Friday, September 30, 2011

A very interesting paper...

From the latest American Economic Review:

By Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus


This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

Unless you're on a university server, you'll probably find that the article is gated. [Update - The working paper version is accessible here.] Fortunately, there are a number of good summaries available on the net. Bottom line: We severely underpay for the goods and services provided by major industries, given the measurable effect that air pollution from these industries has on human health and productivity.

Crucially, the environmental damages that drive these results have nothing to do with any kind of long-term climate change effects. They are simply the local damages that result from compromised air quality and are happening right now.

Lest it be unclear, this most certainly isn't about turning our back on coal (or even agriculture, another industry with a surprisingly high un-costed air pollution damages figure). Or markets in general. It is simply about trying to account for full costs and thinking about the best ways in which we can do that. That's all that good economics is about.

A little bit of Friday awesome

That is all.

Have a good weekend everyone.

Thursday, September 29, 2011

Easter Island - History revisi(onis)ted?

I've just handed in a fat micro assignment and thus finally seen the back of a hellish two weeks. Twelve-hour days (plus) have become the new norm... and then working on weekends as well. Who said university life was lark? Still, I'm acutely aware that I need to keep the odd post going so that I don't lose my readership entirely. In that spirit, I recently came across a fascinating debate concerning Easter Island.

"What's so important about Easter Island?", you may find yourself asking. Well, in short, people have long used it as cautionary tale of the human risks associated with environmental degradation. A once-stable and relatively prosperous civilization suddenly imploded as the supporting systems of their natural environment began to fail. Worse still, these wounds were self-inflicted; it was the islanders that caused the very environmental damage that brought about their demise. This idea was perhaps most memorably outlined by Jared Diamond, in his 2005 book Collapse.

Earlier this month, however, the British environmentalist Mark Lynas (whom I've mentioned favourably before) wrote a blog post that sought to overturn this standard, "ecocide" account of Easter Island's downfall. Drawing on some new archaeological research, Lynas shaped to explain why many of the traditional ideas on the subject are completely wrong. Most importantly, he claimed that the Easter Islanders were actually good stewards of their environment and were thus largely blameless for the fate that befell them. Instead, the tipping point for environmental collapse came with the arrival of European settlers, who brought the disease and invasive species (most notably rats) that ultimately decimated the indigenous plant and animal life. As Lynas's post was one aimed at refuting the orthodoxy, it probably won't surprise to learn that Jared Diamond was the primary focus of much the criticism.

So what happened next?

Well, Diamond responded to this stinging critique by penning an excellent rebuttal, which describes in some depth why the revisionist view is highly implausible (to put it kindly), and why the traditional account continues to provide the most compelling thesis. Ever the scholar, Diamond's tone is never less than respectful and thoughtful, although the evidence he cites is rather damning. I was particularly struck by his concluding paragraph:
The islanders did inadvertently destroy the environmental underpinnings of their society. They did so, not because they were especially evil or deprived of foresight, but because they were ordinary people, living in a fragile environment, and subject to the usual human problems of clashes between group interests, clashes between individual and group interests, selfishness, and limited ability to predict the future. Does that remind you of any problems that we ourselves face today? That’s why we find Easter’s story so gripping, and why it may offer us lessons.
Sage words indeed.

PS - Kudos must also go to Lynas for publishing Diamond's reply. (I believe he is currently seeking a response from some of the researchers that he initially quoted. ) This is what scientific and, I daresay, moral progress looks like. No room for sacred cows... but no indulgence of second-rate science either.

Friday, September 23, 2011

First journal submission

In other news...

I finally submitted my (co-authored) paper to a journal yesterday.

Electricity Prices, River Temperatures and Cooling Water Scarcity

Thermal-based power stations rely on water for cooling purposes. These water sources may be subject to incidents of scarcity, environmental regulations and competing economic concerns. This paper analyses the impacts of water scarcity and increased river temperatures on German electricity prices from 2002 to 2009. Having controlled for demand effects, the results indicate that the electricity price is significantly impacted by both a change in river temperatures and the relative abundance of river water. An implication is that future climate change will affect electricity prices not only through changes in demand, but also via increased water temperatures and scarcity.

All told, I'm pretty happy with it. We'll see what the reviewers think, though... As I understand it, these things take their time and I'm only expecting hear back at the start of next year. Still, a big relief to get it out the door.

Happy birthday to Stickman's Corral!

