Embracing the Robots

03 Friday Mar 2017

Posted by pnuetz in Automation, Labor Markets, Technology

Tags

3-D Printing, Artificial Intelligence, Automation, David Henderson, Don Boudreaux, Great Stagnation, Herbert Simon, Human Augmentation, Industrial Revolution, Marginal Revolution, Mass Unemployment, Matt Ridley, Russ Roberts, Scarcity, Skills Gap, Transition Costs, Tyler Cowan, Wireless Internet

Machines have always been regarded with suspicion as a potential threat to the livelihood of workers. That is still the case, despite the demonstrated power of machines make life easier and goods cheaper. Today, the automation of jobs in manufacturing and even service jobs has raised new alarm about the future of human labor, and the prospect of a broad deployment of artificial intelligence (AI) has made the situation seem much scarier. Even the technologists of Silicon Valley have taken a keen interest in promoting policies like the Universal Basic Income (UBI) to cushion the loss of jobs they expect their inventions to precipitate. The UBI is an idea discussed in last Sunday’s post on Sacred Cow Chips. In addition to the reasons for rejecting that policy cited in that post, however, we should question the premise that automation and AI are unambiguously job killing.

The same stories of future joblessness have been told for over two centuries, and they have been wrong every time. The vulnerability in our popular psyche with respect to automation is four-fold: 1) the belief that we compete with machines, rather than collaborate with them; 2) our perpetual inability to anticipate the new and unforeseeable opportunities that arise as technology is deployed; 3) our tendency to undervalue new technologies for the freedoms they create for higher-order pursuits; and 4) the heavy discount we apply to the ability of workers and markets to anticipate and adjust to changes in market conditions.

Despite the technological upheavals of the past, employment has not only risen over time, but real wages have as well. Matt Ridley writes of just how wrong the dire predictions of machine-for-human substitution have been. He also disputes the notion that “this time it’s different”:

“The argument that artificial intelligence will cause mass unemployment is as unpersuasive as the argument that threshing machines, machine tools, dishwashers or computers would cause mass unemployment. These technologies simply free people to do other things and fulfill other needs. And they make people more productive, which increases their ability to buy other forms of labour. ‘The bogeyman of automation consumes worrying capacity that should be saved for real problems,’ scoffed the economist Herbert Simon in the 1960s.“

As Ridley notes, the process of substituting capital for labor has been more or less continuous over the past 250 years, and there are now more jobs, and at far higher wages, than ever. Automation has generally involved replacement of strictly manual labor, but it has always required collaboration with human labor to one degree or another.

The tools and machines we use in performing all kinds of manual tasks become ever-more sophisticated, and while they change the human role in performing those tasks, the tasks themselves largely remain or are replaced by new, higher-order tasks. Will the combination of automation and AI change that? Will it make human labor obsolete? Call me an AI skeptic, but I do not believe it will have broad enough applicability to obviate a human role in the production of goods and services. We will perform tasks much better and faster, and AI will create new and more rewarding forms of human-machine collaboration.

Tyler Cowen believes that AI and automation will bring powerful benefits in the long run, but he raises the specter of a transition to widespread automation involving a lengthy period of high unemployment and depressed wages. Cowen points to a 70-year period for England, beginning in 1760, covering the start of the industrial revolution. He reports one estimate that real wages rose just 22% during this transition, and that gains in real wages were not sustained until the 1830s. Evidently, Cowen views more recent automation of factories as another stage of the “great stagnation” phenomenon he has emphasized. Some commenters on Cowen’s blog, Marginal Revolution, insist that estimates of real wages from the early stages of the industrial revolution are basically junk. Others note that the population of England doubled during that period, which likely depressed wages.

David Henderson does not buy into Cowans’ pessimism about transition costs. For one thing, a longer perspective on the industrial revolution would undoubtedly show that average growth in the income of workers was dismal or nonexistent prior to 1760. Henderson also notes that Cowen hedges his description of the evidence of wage stagnation during that era. It should also be mentioned the share of the U.S. work force engaged in agricultural production was 40% in 1900, but is only 2% today, and the rapid transition away from farm jobs in the first half of the 20th century did not itself lead to mass unemployment nor declining wages (HT: Russ Roberts). Cowen cites more recent data on stagnant median income, but Henderson warns that even recent inflation adjustments are fraught with difficulties, that average household size has changed, and that immigration, by adding households and bringing labor market competition, has had at least some depressing effect on the U.S. median wage.

Even positive long-run effects and a smooth transition in the aggregate won’t matter much to any individual whose job is easily automated. There is no doubt that some individuals will fall on hard times, and finding new work might require a lengthy search, accepting lower pay, or retraining. Can something be done to ease the transition? This point is addressed by Don Boudreaux in another context in “Transition Problems and Costs“. Specifically, Boudreaux’s post is about transitions made necessary by changing patterns of international trade, but his points are relevant to this discussion. Most fundamentally, we should not assume that the state must have a role in easing those transitions. We don’t reflexively call for aid when workers of a particular firm lose their jobs because a competitor captures a greater share of the market, nor when consumers decide they don’t like their product. In the end, these are private problems that can and should be solved privately. However, the state certainly should take a role in improving the function of markets such that unemployed resources are absorbed more readily:

“Getting rid of, or at least reducing, occupational licensing will certainly help laid-off workers transition to new jobs. Ditto for reducing taxes, regulations, and zoning restrictions – many of which discourage entrepreneurs from starting new firms and from expanding existing ones. While much ‘worker transitioning’ involves workers moving to where jobs are, much of it also involves – and could involve even more – businesses and jobs moving to where available workers are.“

Boudreaux also notes that workers should never be treated as passive victims. They are quite capable of acting on their own behalf. They often act out of risk avoidance to save their funds against the advent of a job loss, invest in retraining, and seek out new opportunities. There is no question, however, that many workers will need new skills in an economy shaped by increasing automation and AI. This article discusses some private initiatives that can help close the so-called “skills gap”.

