the importance of a sound post-war regime, I have to stress the importance of failure as a means of learning; this includes squandering some of the oil wealth they have. Some things, like prudence, cannot really be taught, but rather learned the hard way. Just as post-war Iraq is unlikely to be quickly be a bastion of "life, liberty and the pursuit of happiness" like the United States, is is about as unlikely to be immediately true to, say, Canada's founding principles of "peace, order and good government". Such things take time, and often a bit of trial and error as well.

UPDATE: Lynne Keisling has a great series of posts on the subject of the US and Iraqi Oil.

Swelling Gases?

An article in The Economist points out that the Intergovernmental Panel on Climate Change's forecasts of greenhouse-gas emissions are, in all likelihood, based on questionable assumptions:

The combination of overstated gaps and of built-in assumptions about the extent of convergence in the average incomes of rich and poor countries yields projections of GDP for developing regions which are improbably high. Even the scenarios which give the lowest figures for projected cumulative emissions in the course of the century assume that average incomes in the developing countries as a whole will increase at a much faster rate than has ever been achieved in the past.

The unreality of the assumptions about economic growth in developing countries is highlighted by disaggregated projections which were recently released on the SRES website. These projections imply that, even for the lowest emission scenarios, the average income of South Africans will have overtaken that of Americans by a very wide margin by the end of the century. In fact America's per capita income will then have been surpassed not only by South Africa's, but also by that of other emerging economic powerhouses, including Algeria, Argentina, Libya, Turkey and North Korea.


The projections of climate change and the institutional arrangements designed to address the problem--namely, the Kyoto protocol--have very expensive implications, even though it is becoming increasingly clear that the science is still very, very uncertain. This may justify the skepticism of scicentists like Bjorn Lomborg, and, ultimately, the repudiation of Kyoto by George W. Bush.

Bush, coincidentally, yesterday announced an voluntary initiative on carbon emissions. There are better measures, I think--emissions trading, followed by carbon taxes--but the move is a positive one. This probably shows that Bush's errors in conveying his message to the rest of the world are more ones of style than of substance, as Daniel Drezner writes.

Wednesday, February 12, 2003

The Non-Econometrician's Lament

As soon as I could safely toddle
My parents handed me a Model;
My brisk and energetic pater
Provided the accelerator.
My mother, with her kindly gumption,
The function guiding my consumption;
And every week I had from her
A lovely new parameter,
With lots of little leads and lags
In pretty parabolic bags.

With optimistic expectations
I started on my explorations,
And swore to move without a swerve
Along my sinusoidal curve.
Alas! I knew how it would end:
I've mixed the cycle with the trend,
And fear that, growing daily skinnier,
I have at length become non-linear.
I wander glumly round the house
As though I were exogenous,
And hardly capable of feeling
The difference 'tween floor and ceiling.
I scarcely now, a pallid ghost,
Can tell ex ante from ex post:
My thoughts are sadly inelastic,
My acts invariably stochastic.


-- Sir Dennis H. Robertson

Monday, February 10, 2003

New York Rules

David Warsh writes about the battle for dominance between the New York Times and the Wall Street Journal:

[C]learly the executives who run them are competing for the same space — dominance of the lofty region where short-term causal explanations of events are forged. They may operate rival explanatory standards at the moment. But it is in the nature of standards that one inevitably gains the upper hand.

The papers are the Hertz and Avis of the day-to-day truth business. Ultimately one of them is going to become generally preferred.


Warsh's mentions of truth remind me of a story written two years ago by Brent Cunningham in the Columbia Journalism Review about the New York bias in news reporting, and the thoughts I made of if at the time. Here I present an updated and edited version.

In his anecdotes, Cunningham ends each paragraph with the sentence "New York rules". Over 10,000 journalists work in the city, and the "decisions made each day by journalists in New York determine which issues become national news, what gets emphasized, what gets downplayed. In short, what is important for all of us." They all see the world through a "New York lens", not helped by the fact that all of them read the Times every day. Important things take place in New York; it is the financial capital of the world, seat of the United Nations, and setter of cultural trends -- more so than, say, Hollywood.

