The Pin Factory Blog

Ron Bailey over at Reason has a look at what modern science can tell us about the workings of the brain. The discovery of mirror neurons (essentially an extension of monkey see, monkey do, to monkey see, monkey feels like he do) and their part in the generation of empathy, plus the connections between this and certain forms of autism, all fascinating stuff. And all dependent upon the highest of high technologies: MRI scanners (the development of which got the 2003 Nobel in Medicine) and electro-encelphalogram studies.

But as Bailey points out, while the mechanisms have only recently been uncovered, the basic idea has been around for a couple of centuries or more:

"As we have no immediate experience of what other men feel, we can form
no idea of the manner in which they are affected, but by conceiving
what we ourselves should feel in the like situation," observed British philosopher and economist Adam Smith in the first chapter of his magisterial The Theory of Moral Sentiments
(1759). "Whatever is the passion which arises from any object in the
person principally concerned, an analogous emotion springs up, at the
thought of his situation, in the breast of every attentive spectator."
Smith's argument is that our ability to empathize with others is at the
root of our morality.

Given this further proof of his wisdom, might we be able to persuade a few more people to pay attention to what he had to say about political economy do you think? 

NB: Gavin Kennedy gives us the chapter and verse on the quotations for those who want to follow the reasoning more closely in the original. 

Will Hutton makes a good point here :

The state and market are in a symbiotic relationship of mutual need. Regulation delivers public good. And private markets and corporations are the better because of it.

Quite, absoutely no doubt about it, the only interesting question is exactly what form of regulation delivers the most public good. However, he does, in his examples, rather induce a fit of the giggles.

We now need a social-democratic Keynesian government.

This will make things better he thinks. As one of his examples he offers:

...an activist US government took over Continental Illinois bank in the Eighties.

I think that might be the first time I've heard Reagan's America described as being activist or social democratic, certainly the first time I've seen Paul Volker portrayed as a Keynesian. But then while all of that was going on I was merely an undergraduate at the university where Hutton is now a Governor, so what do I know? The thrust of the piece though seems to be that we should nationalise Northern Rock, just as Continental Illinois was taken over. He might even be right, but let's look at what actually happened way back when...

The situation was in fact eeriely similar. A bank with few retail deposits decides to expand by tapping the wholesale markets to borrow short and lend long. When those markets worry about the quality of lending, those wholesale funds can no longer be rolled over and the bank faces a liquidity crunch. Sound familiar yet? What do the authorities do? Well, first, they guarantee all deposits: yes, all, disregarding the previous statutory limits on deposit insurance. They extend assistance through the Fed's discount window. They guarantee to provide any liquidity needs Continental might have. (This is sounding, well, more recent, isn't it?) Then they fiddle around for a couple of months seeing whether anyone would like to take over the bank. That doesn't work, so then, well, do they nationalise it? In a sense I suppose, for the next part was that the Fed bought a chunk of the bank's bad loans ($4.5 billion) and then invested $1 billion in capital by purchasing preferred stock.

This gave them 80 percent of the equity and the bank survived, being taken over a decade later by another bank. With, for some time, continued liquidity support. 

No, I don't know whether this is the best solution for Northern Rock or not. I just rather like pointing out that Will Hutton is telling us all that we must be more socially democratic, more Keynesian, must follow the Continental Illinois path: when what we've been following for the past few months is exactly that Continental Illinois path, the one pioneered by the decidedly monetarist and free market America of the 1980s.

I really do love this piece in The Guardian about solar power. Almost all of it is an interesting overview of where the science is now and thus where the technology will be in a decade or so. It's all very encouraging indeed: the scientists seem confident that they'll be able to get generation costs from solar down to around and about the same as that from fossil fuels.

Something which will, of course, make a lot of the worries about climate change go away. Of course, this being The Guardian there's the note of doom as well:

But waiting around for the science to become technology isn't an option, says Martyn Williams, senior parliamentary campaigner at Friends of the Earth. "We are aware of moves to find new ways to generate electricity from solar power. We have to move faster than that because every tonne of carbon we pump out is adding to the problem."