Crucially, government should not accelerate the process of automation beyond its natural pace. That means markets and prices must be allowed to play their natural role in directing resources to their highest-valued uses. Unfortunately, government often interferes with that process by imposing employment regulations and wage controls — i.e., the minimum wage. Increasingly, we are seeing that many jobs performed by low-skilled workers can be automated, and the expense of automation becomes more worthwhile as the cost of labor is inflated to artificial levels by government mandate. That point was emphasized in a 2015 post on Sacred Cow Chips entitled “Automate No Job Before Its Time“.

Another past post on Sacred Cow Chips called “Robots and Tradeoffs” covered several ways in which we will adjust to a more automated economy, none of which will require the intrusive hand of government. One certainty is that humans will always value human service, even when a robot is more efficient, so there will be always be opportunities for work. There will also be ways in which humans can compete with machines (or collaborate more effectively) via human augmentation. Moreover, we should not discount the potential for the ownership of machines to become more widely dispersed over time, mitigating the feared impact of automation on the distribution of income. The diffusion of specific technologies become more widespread as their costs decline. That phenomenon has unfolded rapidly with wireless technology, particularly the hardware and software necessary to make productive use of the wireless internet. The same is likely to occur with 3-D printing and other advances. For example, robots are increasingly entering consumer markets, and there is no reason to believe that the same downward cost pressures won’t allow them to be used in home production or small-scale business applications. The ability to leverage technology will require learning, but web-enabled instruction is becoming increasingly accessible as well.

Can the ownership of productive technologies become sufficiently widespread to assure a broad distribution of rewards? It’s possible that cost reductions will allow that to happen, but broadening the ownership of capital might require new saving constructs as well. That might involve cooperative ownership of capital by associations of private parties engaged in diverse lines of business. Stable family structures can also play a role in promoting saving.

It is often said that automation and AI will mean an end to scarcity. If that were the case, the implications for labor would be beside the point. Why would anyone care about jobs in a world without want? Of course, work might be done purely for pleasure, but that would make “labor” economically indistinguishable from leisure. Reaching that point would mean a prolonged process of falling prices, lifting real wages on a pace matching increases in productivity. But in a world without scarcity, prices must be zero, and that will never happen. Human wants are unlimited and resources are finite. We’ll use resources more productively, but we will always find new wants. And if prices are positive, including the cost of capital, it is certain that demands for labor will remain.

Robots and Tradeoffs

31 Wednesday Aug 2016

Posted by pnuetz in Living Wage, Markets, Technology

≈ 1 Comment

Tags

AI, Artificial Intelligence, Biohacking, Capital Intensity, Collaborative Automation, Cyborgization, David Autor, Don Boudreaux, Exoskeletons, Factor Substitution, Farmbots, George Selgin, gier.org, Hal Varian, Human Augmentation, Labor Productivity, Minimum Wage, Owning Machines, Pew Research Center, Resource Allocation, Robert Samuelson, Robotics, Scarcity, Singularity Hub, Superabundance, Work-Leisure Tradeoff

The other day, a few colleagues were lamenting the incipient robot domination of the workplace. It is true that advances in automation and robotics are likely to displace workers in a variety of fields over the next few decades. However, the substitution of capital for labor is not a new phenomenon. It’s been happening since the start of the industrial age. At the same time, capital has been augmenting labor, making it more productive and freeing it up for higher-valued uses, many of which were previously unimagined. The large-scale addition of capital to the production process has succeeded in raising labor productivity dramatically, and labor income has soared as a consequence. That is likely to continue as increasingly sophisticated robots assume certain tasks entirely and collaborate with workers on others, even in the service sector.

Advanced forms of automation are another step in the progression of technology. The process itself, however, and the adoption of robotics, might well be hastened by public policy that pushes labor costs to levels not commensurate with productivity. I wrote about this process in “Automate No Job Before Its Time” on Sacred Cow Chips late last year. The point of that essay was that government-imposed wage floors create an incentive for automation. Because a wage floor has its impact at the bottom of the wage scale, at which workers are the least-skilled, this form of government intervention creates a regrettable and unnatural acceleration in the automation process. Other mandated benefits and workplace regulations can have similar effects.