Well, a day late... but that can probably only be described as fitting.

Of course, recent postings have taken a severe backseat, as you might have observed. To be completely honest, I'm not sure whether I'll ever be able to get back into (semi) regular blogging activity if my workload continues to be this heavy. Hopefully that isn't the case, though... I've been told by almost everyone that the first semester of PhD is the worst.

But, enough blagging. You didn't stop by to hear excuses for current blogging inactivity. You came to see a review of the year passed! (If you didn't; unlucky just go with it.) So, without further ado...

The top five posts over the last twelve months, in terms of unique page views, have been:
1) Why we need maths in economics (317 page views)
2) Movember* (266)
3) Meat and Veg(etarianism) (129)
4) Facts vs Beliefs (114)
5) Should pregnant women be banned from smoking? (110)
* Somewhat depressingly, (2) has virtually all been traffic directed from "movember" image web searches... And, almost certainly for the logo itself rather than my steamy latino pose.

The five most commented on posts are fairly similar:
1) Facts vs Beliefs (24 comments)
2) Should pregnant women be banned from smoking? (21 comments)
3) Meat and Veg(etarianism) (11 comments)
4) Mises's action "axiom" or false dichotomy? (8 comments)
5) And then a bunch with six comments...

If these staggering </sarcasm> numbers weren't enough for you, in terms of readership by country we have:
1) United States (1,871 page views)
2) South Africa (728)
3*) Norway (519... although we should really exclude this as they're mostly mine)
3) United Kingdom (470)
4) Canada (173)
5) Australia (145)

Thanks to everyone that has ever stopped by The Corral for a visit! 

My own favourite posts are bit harder to nail down, especially in the little time I have available here. Still, alongside some of those already mentioned, here are a couple that I probably did enjoy writing more than others:

The lessons that I have learned from blogging very closely parallel my general experiences in the blogosphere. And, on the whole, they are certainly positive. 
  • It really is a great resource for testing and expanding upon ideas; both in the sense of how others respond, and making sure that you understand an idea well enough to write it down in plain language for all to see. (Not that I always managed this...)
  • Blogging takes up a lot of time. For me anyway. That may simply be due to the fact that I am something of a stickler for facts and have an uncanny knack for stretching a story out. Being on the long side of winded is not my favourite personal trait, but at the same time I don't wish to let go of it completely! I'm hoping that keeping this blog has actually moved me towards some kind of middle ground.
  • It's hard to attract a big, regular audience unless you focus on specific, narrow themes. Jumping between completely unrelated topics kills your readership. My feeling is that people mostly visit blogs because they expect certain themes to be consistently addressed (even though the applications can vary widely); not to hear someone's everyday ramblings on whatever interests them. Unfortunately, I tend towards the latter... but so be it! (Although, I certainly have written posts simply because I thought that it would interest one particular person who might have been reading.)

Something I also want to mention specifically is music. I was hoping to put together a downloadable playlist of all the songs that I've linked to over the course of the year... but who has the time? I hope that you'll settle for YouTube links:

Not a bad collection, if I say so myself! (With a little help from the odd Poncey guest post and suggestions by others.)

And with that, I have some GMM estimation techniques that need looking at.

See you soon,

Thursday, September 8, 2011

Like a kid on Christmas eve...

The Rugby World Cup 2011 starts tomorrow... BOOM!

Good times... GOOD times.

Will South Africa become the first team in the tournament's history to successfully defend the title? Is 2011 a few years too early for Australia's team of gifted youngsters? Can this New Zealand side finally put a 24-year hoodoo to rest on home soil? Most importantly, will Stickman's cable subscription hold out and provide the coverage he deserves needs to stay in touch with all the key games... despite his residing in a far-off land where the primitive locals are ignorant of the intricacies of the scrum, the savage beauty of the crash tackle, the deft touches required to put the inside man into space... and where combining the words "hooker" and "prop" in a sentence is likely to only invite accusations of sexual depravity? (Uncivilised boors!)

My tentative answers to the above questions are: 1) "I fear not"; 2) "probably"; 3) "well, they won't be staying on home soil otherwise";... and 4) "by God, I hope so!".[*]

Really, all other sports are just for laughs. This is what I'm talking about:

Krugman, Hotelling and gold

... and negative (short-run) supply curves.

