Archive for September, 2009

Well-Fed Norwegians

September 29, 2009

Reporting on the Norwegian election, the Economist has an amusing description of Norway and Bergen (my hometown) in particular:

Norwegians […] seem a largely content bunch. Why wouldn’t they? A stroll through Bergen, Norway’s second city, reveals handsome, well-fed citizens who work in designer offices or high-tech fishing vessels, relax in art galleries and theatres, and enjoy pristine scenery. Education is free and health care is heavily subsidised.

Krugman Picks Up the Ball

September 29, 2009

After I started discussing cap-and-trade, Krugman saw the need to explain the economics behind it (not the best ‘popular’ explanation of an economic idea, maybe, but fair enough; from the top of his head, I guess).

Anyway, in Krugman’s picture it is fairly easy to see the equivalence of a cap on emissions, which limits the amount of pollution allowed, and a tax on emissions, which increases the costs of pollution and thus indirectly limits pollution. A tax would be set equal to the permit price, polluters would pollute until their marginal benefit of more polluting activity equals the tax, and the deadweight loss would be the same as in Krugman’s picture.

As Kolstad pointed out, a cap may be better because the market knows best how to price pollution (a bureucrat would need to know the marginal benefits curves of all polluters to set the right tax). The right (or ‘optimal’) cap level, however, needs to be set by a bureucrat, and that is not necessarily any easier. (‘Really low’ is perhaps good enough in the current situation, though.) Main point is, there’s a lot of uncertainty around these things; how much do we need to reduce pollution, how much should we spend, what are the benefits; it goes on and on.

Hat-tip: Env-econ.

UPDATE: Jim Roumasset makes a lot of sense over on Env-Econ:

Taxes are better we are told because they generate more revenue. In contrast, cap and trade is said to be better because its primary purpose is to control pollution, whereas the primary purpose of emission taxes is to raise revenue. I’m afraid that these propositions cloud the waters.

[…] In the world of perfect competition, controlling quantity with price (Pigouvian taxation) is exactly equivalent to controlling price with quantity via transferable and auctioned permits. This remains true even if there is uncertainty about marginal damage costs but not about the marginal benefits of emissions (Weitzman, 1974).

[…] The equivalence perspective is also useful for understanding the implications of taxes vs. permits for revenue. In the world of certainty, there are none! Again, a specific tax on all emissions is equivalent to auctioning the permits. Same price, same quantity, same revenue. […] cap and trade can be designed to match the revenue-raising implications of carbon taxes and vice versa.

So much for blackboard economics. In the real world we have uncertainty about both costs and benefits. Clearly it is possible to design hybrid schemes that are superior to either taxes or permits, but I don’t think we have strong results about the optimal hybrid scheme.

Advice to Phd Students

September 27, 2009

I came across a post with advice for graduate students on Greg Mankiw’s blog which links to a lot of interesting reading. Among Don Davis’s advice on finding research topics, I found the following phrase:

Most of economics is boring. No, I don’t mean this in the way that the public at large means it; on the contrary, I think that economics done well can be beautiful and fascinating. What I mean is that most writing on economics is boring because: (1) It does not address interesting questions; (2) It has nothing new to add that is itself important; or (3) Even if the researcher does in fact have something new and important to say, the researcher does such a poor job of articulating this that the reader has little chance of figuring this out.

I take this as another push toward working on writing well, and an indication that writing is very important when it comes to contributing to a science. Science is social, and contributing in a social setting means communicating; doing it well means communicating well, and writing is the way the important communication happens in economics. (I mean, a lot of communication goes on in seminars, on conferences, and workshops, and it is important to do that well too, but when it comes to contributing to the science, it’s the writing that matters, not your slick tounge.)

Cap-and-Trade vs. Tax

September 26, 2009

There’s a debate in the US about cap-and-trade as a means to curb greenhouse gas emissions. In a short article in the Harvard College Economics Review, Charles Kolstad, an economist at UC Santa Barbara, claims that a cap-and-trade system is not a tax in disguise, something which has been claimed.