Commenting at the time on Cunningham's story, Virginia Postrel noted that "for all its excellent national and international coverage, the New York Times is fundamentally a local newspaper, shaped by the experiences and prejudices of life in Manhattan." Cunningham went further, writing that:

Manhattan is arguably the least representative place in the country. Life here is different. We ride trains rather than drive cars. We pay ridiculous amounts of money to live in rented apartments with notoriously tiny kitchens. We cook less, opting instead to order in or dine out on everything from Afghan to Ukrainian food, not exactly staples at the local.


New York reporters, in other words “absorb the notion (even if we know better) that what happens in New York is generally more sophisticated, intelligent, interesting -- in short, more important -- than what happens ‘out there.’”

In countries dominated by one city (and the U.S. arguably is not, with Chicago, L.A. and D.C. to rival it, among others) this is probably to be expected. There are several stories in the British regional press about media bias towards London--all eleven national papers are based there--as if the perspectives of people in Manchester, Birmingham, Edinburgh, or Glasgow were almost the same. The same could probabaly be said of Paris, Berlin, or Tokyo. Canada's 24 million people have two major national dailies -- The Globe and Mail and the National Post, both published in Toronto. Do they have similar influence? Ask Colby Cosh.

The Times-Journal batle is basically one of two different New York prespectives, seeking to dominate the dissemination of "truth", as Warsh puts it. If the Journal should "win", it will be different--the World Financial Center is different from midtown, after all--but it won't necessarily make the news any more representative of America, or the world for that matter.

Sunday, February 09, 2003

Style Rules

Some advice for bloggers, of whatever perspective, courtesy of the Economist Style Guide:

Do not be hectoring or arrogant. Those who disagree with you are not necessarily stupid or insane. Nobody needs to be described as silly: let your analysis show that he is. When you express opinions, do not simply make assertions. The aim is not just to tell readers what you think, but to persuade them; if you use arguments, reasoning and evidence, you may succeed. Go easy on the oughts and shoulds.

Do not be too pleased with yourself. Don't boast of your own cleverness by telling readers that you correctly predicted something or that you have a scoop. You are more likely to bore or irritate them than to impress them.


Indeed.

Billboards

Slight redecoration, and my blog looks a bit more commercial. I link to Amazon.co.uk not because I expect to get any money (though, for the generous among you, that would be nice); rather, it is to provide bibliographic references on the books I mention. I've also switched back from enetation to YACCS as my commenting provider, primarily as they support html links. Whether either change will improve reader "experience" is beyond me. I can only try.

On a side note, The Invisible Heart: An Economic Romance by Russell Roberts is a very good, page turning read; check out this review in The Region, a publication of the Minneapolis Fed. Diane Coyle's Sex, Drugs And Economics is also interesting. One of the many new popular introductions to the dismal science, it does not break much new ground (though it does open with a chapter on prostitution) but is a decent read nonetheless.

Thursday, February 06, 2003

Taxing Times

Arnold Kling discusses tax reform in the U.S., favourably citing this piece by Alberto Alesina and Francesco Giavazzi, who in turn conclude that:

Piecemeal deregulation is doomed to fail. Generating sufficient political support to enact reforms that can survive the opposition of vested interests requires attempting to deregulate the entire economy simultaneously, not select industries, one by one. The key to eliminating inefficient, unproductive subsidies to minorities is to implement tax reductions for all.


Examples of such "big bang" reform, like the independent base closing commission and the passage of the NAFTA trade agreement are profferred, but something is missing here. The examples depend, to a large extent, upon uncertainty--prior to them being implemented, members of Congress did not have much idea regarding which bases were to be closed, or which tariffs were going to be cut, and on completion of the deal they had a straight up-or-down vote. For measure as important as tax reform, it is in turn difficult to say whether members of Congress, or even the President, would be willing to delegate such power to a "blue-ribbon" panel or a high-powered negotiator. (I am also not sure if Congress can, constitutionally speaking, delegate its tax powers.)

