Saturday, February 04, 2017
Comments due by Feb 11, 2017
I’m a capitalist for one reason: to raise living standards in my community. A familiar mantra of capitalism guides me: Markets are powerful and efficient.
I’m also a realist, so I temper that mantra: Markets are powerful and efficient. And markets fail.
Market failure is an established, well-understood field of study in mainstream economics. Generations of economists accept the basics of market failure.
However, American economists turn their heads away at the mention of it, because it sounds like heresy.
Consider the four biggest market failures in human history:
- Climate change: $40 trillion, so far
- Health care in America: trillions per year, ongoing
- The housing-financial asset bubble: at least $8 trillion
- Free trade: $8 trillion, so far
According to the chief economist for the World Bank, Nicholas Stern, climate changeis the greatest market failure in human history. Greenhouse gas emissions are a classic externality, where everyone on earth subsidizes oil companies and consumers of fossil fuels. Fossil fuels are under-priced by $40 trillion — a rough estimate of the cost that future generations will pay for damage we’re doing to the Earth.
Health care in America wastes roughly $1 trillion per year, compared to other wealthy countries, and the problem is steadily worsening.
First, health care is not a market. A market involves buyers and sellers. In American health care, we’re not really sure who is a buyer and a seller.
Figure 1. Find the buyer and the seller in American health care.
As a result, market incentives are badly misaligned.
Very few patients shop around for deals. After the doctor says the word “cancer,” most people lose their shopping instincts.
The housing and financial asset bubble is a classic market failure. Mortgage brokers misled home buyers into bad mortgages. Banks bundled unaffordable mortgages into bogus securities and sold them to investors. Rating agencies provided false security to investors. Herd mentality and massive group-think inflated the asset bubble. Losses in housing values alone exceeded $8 trillion.
We should add costs for the recession, millions of foreclosed homes, personal bankruptcies, lost opportunities, millions of workers unemployed and careers damaged permanently.
Markets rewarded bad behavior and punished millions who behaved responsibly.
Free trade is a market failure, but it is also an intellectual failure for the economics profession, and a policy failure on the part of elected officials. Our cumulative trade debt since NAFTA is well over $8 trillion. Our economy is de-industrializing, with thousands of factories closed, millions of jobs lost, and no improvement in sight.
Free trade has enjoyed inexplicably unassailable reverence since David Ricardo introduced it in 1817. It was unrealistic in 1817, and it is unrealistic today.
It starts with hopelessly idealized assumptions, applied blindly in the complex global economy, where trading partners and multinational companies exploit those assumptions for their own purposes. We were promised mutual gain, but we suffer huge deficits, concentration of wealth and power among trade’s “winners” and loss of bargaining power, de-industrialization and stagnant wages for the rest of us.
If the study of free trade were moved from economics departments in universities to mathematics departments, it would be discredited on logical grounds by the end of the first day. Similarly, its half-life in a physics, astronomy, or chemistry department would be a week or two — the time it would take to send graduates students to the lab to collect data.
It is worth noting that conventional free trade theory is considered largely irrelevant in business schools, where students learn the realities of how to move capital and production around the world.
Worse by far, our so-called free trade agreements are really designed to protect and enrich global companies. These agreements toss aside democratic checks and balances, weaken civil society and erode the middle class.
Under the right conditions, markets will, in fact, produce broad-based well-being. In 1776, Adam Smith argued that beneficial market control occurred when merchants in the village were personally connected to the well-being of their neighbors, who lived and shopped in the village. Social and economic cohesion would prevent market failure.
But globalization, as we’ve managed it, de-couples modern corporate decision-makers from any obligation or connection to communities anywhere.
Figure 2. Globalization de-couples investor interests from public interests.
The test of a market economy is whether it raises living standards. We fail that test when we look at growing inequality and reduced career prospects for the next generations of Americans. As a society, we have stopped sharing the gains from productivity and trade. Almost all new income goes to the top 1 percent — more than $1 trillion per year.
Some economists object that inequality is beyond the narrow scope of economics, so it’s not “really” a market failure. Granted, our looming inequality has broad dimensions — social, political and moral, as well as economic.
