The safest country in the world?

Emil writes*

The Netherlands is famed for its water management prowess. This is not for nothing, from the construction of the Afsluitdijk after the Zuiderzeevloed in 1916, to the Delta works after the Watersnoodramp in 1953, water is, and always has been, a genuine threat to livelihood in the Netherlands. Through this decorated history of water management, the Netherlands has built up a complex network of governmental institutions that divide the responsibilities of domestic water management. An important responsibility of this network is flood management. The relevant institutions use a multilayer safety framework, in which flood prevention takes priority over spatial design (tailored to flood damage curtailment) and crisis management (in case of flooding).

In 2017, the norms of flood prevention were updated through the adoption of the new Waterwet (Water Law). Flood management must now be assessed based on risk, which is defined both by the probability of a flood occurring, and the consequences that flooding entails. Based on this, the probability of flooding must be low in places where the consequences would be great in order to minimize risk. Risk is calculated per dike trajectory, of which the Netherlands has 255. (A “dike trajectory” is a set of dikes for organisational and management purposes in the larger institutional framework. A trajectory ranges from 0.2 km to 47 km in length.)

The accepted probability of a flood occurring is calculated based on two different methods: Local Individual Risk (LIR) and Societal Cost Benefit Analysis (SCBA). LIR refers to the probability of death by flooding and must be ≤0.00001 death per year. Mortality is a constant between zero and one, determined on a neighborhood scale. It represents the average mortality by flooding based on historical data. The highest mortality value within an area behind a dike trajectory determines the mortality constant for the whole trajectory. The evacuation fraction is the estimated proportion of the human population behind a single dike trajectory that can be evacuated preventatively. With these equation terms, the flooding probability for a dike trajectory can be calculated as:

LIR = Flooding probability * Mortality * (1 – Evacuation fraction)

Just like LIR, the SCBA [pdf] calculates flooding probability per dike trajectory, but based on economic value. It is a very complex cost benefit analysis, but notable factors include a discount rate of 5.5% and “value of a statistical life” of € 6.7 million.

For each dike trajectory, the lowest probability calculated, by either LIR or SCBA, is used for the entire dike trajectory. Whether a dike trajectory meets the required safety norm is determined through annual inspection but can change over time. Land subsidence or sea level rise could alter the flooding probability. With the determined flooding probability, it is possible to calculate the economically optimal time to initiate flood defense construction. The flooding probability sharply decreases after the construction of new defense works, after which it increases slowly for the aforementioned reasons. The flooding probability follows a downward trend over time because of increasing population and economic value behind the dikes, which therefore increases the risk of flooding.

The Netherlands’ flood defense management seems impeccable, but the costs of defending against sea level rise of 45 cm to 85 cm by 2085 may be steep.

Bottom Line: Facing a 1/100000 chance of dying in a flood, every year, may seem terrifying, but it’s subjective and should make you grateful for being born here and not in another low-lying, coastal area.


* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

A labyrinth of poor choices

Miqui writes*

The shoes are recycled, upcycled, organic, vegan, made in the EU, and come with a promise to plant two trees! The fashion industry is pushing our buttons and pulling our levers to temp us to purchase new shoes, without guilt. The green movement has become trendy and hip as it’s expanded beyond hippies. In Green consumption: the Global rise of Eco-chic, Bart Barendregt argues that green lifestyles are now part of capitalist society. Now elites combine their environmentalism with taste and personal wellness.

It is, however, the question whether this green movement is actually helping in achieving our environmental goals. Genuine pro-environmental behaviour is severely limited by bounded rationality. With bounded rationality people strive consciously to attain certain goals they have in mind but are also strongly limited in making an optimal choice by things like information gaps, information asymmetries, heuristics and a range of biases.

This bounded rationality is gratefully abused by some parts of the fashion industry. In this, companies make “unwarranted or overblown claims of sustainability or environmental friendliness in an attempt to gain market share”. Because of our bounded rationality people are not well equipped to stand strong against this greenwashing and consequently end up buying products that do not deliver the environmental-friendly result that the ad or label promised.