A few months ago in Slate, Robert Shapiro raises economic arguments that work against tax reform, such as discounting the future. In one instance, he talks about "capitalisation" and the resultant losses from any tax change:

For example, the existence of a home-mortgage deduction, the granddaddy of personal tax preferences, has raised housing prices: By reducing the monthly cost of homeownership, the deduction enables home buyers to bid up the price of housing until it roughly offsets the value of the deduction. That's why homeownership rates in Canada, which provides almost no tax benefits to home buyers, are nearly as high as ours. On balance, U.S. home buyers neither gain nor lose. But if tax reform eliminated the mortgage deduction, housing prices would fall, and current homeowners would face windfall losses.


These arguements are part of the reason why, even though there's a tax-cutting Republican in the White House, there's no Kemp Commission-style efforts of overhaul the tax system. While I support broad-based tax reform--I like the idea of a flat tax or a moderately progressive system, along the line of the plan proposed by Jane Galt--part of this "big bang" seems to me to be more wishful thinking than anything else. Kling says that "Piecemeal proposals mobilize the opposition of narrow interest groups. It is easier to neutralize such opposition with 'big bang' approaches." Where is the evidence for this? It took years to get a new fast-track authority passed, and that only after some special interests were bought off with measures like the Farm bill--a huge distortion to world trade of itself. In a New York Times article that Kling quotes, Daniel Altman writes:

Seventeen years after the tax code was overhauled, why has this crippling complexity returned? The reasons are almost entirely political, said Joel B. Slemrod, director of the Office of Tax Policy Research at the University of Michigan. Raising taxes so that more money could be spent had become taboo in Washington, so politicians had to find another way to cater to their constituencies. Tax changes — in the form of credits, subsidies, deductions and refunds — were the answer.

Others take the argument further. "The tax system," said C. Eugene Steuerle, who coordinated the Treasury Department's tax reform group from 1984 to 1986 and is now president of the National Tax Association, "has become the vehicle of choice for influencing economic policy, the distribution of the tax burden, the state of the economy, the social welfare of families, and almost anything else you want to mention."


A radical tax reform, if it takes place, of itself only provides a new baseline for rent-seeking; there is nothing to prevent complication reappearing, as it did following Reagan's 1986 Tax Reform Act. It will far better, IMHO, to convice legislators and voters of the long-run merits of tax simplification, to ensure that any reform is a lasting one.

Tuesday, February 04, 2003

The Ongoing War Over Oil

It's interesting to note different people taking on the "No Blood for Oil" argument. In last Saturday's Guardian, Julie Burchill shouts (via William Sjostrom):

So what if it is about oil, in part? Are you prepared to give up your car and central heating and go back to the Dark Ages? If not, don't be such a hypocrite. The fact is that this war is about freedom, justice - and oil. It's called multitasking. Get used to it!


Zirman Ahmed, citing opportunity cost, says:

If the US took over Iraq's oil fields and then gave itself the oil for free, it would bear the opportunity cost of selling the oil to the world markets. Given that oil is a commodity product, this price would be exactly what the US would have had to pay for it anyway, whether it was in Iraq or not.


In the New Yorker James Surowiecki takes on the argument from a different angle:

Americans, who usually understand that economic self-interest tends to trump ideology, have assumed that in the Middle East the opposite holds true, even as various despots and mullahs have kept pumping oil regardless of what we do to them or what they think of us. U.S. policymakers still seem to be afraid of the oil weapon, seeing it as a reason for acting with caution (when it comes to pushing for change in Saudi Arabia) or aggression (when it comes to pushing for change in Iraq). By allowing this fear to shape our policy, we've given oil a power it shouldn't have.


