Thoughts on economics and liberty

William Nordhaus thinks population decline is a good thing and resources are constrained. That’s why he is such a mediocre pen-pusher.

William Nordhaus is a big name now in economics, with a Nobel under his belt. But I have strong differences of opinion with him. I consider him a mediocre pen-pusher. I fundamentally object to his recommendation for a carbon tax (SCC) without proof of harm.

Julian Simon considered Nordhaus’s methodological advances might have added something of value to economics, although Simon’s conclusions were transformationally different to those of Nordhaus. This extract from Ultimate Resource.

Like Oscar Wilde’s cynic, to them an economist is a person who knows the price of everything but the value of nothing. But in fact, to be a good economist one must be able to establish a sound valuation – and that means not leaving out any important elements relevant to the valuation. Of course economists often fail, but this is not a failure of the science but of its practitioners. The question really hinges on what will and will not be included in cost-benefit analyses. Economists have long taken into account goods other than those that pass through the market when doing cost-benefits analyses of such governmental activities as dam building. Included have been the value to vacationers of boating and other recreational opportunities. At the same time, economists have tried to determine the felt costs to people who would be moved from their homes by the building of a dam. I am not suggesting that these analyses have always been carried out well, but simply that economists have been cognizant of the need to include magnitudes other than those paid for in money. They have mostly proceeded by estimating how much people would pay to obtain these goods or to avoid these bads if given the opportunity to do so. In all cases, the magnitudes that have been considered have been impacts upon human beings, taking futurity into account with the discounting mechanism in standard economic fashion. On a macroeconomic level, economists – William Nordhaus and James Tobin early among them – have experimented with factoring some important non-market goods and bads into expanded estimates of national economic welfare. They have found that these expansions of the intellectual framework do not change the general impression left by GNP times series, however. But these widenings of the standard economic measurements have not satisfied many ecologists and a few economists. One major charge is that conventional economics does not take into account a depletion cost of the use of natural resources. But such an entry into the calculation often turns out to be double counting, and assumes that the value of materials extracted will be rising in the future rather than falling, as we have seen (see chapter 2 for materials and 11 for energy.)

Another assertion is that the effects of our activities other than on humans should also be included in the calculations. That is, eradication of mosquitoes and reduction of malaria might simply be recorded on the positive side of the ledger by economists. Biologists ask that the effect upon the mosquitoes, and upon species in the rest of the ecosystem such as fish that eat the mosquito larvae, also be taken into account.

I decided to investigate personally, starting with his 1974 article: Resources as a Constraint on Growth

This article is very problematic. The worst part is that while the world was exceptionally cold and scientists were screaming “Ice Age”, Nordhaus was busy thinking that CO2 is a problem –  as long ago as in 1974! He went off on a complete tangent after that, working on ways to tax the world. This type of economist brings great disrepute to the discipline.

==EXTRACTS==

Resources as a Constraint on Growth By WILLIAM D. NORDHAUS*

For a considerable part of its history, the American economy has functioned as a cowboy economy. It has been a cowboy economy in the sense that there have been no important resource constraints on growth. This is not to say that land, minerals, and a clean environment have been freely available. Rather, agricultural land could be obtained at roughly constant costs; most essential minerals have been present at fairly high grade in considerable abundance; and the environment could be used as a sink without becoming fouled. In the last several decades, however, cropland has stayed almost constant. Some high grade mineral deposits have been exhausted, and the carrying capacity of our environment has been strained. [Sanjeev: This is in TOTAL CONTRADICTION to what Simon has found – and that’s the kind of problem with Nordhaus: he is not a deep thinker]

The scarcity of resources has led many to argue that the operating rules of our economy must change. Whereas in the cowboy economy we could afford to use our resources profligately, the new view of economic growth is that the closing of all our frontiers means that we are now operating in a spaceship economy. In a spaceship economy, great attention must be paid to the sources of life and to the dumps where our refuse is piled. Things which have traditionally been treated as free goods—air, water, quiet, natural beauty—must now be treated with the same care as other scarce goods.

It would seem difficult to question the observation that the world economy is progressing toward a closed system. Many have carried this observation further, describing a future imperiled by famine, depleted of essential materials, running out of energy, or choking in its own exhaust fumes. Behind these pessimistic visions is a deeper skepticism about the very fruits of economic growth. [Sanjeev: I strongly differ with this absurd view]

Economists have for the most part ridiculed the new view of growth, arguing that it is merely Chicken Little Run Wild. I think that the new view of growth must be taken seriously and analyzed carefully.

What have we learned about the new view?
The first set of studies relates to theoretical investigations. (By theoretical I mean propositions based on largely untested assumptions about model structure —perhaps hypothetical would be a more accurate term.) In this category belong the celebrated writings sponsored by the Club of Rome as well as many offshoots of this work (Jay Forrester, Dennis H. Meadows et al.). These works have demonstrated that, under certain conditions involving technology, population, and resource availability, a sustained growth path for consumption is not possible.

