Categories
Books, essays and others Economics

[1409] Of complexity economics is unconvincing

This is embarrassing to admit but it is only after 10 months that I was able to set my eyes on the last page of Eric D. Beinhocker’s Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics. The book is one of those literatures that add new perspectives and challenge pre-existing worldview. That, the slightly technical arguments as the author works toward the punch line — hence, slightly dry — and my typical busy-and-lazy excuse are the reasons why I took so much time. In fact, amid Origin of Wealth, I took a pause and began reading Paul Michel Munoz’s excellent Early Kingdoms of the Indonesian Archipelago and the Malay Peninsula. But I am done with Origin of Wealth now. While Mr. Beinhocker’s work is enlightening, I am not quite convinced of the extent of a revolution inside economics, as suggested by the author.

In the book, the author asserts that the field of economics is rapidly looking up to biology, disfavoring physics. Specifically, it calls for a migration from the idea of equilibrium in physics to the biological concept of evolution. This is not the first time such idea has been conveyed. While this is the first time I am exposed to the idea, the wanting to switch track has been out there in public consciousness for at least a decade. It perhaps popularly cumulated to Paul Krugman’s The Power of Biobabble which harshly criticizes “bionomics” as pseudoscience. In the Origin of Wealth, instead of bionomics, Mr. Beinhocker referred to it as complexity economics.

The book starts with an overview of economic history, started from Leon Walras. While Adam Smith popularized the idea of free market, it was Walras, as one of few pioneers of marginalism movement that later led to neoclassical school within economics, whom introduced rigorous mathematics into economics; economics is science because of Walras, and a few fellow early marginalist economists. More importantly, it was Walras that placed economics as parallel to physics with his idea of equilibrium.

From then on, the author starts to criticize mainstream economics, which he refers to as traditional economics; the concepts of equilibrium and homo economicus are his favorite punching bags. He explains how in the real world, mainstream economics fails to describe various phenomena due to its reliance on the ideas of equilibrium and complete rationality.

One criticism that rings in my head even before I picked up the book is the static-dynamic dichotomy. Mainstream models are notorious for its assumptions of static to explain the dynamic real world and the author derides the mainstream for unrealistic assumption. While it is true that mainstream models are static, I do not see how his alternative could replace what he attacks. While I may not be deeply educated in economics as I would like to be, my reading tells me that many of Mr. Beinhocker’s points are being addressed in economics. The author cites a number of economists working seemingly working to dismantle mainstream economics. In truth, those cited, as least the more well-known figures are the ones that are widening and improving our understanding of economics.

He further describes how typical mainstream economics models are simplistic in nature. But models are supposed to simplify the real world, while eliminating irrelevant noise. If one wishes for it to be as complex as the real world, the only model would be the real world and that would be utterly hard, if not unhelpful. Besides, the models are static for comparison purposes. It is static to aid decision making. One would have a hard time comparing dynamics.

Still, those two criticisms are valid.

What I disagree most with his book is the alternative that he offers: a move to complexity economics. The alternative is not convincing at all and it involves a mish-mash of various findings that criticizes the ideas of static models and perfect rationality. There is no concrete “new economics” to migrate to. At best, the new economics might be what Krugman had described a decade ago: biobabble, pseudoscience. Mr. Beinhocker might realize the lack of concrete alternative to mainstream, or rather traditional, economics when he said complexity economics is still evolving and it is hard to see where the movement is going.

Still, there are interesting and enticing points presented in the book. What I like most are the experimental model on inequality and the importance of trust in economic development. This resonates well especially when the question of Malaysian judiciary credibility was first raised recently. Then again, trust is the message put forward by a branch of mainstream economics called game theory. Therefore, it is nothing new. On inequality, it tries to argue that deterministic factors do affect wealth; that I agree. Further, the author writes that the development path is dependent on culture and not on just endogenous trends and factors coupled with exogenous shocks like technological progress. This may violate the idea of political correctness but here, I am in the opinion that political correctness comes second in search for truth.

In all in, Origin of Wealth is a good read through I would advise reading the book in front of a tablespoon of salt and frequent independent reference to the current state of economics. Mainstream economics may have its weaknesses but complexity economics as forwarded by Mr. Beinhocker does not quite offer a solution to that weaknesses. Mainstream and other heterodox economics do a better job in making economics as a whole worth our effort.

If there is at all any serious effort to dump mainstream economics in favor of complexity economics, I would certainly prefer to wait for a proper definition of the latter to be understood first. At the moment, to me, complexity economics is what bionomics is to Krugman.