In your first environmental economics class, you’ll learn how a cap or quota on something, pollution for example, is equivalent to a tax in some aspects. They may spread income around differently, but not necessarily. They may also differ when it comes to efficiency. An important issue is how the price (the price of the quota or the level of the tax) is set. Kolstad writes 

 

A […] subtle advantage of a cap-and-trade system is that the pollution price is induced by a market, not chosen by a bureaucrat [p. 23]. 

But how does Kolstad argue his claim?

 What is the difference between a tax and a revenue-raising cap-and-trade? The primary purpose of a tax is to raise revenue; a secondary purpose is to modify incentives (perhaps even perversely). The primary and fundamental feature of a cap-and-trade system is that it induces a price on pollution, providing an incentive for polluters to innovate and clean up their act. A secondary feature is that revenue is collected. That secondary feature can be neutralized by reducing taxes elsewhere in order to make the program revenue neutral. This is why a cap-and-trade system is not the same thing as a tax [p. 23].  

 The argument is semantic and I don’t find it convincing; I’m tempted to say not even true. To be sure, the encyclopedia entry for tax on dictionary.com says:

[I]mposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well (my emphasis).

Landing fees on harvested fish, for example, is a tax whose primary purpose is to modify incentives and not raise revenue. Further, any tax can in principle be made revenue neutral. However, Kolstad is more concerned with the political process of getting cap-and-trade through legislation, where, presumably, semantics are important.

[A] revenue-neutral cap-and-trade, which cannot be labeled a tax, may have the easiest time making it through the tough political obstacles it faces [p. 23].

Philosophy of Taekwon Do Fundamentals

September 18, 2009

The five fundamental principles or tenets of (ITF) Taekwon Do are courtesy, integrity, perseverance, self-control, and indomitable (unconquerable) spirit. Once, a 3. Dan (third level black belt) asked me which of the principles was the most important. After some contemplation, I realized self-control embodies the other four principles and concluded that self-control is the most important fundamental principle of Taekwon Do.

After further contemplation, however, I realized that my conclusion depends on an unsettling premise; it requires that self-control is necessary to be courtly; that self-control is necessary to maintain integrity, and so on. In other words, that self-control is the most important principle implies that humans are inherently impolite, corrupt, lazy, and have a weak  spirit; self-control is needed to control the in-built human features.

The premise that humans are inherently impolite, corrupt, lazy, and spiritless is not necessarily wrong, but certainly implies a negative view of things. If, instead, the premise was that humans are polite, honest, persevere, and spirited, as part of a more positive view, self-control would not be required, it would not embody all other principles, and the five principles would be of equal value.

Innarresting Links

September 17, 2009

Various interesting stuff:

One Year with Kvams

September 16, 2009

It is now exactly one year since I started this blog. It’s been 156 posts (including this one), 2 pages (I planned to publish my About page on this anniversary, but ended up postponing it, again), 11 categories, and no less than 486 tags. More interestingly, maybe, Have I achieved anything of what I wanted with this blog?

Well, I’ve discussed books, some rather extensively (to a blog, at least [I think]); the blog at times may look like a discussion with myself (although that point has gone lost on me for a long time; however, it is obviously not a discussion with anyone else; it feels like talking to myself [and the occasional stray dog wandering in from Google], but that was also a part of the point); I’m not as critical as I’d ideally be, I think (I know!); I’ve certainly got a lot of writing exercise; I haven’t discussed music to the extent that I originally imagined and wanted (I’ve realized it takes a lot of effort to write well, originally and creatively about music); it’s definitively been an ‘outlet’ (or arena, I don’t know) for my narcisissm and a distraction; I’ve posted on both interesting (to me) and important (to me) stuff, I’ve even posted on fun (to me) stuff; finally, I’ve let myself down on the weather in Bergen (oh well, not much to talk about, really).

In conclusion, I’m quite happy with both my input and the outcome of Kvams. More often than not have I kept up a steady posting rate, and even though I’m quoting other blogs, articles and stuff quite heavily, I think I contribute a fair share myself. In all, I’m looking forward to more blogging.