So Williams' idea is that we should spend a lot of money now on bad technology now rather than wait for the technology which actually works. That is, we should make ourselves vastly poorer now than we need to be, reducing what we can spend upon the technology when it is ready.

But what really fascinates me about all of this is that if you go back and read Bjorn Lomborg's Skeptical Environmentalist again, his argument about climate change rested upon the following. Somewhere in the 2030-2040 time span, solar power will become cheaper than generation using fossil fuels. At that point we'll all naturally switch: and none of the models used by the IPCC acknowledge this fact (well, prediction perhaps). So all of the predictions of future emissions are too high (again, possibly).

Now as you might recall, Lomborg got a lot of stick for this argument, and it does look like he was wrong. Too pessimistic that is, not too optimistic, for that magic price moment looks like it might appear before 2020.

While there are an awful lot of people who say they like solar power, I have a feeling that if this comes to pass there'll be a few at least who won't be happy. Cheap renewable power will allow the whole capitalist/consumerist juggernaut to carry on which isn't the point at all for some people.

An American radio show, Planet Money, got together a group of economists and jotted down a list of policies that they all supported. An eclectic mix: Dean Baker is very much of the left for example and Russ Roberts somewhere to the right of me if such an intellecual position can be believed. It's an interesting list:

1) Eliminate the mortgage tax deduction. OK, we in the UK have done that. Nigel Lawson gave it the coup de grace and quite rightly too.

2) End the tax deduction companies get for providing health-care to employees. It's not tax deductible here: and I think it's a taxable benefit in kind, isn't it?

3) Eliminate the corporate income tax. Not happened yet but we can live in hope.

4) Eliminate all income and payroll taxes. Not yet: but there are a number of plans floating around for a consumption tax. The easiest way of doing which is simply to treat all savings and returns from them as if in a giant ISA.

5) Tax carbon emissions. Yes, we do that. At too high a rate actually.

6) Legalize marijuana. It's not quite legalised but not much is done about it unless you're spotted with a tonne or two.

What I think is interesting is the way in which such wildly disparate economists did agree on these policies. Further, that those that we have adopted are now entirely uncontroversial while the two we haven't as yet would be politically wildly unpopular.

Perhaps it's just another illustration of the way in which when economists are most united in their answer to a question they have the least public influence. I mean good grief, we've got several senior in the Labour Party currently arguing for a return of rent controls. The best way to destoy the housing of a city short of aerial bombing.

The White House has just announced:

To fulfill its functions, the federal government asks people to fill out a lot of forms. To get permits and licenses, to pay taxes, and to qualify for benefits and grants, forms are often required. Too often, however, those forms are too confusing and complicated, especially for individuals and small businesses.  Today we are doing something about that problem.

From now on, agencies will be asked to test complex or lengthy forms in advance, by seeing if people can actually understand them. Advance testing can take many forms. Agencies might use focus groups. They might use web-based experiments. They might try in-person observations of how users understand the forms.  From those tests, agencies will be better able to identify the likely burdens on members of the public and to find ways to increase simplification and ease of comprehension. 

We cannot let ourselves be beaten by such a group of rebellious colonials of course.

There's also a story rolling around my memory of Maggie, when in Number 10, insisting that she should try out the draft census form. As a result of which at least one question was dropped for being far too invasive. I would suggest that we build upon that precedent in order to beat those Yanks.

Any and every form that is issued for us hoi polloi to fill out must first be tried out on the relevant Minister (with local councils, the mayor, lead councillor, whatever, and so on through the ranks). No help from officials, no phoning a friend. Just the form and the proposed guidance notes in a locked office. Any form which cannot be so completed must and will be rejected as an imposition upon the populace.

The procedure will not happen once. It is something that will be repeated by every minister upon taking office: yea even if they're just moving around in the same department. Quite apart from anything else I cannot think of a better way for a politician to find out what it is that government actually does.

