Category: One-handed!

Benefit-cost accounting (BCA) began with a simple comparison of monetary benefits and costs, e.g., should I invest $100 in exchange for a return of $10 per year.

Then people wanted to compare more abstract values, such as the benefit of a vacation or sandwich or education against the costs of those goods. In those cases, the benefits are somewhat subjective — depending on the person, timing, etc. — but economists have used various techniques to try to quantify the benefits. The most obvious is “revealed preference,” which looks at decisions as an indicator of value. Thus, we assume that anyone who buys the sandwich is receiving adequate benefits (happiness, calories) compared to the the cost. This method is not very precise for individual decisions, but it is more accurate with a lot of data on frequent purchases in competitive markets. So it’s better for sandwiches or houses, but not so much for antiques, a cooking course or even an education (we rarely do two university bachelor’s degrees).

So there are issues of subjectivity. And they get worse, the more abstract the benefits and costs — the value of a whale for example.

But we need to know the value of whales, or a human life, or a cure for HIV/AIDS, so economists have gotten more and more creative.

(Can we just ignore exact values and say “it’s worth infinite”? Not when it comes to making choices, i.e., how many whales are we willing to kill if that means saving a human life… or how many humans are we willing to let die to save a whale. More on this in a moment.)

The “science” of calculating the value of a statistical [human] life (VSL) is theoretically elegant, but controversial — most obviously because it’s based on wages, which implies, for example, that one American life (gdp/capita) is “worth” ten Peruvian lives.*

But, back to whales. There are two main methods of assessing value, both based on asking people questions:

• Willingness to pay (WTP): “How much will you pay to save a whale from death?”

  

• Willingness to accept (WTA): “How much can I pay you to kill a whale?”

  

Although these $$ figures should be the same, they are vastly different in practice, due to budgetary limits (money in your pocket), endowment effects (is the whale mine), abstraction (this whale or a “representative” whale?), etc.

Which brings me to ducks…

So there’s an old joke among economists:

Land developer: “Can you give me the value of this wetland, so I can decide if I should build a shopping mall here?”
Economic consultant: “Sure.”
LD: “Great, how much will you charge?”
EC: “Depends on what answer you want.”

So, the point here is that there’s a lot of subjectivity in calculating the non-market values of benefits or costs. That’s why you often see economists on both sides of a dispute, each with a “scientific” estimate of value that is vastly higher or lower than the others. That’s not because values are so different from the same process; it’s because there are different processes of arriving at values — none of which is more legitimate than the other!**

Now to ducks.

If the EC wants to stop the LD from building the shopping mall, then they need merely to identify some ducks (say 100), assign a WTA value of  $50,000 per duck, and say “whelp, the costs of destroying that habitat and thus those ducks is so high that your project fails the CBA.”

OTOH, the EC can say “ducks are like chickens, and chickens cost around $2 each, so you need to send $200 to Ducks Unlimited so they can save some ducks elsewhere. Bring on the machines.”

Bottom line: Economists with two hands can make or break your project by ignoring or counting VSDs. Is that fair? No. But it is “scientific” so plan accordingly.

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* Back in the times of paper airline tickets, this tradeoff was spelled out, in terms of compensation for death on flights in/to/from the US, which was a multiple of compensation for flights that did not have a US-leg. That may have also reflected the influence of lawyers. I can’t find a good link, but here’s a start.

**This is no trivial point. The “social cost of carbon” is one of the most relevant, yet debated (often for nefarious reasons) values out there. I’d say that the future of our civilization depends on getting it right. Sadly, we are getting it wrong because a lot of people want to pretend that emissions do not matter… while they are living large.

Humans are not doing enough mitigation to slow — let alone reverse — climate change chaos. Average global temperature is now +1.2C, far above which is on track to exceed the 2015 Paris Agreement’s target of “holding the increase in the global average temperature… increase to 1.5 °C above pre-industrial levels…” by 2034.*

In this 2011 post (“We’re screwed, now what?”), I wrote:

Mitigation-focused investments (solar, biofuels, zero-emissions stuff) are wasted if there’s no “carbon reduction payback” — this means that a lot of projects are going to turn instantly unprofitable.

Thus, it’s time to adapt: lift your skirts for floods and prepare for droughts.

So which countries will do better with adapting — and which will not?