The Opportunity Cost of Not Reading Mail Ads

September 16, 2009

We receive a lot of mail advertisements; I never read them. My wife, however, routinely flips through the pile, checking out the food stuff and whatever draws her attention. Yesterday, she thought me a lesson on the opportunity cost of my lack of interest in the mail adds.

A while ago, our washing machine broke down and we replaced it (it was nine years old, and cheap back then, so we quickly calculated that we had got more than what we paid for and that our money were better spent on a new machine instead of repairing the old one). In the washing machine shop, we ended up choosing between three alternatives we perceived as low priced, but with high quality. We chose the most expensive alternative.

Anyway, a couple of days ago an ad from the shop showed up in the mail, and my wife found our machine at the same price as the cheap alternative! Lucky for us, the store had a ’30 days price guarantee,’ so we went back and the store refunded us the price difference without any much trouble.

Now, given the time my wife spends flipping through all those ads, the pay-off may be unimpressive. However, she flips through the ads hunting for relatively small awards and because of curiosity, not to find actual money. Yesterday was, in other words, like finding the keys under the lamp post, or maybe like finding thousand dollar bills on sidewalks.

I worry that my wife will spend even more time reading mail ads in the future now that it has taken on a guise of gambling (small bets turn in to huge rewards, ever so unlikely).

Rebuilding Global Fisheries

September 15, 2009

Boris Worm, Ray Hilborn, and, among others, Chris Costello, recently had the article ‘Rebuilding Global Fisheries’ in Science (Vol 325, pp. 578 – 585). It discusses trends in the rebuilding of fisheries and marine ecosystems. The inherent problem in fisheries is the tragedy of the commons; many fisheries are poorly managed and access rights are not distributed properly. ‘Rebuilding Global Fisheries’ touches upon it in the introduction:

[…] progress toward curbing overfishing has been hindered by an unwillingness or inability to bear the short-term social and economic costs of reducing fishing [p. 578].

And again, while discussing species collapse:

Rebuilding […] collapsed stocks may require trading off short-term yields for conservation benefits [p. 581].

Short-term costs are like an investment in future abundacy; if fishermen are uncertain whether the promised future will enrich themselves, they will probably avoid the investment if they can. Accordingly, Worm et al. list access rights and economic incentives among tools for rebuilding fisheries:

Assingning dedicated access privileges, such as catch shares or territorial fishing rights, to individual fishers or fishing communities has often provided economic incentives to reduce effort and exploitation rate […] Realigning economic incentives with resource conservation (rather than overexploitation) is increasingly recognized as a critical component of successful rebuilding efforts [p. 583].

Another problem for many fisheries is simply that they are located in the developing world:

On a global scale, a key problem for rebuilding is the movement of fishing effort from industrialized countries to the developing world […] This north-south redistribution of fisheries has been accelerating since the 1960s […] and could in part be a perverse side effect of efforts to restore depleted fisheries in the developed world, as some fishing effort is displaced to countries with weaker laws and enforcement capacity [p. 584].

Collapsed fisheries in the developed world, like the Canadian Northern Cod scandal, are also a likely source of effort movements to the developing world. Further, the technological ability to fish far from, and even independent of, (home) port, poorly regulated fisheries, limited enforcement of regulations, corrupted, political systems, and lack of knowledge are all probable reasons for the sorry state of many fisheries in the developing world. Also, many fisheries in the developing world are small-scale, artisanal fisheries and such fisheries cannot be managed in the same way as industrial fisheries (p. 582).

Finally, Worm et al. discusses open questions in relation to the rebuilding of fisheries. One I found interesting (I’m doing related research) relates to by-catch problems of vulnerable, and, one might add, endangered species:

[An area] of inquiry relates to the question of how to avoid contentious trade-offs betweeen allowable catch and the conservation of vulnerable or collapsed species. Recovering these species while maintaing global catches may be possible through  improved gear technology and a much more widespread use of ocean zoning into areas that are managed for fisheries benefits and others managed for species and habitat conservation. Designing appropriate incentive for fishers to avoid the catch of threatened species, for example, through tradable catch and by-catch quotas has yielded good results in some regions [p. 584].