Robert Samuelson makes the same points in “Our Robot Panic Is Overblown“. He notes the effectiveness of the U.S. economy in creating jobs over time in the presence of increasing capital-intensity. But he also warns of potential missteps, including the dangers of government activism:

“There are two dangers for the future. One is that the new jobs created by new technologies will require knowledge and skills that are in short supply, leaving unskilled workers without income and the economy with skill scarcities. … The second danger is that government will damage or destroy the job creation process. We live in a profit-making economic system. Government’s main role is to maintain the conditions that make hiring profitable. … If we make it too costly for private firms to hire (through high minimum wages, mandated costs and expensive regulations) — or too difficult to fire — guess what? They won’t hire. That’s what ought to worry us, not the specter of more robots.“

Historically, automation has actually created more jobs than it has destroyed. In general, however, the new jobs have required higher levels of skills than the jobs lost. In “Why Are There Still So Many Jobs? The History and Future of Workplace Automation“, David Autor of MIT says it this way:

“Automation does indeed substitute for labor—as it is typically intended to do. However, automation also complements labor, raises output in ways that lead to higher demand for labor, and interacts with adjustments in labor supply. … journalists and even expert commentators tend to overstate the extent of machine substitution for human labor and ignore the strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor.“

As with almost all automation, robots will replace workers in the most routine tasks. Tasks involving less routine will not be as readily assumed by robots. To a large degree, people misunderstand the nature of automation in the workplace. The introduction of robots often requires collaboration with humans, but again, these humans must have more highly-developed skills than a typical line worker.

Hal Varian, who is the chief economist at Google, describes the positive implications of the ongoing trend to automate (see the link in the last paragraph of this post), namely, less drudgery and more leisure:

“If ‘displace more jobs’ means ‘eliminate dull, repetitive, and unpleasant work,’ the answer would be yes. How unhappy are you that your dishwasher has replaced washing dishes by hand, or your vacuum cleaner has replaced hand cleaning? My guess is this ‘job displacement’ has been very welcome, as will the ‘job displacement’ that will occur over the next 10 years. The work week has fallen from 70 hours a week to about 37 hours now, and I expect that it will continue to fall. This is a good thing. Everyone wants more jobs and less work. Robots of various forms will result in less work, but the conventional work week will decrease, so there will be the same number of jobs (adjusted for demographics, of course).“

An extreme version of the “robot domination” narrative is that one day in the not-too-distant future, human labor will be obsolete. Automation is not limited to repetitive or menial tasks by any means. A wide variety of jobs requiring advanced skills have the potential to be automated. Already, robots are performing certain tasks formerly done only by the likes of attorneys, surgeons, and computer programmers. Robots have the potential to repair each other, to self-replicate, to solve high-order analytical problems and to engage in self-improvement. With advances in artificial intelligence (AI), might humans one day become wholly obsolete for productive tasks? What does that portend for the future of so many human beings and their dependents who, heretofore, have relied only on their labor to earn a living?

There are any number of paths along which the evolution of technology, and its relationship to workers and consumers, might play out. The following paragraphs examine some of the details:

The Human Touch: There will probably always be consumers who prefer to transact with humans, as opposed machines. This might be limited to a subsegment of the population, and it might be limited to the manufacture of certain artisan goods, such as hand-rolled cigars, or certain services. Some of these services might require qualities that are more uniquely human, such as empathy, and the knowledge that one is dealing with a human would be paramount. This niche market might be willing to pay premium prices, much as consumers of organic foods are willing to pay an extra margin. However, it will be necessary to retain the perceived quality of the human touch and to remain reasonably competitive with automated alternatives on price.

Human Augmentation: Another path for the development of technology is the cyborgization of labor. This might seem rather distasteful to current sensibilities, but it’s a change that is probably inevitable. At least some will choose it. Here is an interesting definition offered by geir.org:

“Cyborgization is the enhancement of a biological being with mechanical or non-genetically delivered biological devices or capabilities. It includes organ or limb replacements, internal electronics, advanced nanomachines, and enhanced or additional capabilities, limbs, or senses.“

These types of modifications can make “enhanced” humans competitive with machines in all kinds of tasks. The development of these kinds of technologies is taking place within the context of rehabilitative medical care and even military technology, such as powerful exoskeletons, but the advances will make their way into normal civilian life. There is also development activity taking place among extreme hobbyists underground, such as “biohackers” who perform self-experimentation, embedding magnets or electronic chips in their bodies in attempts to develop a “sixth sense” or enhanced physical abilities. Even these informal efforts, while potentially risky to the biohackers themselves, might lead to changes that will benefit mankind, much like the many great garage tinkerers who have been important to innovation in the past.

Owning Machines: Ownership of capital will take on a greater role in providing for lifetime earnings. Can the distribution of capital ever be broadened to the extent needed to replace lost labor income? There are ways in which this can occur. The first thing to note is that the transition to a labor-free economy, were that to transpire, would play out over many years. Second, we have witnessed an impressive diffusion of advanced technologies in recent decades. Today, consumers across the income spectrum hold computers in their pockets that are more than the equivalent of the supercomputers that existed 50 years ago. Today’s little computers are far more useful in many ways, given wireless internet connectivity. There are many individuals for whom these devices are integral to earning an income. Thus, the rate of return on these machines can be quite impressive. The same is true of computers, software (sometimes viewed as capital) and printers, not to mention other “modern” contrivances with income-earning potential such as cars, trucks and a vast array of other tools and hardware. Machines with productive potential will continue to make their way into our lives, both as consumers and as individual producers. This also will include value-added production of goods at home, even for use or consumption within the household (think 3D printers, or backyard “farmbots”).