Whichever way you look at it, the argument that the coming war is about oil is spurious, at best.

Sunday, February 02, 2003

Personal History

Thanks to Stephen Karlson for his comments on, and link to, my post on heterodox economics. I don't (yet) have an about page, so let me introduce myself. My name is Damien Smith, and I am currently doing a part-time Postgraduate Diploma in Economics at Birkbeck, University of London; I hope to continue next year and complete the full MSc. I have a BA in history from the University of the West Indies, and last year I completed a Postgraduate Certificate in Economics, also at Birkbeck. I have a full-time day job as a library assistant. This work, which does not pay very much for this city, not only ensures my survival, but pays for my course as well.

At this time two years ago I was head librarian at CCN TV6, the most popular televsion station in the twin-island republic that is Trinidad and Tobago. It was my fourth job there, having been hired as an intern back in 1996 and working my way up. My previous job was as a production assistant in TV6's newsroom, where for almost three years I worked on producing the international news--recording it, selecting stories for the news editor, editing the video and writing the script. I also assisted on other news assignments; I have three awards for journalism for this story (top item), including two from the Pan American Health Organisation. I did not enjoy the work terribly, though--it became pretty routine after a while, to be honest, except for the occasional outside broadcast--but it was comfortable, and I made a decent living, especially in a country that has a low cost of living. I gave all of that up to come to London to work my way through grad school in a city with a high cost of living. Phrasing it this was makes it sound a little noble; it's not. I don't have to be studying economics this this way. I could have done a second bachelor's degree, or I could have tried going to the US. (I am an American citizen, having been born in New Jersey, though I have not lived there since I was six.) I'm here because I want to be here, and, while I have made some mistakes, I don't regret it.

Why economics, though? Like some young idealists, it began with a visit to the United Nations in New York. I made my first visit there when I was 15, and, strange as I was (and am) I then bought the World Bank's World Development Report 1990, which focused on poverty. I was too young to understand it (I didn't actually read the report until I was 21) but the deprivation described in its first chapter was compelling. I thought then that reducing poverty in developing countries was what I wanted to do with my life, and I desperately wanted to do a degree in development studies. Times change, and people change; I eventually plumped for history as an undergrad. Still, the goal was to understand how things came to be the way they are, in a view to making people's lives better.

I realised at university that sociology (in which I took a few electives) was not the answer. One course was called Social Change and Development, which turned out to be mostly a descriptive course in the history of development economics. There were several paradigm shifts, from "modernisation theory" (otherwise known as Fordism, but basically the development economcs of the 1950s) to "dependency theory" (late 1960-early 1970s) the oil-shocks 1980s debt crisis, structural adjustment and, now, post-modernism. Post-modernism? (I'll actually ignore that--it's too easy a target.)

Why did all of these development "paradigms" fail? The post-modernists had the idea that different people had different ideas about what mattered in development, and that all that came before was a bit mechanistic. My problem with the course was with discussing what is, in large part, an economic situation using non-economic analysis. To discuss the 1970s oil shock without saying that developing countries borrowed irresponsibly and unsustainably during it struck me as disingenuous, as did the 1980s campaign for debt relief. I am not saying that debt relief was not necessary, only that it would have helped if those countries showed a little humility, acknowledging that they were responsible for getting themselves into their dire situation and that they needed to adjust. No such luck. Other explanations, like the deterioration in world commodity prices and a rise in real interest rates, had to be to blame. A recent Economist article on Zimbabwe notes:

It may seem harsh, when faced with the misery of an Ethiopian coffee farmer, to argue that it would be more efficient to let the price mechanism deliver its message (“Grow something else”) unmuffled. But greater efficiency leads to greater wealth, and vice versa, as Zimbabwe so harrowingly shows.