In conclusion, Worm et al. has a grand view for fisheries science:

We envision a seascape where the rebuilding, conservation, and sustainable use of marine resources becomes unifying themes for science, management, and society. We caution that the road to recovery is not always simple and not without short-term costs. Yet it remains our only option for insuring fisheries and marine ecosystems against further depletion and collapse [p. 584].

Maybe the most important message I take home from ‘Rebuilding Global Fisheries’ is the crucial role the economist must play in order to make conservation and rebuilding strategies work; incentives matter and are very important. The same message, by the way, is made by Gardner Brown & Jason Shogren  in relation to the Endangered Species Act (I’ve posted excerpts from their article here).

Hat-tip: Legal Planet

Truth Versus Precision in Economics by Thomas Mayer

September 12, 2009

TruthVersusPrecisionMy initial interest in Thomas Mayer’s Truth Versus Precision in Economics was spured when it was mentioned alongside McCloskey’s The Rhetoric of Economics in a footnote in a paper I read; the paper refered to it as a justification to accept unconventional p-values (probability of sampling error) in evaluating regression results.* Anyway, I picked it up at the library and was soon enthralled by Mayer’s sympathetic ideas.

The main claim in Truth Versus Precision is that economics is a victim of the principle of the strongest link, which leads to increased rigouization and decreased real-world relevance.

Mayer argues persuasively that economists has incentives to spend too much time on formalism, and that the formally explicit parts of arguments thus gets too much attention. Weaker parts of arguments are usually tended to by arm-waving. Strong, mathematically explicit arguments are subject to relatively much attention and are thus made stronger; weaker, implisit or verbal arguments receives less attention and remains weak. Further, the strength of a chain of arguments is often measured by the strength of the strongest argument, counter to the proverb that a chain is no stronger than its weakest link:

I call this procedure of focusing attention on the strongest part of an argument, and then attributing its strength to the entire argument, the ‘principle of the strongest link’ [p. 57**].

Mayer further suggests that economists preoccupation with formalism governs the prestige ranking of economics fields:

The prestige ranking of economics runs: first, formalist theory; second, empirical science theory; third, policy-advicing and data gathering, and fourth, history of economic thought and methodology [p. 46].

Mayer is a macroeconomist, and naturally parts of Truth Versus Precision discusses problems in macroeconomics. In particular, he argues that the foundations of new classical economics are questionable and concludes:

[N]ew classical theory is another example of the principle of the strongest link. Its advocates rightly take pride in the rigour of their deductive chains. But a rigorous deduction from a questionable premise, accompanied by no adequate tests of the conclusions, does not guarantee truth [p. 120].

Mayer also discusses the problems surrounding empirical testing in economics, for example that many focuses solely on Type I errors, that regressors with insignificant coefficients are excluded, problems with pre-testing of data, and confusions between statistical and substantive significance (see pp. 134 – 139). Finally, he discusses problems surrounding robustness tests (or rather, the lack thereof) (see pp. 142 – 147). He concludes the chapter on emprical testing accordingly:

[M]ost econometric testing is not rigorous. Combining such tests with formalized theoretical analysis or elaborate techniques is another instance of the principle of the strongest link. The car is sleek and elegant; too bad the wheels keep falling off [p. 149].

In the last chapter, Mayer discusses possible remedies. He calls for less abstraction and less formality; more replications and retests; proper use of statistical tests; care for data and awareness of anecdotal evidence; he wants journals to act as communication devices (not archives); critical evaluations of conflicting evidence; less focus on formal techniques in graduate training programmes; and more focus on writing skills.