Saving Constructs: Most of the examples above involve machines that require some degree of human collaboration. Of course, even the act of consuming involves labor: I must lift the fork to my mouth for every bite! But in terms of earning income from machines, are there other ways in which ownership of capital can be broadened? The first answer is an old one: saving! But there is no way most individuals at the start of their “careers” can garner a significant share of income from capital. Other social arrangements are probably necessary. One of great importance is the family and family continuity. Many who have contemplated a zero-labor future imagine a world in which there are only two kinds of actors: individuals and the state. Stable families, however, hold the potential for accumulating capital over time to provide a flow of income for their members. Other forms of social organization can fill this role, but they must be able to accumulate capital endowments across generations. Of course, in an imagined world with minimal opportunities for labor, some have concluded that society must collectively provide a guaranteed income. To indulge that view for just a moment, a world of complete automation would almost certainly be a world of superabundance, so goods would be extremely cheap. That means a safety net could be provided at a very low cost. Nonetheless, it would be far preferable to do so by distributing a minimal number of shares of ownership in machines. These shares would have some value, and to improve resource allocation, it should be the individual’s responsibility to manage those shares.

Economic Transition: The dynamics of the transition to robot-dominated production raise some interesting economic questions. Should the advancement of robotics and artificial intelligence create a massive substitution away from labor, it will be spurred by 1) massive upward shifts in the productivity of capital relative to its cost; and 2) real wages that exceed labor’s marginal productivity. There will be stages of surging demand for the kinds of advanced labor skills that are complementary to robots. The demand for less advanced labor services does not have to fall to zero, however. There will be new opportunities that cannot be predicted today. Bidding for scarce capital resources and the flow of available saving will drive up capital costs, slowing the transition. And as long as materials, energy and replacement parts have a cost, and as long as savers demand a positive real return, there will be a margin along which it will be profitable to employ various forms of labor. But downward adjustment of real wages will be required. Government wage-floor policies must be abandoned. That will not be as difficult as it might sound: the kind of automation envisioned here would have profound effects on overall costs and the supply of goods, leading to deflation in the prices of consumables. As long as real factor prices can adjust, there will almost certainly remain a balance between the amounts of capital and labor employed.

In “Robots Are Nothing New“, Don Boudreaux passes along this comment from George Selgin:

“I’ve always been aghast at finding many otherwise intelligent economists arguing as if technology had a mind of its own, developing willy-nilly, or even perversely, in relation to the relative scarcity of available factors, including labor. Only thus can it happen that labor-saving technology develops to a point where labor, instead of being relatively scarce, becomes superabundant!

The fundamental problem, I believe, is confusion of the role of technological change with that of government interference with the pricing of labor services that is among the things to which technology in turn responds. Labor-saving technology becomes associated with unemployment, not because the last is a consequence of the former, but because both are contemporaneous consequences of a common cause, to wit: minimum wage laws and other such interference that sets wage rates above their market-clearing levels.“

There is much disagreement on the implications of automation. This excellent survey of experts by the Pew Research Center contains a number of insights. Also, visit Singularity Hub for a number of great articles on automation and AI, some of which are surprising. I believe that these technologies hold a great deal of promise for humanity. The process will not take place as suddenly as some fear, but ill-conceived policies such as a mandated “living wage” would put us on an unnaturally speedy trajectory. Opportunities for the least-skilled workers will be foreclosed too soon, before those individuals can develop skills and improve their odds of establishing a life free of dependency. Too rapid an adoption of advanced automation and AI would increase the likelihood of choosing suboptimal production methods that might be difficult to change later, and it would leave little time for education and training for workers who might otherwise leverage new technologies. The benefits of automation and their diffusion can be maximized by allowing advances to take a natural course, guided by market forces, with as little interference from government as possible.

When Is Recycling Not Wasteful?

17 Wednesday Feb 2016

Posted by pnuetz in Environment, Government, Markets

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Benefits of Recycling, Daniel K. Benjamin, Hazardous Waste, Landfill Space, Mandatory Recycling, Mobro 4000, Packaging, Property and Environmental Research Center, Rubbish, Scarcity, Scavenging, Sustainabilty, Voluntary Recycling

Recycle

Recycling is not wasteful when it makes economic sense to recycle, without government force brought to bear in the form of mandates, taxes or subsidies. The argument that private parties undertake recycling to a less-than-optimal extent is based on the notion that there are external benefits of recycling that go unrecognized. According to this line of thinking, government must mandate recycling and must tax or impose fees to provide recycling infrastructure. It must demand that producers of goods utilize a certain percentage of recycled materials. Children must be taught the sustainability, goodness, and sanctity of recycling. These positions are ill-founded and misdirect resources toward excessive, and yes, sometimes wasteful recycling.

In 2010, The Property and Environment Research Center (PERC) published an excellent paper by Daniel K. Benjamin entitled “Recycling Myths Revisited“. Benjamin begins by offering “a brief history of rubbish”, which recalls the great extent to which recycling efforts have always been made out of sheer self-interest. Scavenging is as old as civilization, and recycling efforts have generated inputs to production from the start of the industrial age. Some older recycling activities have become obsolete for various reasons; others have been spawned by new technology.