Categories
Economics Environment

[1407] Of Nobel Prize and climate change

OSLO (Reuters) – Former Vice President Al Gore and the U.N. climate panel shared the Nobel Peace Prize on Friday for work on global warming, and the award committee urged action “before climate change moves beyond man’s control.”Gore and the United Nations’ Intergovernmental Panel on Climate Change (IPCC) won “for their efforts to build up and disseminate greater knowledge about man-made climate change, and to lay the foundations for the measures that are needed to counteract such change,” the Norwegian Nobel Committee said. [Gore shares Nobel win with U.N. climate panel. Reuters. October 12 2007]

If Al Gore is planning to run for the Presidency, he has a big capital in his bag.

Now, if Nordhaus wins the Prize in Economics…

Categories
Economics

[1405] Of Wal-Mart comes to bury you all with Snapple

Previously, talks on the street had it that Wal-Mart was interested in acquiring stakes in Makro. It did not happen and instead, it was TESCO that absorbed Makro. A year after that, news of Wal-Mart coming to Malaysia resurfaces.

Domestic Trade and Consumer Affairs Minister Datuk Mohd Shafie Apdal said yesterday that US-based Wal-Mart Stores Inc and Germany’s Metro AG had applied to open stores in the country and that the Government was still vetting the applications. [Economist: More operators good for hypermarket sector. The Star. October 12 2007]

If the application is approved, two of the largest retailers in the world would have presence in this country. Number one is Wal-Mart of course; number two is Carrefour. But do not be misled by the 1-2 ranking: Wal-Mart is much larger than Carrefour. Even if four of the top five global retailers excluding Wal-Mart consolidate into an entity, Wal-Mart would still be the largest retailer in the world in terms of revenue.

Also, there were rumors that Wal-Mart wanted to acquire Carrefour. But heh, the French would never allow that!

This apparently is made possible by recent market liberalization:

The ban on new foreign hypermarkets establishing a presence in Malaysia was lifted in May, with the ministry issuing permits on a case-by-case basis.

[…]

In April 2002, former Domestic Trade and Consumer Affairs Minister Tan Sri Muhyiddin Yassin banned the setting up of new foreign hypermarkets and imposed restrictions on store sizes, opening hours and locations for those already operating in Malaysia to protect local retailers. [Economist: More operators good for hypermarket sector. The Star. October 12 2007]

With the liberalization, I hope to get my daily supply of Snapple and Snapple caps! They must bring more Snapple into Malaysia!

Yup, yup. The application must only be approved on one condition: amply availability of Snapple! No Snapple, no license!

Categories
ASEAN Economics Liberty

[1397] Of the most moral action is to integrate Myanmar into the global economy

What is happening in Myanmar is nothing short of tragedy. Amid outrage, calls for actions against the junta of Myanmar could be loudly heard. Yet, what action is the most moral of all?

The basis for action is simple: conscience calls it. Forceful suppression that leads to death invokes strong emotions. These emotions as well as the ability to differentiate between right and wrong, for many, lead to one goal: halt the killing. Those with stronger inclination demand absolute respect for liberty and restoration of democracy in Myanmar. While the objectives are noble, it does not prescribe how one achieves that goal with intact moral.

There are those that favor wide economic sanction against the country in hope to pressure to junta out of power or at least, into executing meaningful democratic reforms. I am not too warm to that idea; there is little to achieve by isolating an already isolated country. More often than not, such isolation hurts the people while tyrannical regimes continue to hold power, as proven in North Korea, Cuba, Libya, Zimbabwe and no less, in Myanmar. Sanctions reduce the opportunities for the people from lift themselves out of poverty by preventing them from riding on the wave of globalization.

Some have gone farther down the line by calling for direct intervention in Myanmar, just like what happened in Yugoslavia in the 1990s. The moral dilemma of this suggestion, for a libertarian at least, while viewing it through the lens of state sovereignty, is glaring.

Transgression of liberty by itself is enough for a libertarian to act. I however have yet to read a convincing thought specifically forged as a basis of a foreign policy that is capable truly respecting state sovereignty. The reason is, libertarianism is an individual-centric philosophy.

Perhaps, the safest position that appeals to stability for a libertarian is to consider the state as an individual and from that assumption, adhere to non-aggression principal. This translates into non-interference policy. That unfortunately will only justify the stance that ASEAN: relative inaction. Taking a step back, there seems to be conflict of moral: surely, inaction in the face of tyranny is immoral. As an old saying goes, all that is necessary for the triumph of evil is that good men do nothing. Nevertheless, the trade-off between stability and impeccable moral is real.