Paul Krugman's recent column, which links the high price of gold to a disinflationary environment, has generated a lot of discussion in the blogosphere. In essence, he references the Hotelling Rule to show that a high gold price is perfectly consistent with the rock-bottom treasury yields... despite the fact that these two extremes seem to simultaneously imply contradictory expectations of 1) hyperinflation and 2) deflation/very low inflation.
What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold. But if the price path is going to be flatter while still leading to consumption of the existing stock — and no more — by the time it hits the choke price, it’s going to have to start from a higher initial level. So the change in the path should look like this: 
And this says that the price of gold should jump in the short run. 
The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future. 
[...]For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. [...]So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.
Krugman's invocation of the Hotelling Rule here is pretty neat. I certainly count myself as someone in the non-inflationista camp and have been using the "right for the wrong reasons" line on gold bugs for a while. At least those claiming the high gold prices reflects an impending surge in (hyper)inflation, while the actual numbers themselves -- CPIX, BPP and bond rates -- show anything but. It's like an overweight person looking into a fairground mirror and congratulating themselves on their successful diet... all the while losing weight for unrelated reasons. Perhaps they've become enamoured with their reflection and forgotten to eat?

Tortured metaphors aside, I do, however, have two problems with Krugman's analysis:
  1. Bond rates certainly aren't low everywhere (Greece, Portugal, etc), and US consumers certainly aren't the only ones buying gold.
  2. The Hotelling Rule has, historically, been a poor guide to the price path of gold (and, indeed, other metals). There's nothing wrong with the reasoning behind the H-R in of itself; indeed, it conveys an elegant truth that is almost impossible to refute, ceteris paribus. However, abstracting to a pure interest rate effect hasn't proven empirically successful. In short, it has been overwhelmed by technological shocks on the supply side, as well as other demand-related factors.
That's not to say that there isn't merit in Krugman's argument, because it certainly serves a purpose in trying to reconcile high gold prices and low interest rates. At least, in the US. My own opinion differs, to be sure, but is not entirely incompatible. I see the high gold price is primarily a function of fears of insolvent governments being unable to repay their debts, and the simple dearth of alternative investment opportunities out there. As long as equities are yielding negative returns and bonds yields are low and/or risky, even modest rises in gold prices suddenly become very attractive. <Insert jokes about beauty contests here.>


There is a quasi-related factor to all this is that I want to finish today's post with:

The supply elasticity of gold production in certain countries -- most notably South Africa -- is negative. That is, gold miners actually cut back on production following an appreciation in the price of gold rise. Just as high gold prices and low interest rates seem incompatible (at least at first blush), the idea that producers should reduce production in the face of rising prices appears to contradict common sense. Until you understand a bit more about the circumstances under which gold miners operate.

Gold mines in South Africa are incredibly deep, making them complex and expensive operations to run. When the price of gold suddenly rises, producers are afforded the opportunity to prolong the life expectancy of a mine. They do this by mining the poorer quality veins of gold first, since it is now profitable to do so. When the price falls again, whether that be in absolute terms or relative to costs, they switch back to mining the richer deposits and thereby maintain projected cash flows. Gold producers are thus trading off short-term profitability against the expected lifetime value of their mines.

Rather presciently, John Maynard Keynes hypothesised the backward-bending supply curve for South African gold production for these reasons back in 1936.

THOUGHT FOR THE DAY: There are many factors pushing up the price of gold to extreme highs. Personally, I don't think that inflationary fears can justifiably be cited as the key driver. At the same time, there are reasons to be sceptical that high gold prices necessarily follow low interest rates (as per the Hotelling Rule). Nevertheless, there are certainly strange forces at play in determining the gold price right now. Some of the most important ones would, at first glance, even appear to contradict common sense. It may be convenient to be right for the wrong reasons for a while, but you wouldn't want to stake your career (or your house) on it any longer than is necessary.

Friday, September 2, 2011

Privileging theory over evidence

It's late and my brain is in desperate need of sleep, but I've just read something very interesting on the blog (via Twitter). In particular, Bob Murphy shapes to provide a takedown of a new book by economic anthropologist, David Graeber, on the true origins of money: Debt: The First 5,000 Years. Bob's motivation appears to stem, in large part, from the awkwardness that Graeber's thesis would imply for adherents of Austrian economics. As he writes in the introduction to his article:
Last week the popular blog "naked capitalism" ran an interview with David Graeber, an "economic anthropologist" whose new book allegedly destroys the standard account of the origin of money. If correct, Graeber's views would prove embarrassing to the Austrian School, because it was none other than Carl Menger who developed the first systematic explanation for how people went from barter to a full-blown monetary economy.
Bob then goes on to summarise Menger's position, before refuting Graeber's challenge in the body of his post... Which is all good and well, except that Graeber has provided an outstanding reply in the comments section, which rather eviscerates the original critique.