Benjamin’s history of rubbish recounts the history of landfill usage and development. He discusses one seminal event in the history of rubbish: the Mobro 4000 garbage barge from New York City. Rumors of hazardous waste aboard the Mobro led to it’s rejection at various rubbish “ports of call”. However, inaccurate reports circulated that the issue was a shortage of landfill space, a narrative that certain parties were only too happy to encourage, including the EPA and certain trade groups. The episode is a fascinating example of rumor, misinformation and manipulation.

“Although the physical availability of landfill space was not an issue, that was not how the situation played out in the press. The Mobro, said a reporter on a live TV feed from the barge itself, “really dramatizes the nationwide crisis we face with garbage disposal”. A strange cast of characters went on to turn Mobro’s miseries into a national cause. …

The result of this steady drumbeat of expressed concern was a growing fear that America was running out of places to put its garbage and that yesterday’s household trash could somehow become tomorrow’s toxic waste. By 1995, surveys revealed that Americans thought trash was the number one environmental problem, and 77 percent reported that increased recycling of household rubbish was the solution. Yet these claims and fears were based on errors and misinformation— myths of recycling.“

From there, Benjamin proceeds with an excellent discussion of eight recycling-related myths, which I attempt to summarize below:

We are running out of space for our trash: no, the capacity of landfills in the U.S. has outpaced growth in refuse for years. At 500 feet deep, a century’s worth of trash in the U.S. would fit into an area of five square miles. There is no shortage at all.
Trash threatens our health and ecosystem: actually, the EPA estimates that health dangers posed by landfills are close to zero. Older landfills sited on wetlands or containing any hazardous industrial waste are the only real threat, which has nothing to do with recycling today. Benjamin describes the superior design features of modern landfills.
Packaging is our problem: packaging “amounts to about 30 percent of what goes into landfills, down from 36 percent in 1970“. Thanks to innovations, the thickness and weight of almost every kind of packaging has declined significantly over the years. Moreover, packaging actually reduces waste in many instances by minimizing breakage and spoilage. For example, with packaging you deal with much less waste in your kitchen every time you buy chicken. The producer is able to recycle the useable waste more efficiently than you ever could.
Trade in trash is wasteful: no, trade in trash allows it to be placed where it costs the least, including dumping fees and transportation costs. Both parties to a trash transaction are likely to benefit, including those in areas that import trash by virtue of the local fees and taxes paid by landfills.
We are running out of resources: no we’re not, but it’s not that the total stock of earthbound resources is infinite (though many resources like forests are renewable). Instead, as Benjamin asserts, it’s that proven reserves of many resources keep growing, and the effective known stocks of nonrenewable resources are continually stretched by human ingenuity. Even land! Within a few decades, some resources are likely be mined on extraterrestrial bodies, but only if it makes economic sense. This is not to deny that scarcity is real, but prices in well-functioning markets always convey the degree of scarcity, the value of conservation, the cost of substitutes, the value of new exploration, and the value of new technological efficiencies. Right now, the world is awash in many commodities, and their prices reflect a relative lack of scarcity.
Recycling always protects the environment: this is nonsense. “Recycling is a manufacturing process, and therefore it too has an environmental impact. … over the past 25 years, a large body of literature devoted to life-cycle analyses of products from their birth to death has repeatedly found that recycling can increase pollution as well as decrease it (EPA 2006, 2010).” Benjamin notes that curbside recycling may well have a negative environmental impact due to the resource costs of the extra trucks, fuel, and exhaust required to collect it. The point is that tradeoffs exist and should not be ignored.
Recycling saves resources: not if the recycled material is inferior to virgin material, with attendant inefficiencies and lower-valued final products; not if the process absorbs more resources than it saves. These kinds of decisions are best left to rational market participants, for whom the question of recycling is a matter of self-interest. “Commercial and industrial recycling is a vibrant, profitable market that turns discards and scraps into marketable products. But collecting from consumers is far more costly, and it results in the collection of items that are far less valuable.” When low-value recycling is mandated or subsidized, the true cost of the activity is hidden.
Without recycling mandates, there wouldn’t be recycling: “Another force behind mandatory recycling is ignorance about the extent of recycling in the private sector. Private sector recycling is as old as trash itself. For as long as humans have been discarding rubbish, other humans have sifted through it for items of value. Indeed, … scavenging may well be the oldest profession.” Recycling must make economic sense. If it doesn’t, it simply should not happen.

Benjamin’s paper is loaded with great illustrations of all these points. Here’s one of my own: Some years ago, a local municipality was revealed to be sending recyclables to a landfill due to the low market value of the material. Net of the costs of sorting, selling and transporting the materials to buyers, it was apparently better to pay the fees for normal waste disposal. Residents were justifiably furious, but the reality is that recycled materials have a value that fluctuates. That value reflects the real resources the recycled materials can save, if any. However, the value may not always cover the variable cost of collecting the recyclables, let alone the fixed costs of the process. That’s to say nothing of the costs imposed on individuals by mandates.