In contrast, hawkish libertarians will ignore state boundaries to promote individual liberty. They will not grant the state the same rights granted to individuals for a very simple but appealing reasoning: a state is not an individual. In isolated incident where consistency of thoughts is suspended, the clear promotion individual liberty leads to the best of all outcomes imagined by libertarians and others that seek the goal of a liberal and democratic Myanmar. Rarely however does such policy is executed in the public domain by instead it will act as a precedent for future actions. Worse, this rationale will lead to a highly unstable world. Many libertarians that support the war in Iraq subscribe to this view. Various states will constantly be at war, at the slightest violation of individual liberty; there will be no such thing as internal issues and such, this erode the idea of the state.

Through this, I hope I have helped illustrate how morally, executing an action is harder than a simply call for noble action. Despite that, there is a path that stays better than isolation and direct or indirect intervention. That path is active engagement.

The countries that I leverage against the junta are countries with considerable ties with Myanmar. Among these countries are China, India and Russia. Countries with have no tie with Myanmar have little influence over it. Through extrapolation, it is only rationale to project that the more integrated the Myanmar economy is to the global economy, the more leverage the world will have over the government of Myanmar. Through this, Myanmar will have to be sensitive to international opinion, lest Myanmar will lose the huge benefits it enjoys from global trade. The fact that the countries that have significant relationship with Myanmar do not exactly hold sympathy for liberty does not help: these countries have little reason to pressure Myanmar to cease its oppression when those countries themselves suppress individual liberty.

Integration also increases the effectiveness of future threat of sanction. As mentioned earlier, the act of isolating an already isolated country is useless: the marginal benefit of such policy has gone over the peak for Myanmar. Integration and by extension, freer trade between Myanmar and the world will grant Myanmar the benefits of economic globalization. Under reasonable autarky that Myanmar currently is, it has nothing to lose from sanction. Under reasonable open market atmosphere, Myanmar has something to lose from sanction.

More importantly, the people of Myanmar will enjoy the benefits of freer trade and the march towards liberal democracy. Truly, there is greater moral here than further sanction or direct intervention, if one wishes to keep the idea of state sovereignty intact.

For a normative model to be successful, it has to include a working carrot and stick model. Under the current setup, there is no carrot. Integration is the carrot and once the carrot is out, the stick will become effect. Without the carrot, the effect of the stick is reduced, as what is happening at the moment in the largest countries on mainland Southeast Asia.

The conclusion suggests this: for ASEAN to have a greater influence over the government of Myanmar, ASEAN, especially the more prosperous states, need to do more to integrate Myanmar into the regional economy that is AFTA.

Categories
Economics Environment

[1392] Of economists love taxes, politicians love quotas

One of the main themes of the ongoing United Nations General Assembly is climate change but it is clear that the issue is receiving token attention and nothing more. The real debate on climate change is occurring outside of the four walls of the United Nations and it revolves around the effectiveness of two economic policies: carbon tax and quota. It is a question of how, not what or why anymore. The successor of the Kyoto Protocol, which is to be discussed later in December this year in Bali, Indonesia, is likely to center around the debate.

The Kyoto Protocol which is set to end in 2012 has several mechanisms aimed at reducing greenhouse gases emissions. Central to the mechanism is a method known as cap and trade; it is quota system (also known as carbon credits). Developed countries are given certain cap or amount of quotas and each divides those quotas as they see fit to entities within their boundaries. On top of that, these countries which are officially called the Annex 1 could reduce its reduction obligation by investing in clean technology in developing countries like China and Malaysia that will aid emissions reduction effort.

Alternative to carbon credit is carbon tax. While it has no sanction in the Kyoto Protocol, its end is the same as carbon credit.

The point of these two policies is to realign private cost with social cost. Under circumstances where only private cost is considered, imposition of tax will create inefficiency. When there is a divergence between social and private costs, imposition of tax however — or subsidy depending on the scenario — will create efficiency. The phenomenon of climate change is essentially the case of misalignment of social and private costs.

