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Archive for March, 2013

The title is a reference to the guide, Mostly Harmless Econometrics, which is a staple for those without a math backbone.  Apologies for the really obscure references.  

My Terrible Procrastination

I’m approximately 8 weeks behind schedule on my public economics dissertation.  How is that possible, when we are less than 8 weeks into the Term?  It is, when you understand that the more I read, the less I think I understand about this topic.

Harmless Economics

Economics has rightfully earned a reputation for being abstract to the point of obscurity.  Theoretical physics and mathematics also practice this same level of abstraction, but unlike economics, those fields also don’t arrogantly claim that their usefulness lies in their applicability to real life.  It is this combination of both asserting relevance and simultaneously reducing complexity of real applications that leads to some dangerous assumptions about how the world should work.  For example, my research thus far;

The Many Facets of Carbon Emissions

Global climate change is an economic puzzle in that it involves a lot of different elements, that relate back to concepts of fairness and unfairness.

1) Historical Grudges

Given the amount of manmade emissions that have collectively been produced to date, it is arguably the currently rich countries that have benefited the most from this.  Carbon emissions are a by-product of industrialization, and industrialization is associated with the economic development of most of the West. Thus, climate change treaties are saddled with the burden of how to distribute future obligations based on historical responsibility.

2) Privately Produced, Publicly Suffered.  

Carbon emissions are an externality; because they are a by-product of industrialization, the benefits are economically accrued to a small group contained within national borders.  As an atmospheric gas, carbon emissions are free to move anywhere they want, and the resulting impacts of global warming will be experienced all over the world.

3) Different Costs, Different Benefits

They can be felt all over the world, but to different magnitudes.  It is arguably the poorest countries that suffer the most and have the most to lose from climate change.  The list of factors that will determine how much they suffer includes things such as dependence on agriculture, how hot it is currently, whether or not the country has the ability and technology to adapt (or buy air conditioning).

Many solutions have all been proposed but essentially they boil down to making actions that lead to pollution costlier.  How costly they will be for each country depends on a number of factors, but one of these is a relatively abstract dimension of economics called welfare weighting.  Below a commonly used and seldom understood example:

Negishi Weights: 

One general strategy for calculating how people should ration their consumption of goods and services is to look at the overall welfare they can generate from consuming these goods.  For economists, this problem looks like this: 

 

Max:

Screen shot 2013-03-04 at 12.50.58 PM

Subject to: 

Screen shot 2013-03-04 at 12.51.05 PM

You can find the in-depth explanations here.  The first line is the welfare you want to maximise.  The second line relates both the costs (from pollution) and benefits from consumable goods.  Given that producing more goods today gives you more pollution which will affect everyone’s welfare negatively later in life, the resulting solution should give you an allocation of consumption that produces the maximum amount of welfare, globally, over a long period of time, by considering the benefits from goods and the global costs.  The only “problem” with this was that, when the calculations were completed, regardless of wealth, would be given equal consideration in terms of welfare, produced results that emphasized large sacrifices being made by developed countries for the sake of protecting developing countries from environmental damages.

The result was ” the problem of climate change would be drowned by the vastly larger problem of underdevelopment“.

How to rectify this? Economists developed a system of Negishi weights, which would weight more heavily the impact of reducing consumption on countries that had a higher initial level of consumption (ie, more wealthy countries). This prevented large sacrifices of welfare in the developing world, and the solution would maintain a large portion of initial global inequality; all balance was restored to the universe.

In the process of “solving the problem of underdevelopment,” the implications of ignoring initial inequality were masked, to a large extent by undervaluing the welfare of the poorest regions of the world.  That is essentially what Negishi weighting does, and the implications of it are lost because they are difficult to locate in the models (if you are curious, it is the w in the first equation).  

Good Models, Bad Models

The process of using economic modelling solves a host of problems that would otherwise be unsolvable, such as how to allocate responsibility of sacrifices for climate change prevention.  However, its conclusions are often far reaching and affect many people, and the models makes far reaching assumptions about morality that often aren’t justified by mathematical reasoning.  These assumptions are carried all the way through the calculations, produce a solution, which is then packaged, presented, and sold to policy-makers with the real power to use these conclusions.  The lack of technical knowledge of those using these economic tools then prevents them from acknowledging the validity (or lack thereof) of any of those initial moral assumptions.  They lie embedded in formulas, secret and misunderstood by most of the people who will use them. They also remain safe from any criticisms people may have about their implications.

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As was suggested in the study on Negishi weights, the models themselves aren’t faulty and there is nothing wrong with making assumptions in order to reach conclusions.  However, the communication of these assumptions is necessary if economics is going to able to safely assert its applicability to the greater world. Rather than having a cluster of people at the level of academics, and another cluster of people working in policy, there should be more individuals somewhere in the middle.  For all the complaining that my colleagues do about having to read books like “Mostly Harmless Econometrics,” we are the necessary missing link in the puzzle.

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