The eight points above demonstrate that there is little in the way of external benefits from recycling. There is nothing mystical here to justify government coercion. Recycling must make economic sense and it must be voluntary. When we allow government to force the decision, the sure result is an overallocation of resources to an endeavor presumed by its adherents to save resources. There is no paradox. It’s just more waste.

Progressives Identify Twin Evils: Progress and People

20 Monday Apr 2015

Posted by pnuetz in Human Welfare

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Big Coffee Table Book of Doom, Depopulation, Dismal Science, Don Beaudreaux, Fixed Supply, Free Markets, Infinite Resource, Kevin Williamson, Overdevelopment, Overpopulation, Overshoot, Ramez Naam, Reason, Ron Bailey, Scarcity, Thomas Malthus

“The Big Coffee Table Book of Doom” is an entertaining review of an actual coffee table book entitled “Overdevelopment Overpopulation Overshoot“, which appeals to the progressive Left’s neo-Malthusian mindset. I am almost tempted to buy this book for my coffee table as fodder for my own amusement, sort of like the board game “Class Struggle” I bought for laughs when I was in grad school. The review, written by Ron Bailey in Reason, pokes fun at the selection of photos in the book, which are chosen to reinforce such fables as over-population, climate change and the supposed evils of capitalism. Of course, this sort of nonsense will never die, primarily because people love a good scare story and because it aligns with the privileged Left’s sense of righteousness and noblesse oblige. Bailey highlights several actual trends that contradict the doomsday narrative:

“Agricultural productivity per acre is improving faster than the demand for food; as a result, fewer acres are needed to grow crops. These trends suggest that as much as 400 million hectares could be restored to nature by 2060, an area nearly double the size of the United States east of the Mississippi River.“

“… the total global fertility rate has fallen from over 5 children per woman in 1970 to 2.45 today, rapidly approaching the 2.1 rate that is the threshold of population stability.“

And on the “perils” of urbanization:

“Urban dwellers have greater access to education, market opportunities, and medicine, and they have fewer kids.“

As Kevin Williamson has pointed out, an egregious distortion of the neo-Malthusian perspective is an attitude that human beings are liabilities rather than assets. This is underscored by the recent comments of a UN official calling for depopulation as a serious objective. One wonders how she might propose to attain that objective. Can the eliminationists be far behind? In rebuttal to such thinking, Bailey quotes Ramez Naam, author of “Infinite Resource“:

“‘Would your life be better off if only half as many people had lived before you?’ In this thought experiment, you don’t get to pick which people are never born. Perhaps there would have been no Newton, Edison, or Pasteur, no Socrates, Shakespeare, or Jefferson. ‘Each additional idea is a gift to the future,’ Naam writes. ‘Each additional idea producer is a source of wealth for future generations.’ Fewer people means fewer new ideas about how to improve humanity’s lot and to further decouple our endeavors from the natural world. ‘If we fix our economic system and invest in the human capital of the poor,’ Naam writes, ‘then we should welcome every new person born as a source of betterment for our world and all of us on it.'”

Population growth has traditionally been a source of economic growth and enhanced welfare, and that is likely to remain the case. I do not claim that population growth will always be an imperative. Rather, fertility decisions are properly the business of families and individuals, not central authorities or public policy, which should take a neutral stance with respect to these decisions.

Malthusian doom is related to the economic law of scarcity, but it is not a direct implication of that law: scarcity means that resource availability is limited relative to potentially limitless demand. The law of scarcity does not assert that there are absolute limits to raw materials or production in the long run, only that human wants, if unrestrained, will always exceed available supplies. There are many ways in which supplies of resources increase over time. Exploration reveals new supplies and technology makes new supplies accessible at lower cost. More fundamentally, growth in the productivity of utilized resources causes effective economic supplies to grow. This is illustrated in Don Beaudreaux’s recent essay on the productivity of land (and see a follow-ups on the topic here):

“The economic supply of land, like that of any other resources you can name, is not a physical phenomenon. As long as people are free and inspired to innovate – and as long as input and output prices are free to adjust to changes in supply and demand – the economic supplies of even the most ‘fixed’ and ‘nonrenewable’ resources will expand.“

Prognostications of doom for humanity appeal to the ignorance of those with no perspective on the mechanisms by which well-being has improved in the developed world over the past few centuries. This has occurred largely by virtue of human ingenuity and free markets. The growth has also enabled greatly improved environmental conditions. The developing world will share in the prosperity only when those governments embrace real market liberalization.

Scarcity Scarcity Everywhere, And Water Pricing Stinks

09 Monday Mar 2015

Posted by pnuetz in Markets

≈ 2 Comments

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Administrative pricing, Allocative efficiency, Econ Talk, Marketable permits, Mis-pricing and environmental damage, San Antonio water, Scarcity, Secondary markets, Water rationing, Water scarcity, Water trading

What weird irrationality compels water authorities to price “Adam’s Ale” so cheaply, then mercilessly harangue consumers to conserve? The enforcement of sometimes crazy rationing schemes, like watering lawns only on dates ending with the last digit of one’s street address, is but a symptom of this dysfunction. If water is scarce, then it should be priced accordingly. Only then will users voluntarily limit their use to quantities they value at no less than its real resource cost. This might involve changes in agricultural and industrial practices, landscaping and lifestyles. Perhaps there would be fewer lawns and swimming pools installed where water is most scarce. But these actions should be taken voluntarily in response to market incentives.