The conclusions of these works have not generally been accepted by economists because of the dubious nature of many of their assumptions. In particular, the assumptions regarding population growth and technology are quite unsatisfactory. Several authors have shown that the conclusions of these models are not robust to minor modifications in structure. Thus R. Boyd showed that introducing a new factor called “technology” would drastically alter the model’s path. My work (1973a) showed that any of three changes in model structure—ongoing technological progress, adequate factor substitution or population decline—would lead to opposite and more optimistic results. [Sanjeev: Nordhaus thinks that POPULATION DECLINE WILL BE A GOOD THING – Simon would strongly disagree. Population is the ultimate resource.]

It should be stressed, however, that all of the debate about Club of Rome models has been theoretical. It has been demonstrated that different world models paint drastically different pictures of future economic life. It is at this moment an open question as to which is the preferred model. [Sanjeev: Why is it an open question? These are ALL ENTIRELY WRONG] Only careful empirical analysis can indicate which of the alternative models is closer to reality.

What then of empirical studies of long-run constraints on growth? Although there have been no comprehensive studies, several particular problems have been investigated. I will report on recent findings for mineral resources and energy.

For centuries there has been virtually constant concern about the availability of mineral resources. Many recent studies have kindled this anxiety by showing that the ratio of proved reserves to current consumption (R–C ratio) for most minerals is very low. Fortunately, this is unduly pessimistic because the concept of reserves is entirely different from ultimate recoverable resources. Proved reserves are akin to the working capital or inventory of known resources. At the opposite extreme it is possible to calculate the total crustal abundance (CA) of different materials; of course this is unduly optimistic because it assumes that everything can be recovered. [Sanjeev: this is ENTIRELY wrong way to look at things – the concept of resource needs to be understood first, and Nordhaus has no clue] Somewhere between the two concepts lies the economically relevant measure—ultimate recoverable resources ( URR). [Sanjeev: THIS CONCEPT IS AN ULTIMATE PIECE OF GARBAGE] Although URR is a variable which depends on technology and price, we can as a first approximation use recent estimates prepared for the U.S. Geological Survey. These assume that URR is approximately 0.01 percent of total availability to a 1-kilometer depth (Geological Survey, p. 23). It should be emphasized that these estimates do not take into account the economic feasibility of mining lower grade ores as prices rise or techniques improve. [Sanjeev: This discussion is so puerile. It doesn’t even begin to understand what is a resource, and in particular a resource is NOT what is currently considered a resource. That’s why Simon is so vastly superior to such mediocre pen-pushers]

deleted a big chunk

Under the assumptions of the model it thus appears that the long-run outlook for energy prices is favorable, although less favorable than over the last few decades. (The assumption of competitive behavior is clearly unrealistic. A cartel of oil producers would drive up the short-run price. But as Robert Solow has noted, monopolists are the conservationists’ best friends: higher prices lead to lower consumption, a stretching out of finite resources, and possibly even lower prices in the future.) [Sanjeev: This is SO VERY WRONG – the ideal is to “exploit” as much as you can immediately, grow the population, grow innovation and create new resources tomorrow]

The final and probably the most difficult question concerns the environmental effects of energy use. Up to now, there has been considerable attention given to the “local” environmental problems—especially sulphur emissions from stationary sources and the emission of oxides of nitrogen, carbon monoxide and hydrocarbons from automobiles. Adapting a technology to these new constraints has proved difficult and costly, but there seems to be wide agreement that—with sufficient time and money—emissions can be brought in conformity with any reasonable set of standards (see National Academy of Science Report).

A second set of environmental problems

The report on Man’s Impact on the Global Environment reviews very thoroughly knowledge about the possible adverse global effects of energy consumption. The most important of these for energy were a possible “greenhouse effect” stemming from a large increase in carbon dioxide (CO2) production from fossil fuels and the problem of global heat balance. Although there is great uncertainty, meteorological studies indicate that a change of two degrees Centigrade in average temperature is the order of magnitude which could trigger “albedo instabilities” leading to melting ice caps or “equator-to-pole ice cover” (Massachusetts Institute of Technology, p. 98). [Sanjeev: The man doesn’t think for himself. He has bought into some garbage study and made a career out of “analysing” its implications. That study itself is badly faulty. A very poor example of a thinking human being.] Studies report that such a temperature rise could result from a doubling of atmospheric CO2 or from net waste heat of around 3 percent of total solar radiation (MIT, p. 88). These thresholds are well beyond current levels of human activity. Moreover, our limited supply of fossil fuels limits the production of CO2 to acceptable levels.

I have performed a rough calculation of the atmospheric concentration of CO2 along the efficient path described above. Assuming that 10 percent of the atmospheric CO2 is absorbed annually (G. Skirrow), the concentration would be expected to rise from 340 ppm in 1970 to 487 ppm in 2030—a 43 percent increase. Although this is below the fateful doubling of CO2 concentration, it may well be too close for comfort. [Sanjeev: this was the start of his lifetime work on the completely wrong problem]

Waste heat could conceivably be a problem—but not for a while. Energy consumption is currently about 0.003 percent of incident solar energy—a five hundred-fold increase (160 years at a 4 percent annual growth rate) would be environmentally unacceptable.

 

Sanjeev Sabhlok

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