All in all, I find many of Mayer’s arguments persuasive; they align with my feeling of unease when it comes to mathematical economics (note; I’m a mathematical economist myself). Some of Mayer’s critique also align with some of McCloskey’s critique. However, a professor at my school told me that Mayer was out-dated already in 1993 (the year of publication), and mentioned an article by Alexander Rosenberg from 1983 as evidence: Rosenberg discusses new classical economics. Notwithstanding, I still think there is something to Mayer’s critique, and as I said, it resonates with my own attitude towards economics. A more recent treatise discussing the very modern development of economics would be useful; have economics ridden itself of the principle of the strongest link? I need to find out.

* See p. 157; as far as I can see the only place in the text that actually argues for unconventional p-values, but not unconditionally.

** Page numbers refer to the paperback edition.

Related posts:

Picture of the Day

September 10, 2009

Go over to NASA to check out new pictures from the upgraded Hubble telescope! Below is the ‘Butterfly Nebula’:

Butterfly Emerges from Stellar Demise in Planetary Nebula NGC 6302

This celestial object looks like a delicate butterfly. But it is far from serene.

What resemble dainty butterfly wings are actually roiling cauldrons of gas heated to more than 36,000 degrees Fahrenheit. The gas is tearing across space at more than 600,000 miles an hour — fast enough to travel from Earth to the moon in 24 minutes!

Nasa-Butterfly

Science vs. Pseudo-Science

September 10, 2009

While discussing the selection bias in published economic research (the principle applies to most kinds of research, really, but some fields are more exposed than others) in his Truth versus Precision in Economics, Tom Mayer quotes the Richard Feynman, a Nobel Laureate in physics, on contrasting genuine science with pseudo-science:

But there is one feature … that is generally missing in … [pseudo-science.] It’s a kind of scientific integrity, a principle of scientific thought that corresponds to a kind of utter honesty – a kind of leaning over backwards. For example, if you ar doing an experiment, you should report everything that you think might make it invalid – not only what you think is right about it; … [p. 141, italics in original].*

According to Mayer, a practice to only report the best of many results is reputed to be common among economists. I find this alarming. Of course, economists are aware of the possibility of a bias in reported results, and, as Mayer points out (p. 142), it leads to credible results receiving less attention than it deserves.

* See Mayer’s Truth versus Precision (p. 141) for the reference to Feynman.

Chaos Theory & George Sugihara

September 9, 2009

In Alaska, I met George Sugihara. He was one of the keynote speakers at the conference I attended and he gave a stellar talk on nonlinear methods in fisheries (abstract). To me, it was an eye-opener: The methods he talked about didn’t seem too hard to master (I think I understood the basic idea), but from what he showed us, they had impressive power in prediction and made understanding complex systems like eco-systems seem (relatively) easy (I mean understand as in better than before).

The Lorenz Attractor

The Lorenz Attractor

The methods Sugihara talked about are rooted in chaos theory. Despite its name, chaos theory deals with order, but complex order of seemingly random systems. The typical example is the Lorenz attractor (check out the cool demonstration of the attractor: try initiating two curves with similar starting points and observe how different they evolve); a well-known result is the butterfly effect. Chaos theory is closely linked to fractals, and Sugihara has co-written a book on the use of fractals in the natural sciences. (I’ve posted on fractals earlier.)

Sugihara is an impressive guy. He does research in fisheries, astrophysics, theoretical ecology and on climate change and probably a lot more. He even once worked for the Deutsche Bank analysing market fluctuations. Currently, he’s a professor at the Scripps Institution of Oceanography in San Diego. The Scientific American ran an interview with Sugihara in Febuary:

Sugihara has […] shown that populations of different fish species are linked. Most regulations consider each species—sardines, salmon or swordfish—in isolation. But fishing, he says, is like the stock market—the crash of one or two species, or a hedge fund or mortgage bank, can trigger a catastrophic collapse of the entire system.

Related post:

Quote of the Day

September 1, 2009

Managing fish populations is just like managing forests, except that fish move and you can’t see them.

Anonymous, refered in J.N. Sanchirico & J.E. Wilen, Optimal spatial management or renewable resources: matching policy scope to ecosystem scale, Journal of Environmental Economics and Management 50 (2005), p. 24.