Water prices are generally regulated and administered, and only rarely established in an actual market. Pricing is usually based on the infrastructure costs of delivering water, as well as the costs of processing required to meet various standards. Again, these prices seldom reflect the real scarcity of water. This is partly due to populist distortions of the idea that water is basic to life, the perception that water is a public good, and the related political appeal of notions like “the water belongs to everyone”. There is also the admirable objective of keeping water affordable for the poor. But unit water prices faced by different users are not uniform: agricultural users sometimes pay as little as 90% less per unit than the generally cheap prices faced by urban consumers. Industrial users are also accorded favorable rates. Needless to say, incentives are way out of line!

When a resource is priced at levels that do not reflect its scarcity, something has to give. The resource will be overused, and overuse of water inflicts severe environmental damage. With water, that can mean draining lakes and killing springs and riverbeds along with the habitat they support, not to mention lower water quality. The waste doesn’t stop there: authorities are sometimes prone to propose costly infrastructure boondoggles to address water needs, such as dams and reservoirs in arid climates from which large quantities of stored water evaporate.

This episode of Econ Talk features a discussion of water mis-pricing and its consequences. (A hat tip on this to the estimable John Crawford). It covers issues in the management of water systems in the U.S. and under-developed countries. It is a very informative discussion, but it neglects one of the most promising methods of pricing, managing and conserving water supplies: marketable permits, or a secondary market in water rights.

Marketable permits involve the assignment of base usage rights using criteria such as estimates of total supplies and the customer’s past usage levels. This base allocation of rights can be dynamic, changing over time with drought conditions or improvements in conservation technology. Usage up to the permitted quantity is priced administratively, as usual, which keeps water affordable to individuals in lower economic strata. Beyond that base level, however, users must acquire additional permits from a willing seller at a mutually agreed-upon price. Trades can take place on a centralized water “exchange” so that prices are observable to all market participants. And trades may take various forms, such as short-term or long-term contracts which may involve prices that differ from “spot”.

How does this help solve the problem of scarcity? The price of water on the secondary market will rise to the point at which users no longer perceive a benefit to marginal flows of water above cost. A higher price encourages voluntary conservation in two ways: it is a direct cash cost of use above one’s base water rights, and it is an opportunity cost of foregoing the sale of permits on water use up to the base assignment. Those best-prepared to conserve can sell excess rights to those least prepared to conserve. The price established by the trade of permits will bear a strong relationship to the actual degree of scarcity.

A hallmark of allocative efficiency is when the marginal value of the resource is equalized across different uses. This condition implies that no gains from trade are left unexploited. But in the case of water, this means that gains in efficiency will be limited unless all users face the same “spot” price. To fully exploit the market’s potential for efficient allocation, large agricultural and industrial users must face a relatively low base price that differs from residential customers only in terms of infrastructural costs. Granted, voluntary trades between users can take place under specialized contracts as long as the terms are publicly available. This allows intensive users to hedge risks to assure that their needs can be met in the future. However, those users will still have to weigh the marginal benefits of certain crops or industrial processes against prices that more accurately reflect scarcity.

This discussion has ignored certain complexities. For example, assigning rights is complicated by the fact that there are almost always multiple sources of water, such as rivers, public and private wells, lakes and runoff capture. There are sometimes different classes of rights-holders on specific sources. Rights on some sources might not be subject to base pricing by a water authority, but water permits could still be sold by these rights-holders on the secondary market, providing an incentive for them to conserve.

There have been political and legal impediments to the development of water markets in the U.S., some of which are discussed here. A recent effort to promote a water market in the western U.S. has arisen in response to drought conditions. Here is a good article from the last link above, a lengthy abstract of a research paper proposing development of a water market in the American West. Of course, there are many academic papers on this topic, but they are mostly gated. I lived in San Antonio in the 1990s when a controversial proposal to build a large reservoir was under debate. This was intended to relieve demands on the Edwards Aquifer, upon which a large area of Texas depended for water. It was voted down by a coalition that included many libertarians and environmentalists. At about that time, I met a natural resource economist from the University of Texas system who proposed the establishment of a water market in south Texas. He had trouble getting local support for the idea; it was politically taboo due to superstitions about an effort to allocate rights (marketable permits) on what is often perceived as a “public good” (despite the exclusivity of its benefits to customers). Later, in 1998, the San Antonio branch of the Federal Reserve Bank of Dallas published this interesting article on the development of a water market in south Texas. To my knowledge, there is still no water market there, but battles over water use and conservation continue.

Dismal Implications of Aggregate Analysis

12 Thursday Feb 2015

Posted by pnuetz in Macroeconomics

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Aggregate demand, Aggregation, Collectivism, FEE, Gary Galles, I Pencil, incentives, Interventionism, Keynesians, Leonard Read, Macroeconomics, Mises Institute, Scarcity, Stabilization policy, statism

Economic aggregation is basic to traditional macroeconomic analysis, but it distorts and drastically oversimplifies the enormous number of transactions and the vast network of decision-makers that comprise almost any economic system, especially a market economy. There are some basic problems with aggregating across individuals and markets, but these are typically glossed over in macro-policy analyses. Instead, the focus is on a few key outcomes, such as aggregate spending by sector and saving, masquerading as collective “decisions” amenable to behavioral analysis. In this kind of framework, the government sector occupies an equal place to consumers and business investors. It is usually depicted as a great exogenous demander of goods and services, capable of “stabilizing” demand in the event of underconsumption, for example.