One thing is clear, sustainable consumption is an oxymoron. Consumption of products practically always involves the use of resources and the production of waste which in an overpopulated earth inevitably harms the environment. Sustainable consumption is no consumption.

Nevertheless, we can reduce our footprint by buying recycled, upcycled, organic, vegan, second-hand and offset emissions. As explained above, we are very limited in making a choice with an optimal environmental result.

For example, the promise of a shoe brand to plant two trees if you buy their product sounds like a great deal for an environmentalist, but do most people know whether these two trees actually compensate in any significant way? It does for your consumer shame but with regard to the environment it is a complicated question. The image of two large, full-grown trees and a pair of shoes probably comforts you with regard to the CO2 emissions. Perhaps those trees actually do compensate for the CO2 emissions but the production and sale of shoes involves much more than the CO2 emissions.

A Life Cycle Assessment (LCA) on footwear tells us that the use of energy, and the raising of cattle in the case of leather shoes, indeed has a huge impact on global warming. However, what this LCA also shows is that there is a striking impact in the solid waste management phase and that cattle raising also results in significant acidification and eutrophication of environments. An important factor in this assessment is the studied production area which considerable affects the impact of production. What this means is that offsetting CO2 by planting two trees does not compensate the wide range of environmental impacts.

With this in mind, is it possible for a mainstream consumer to make a well-intended choice with an optimal environmental result? Arguably not. Most people simply do not have the time, resources and capability to come to such a result. According to Thomas P. Lyon, a business professor at the University of Michigan, says that “the ideal system for regulating green marketing claims would entail comprehensive labeling and certification requirements”. Whether labeling and certifications are helpful in promoting environmental behavior is not clear. Lyon compares it with making right decision in relation to healthy food as he argues that “there’s not a lot of evidence that those nutrition labels have changed America’s eating habits.”

Bottom line: The green movement is turning trendy. More people are developing environmental awareness, and pro-environmental choices are going mainstream. We are on the right track, even if we’re a bit distracted as to what it means.


* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Valuing tigers and humans

Shivalika writes*

The Sundarbans — the world’s largest mangrove ecosystem — is shared between India and Bangladesh. With the global mangrove biome increasingly under threat from human exploitation, how India and Bangladesh choose to manage and conserve the Sundarbans could be the difference between preserving these crucial and biodiverse habitats or letting them disappear in 100 years. But the two countries are struggling to manage this resource effectively. A necessary first step is forming a cooperative alliance to collectively manage the resource.

The Sundarbans provide many crucial ecosystem services. They are, for example, the last remaining stronghold for the endangered Royal Bengal Tiger and host several species of mangrove trees that have an intrinsic value of their own. The livelihood of roughly 3.5 million coastal residents depends on the forest. Due to climate change and resulting sea-level rise, the mangroves provide essential flood protection and reduced mortality from floods, tsunamis, and cyclones that are common in the area.

Photo by Deshakalyan Chowdhury, AFP.

One can, by this point, draw the conclusion that the Sundarbans need to be protected, at all costs. But what are these costs exactly? It is the environmental economist’s duty to quantify the benefits of action and the costs of inaction to inform policy. One simply cannot put “all costs” into one cause.

A cost-benefit analysis is thus called for to make credible policy suggestions to the Indian and Bangladeshi governments in regard to the protection of the Sundarbans. About a quarter of the Indian Sundarbans [pdf] is currently a core protected area – allowing no human activity whatsoever. In the Bangladeshi Sundarbans, 23% of the area is declared protected.

What would the area look like if the entirety of it was protected? This policy appeals to advocates of strong sustainability or preservationists, but there are economic, social, and political consequences to consider.