Here are four factors**

1. Climate chaos will arrive in all places in different ways. No physical geography will consistently be “better” or “safer.” Winners and losers will change places. Chance and planning will battle. Nature always bats last!***
2. Wealth is a double-edged sword. It correlates with more resources (useful but not necessary), but it is not sufficient to overcome social divisions and political opportunism.
3. Poverty can be a blessing in communities that have practiced mutual aid while having to adjust to various shocks and injustices. The poor will abandon a cardboard shack before it floods. Will the wealthy abandon Miami as the waters rise?
4. Corruption — the abuse of public office for private gain — will get worse before it gets better, for the same reasons as always: stealing is easier than working. The temptation to steal in a “shrinking pie” world — a world that humans have not faced for centuries — will rise as we tell ourselves “I deserve. You don’t.”

Look around you — is your community ready? Do you even have a community?

* Global average temperatures were +1.58C in April 2024, but that’s not the long-term average? Small consolation.

** What factors have I missed?

*** IMO, homo sapiens will not go extinct, as we are more tenacious than mosquitoes. I see three steps “down” from our current status as the world’s dominant organism. I think each step will take a few hundred years.

1. We fight over a shrinking pie, but maintain a semblance of today’s nation-states, technological advances, and so on.
2. We start to forget key elements of knowledge (e.g., nuclear power or silicon chips) and civility (e.g., more slavery).
3. We are reduced to tribes of social primates who cooperate to survive, but we are too few, and the Anthropocene slowly starts to end.

Simon Kuznets (1901-1985) was a brilliant economist, making both important theoretical and empirical contributions to the discipline.

One that I’ve known about for years, without delving into details, was Kuznets’s invention (definition?) of GDP under the original name of “National Income.”

Well, I just read his 1934 paper on that topic [pdf], and there were two surprises:

(1) “If all the commodities produced and all the direct services rendered during the year are added at their market value, and from the resulting total we subtract the value of that part of the nation’s stock of goods that was expended (both as raw materials and as capital equipment) in producing this total, then the remainder constitutes the net product of the national economy during the year.”

This passage clearly indicates that net income must be reduced by the amount of capital lost or used to produce that income (e.g., depreciation), but that subtraction is left out of the modern definition of GDP (“the market value of all the final goods and services produced and rendered in a specific time period by a country“), which can encourage (or disguise) excess conversion of capital into income, e.g., running down machines or converting forests into toothpicks.

(2) The depression hit wage earners harder (see Table 5) than salaried workers, worsening economic (and social) inequality.

What about Kuznets saying “Don’t use GDP as a measure of progress?” Well, he said this in 1937: “Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.”

Bottom line: GDP is a shit measure that helps no citizens while encouraging politicians waste resources competing over whose GDP is bigger.

This figure shows Russian losses in Ukraine. The 500,000 figure is for casualties, i.e., dead and wounded. According to Perplexity, 100,000-180,000 of these are deaths.

How do these losses compare to other Russian fighting?

The scale of Russian losses in just over a year of fighting in Ukraine already exceeds the Soviet death toll across the entire 9-year Afghan campaign. It likely surpasses all of Russia’s military deaths since World War II combined.
While difficult to verify exact figures, the various estimates from Ukrainian, Western, and even some Russian sources highlight that Russian troop losses in the Ukraine invasion have been catastrophically high compared to other post-WW2 wars, potentially unprecedented in modern Russian military history.

Around 58,000 American soldiers died in Vietnam (1964-1975).

Bottom line: Putin doesn’t care about his people.

Institutions are commonly defined as “formal rules and informal norms,” but when does one form dominate the other? I’m sure that everyone will have a casual view of informal (formal) norms being more important in smaller (larger) groups, but where is the dividing line?

While discussing this topic, I hit upon the Dunbar number as the separating concept, i.e., a suggested cognitive limit to the number of people with whom one can maintain stable social relationships—relationships in which an individual knows who each person is and how each person relates to every other person.