Now it is true, given the intellectual capacity of all many some most (choose your favourite here) who achieve high office, that we'll end up with a series of forms which can only be completed in thick crayon in words of one syllable. But that's fine: it all takes us a step closer to the paradise that Sir John Cowperthwaite enforced in Hong Kong. He refused to allow anyone to collect economics statistics like GDP on the grounds that if they were known then some damn fool would only have the impertinence to try and do something about them.

For here is the real point about all of this. It is right and proper that there is open government for we most assuredly should know what it is that they are doing to us with our money. But they should know little to nothing about us and what we do for we're free people in a free land and therefore it's absolutely none of their damn business how we decide to spend our lives.

Here actually is the problem with using relative poverty as a measure:

Compared to the 1960s, China today has higher income inequality,
but also incomparably lower levels of material poverty. By Brady’s
definition, China was less impoverished in the near-starvation years
of the 1960s than it is as an economic superpower today. According to
the OECD, during the last three decades the share of Chinese living
in absolute poverty dramatically declined from eight in ten to one in
ten (Garroway and de Laiglesia 2011). During the same period, relative
poverty, measured exactly as Brady measures it, roughly doubled.
Although inequality and relative poverty are not irrelevant for measuring
the well-being of a society, we should be apprehensive about a measure
of poverty that is incapable of detecting the largest decline in material
poverty in human history.

As pointed out, a measure of poverrty that not just ignores, but actually gets the sign wrong on, the largest reduction in poverty in the history of our species is of limited value.

Not of no value: as Adam Smith's linen shirt example shows. If you can't afford a linen shirt, but not being able to afford a linen shirt marks you out as being poor, then in that society you are poor if you cannot afford a linen shirt. But as our Chinese example shows only worrying about relative poverty is simply nuts.

Which leads us to something of a conclusion: it's fine to consider the distribution of incomes within a society. But we do it rather too much with the constant political obsession over relative poverty. We need to be paying a lot more attention to absolute standards of living: most especially how these change over time. Most specifically I'm thinking about the effects attempts to reduce relative poverty might affect our ability to increase absolute standards of living in the future.

For as ever in economics there is actually no solution. There are only a series of trade offs. We could, obviously, confiscate all of everyone's money and share it out equally. This is not going to make our children richer than ourselves equally obviously. Similarly, no one at all is suggesting that there should be no taxation at all to aid the lame and the halt of our society even if that might increase future growth rates. It's a matter of balance and to my mind there's much too much attention being paid to the relative part and not enough on the absolute incomes of the future.

OK, perhaps I shouldn't use a distaff side Johnson as a source of fact but this did rather strike me:

It’s A-level results day! If this year is anything like previous years, people will aerate about two things: grade inflation, and girls doing better than boys. Naturally, I disapprove of grade inflation except when it benefits my own children (at the time of writing I don’t know my daughter’s grades…) but when it comes to girls’ success as a cohort, I exult openly.

As a general rule one of the things that we know about education is that girls do better under a system of continuous assessment and boys under a system of competitive examination. This is of course not necessarily true of any one individual: but it is on average across any particular age cohort of children. If you want the girls to do better than the boys then skew the testing system to course work. Want the boys to appear to do better then forget the homework and see what they can regurgitate in two three hour periods in the summertime.

That we really do know that this is true comes from the way that a few years back the system of examinations in Enlgand and Wales was deliberately changed to reflect this very point. GCSEs, A Levels, are now more based upon coursework than they used to be. The actual exams themselves now have less importance in the system than they used to. The stated objective of this change was to lessen the skew in favour of boys that a purely examination based system entailed.

So it is possible to exult about the girls outdoing the boys these days if that's what you want to do. For it would be an example of a government policy, a very rare one indeed, actually achieving the goal originally set out. The educationalists wished to reduce the achievement gap between boys and girls. They did so.

Hurrah.

However, do note how they achieved their goal. Not by improving education in any manner. They did it by changing the scoring method.

Maybe not so hurrah, eh?

Apologies for this extensive quote from The Guardian. It might shock the eyes of those who generally avoid that particular paper:

One more thing is required of academia: to play its role right at the heart of democracy. Being adequately informed is a democratic duty, just as the vote is a democratic right. A misinformed electorate, voting without knowledge, is not a true democracy. Society needs the expertise of academics in the most important issues: climate science above all. A democracy then needs the press to disseminate academia's knowledge and to do so with integrity. But the media's ambition to be entertaining and provocative too often overrules its respect for intellectual rigour.