In a perfect world, the effects of quota and tax are the same but the methods differ. In the real world, unfortunately, it is more about politics than economics. This is reflected in the clear division of opinion between economists and politicians on the issue.[1]

On one hand, most economists prefer carbon tax over tradable carbon permit. Politicians on the other hand prefer cap and trade method to tax. The reason for the latter’s preference is simple: the idea of direct imposition of tax on the masses is very unpopular and could cost them votes. Economists prefer carbon tax simply because the method is simpler than what a quota system will demand. Most of all, economists do not need votes to do their work but politicians do.

Under the quota system, permits have to be distributed among entities. The problem of distribution is sticky and it has to appeal to the concept of fairness whereas such concept is hard to define. Mainstream economics itself has chosen to bypass the issue of fair equity altogether and concentrate on efficiency instead. Still, that does not prevent one from questioning how does one distribute those permits fairly?

The most common method is to use past information. An authorized distributor of permits, in this case the state, gathers emissions data of various firms and offer permits to players in various industries according to past volume. For instance, if a company emitted 1 ton of carbon last year, the company would get a permit to emit a certain ton of carbon this year to accommodate growth or to encourage carbon reduction. The problem with this method is that past information is not always helpful, if not helpful at all; historical data is a bad way to project the future. Worse, such method may be biased to stable industries at the expense of expanding industries.

Another method of permit distribution is most economists’ favorite: auction. Through this, apart from all the virtues of efficient market, the government will receive income.

Despite that, the method advocates by most economists so far is carbon tax. Carbon tax is to easier to manage because it does not need all the distribution setup that the permit system requires. Furthermore, the cap and trade method might suffer what the Kyoto Protocol is suffering now. The mechanism under Kyoto Protocol as practiced by the European Union is less than perfect because of permit inflation.[2] Participating countries have issued too much permits in the name of Kyoto Protocol. For this reason, many participants are expected to miss their reduction target. Of course, the same scenario is repeatable under carbon tax regime; too low a tax rate, we will see meager reduction.

For the successor of Kyoto Protocol however, the question of whom to collect the tax will be sticky. To have an United Nations-sanctioned entity to collect it might be tantamount to the idea of world government. That itself may receive considerable objection from various countries apart from the question of how should the money collected be spent. In order to circumvent the question, we could have a cap and trade mechanism to distribute quotas among countries. Based on the amount of quotas a country receives, the country could impose comparable tax on itself. That however may be less than desirable — it might suffer the weaknesses that Kyoto suffers — though internationally, more politically feasible.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — Too bad, then, that politicians seem set on a second-best route to a greener world. That is the path of cap-and-trade, where the quantity of emissions is limited (the cap) and the right to emit is distributed through a system of tradable permits. The original Kyoto treaty set up such a mechanism and its signatories are keen to expand it. The main market-based alternative—a carbon tax—has virtually no political support.

A pity, because most economists agree that carbon taxes are a better way to reduce greenhouse gases than cap-and-trade schemes. That is because taxes deal more efficiently than do permits with the uncertainty surrounding carbon control. In the neat world of economic theory, carbon reduction makes sense until the marginal cost of cutting carbon emissions is equal to the marginal benefit of cutting carbon emissions. If policymakers knew the exact shape of these cost and benefit curves, it would matter little whether they reached this optimal level by targeting the quantity of emissions (through a cap) or setting the price (through a tax). [Doffing the cap. The Economist. June 14 2007]

[2] — [An] audit showed that several EU governments had issued permits for 66 million tons more CO2 than was actually being emitted. Everyone realized that the supply of permits was not scarce, so the price of carbon promptly collapsed to less than 9 euros per ton. By February 2007, an allowance to emit a ton of CO2 could be had for less than a euro.

The woes of the EU’s carbon market are not over. In October 2006, all of the European Union countries forwarded their proposed National Allocation Plans for carbon dioxide emissions to the European Commission. It turns out that all of the countries, except the U.K., allocated permits for emissions that averaged about 15 percent above actual current levels. The EC’s environment commissioner, Stavros Dimas, warned: “If member states put more allowances into the market than are needed to cover real emissions, the scheme will become pointless, and it will be difficult to meet our Kyoto targets.” In other words, if there is no scarcity of carbon permits, then the permits are worthless, and there is no carbon market.

Many commentators argue that the last two years of turmoil are just the shakeout phase of a carbon market that will soon be robust. But the travails of the ETS highlight the fact that governments have every incentive to cheat. If they issue enough permits, their electricity companies will be able to generate power without adding to their costs—or the costs of their customers. And low energy costs give a nation’s businesses a competitive advantage over businesses in other countries. [Which Carbon Diet Works Better?. TierneyLab. NYT. May 26 2007]