Graeber's comment is very long (broken up into six parts), but well worth reading through the whole thing to get a full sense of his arguments. In the interest of being fair to any Austrian readers, at this point I should probably say that -- as suggested by the quoted text above -- this is more a matter of pride than a fundamental attack on, say, ABCT. While awkward for Austrian sympathisers, I'm not trying to claim that the possibly of Menger being wrong in this instance serves to invalidate the edifice of Austrian Theory...[*]

That being said, it remains a very interesting topic, especially in these fractious times where the proponents of "hard money" and fiat currency are clawing at each other's throats. More fundamentally, the debate serves to highlight something closer to my own heart: The dangers of privileging theory above evidence.

As Graeber's writes:
As for the supposed refutation of my example of the village where people loan things to one another, no, [Murphy] does not get my argument right at all. First of all, we are not dealing with a situation where people borrow things from one another and expect an equivalent of exactly the same value. I suppose the certain Austrian school theories of human nature assume that's what neighbors in a moneyless economy would do with one another, but again, this just shows a flaw in those theories of human nature, because when tested against the empirical evidence, this is not what one finds.[...]  
I think the participants in this forum should reflect on what they consider the status of economics to be. Is it a science that generates hypotheses about empirical reality that can then be tested against the evidence, and changed or abandoned if they don’t prove to predict what’s empirically there? Or is it a kind of faith, a revealed Truth embodied in the words of great prophets (such as Van[sic] Mises) who must, by definition be correct, and whose theories must be defended whatever empirical reality throws at them – even to the extent of generating imaginary unknown periods of history where something like what was originally described “must have” taken place? 
Well said. I've expressed my scepticism about the extreme a priori approach adopted by certain Austrians before (e.g. here and here). Yes, it's true that we can deduce much about human behaviour and economic systems based on a few key assumptions -- indeed, all theory aims to do something along those lines. However, I find the notion that these simple axioms provide the foundation for understanding the full complexity of economic activity, without the need for supporting empirical evidence to be... well, nothing short of the pretence of knowledge.

[*] Indeed, from my reading of things, Graeber appears to be refuting Adam Smith's account of the barter economy as much as anyone. Let me also state for the record that I actually look forward to Bob's response. I've seen him stage a comeback before after appearing completely cornered on an issue before, so you never know...

Thursday, September 1, 2011

Cover Thursdays - Poncey Dylan edition

Guest post.

My mate, Poncey notes my calls for help RE this whole blogging thing and a lack of sufficient posting time. I would also let the record state that the man has started up his own blog, which you'll no-doubt be wanting visit straight after reading this! Who can resist a "A Smörgåsbord of weighty opinions[...] An exotic blend of rants, sport, music and observations of the absurd in everyday life -- as well as some other kak."? Not I. Anyway, here the Ponceman making a fairly ballsy call - Ed.

Right, so you get really excited when you hear that one of your favourite bands is singing a cover of one of your favourite artists.  In this case it's the Decemberists* doing Leonard Cohen's 'Hey that's no way to say goodbye'.  You patiently wait for it to be released and for it to reach YouTube and when -- and I'm just finishing my first listen here as I type -- you hear it and you're thoroughly disappointed.

I was going to say something along the lines of you've got to have a huge set of stones to cover Leonard Cohen, but then I realised that an oke named Rufus Wainwright and Liv Tyler have done decent efforts -- so maybe he lends himself to the cover a bit better than Bobby D.

If you're reading Stickman's blog or know the man personally you're probably not averse to the odd thesis-length post or conversation (he remains the only person I've ever heard use annotations during a conversation), but I'm going to keep this relatively short.

Covering Dylan is an insane risk in my opinion.  Yes, Guns 'n Roses, Jimi Hendrix and no doubt some quite enjoy the wailing of Joan Baez or the unbearable naff-ness that is the Byrds.  Yes yes.  Making something that is already brilliant more popular ain't really the point.

HOWEVER, I do believe I have found the greatest Dylan cover ever.  Up until two months ago it wasn't on YouTube, but here it is now for your enjoyment.

Aim your stones at the body.  Go.