Journalists cannot hold degrees in every subject they report on, but their job is not to claim they know the science better than the experts, or to practise that consummate deception of pretending there is controversy when the consensus is overwhelming. But a controversy is more fun, and the media – skedaddling towards infotainment – is losing sight of the core purpose of its activity: to be a truthful messenger, in this case between the world of academia and the public. I would propose a system of certification for media articles in which there is a clear issue of social responsibility – a kitemark of quality assurance. It would be awarded by teams of academics, and be given to the article, not the journalist, recognising the facts, not the sometimes spurious credibility of being a "personality".

It would be awarded when the article is accurate, using reliable sources and peer reviewed studies. There already exists the Climate Science Rapid Response Team, which answers journalists' questions to help them achieve accuracy. The formality of certification is necessary, though, for the reader to know whether to trust an article. Accuracy must not only be achieved, but be seen to have been achieved.

Now note that this is voluntary. We're in favour of voluntary cooperative action around here so let us applaud this idea.

However, let us also insist that this be carried over into the realm of what we do about climate change assuming it exists. For there are experts there just as there are in whether it exists. And we call those experts "economists". Those who study how human beings respond to the incentives in their lives. These are the correct experts to be using of course, for assuming that climate change does exist, is a problem we want to do something about and is amenable to human action (as you all know, generally my own view), then it is indeed changing what humans do that will be the solution. Which, in turn, means changing the incentives humans face.

So, entirely happy to support the idea of a "kitemark" scheme, an entirely voluntary one, for articles on the science of whether climate change is happening and how. But that same scheme also needs to extend to cover those articles which discuss what we should do about it. Something which, I assure you, will be much more entertaining.

For absolutely nothing from nef, Greenpeace, Friends of the Earth, Action Aid, CAFOD, Oxfam or any of the other NGOs will manage to pass such a test. Certainly nothing put forward by Jonathan Porritt, George Monbiot, Bill McKibben would achieve the badge of sensible and factually based policy. Most of the output of the various scientific institutes, even of our own government's Chief Scientific Officer would go unlaurelled. In fact, it's a reasonable certainty that articles by the Ministers involved, laying out their policies would fail, as would Green and White papers as proposals for legislation.

For the truth is that economists are in general of one mind about what we should do about climate change, assuming that it is happening, is amenable and so on. We should either have a carbon tax or a cap and trade system. And that's all we need. Set the incentives, get the prices right, and let that only calculating engine that we have capable of solving for a solution, the market, get on with its job.

The disagreements are more trivial. Should we tax now and hard now (Stern) or lightly now and more heavily in the future (Nordhaus)? Should the actions attempt to prevent a 2oC rise or not (Tol often enough)? Should it be a tax or would cap and trade allowing the idiot politicians to meddle more be even worse (erm, me, who is not an economist)?

I would certainly su[port a scheme which asked for an verified scientific accuracy in articles about climate change. For I know very well that almost all articles suggesting what we should do about it will fail such a test. Which would be, don't you think, just so hugely, hugely, entertaining? As well as educational.

I know, I know, climate change isn't happening, it's all been made up. OK, so, for the next few paragraphs let's just assume that it is, we're causing it and also that we need to do something about it. And here's yet another example of what we want and need to do about it is a simple and straightforward carbon tax:

Scottish Renewables said that although the review had reduced connection costs for generators based on the mainland, estimated projected annual connection charges for the Pentland Firth and Orkney Waters area have almost doubled – from £56 million last year to £107m in 2020. Had the affected projects been built in the UK's other Marine Energy Park, in the south-west of England, they would instead receive an annual subsidy amounting to around £2m.

The point here being that connecting the Orkney Islands to the national grid is bloody expensive. Connecting Cornwall to the grid isn't (even if connecting it to the 21 st century still has some way to go). Thus, assuming that we actually want tide and wave power to be used to run washing machines in London we should be connecting up Cornwall and not the Orkneys. This is what prices do for us, give us the information we need to make decisions.