Thus, the following figure, showing  where informal norms and formal rules are more efficient than each other:

 

PB sent me this article (“US lawmakers Elizabeth Warren and Ro Khanna seek to ban trade in water rights”), which is full of silly ideas that I will refute:

1. “With private investors poised to profit from water scarcity in the west” — those  investors are profiting by moving water from a less valuable to a more valuable use, which is better for society. Those moves will involve willing sellers (often farmers) and willing buyers (often cities), so all three parties will share the benefits.
2. “…pursuing a bill to prohibit the trading of water as a commodity” — Water can be a commodity (excludable) or a collective good (non-excludable) — as I explain in my book. These lawmakers are mixing up water’s different uses in the same way as they would if they banned trading of land as a commodity to “save parks” while also destroying the real estate market.
3. “Warren and Khanna’s Future of Water Act has been reintroduced amid growing concerns about meddling from investors [a] in western water rights… The lawmakers and supporters of the bill argue that now is a crucial moment to re-introduce it – and stop water-futures trading before the climate crisis and booming water speculation threaten to shrink supplies [b] and inflate prices [c].” — (a) Water rights, by definition (“excludable goods”), can be bought or sold; if investors are buying or selling, then they are making the market work better. No water holder wants to sell to a middleman when they can sell directly to the water user, but those matches are not easy. Thus, the value of the investor. (b) the climate crisis is impacting supply but buying/selling does not, in the long run, since there’s no value if water is not in use. Futher (c) prices MUST be higher if there’s going to be any hope of rationing scarce water to excessive demand.

The rest of the article is full of more non-sensical thinking, but I don’t have the time to debunk every stupidity.

Water markets/trading/prices are essential for balancing shrinking supply and increasing demand. Ban them and you pretty much guarantee (a) shortages to those unable to buy water and (b) wasting water on “low value uses” because those with rights are only able to use water — rather than selling it to others with higher value uses.

The bottom line is that Warren and Khanna’s misguided ideas promise to make a bad situation worse.

I’ve been thinking of the costs of “staying in place” (in terms of consumption) while CC damages arrive since I read 2052 a few years ago (my review).

It works like this: CC means that free and useful ecosystem services (e.g., cleaning water, regulating temperatures) are turning into expensive and harmful ecosystem attacks (e.g., storms, floods, heat waves). The result is that (a) we are poorer for lack of what we used to get for free and (b) poorer still because we need to divert production aimed at consumption into production aimed at defense and recovery, a double-whammy.

So we need to run, faster and faster, only to stay in place.

This recent article from The Economist estimates that “the costs of climate change [to housing over the next 25 years]… may amount to almost a tenth of the value of the housing… or roughly $25trn.” The costs to agriculture, infrastructure, industry, goods and services, etc. should be added on top of that $25 trillion figure.

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Fun facts: World GDP is now around $100 trillion. In 2014, scholars estimated that ecosystem services were worth $125 trillion per year based on 2007 data, and that the value those ecosystem services has already fallen by around $15 trillion. (A 2017 estimate gives $155 trillion, but note that the value per unit of ecosystem is rising with scarcity, i.e., as physically damaged ecosystems go “out of service.”)

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So, at some point in the near future (I’d say next 10 years), we will be receiving a “net negative” flow of ecosystem services, which human produced GDP will not be able to replace, such that we are not just poorer (our benefits from GDP are smaller) but radically poorer.

Say that we gain net benefits from GDP and ecosystem services of $100T + $185T* or $285T now. If GDP grows by 3% per year and ecosystem services go to zero (remember they will be going negative) in 10 years, then our net benefits will be $134T + $0T, or $134T, a fall of more than 50 percent.

How will that go? Terribly, I am pretty sure. Here’s what TE says about the impact on property:

The impending bill is so huge, in fact, that it will have grim implications not just for personal prosperity, but also for the financial system. Property is the world’s most important asset class, accounting for an estimated two-thirds of global wealth. Homes are at the heart of many of the world’s most important financial markets, with mortgages serving as collateral in money markets and shoring up the balance-sheets of banks. If the size of the risk suddenly sinks in, and borrowers and lenders alike realise the collateral underpinning so many transactions is not worth as much as they thought, a wave of re-pricing will reverberate through financial markets. Government finances, too, will be affected, as homeowners clamour for expensive bail-outs. Climate change, in short, could prompt the next global property crash.

…and that’s just property.

I have been saying for quite some time now (since 2021, and in this paper) that CC is going to “shrink the pie” of economic production, i.e., reversing the positive trend that we’ve enjoyed since the beginning of the Industrial Revolution (200 years, to be conservative).

Consider the brutality of our fights right now, in a world with a growing pie. Now consider how those fights will worsen as the pie shrinks.

Shit’s gonna get ugly.

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*The 2017 article estimates a 1.85:1.00 ratio of ecosystem services to GDP.