Take the example of Bengal tiger protection alone. Here, there are economic costs for enforcement and monitoring, social costs because of the tiger-human conflict in the surrounding villages, and political implications of any policy that would effectively be perceived as a prioritisation of the lives of tigers over the lives of people that depend on extractive industries in the Sundarbans or have been hurt or killed by tigers. The intrinsic value of the tiger, or extrinsic value of the ecosystem of which it is a part, are the benefits of this proposed policy. And tigers are only a small part of the Sundarbans. A bigger picture analysis would need to include a host of different factors to consider and monetise.

Bottom line: These costs and benefits are, if at all possible, not easy to monetise. But even a humble attempt at doing so will add to the understanding of the complex nature of the Sundarbans, and the ever more complex consequences of any policy for their conservation.

 


* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Equilibrium of normal demand and supply

Book 5, Chapter 3

§1. What determines supply in the market? An individual trader considers a  host of factors (p 281):

Dealers take account of the areas sown with each kind of grain, of the forwardness and weight of the crops, of the supply of things which can be used as substitutes for grain, and of the things for which grain can be used as a substitute… If it is thought that the growers of any kind of grain in any part of the world have been losing money, and are likely to sow a less area for a future harvest; it is argued that prices are likely to rise as soon as that harvest comes into sight, and its shortness is manifest to all. Anticipations of that rise exercise an influence on present sales for future delivery, and that in its turn influences cash prices.

From this, we can see how the market price depends on the mix of opinions from dealers, buyers and sellers, and how price volatility reflects differences in these opinions.

§2. The cost of producing a good depends on a mix of labor and capital costs (money paid), as well as their opportunity cost at the margin (money not paid). This formulation disagrees with Marx’s Labor Theory of Value because it evaluates capital costs not in terms of the embedded labor it took to produce that capital but in the capital’s alternative uses.

§3. The price for a good will depend on the cost of inputs needed to bring it to customers. Thus, a tree is cheap when it’s bought from the logger, but furniture made from that tree reflects the costs of transportation, transformation, design, retail rents, etc.

All market participants will change the mix of inputs as relative costs shift, to maximize profits. Thus Marshall introduces the Principle of Substitution.

§4. Most market participants watch each other, making it possible to assume a “single price” for a given good that changes with time and circumstances. The price will move up (or down) as demand exceeds (or trails) supply. Better run firms will expand faster (or contract slower) than worse run firms.

§5. The price of goods usually increases as quantity sold increases, due to the need to attract increasing quantities of inputs. Economies of scale (spending more capital to shift to larger machines) can lower costs at higher volumes, but that’s discussed later.

§6. Marshall describes “equilibrium” in price and quantity, before explaining how that equilibrium is moving more randomly than “a disturbed stone on a string returning to rest,” i.e.,

In an age of rapid change such as this, the equilibrium of normal demand and supply does not thus correspond to any distinct relation of a certain aggregate of pleasures got from the consumption of the commodity and an aggregate of efforts and sacrifices involved in producing it… We cannot foresee the future perfectly. The unexpected may happen; and the existing tendencies may be modified before they have had time to accomplish what appears now to be their full and complete work. The fact that the general conditions of life are not stationary is the source of many of the difficulties that are met with in applying economic doctrines to practical problems.

§7. Marshall gives one of his enduring metaphors for the relative importance of demand (value) versus supply (cost) in determining market equilibrium (p290):

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.

In the same way, when a thing already made has to be sold, the price which people will be willing to pay for it will be governed by their desire to have it, together with the amount they can afford to spend on it. Their desire to have it depends partly on the chance that, if they do not buy it, they will be able to get another thing like it at as low a price: this depends on the causes that govern the supply of it, and this again upon cost of production. But it may so happen that the stock to be sold is practically fixed. This, for instance, is the case with a fish market, in which the value of fish for the day is governed almost exclusively by the stock on the slabs in relation to the demand: and if a person chooses to take the stock for granted, and say that the price is governed by demand, his brevity may perhaps be excused so long as he does not claim strict accuracy.