However, when economists duck responsibility for inequality, they are really acknowledging that free markets and free trade will predictably create inequality, without strong intervention in the form of public policy and social values. That sounds like market failure to me.
Here’s the take-away message. The narrow orthodoxy of free markets and free trade says that markets will solve all our problems, and government intervention is bad. Look at politics in America, today.
Unfortunately, the real world is a very large system with many interacting forces and interests.
Markets fail. A legitimate purpose of public policy is to intervene in markets to prevent market failure. Public policy has a necessary role in protecting the environment, human rights, labor rights, education and public health, managing growth, regulating markets, and managing global trade.
That’s capitalism for realists.
Wednesday, January 25, 2017
Sunday, April 17, 2016
Comments due by April 25, 2016
We have already posted ten "stories" that we promised to do during this semester. The following, however, is for extra credit and is the response of George Monbiot to a couple of questions. Enjoy
Why is implacable growth a threat to the existence of life on the planet?
Never-ending growth simply cannot be sustained on a finite planet. The promise of growth is used as a means of deflecting social conflict: If the economy keeps growing, we are told, inequality doesn't matter, however extreme it becomes, as all will be rich. Well, it hasn't worked out like that: The rich are now able to capture almost all the increment; wages have stagnated despite rising labor productivity; far from trickling down, wealth is still seeping upwards. But even if it did work, this merely exchanges a deferred political crisis for an environmental crisis.
In the pre-coal economy, industrial growth was repeatedly undermined by agricultural collapse, as both competed for the same resources: land (industry needed it for growing fuelwood and fodder for horses) and labor. So growth kept stalling and reversing. Coal meant that rather than relying on annual productivity (of timber, grass, oats etc.), industry could exploit the concentrated productivity of millions of years. It amplified the effects of labor. It allowed agriculture and industry to live alongside each other, ensuring that industrial growth did not rely on starvation. The economic transformation was miraculous. But it had a number of costs, and by far the greatest, in the long run, was the assault on the natural world.
We are urgently in need of a new, coherent economic model, that provides prosperity without compromising future prosperity, that does not rely on destroying the more-than-human world.
Why will a continuing "shift from small to large farms ... cause a major decline in global production"?
There is a long-established inverse relationship between the size of farms and the amount of crops they produce. In other words, the smaller they are, the greater the yield per hectare. This observation has been repeated in many parts of the world.
The most plausible explanation appears to be that small farmers use more labor, and more committed labor (generally family members), per hectare than big farmers.
What this means is that farm consolidation (often assisted by international agencies) is likely to be damaging to productivity, and threatening to world food supplies. Land grabbing by foreign corporations and sovereign wealth funds (which brings together the traditions of enclosure and colonialism) is disastrous for the rural poor. It is also disastrous -- especially when it results in the replacement of subsistence crops with crops grown for animal feed or biofuels -- for global food security.
Make the case for being "deviant and proud."
Our identity is shaped by the norms and values we absorb from other people. Every society defines and shapes its own according to dominant narratives, and seeks either to make people comply or to exclude them if they don't. These norms and values are often handed down from on high: We absorb and replicate the worldview of those who possess power, the phenomenon Antonio Gramsci called cultural hegemony.
Neoliberalism insists that we are defined by competition, and are essentially selfish and acquisitive. This turns out to be a myth: As a paper in the journal Frontiers in Psychology points out, Homo economicus -- the neoliberal conception of people as maximizing their own self-interest at the expense of others - is an excellent description of chimpanzees and a very bad description of human beings. We simply don't work like this. Humans are distinguished from other mammals by an enhanced capacity for empathy, an unparalleled sensitivity to the needs of others, a unique level of concern about their welfare and an ability to create moral norms that generalize and enforce these tendencies. These traits emerge so early in our lives that they appear to be innate: We have evolved to be this way.
But the dominant narrative tells us that we are very different creatures. It celebrates selfishness and greed and pushes us to conform to a social and economic model that rewards them. When we are forced into a hole that doesn't fit, the result is psychological damage. As the professor of psychoanalysis Paul Verhaeghe points out, the neoliberal transition has been accompanied by a spectacular rise in self-harm, eating disorders, depression, performance anxiety, social phobia and loneliness.