In addition, the increasing capacity of renewable electricity due to be generated in the Orkney waters from wave and tidal projects will require a new, larger grid cable at additional cost. The Government has the power under the Energy Act, as amended by the Climate Change and Sustainable Energy Act, to adjust transmission charges for renewable electricity generators in a specified area in the UK. Stuart called on the Government to use this power, which can be exercised if renewable development in a particular area is likely to be deterred or hindered to a "material" extent by the level of transmission charges that would otherwise apply, for the benefit of projects in the Orkney Islands. "We would like to see the Secretary of State for Energy and Climate Change use his powers to adjust the transmission charges and ensure costs do not deter renewable energy generation in the north of Scotland, home of the world's leading wave and tidal sector," he said.

And there's our problem with the current system. Having given the Sec of State the power to intervene then the political pressure is on the Sec to intervene and ignore prices. And make our solution to climate change ever more expensive for political reasons.

Oh, did I mention that the constituency is the longest held Liberal/Lib Dem seat in the country? The same party as the relevant Sec of State?

As at the top, assume that climate change is happening, it's a problem, we're causing it and we must do something. What we must do is therefore change just one thing, the price of carbon. Instead of this appalling mish mash of regulation and political favouritism that we currently have. For we can see that when politicians have the power to pick and choose they're always urged to pick and choose the method that picks our pockets even more. What's worse, they often agree to do so.

So we've another of these fellahs trying to tell us that economics has got it all wrong. You know the sort of thing: economics doesn't consider pollution or other externalities. When half the subject in recent decades seems to have been about that very point. Or that it doesn't consider value to people properly, only thinks of what can be counted in lucre. When the very definition of economic value is the value to people, both monetary and non-monetary. Here's we've the wallah from the Institute for New Economic Thinking over in the US insisting that we've got to change economics once again:

But what happens when economists' implicit value assumptions break down? Take, for example, the so-called "Easterlin paradox," which teaches that when a person's income rises beyond what's necessary to meet their basic needs it does not increase their happiness. This doesn't match the standard capitalist economic assumption that rising personal wealth leads to increased individual fulfillment. Yet it's been proven time and again. And economics ignores this. Our textbook models remain unchanged.

There's two slight problems to this interesting little thesis. The first being that no one at all ignores the Easterlin Paradox. M'Lord Layard (as an LSE Professor and Labour Peer, ignoring the Old Etonian and Head of Pop bit, about as establishment a figure as it is possible to be) has based much of his happiness economics on this very point. The Spirit Level depends upon it and it's most certainly taught in an undergraduate degree in the subject. So to say that economics ignores this thus we must think again is a little odd. Almost as if the writer doesn't know that standard economics already incorporates what he says it does not.

The second little problem is of course that the Easterlin Paradox is in fact wrong. There is most assuredly a declining marginal utility to money. That last £10 of a £1,000 a day income brings less joy than the first £10 of a £10 a day one most certainly. This on its own leaves room for taxation, moving that £10 from a lower utility use to a higher one if that's what you're looking for. But declining marginal utility, a truth, is not the same as zero marginal utility, the claim. We actually find that there is indeed something of a break point, but that extra joy is still there, it just rises with the log of income rather than the amount.

So perhaps we should rethink economics and root out all of those conclusions that rely upon the Paradox being true after all.

My own assumption about what is really going on in the Paradox is that it isn't actually the level of income at all that makes the difference. It's the growth or not in it. In an economy that's humming along at the standard frontiers of technology pace of 2-3% then people are about as happy as economic growth is going to make them. Zero growth makes people less happy than this optimal rate: and a shrinking economy makes people very unhappy indeed as can be seen all over Southern Europe right now (note that if Easterlin were actually correct then falling incomes above that basic needs level would not make people unhappy. Not something I think we're currently seeing really). Happiness is thus correlated with the rate and direction of change of income, not the level of it.

But as I say, that's an assumption of mine, not something I'd really like to have to prove.