…and with scissors and fish in hand, the chapter ends.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Interesting stuff

  1. It’s not so nice when “nice white families” take over a non-white school
  2. How energy bars turned into meals
  3. The first “good” map was made by a Greek who also (accurately) calculated the diameter  of the Earth.
  4. Working at home is forcing cultural change
  5. Taibbi on the Trump Era that we’re sick of
  6. Rice vs wheat: a labor, calorie and governance comparison
  7. How settlers screwed up ecosystems in the “New” world
  8. What does “gentrification” mean?
  9. Singapore’s “authoritarian capitalism” doesn’t scale
  10. Every episode in this podcast series has changed my mind on race and US history. Listen in!

H/T to TJ

Review: Bitcoin Clarity

Kiara Bickers, the author of this 2019 book, sent me a copy because I reviewed Digital Gold: Bitcoin, the Inside Story. As an economist with an interest in how bitcoin, blockchains, and crypto-assets are evolving, I agreed to look at her book.

In short, I found it insightful and interesting. I learned some useful stuff, but there were also some weaknesses.

The book is divided into four parts (conceptual reframing, analysis & knowledge, properties of the system, and synthesis & understanding), i.e., “what’s the idea, how does it work, how do people use it, and how can I get involved?” Some of these topics can get quite technical, but Bickers has a friendly tone and uses sketches to lay a foundation that readers can build on with further research.

(I’m now thinking the “bitcoin ecosystem” may now be too complex for anyone to understand.* The “crypto” ecosystem, of which bitcoin plays a small but significant part, is even more complex, confusing and chaotic.)

Here are some thoughts and highlights I noted while reading…

Part one explains bitcoin and the Blockchain (capital B, to distinguish it from many other blockchains that use similar protocols), two related ideas that depend on public key/private key cryptography. In my understanding, the blockchain records transactions linking bitcoins to various addresses that function as “safes.”

A miner is rewarded with bitcoin when they solve a math problem before other miners — all of them using special computer hardware and lots of electricity. Reward bitcoins are recorded in new blocks that also (and this is really important) record transfers of existing bitcoins among addresses. These actions mean that bitcoins, which can be divided into one million satoshis (think milli-pennies) are stored at an address until all or part of the bitcoin is transferred reassigned to a new address. Some addresses can be “rich” with many bitcoins but many addresses are empty. Transfers only occur when the person controlling coins at an address “signs” (cryptographically approves) a transfer to another address. Approved transfers are then bundled into new blocks that are added to the end of the Blockchain, copies of which are kept all over the world on “full nodes” (simple computers that do not use much electricity).

I learned from Bickers’s description of these steps. First, miners do the work but full nodes display the results of work, which — in the case of bitcoin — consists of a shared public ledger that shows where bitcoins are held as well as confirming when and where bitcoins are transferred. (I say “shared” in the sense that over 100,000 nodes agree have copies of the same Blockchain, which keeps the system “secure” from those who want to shut down the system or spend coins they do not have.)

Second, the combination of bitcoin+Blockchain is elegant and effective, just as many “alt coins” (or shit coins) and/or blockchains are solutions in search of problems. (Read “Blockchain, the amazing solution for almost nothing,” which is insightful, funny and cringy, and this academic analysis of the many useless projects that are burning government and enterprise cash without producing value, let alone evidence of success.)

Third, bitcoin/Blockchain are “trustless” in the sense that you can use them without needing to trust any person, organization or government.* This characteristic explains how and why people get scammed by so many alt-coins, but also why bitcoin is popular in dysfunctional countries (Turkey, Venezuela, and Zimbabwe spring to mind). Trustless doesn’t mean simple, by the way, which is why the “bitcoin industry” of consultants, speakers and services has sprung up. (Bickers offers her own advice to paying clients.)

Fourth, a lot of people think bitcoin is a terrible “payments solution” because it records a few hundred transactions every 10 minutes, rather than thousands of transactions per second, like Visa/Mastercard. This critique misses the point of the 10-minute block: to help synchronize 100,000+ copies of the Blockchain held in nodes around the world. Slow but secure is why many people see bitcoin more as digital gold (an asset) than as a digital currency.