So if you don't fit in, and feel at odds with the world, it could be because you have retained the human values you were supposed to have discarded. You have deviated from the social norms. You should be proud to have done so.
Saturday, April 09, 2016
Comments due April 18, 2016
The United States and China are the world's largest carbon emitters , so the 2014 agreement by U.S. President Barack Obama and Chinese President Xi Jinping to reduce their countries' greenhouse gas emissions represented a major shift in momentum for addressing the effects of climate change.
Both countries committed to substantial emissions-reduction efforts over the next 10 to 15 years, with the understanding that they would continue to grow more ambitious with their efforts in the future. The pledges were fundamental to each country's national commitments for the Paris Agreement, adopted during the United Nations' 2015 climate conference and awaiting signatures this month at the United Nations in City.
Once a minimum of 55 countries representing at least 55 percent of total global greenhouse gases sign on, the agreement will come into effect. Already 100 countries are expected to attend the U.N. meeting on Earth Day this April 22.
An energy explosion
While China vowed to put a peak on its growing carbon dioxide emissions by the year 2030, a report from the Grantham Research Institute on Climate Change and the London School of Economics and Political Science argues that the past year brought a changing economic and energy landscape. This is because China's rapid growth, which consumed tremendous amounts of energy and produced record-setting emissions, is slowing.
China's economic model over the past few decades — like that of many other developing countries — was based on heavy investment in construction and related industries, such as steel and cement, in order to expand the nation's . Such industries are energy-intensive and in China relied heavily on coal, which produces large amounts of greenhouse gas emissions .
Now that much of China's infrastructure build-out is slowing, the demand for steel, cement and other building materials is decreasing, while at the same time China is expanding energy investments in hydroelectric, nuclear, wind and solar power.
In fact, the increase in China's renewable energy generation is expected be larger than energy-investment increases in the European Union, the United States and Japan combined, according to the 2013 World Energy Outlook from the International Energy Agency (IEA).
These promising shifts in energy investment are not unique to China. In the United States, the Energy Information Administration suggests that in the coming year, more new solar electricity-generating capacity will come online than natural gas, wind or petroleum combined.
Industries shifting while governments hesitate
Industries are making the transition even faster than government: American businesses made deals to acquire 3.4 gigawatts of renewable energy in 2015, nearly double the peak power generation of the Hoover Dam.
Of that amount, two-thirds came from first-time buyers, according to the nonprofit Rocky Mountain Institute, a leading source on addressing climate change through market-based solutions. The most-promising trend shows older established companies — like Owens Corning, Procter & Gamble and HP — joining well-publicized new industry leaders like Amazon, Google and Ikea in making the transition toward renewable energy purchases. For example, last year, Owens Corning signed an agreement with Chicago-based Invenergy for 125 megawatts of capacity, equivalent to the power needed for 30,000 households or more, from a wind farm being built in Texas.
Beyond industry — beyond government — a third, large-scale stakeholder is innovating in the context of climate change: academia. Responding to a growing demand from their students and faculty to transition away from fossil fuels, colleges and universities such as Ohio State University and the University of Oklahoma are among the partners with the largest U.S. green power contracts, according to the U.S. Environmental Protection Agency.
Chinese energy evolution
Like recent progress in the United States and European Union, China's energy landscape has continued to diversify, according the Grantham report. Hydroelectric, nuclear, wind and solar power are all expanding and accounted for more than 11 percent of the nation's primary energy consumption by the end of 2014.
Perhaps most notably, coal consumption, which powered so much of China's forward momentum in the previous decade, saw no growth in 2014 and actually declined in 2015.
Whether China's emissions peak has actually crested, the trends there and elsewhere are becoming more evident: Nations and companies across the world are making the transition to clean energy alternatives and putting their money behind those investments in order to foster new, innovative paths to a lower-emission future.
Global perspectives have shifted toward encouraging nations to finally respond to climate change, but the window for action to avoid catastrophic climate impacts is limited. New technology is opening opportunities to reduce global emissions, and China's move toward renewable energies is at the forefront, such as their world-leading number of solar-voltaic installations for power generation.
It's up to the rest of the world to continue to look forward, not back, to enhance global prosperity, reduce risks to communities, and sustain healthy ecosystems on which people depend.