Addendum (18 Apr): This paper (via AH) estimates that global income (~GDP) will drop by 19% between 2024 and 2050 due to “baked in” CC (i.e., no matter what we do). That’s roughly  $19 trillion, and it’s only a “downpayment” on likely further decreases as mitigation continues to fail.

The terms “mythos” and “logos” are used to describe the transition in ancient Greek thought from the stories of gods, goddesses, and heroes (mythos) to the gradual development of rational philosophy and logic (logos). Source

Most of us turn to one or the other of these two perspectives, depending on circumstances, but most of us tend to favour one over the other.

I am logos-oriented. I am not religious, barely patriotic, and skeptical of policies that rely on good will to succeed. I tend to think that people act rationally, in the sense that they seek goals, that incentives can change those goals, and that they will respond in a fairly predictable way.

OTOH, I know there are many instances where people “go nuts” — sometimes for noble causes (to help a stranger) and sometimes to support strange beliefs (to fight an imagined foe).

So I need to be sensitive to the type of person or situation that I am in.

In most interactions with most people, I think it’s kinda normal to see the two different sides of the same person and we can get along just fine.

But some interactions can be troubling, such as when — for example — a Christian tells me that (a) God made the Earth 4500 years ago (their mythos against my logos) or (b) that Trump is a good president — despite being a terrible human — because he sells Bibles (their logos against my mythos). In those cases, I prefer to “agree to disagree” because it’s not worth trying to engage with such a different perspective, let alone get them to change it — since they may think that I am the one who needs change saving.

But how often can that happen, that you run into someone so different?

In the academic world, it’s a bit too common for my taste because academics can easily go for years (decades!) without facing the consequences of their beliefs, either in the people they interact with (peers agree; students better agree), which means that these academics can be more radical in their thoughts and less tolerant of those who do not hold them.

In this post, I discussed how academics in STEM and the humanities (BSc and BA, respectively) are fighting for control or power in universities. Those fights* are much worse due to their inexperience in dealing with “mixed” people in the real world, which is not just bad for their students but also for society, since the academics will not “give way” to the other side.

My bottom line is that you should “know thyself” but also know that “thy” has no monopoly on truth.

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*An old joke: “Why are academic fights so brutal? Because the stakes are so small.”

How can we reconcile voluntary, “win-win” market transactions with the popular notion of “giving back” ?*

Consider how sellers have traditionally marketed to you: the street vendor who tosses in an extra “free” orange; the points (or stamps) you get for spending money with X; the “complementary” peanuts or bottled water you get while traveling; “new improved” products, now with “20% free” — and so on.

Every one of these examples raises the cost of what you DO pay for, but most people seem to think they are actually getting something for free.

The same can be said about the rich people, companies and nations who “give back” to various charities. They wouldn’t need to give back if they hadn’t taken too much in the first place — via tax dodges, harmful competition** and colonialism/mercantilism, respectively.

The bottom line? You ain’t get sump’m fer nuthin.

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* This post was partially inspired by Chris Rock, who complains in his latest special about “everybody’s talking bullshit… companies say ‘we give back… we give back… we don’t even like the money!'” So true (the BS part).

** My definition of “harmful” competition is much narrower than that of most people — i.e., breaking laws, externalizing negative costs, abuse of market power, etc. I am not too worried about price gouging, excess profits, etc. that are the reward for bearing risk.

My students are quick to call a job “exploitative,” and I wrote the following to frame my thoughts on those jobs and to push them to be more careful about calling too many jobs exploitative.

Workers are exploited when… 

• They cannot chose where they work.
• They are screwed because agreed terms are not delivered (wages, housing, hours, etc.)
• Their working conditions are worse than agreed.

Workers are NOT exploited when… 

• They work many hours, with bad conditions, for poor wages.
• They can quit and go work elsewhere
• They cannot pay for a decent standard of living.

I make these distinctions because there’s a difference between exploitation and being poor. There are MANY poor people in the world, which is why many of them are “economic refugees” to richer countries. But shit luck (those of us in the “lucky sperm club” were born with the right papers) is not the same as getting exploited.  I’ve traveled in many countries, and I appreciate our common humanity, but I am also aware of the really big differences between rich and poor countries.

That’s why I left the US (as an economic — but also social — migrant) to live in the Netherlands.  

Your thoughts?