The early discussion of "modernisation" echoed this. Much of the literature on this was written by Nobel prizewinners (Gunnar Myrdal and W. Arthur Lewis, for example), and things like W.W. Rostow's "Stages of Growth" seemed plausible. Why did they fail? Paul Krugman, in a somewhat presumptious 1994 essay titled "The Fall and Rise of Development Economics", asserts that the problem was methodological:

It is common for those who haven't tried the exercise of making a model to assert that underdevelopment traps must necessarily result from some complicated set of factors -- irrationality or short-sightedness on the part of investors, cultural barriers to change, inadequate capital markets, problems of information and learning, and so on. Perhaps these factors play a role, perhaps they don't: what [some models now show] is that a low-level trap can arise with rational entrpreneurs, without so much as a whiff of cultural influences, in a model without capital, and with everyone fully informed . . . In particular, verbal expositions of [Paul Rosenstein-Rodan's theoretical] Big Push story make it seem like something that must be true. In this model we see that it is something that might be true. A model like this makes one want to go out and start measuring, to see whether it looks at all likely in practice, whereas a merely rhetorical presentation gives one a false feeling of security in one's understanding.


Krugman concludes that "Non-economists tended to think that Big Push stories necessarily involved some rich interdisciplinary stew of effects, missing the simple core." The verbal exposition and interdisciplinary nature of these theories is what makes the material good content for sociology courses, even if it is to debunk them. (I say Krugman is somewhat presumptious in that he has not actually looked at the history of development economics as it was practised--for example, by reading Gerald Meier's 1983 book Pioneers of Development--but assumes a lot of the history. This does not, of itself, make him wrong, but it does seem a bit smug in his conclusions.)

Other courses I did were like this. I loved doing economic history, for instance, but my undergrad courses were very descriptive, and without data it was very easy to find an agreeable source to support one side or another. (Which, to some extent, explains the ongoing debate over Eric Williams's book Capitalism and Slavery.) The way of discussing development up to that point was dissatisfying to me; all theories had some measure of plausibility, but none seem to have had any real-world effect, nor have their solutions been durable. It all seemed so impersonal: modernisation theorists extolled the virtues of planning, for instance, while dependency theorists stressed the role of power structures in the world economy. As I wrote earlier, an analysis of the debt crisis has to examine the responsibility of the developing countries for their own situation; over time I realised that a good analysis of all development issues has to be considered from such a perspective. Those countries, and the people that live within them, have the most to gain from success, and they suffer most the consequensces of failure. As so many people have written over the years, people respond to incentives.

When I finished my BA I initially intended to do economic history, partly because it was less mathematical, and I was terrible at algebra. There are actually few pure economic history MSc programmes in the world, bur more than that my interest in economics broadened from the consideration of development. From my citations of Krugman in this and other posts, it should be clear by now that I am a great consumer of popular economic writing. (This, paradooxically, is the reason why I don't read his New York Times columns regularly anymore; he's a political columnist now. I don't have a problem with that per se--it is his choice, after all--but the world is a bit poorer for it all then same.) By the time I was promoted to the post of librarian (I was a production assistant before, and continued to freelance as one on outside broadcasts) I made up my mind to do an MSc in straight, neoclassical economics.

At some point in another post I'll probably explain my thoughts on London and Birkbeck (in short, it's relatively cheap if you can do it part-time). I also don't know if I still want to work in the field of development, as my interests have broadened into other areas. The problems of developing countries, though, remains a huge concern of mine.

Saturday, February 01, 2003

Marx Lives On

I confess my ignorance in the post below. There are volumes written about Marxian Economics, as a look at the bibliography on this website shows. The History of Economic Thought website also has a wealth of information, with links.

At risk of beating a subject to death, take a look at the comments to Jane Galt's post on Idiotarian Economics, following an article on the subject by Arnold Kling. Among other things, there is a long discussion of Marxian economic theory, with good comments by Daniel Davies, among others.

Karl Marx may have been wrong about most things, but his contribution to economic thought is considerable, and debates about what he meant (there is still no concensus) and what that means, will, no doubt, continue.