Part two gets into some deep technical analysis, but it’s quite interesting.

I like the idea of the Blockchain as a method of “triple-entry bookkeeping” that shows where bitcoin have been subtracted (sender) and added (receiver) — the double-entry part — but also giving a global view of where all bitcoin are. (Bitcoin transactions are not anonymous but in plain view on the Blockchain; the tricky part is identifying who controls bitcoin at various addresses.)

Bickers is a fan of Austrian economists and “full” (as opposed to fractional) reserve banking, and the Blockchain’s “triple entry” nature means it’s impossible to inflate bitcoin by printing more (miners can’t get paid when they try that) or trading more (nodes prevent “double spending”), which gives bitcoin an advantage over fiat currencies that have value because governments say so. Although most of us trust US dollars or Euros, others want trustless, “sound” money as a hedge against printing new money and inflating the money supply via fractional reserves. (I keep a wad of 100 Bolivares notes as a handy reminder of how Venezuela debased its citizens’  savings. The wad of 100 notes was worth around USD2,500 in 2013, but only USD0.01 in 2018.)

The rest of Part two is technical but not unclear, covering transactions, node networks, mining and smart contracts. In that last chapter, Bickers does a pretty good job demolishing the 1,000-plus altcoins and blockchains that claim to be “trustless” but deliver scams and broken promises.

In Part three, Bickers discusses governance and decentralization, both of which exhibit robust stability under game-theoretic conditions in which many players in many roles cooperate via self-interest without creating vulnerabilities that can be taken over by insiders or outsiders.

When she turns to “the economics of money,” she falters, misinterpreting and misunderstanding comparative advantage, Smith’s interested bystander, the labor theory of value, quantitive easing, mortgage-backed securities, and service-sector inflation. I think most of these errors arise from her reading of biased, unreliable sources. Perhaps they can be fixed in edition 2.0?

Part four covers markets, hype cycles, and a healthy mindset for switching from fiat to bitcoin. These philosophical chapters draw on Bickers’s self-identity as a university drop-out pursuing a career in bitcoin. Although the discussion was useful, there were also errors in explaining the origin of “HODL”, the problem of known unknowns, and valuing growth stocks. Even so, the chapter ends with a heartfelt and welcome call to rebel against the status quo

My one-handed conclusion is that this book offers insights, explains complex ideas, and gives plenty of material to ponder. Although weakened by some preventable mistakes, I recommend it to anyone interested in bitcoin. FOUR STARS.

* 2 Nov 2020: I think it’s helpful to think of Bitcoin/Blockchain as a new (digital) species whose evolution, use and “goals” are beyond our control but important in our lives. If the 80s were the decade of the PC, 90s of the Internet/WWW, 00s of mobile phones, and 2010s of social media, then what consumer tech will dominate the 2020s? Bitcoin and crypto might be that tech.

Addendum: On bitcoin adoption: Discovering Digital Gold and Bitcoin and The American West

Feb 16: Ray Dalio and his researchers put out a great note on Bitcoin.

Apr 7 2022: Ten (useful) pieces of advice on bitcoin


Here are all my reviews.

Temporary equilibrium of demand and supply

Book 5, Chapter 2

§1. People make various trades for benefit without worrying about equilibrium, or balancing aggregates of supply and demand, which occurs when many actors repeatedly trade (semi-)commodified goods.

§2. Marshall gives the example of a corn market — a “grain” market in the US — in which buyers (with willingness to pay) and sellers (with willingness to accept) converge on an equilibrium price of 36 pence/quarter at which quantity demanded equals quantity supplied. Fluctuations around 36d occur, but they do not persist, since buyers wait out “outrageous” offers and sellers ignore “lowball” bids.

§3. Prices in commodity markets do not deviate too far from equilibrium because traders can borrow (or lend) money to smooth bumps. Prices (wages) in labor markets can vary a lot because workers go hungry if they cannot eat whereas capitalists can eat while they wait for willing workers. The implication, which Marshall elaborates in Annex F (“Barter”), is that money allows commodity markets to clear “on the margin” while labor markets (which have a barter component when one considers that workers are offering heterogeneous units of labor) have a lot of inframarginal noise due to workers getting bad deals. Gender-wage gaps, for example, can be explained by men driving harder bargains than women when negotiating their starting salaries.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Interesting stuff

  1. Measuring the scale of coronavirus via sewage
  2. So… the American Revolution was not about democracy but changing which leaders were in charge (and making money, especially via cotton and slavery). Related: Race and science
  3. Why are market prices surging? A lot of money managers only get paid if client funds are “invested” (!)
  4. A website with Trump’s new slogan (“Keep America Great”) points out how he’s broken all his promises and failed to deliver
  5. Western “liberals” are rejecting tolerance for their subjective truth?
  6. Lol: “Facebook apologizes to users, businesses for Apple’s monstrous efforts to protect its customers’ privacy
  7. Why are there 5280 feet in a mile?
  8. The pandemic is nuking college-town economies (velocity of money case study)
  9. Online advertising wears the emperor’s new clothes (= it’s often worthless)
  10. Blockchain: the amazing solution for almost nothing

H/Ts to PB and BZ

Introductory. On Markets

Book 5, Chapter 1

Book 5 concerns “General relations of demand, supply and value.”

§1. Price balances supply and demand. Marshall defers discussion of other factors affecting supply, demand and prices — money, credit, foreign trade, labor, and so on — to a later volume, which he never wrote.

§2. In a “market,” buyers and sellers see the same price for the same good. Most markets are local (e.g., a street market) but they can be physically separated if information flows allow price comparison and thus convergence (subject to transport costs).

§3. Improved communications and transport have created “wide” markets for the same goods, with similar prices. Commodification and standardization makes it easier to have wider markets. Goods that are heavy relative to their value (Mashall uses bricks, but water also fits) will be traded in “narrow” markets where prices reflect local supply and demand.

§4. Markets for gold, silver and (heavily traded) stocks and bonds will tend to have one global price. Traders will ask small margins (bid-ask spreads) for these “liquid” assets, since they are sure to find counterparties. Illiquid assets have larger bid-ask spreads and more price noise.

§5. Custom-made goods (e.g., tailored suits or portraits) and perishable or bulky goods will sell for a range of prices, especially if trade is infrequent. Prices from wide liquid markets (e.g., London) will influence prices in narrow illiquid markets if some traders can switch between markets to get better deals. This arbitrage converges prices.

§6. Besides space, time influences supply and demand. Here Marshall makes some insightful comments (which are often buried/forgotten by vague references to elasticity), i.e.:

We shall find that if the [time] period is short, the supply is limited to the stores which happen to be at hand [Qs is fixed and vertical; D goes up/down to determine P]: if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity in question [S slopes up; D goes up and down more gradually to determine P]; and if the period is very long, this cost will in its turn be influenced, more or less, by the cost of producing the labour and the material things required for producing the commodity [S shifts in or out]. These three classes of course merge into one another by imperceptible degrees. p 275

The next chapters explore these dynamics.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Interesting stuff

  1. The Olympics are bad for local communities. (Maybe keep it in one place to avoid disruptions?)
  2. Will our eyes give up all our data in the future?
  3. The collapse of a key Antarctic glacier
  4. How the pandemic might play out in 2021 and beyond
  5. Listen to this excellent 2006 TED talk on how schools kill creativity (a big failure and missed opportunity, IMO)
  6. Socially responsible/impact/ESG investing is doing rather well
  7. California is already living with climate chaos (+2C, fires, blackouts)
  8. RobinHood’s “free” trading takes advantage of retail investors
  9. Race and advertising: “Black people are not just white people with darker skin”
  10. The USPS built America. Crippling it (policy since 2006) is a mistake.