An insightful post by Gary Galles at the Mises blog drives home the inherent distortion involved in the analysis of macro-aggregates: “How Economic Aggregation Hides the Problems of Interventionism“. The problems start with a nearly complete misapplication (if not neglect) of the basic problem of scarcity, as if that problem can be solved via manipulation of aggregate constructs. Galles offers a simple example of the macro distortion of “net taxes,” or aggregate taxes minus government transfer payments. Both taxes and transfers are complicated subjects, and both are subject to negative incentive effects. The net-tax aggregation is of little use, even if some rudimentary supply function is given treatment in a macro model.

By its very nature, aggregate government activity is distorted by the prices at which it is valued relative to market activity, and intervention in markets by government makes market aggregates less useful:

“For example, if government gives a person a 40 percent subsidy for purchasing a good, all we know is that the value of each unit to the buyer exceeded 60 percent of its price. There is no implication that such purchases are worth what was paid, including the subsidy. And in areas in which government produces or utilizes goods directly, as with defense spending, we know almost nothing about what it is worth. Citizens cannot refuse to finance whatever the government chooses to buy, on pain of prison, so no willing transaction reveals what such spending is worth to citizens. And centuries of evidence suggest government provided goods and services are often worth far less than they cost. But such spending is simply counted as worth what it cost in GDP accounts.”

Galles article emphasizes the unintended (and often unpleasant) consequences that are bound to flow from policies rationalized on the basis of aggregate macro variables, since they can tell us little about the impact on individual incentives and repercussions on the ability of markets to solve the problem of scarcity. In fact, the typical Keynesian macro perspective lends itself to slow and steady achievement of the goals of collectivists, but the process is destined to be perverse: more G stabilizes weak aggregate demand, or so the story goes, but as G expands, government entwines itself into the fabric of the economy, and it seldom shrinks. Taxes creep up, dependencies arise, regulation grows and non-productive cronies capture resources bestowed by their public sector enablers. At the same time, the politics of taxes almost ensures tat they grow more slowly that government spending, so that the government must borrow. This absorbs saving that would otherwise be available for productive, private investment. As investment languishes, so does growth in productivity. When economic malaise ultimately appears, we hear the same policy refrain: more G to stabilize aggregate demand! All the way down! Perhaps unemployed dependents are simpler to aggregate.

Aggregation masks the most basic issues in economics. A classic lesson in the complexity of creating even a simple product is told in “I, Pencil“, by Leonard Read. In it, he allows the pencil itself to tell the story of it’s own creation:

“Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred. “

How many individual decisions and transactions are involved, throughout all intermediate and final stages of the process? How many calculations of marginal value and marginal cost are involved, and ultimately how many prices? While the consumer may think only of the simple pencil, it would be a mistake for a would-be “pencil czar” to confine their planning to final pencil transactions. But macro-analysts and policymakers go a giant leap further: they lump all final transactions together, from pencils to pineapples (to say nothing of the heroics involved in calculating “real values”, an issue mentioned by Galles). They essentially ignore the much larger set of decisions and activities that are precedents to the final transactions they aggregate.

Peak-Resource Myopia Serves the State

08 Sunday Feb 2015

Posted by pnuetz in Peak Oil

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David Henderson, Don Boudreaux, Government Failure, Michael Lynch, Peak Oil, Scarcity, Thomas Malthus, William Jevons

We often hear we’re at the “peak” availability of some resource, but what’s really meant is that we’re at a cliff’s edge, about to run dry. These claims are usually uninformed and have been wrong historically. Of course, scarcity is real; it’s why I do economics and love markets, which solve the problem of scarcity through voluntary, arms length cooperation in balancing needs and wants with the availability of resources. But scarcity at any point in time rarely implies anything about the availability of resources going forward. Current knowledge and conditions, and existing technology for extracting and utilizing resources, provide signals about opportunities; they should not dominate our outlook for the future in a dynamic economy.

The view that the availability of resources is subject to hard limits, or that they will “run out”, is discussed by David Henderson in his post “The Jevons Fallacy,” regarding the “peak” views often credited to economist William Jevons. Henderson quotes his own bio of Jevons:

“Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).”

Don Boudreaux has a few thoughts on Henderson’s post and the topic of scarcity, emphasizing the contribution of human ingenuity to the supply of resources:

“Atoms are created and made into matter by the impersonal forces of nature (or, if you are a theist, by God). In contrast, matter is made into resources only by human creativity, especially when this creativity is unleashed and directed by markets. So more humans – and more markets – quite realistically (and, so far, historically) mean an increasing, not a decreasing, supply of resources.”

A 2005 post at the humansunderrated blog made the same point: “Only one resource truly matters and that is the human mind.” And the human mind, guided by market signals, is what ultimately solves the problem of scarcity. It does not get solved when human initiative is shackled by regulation, insecure property rights, or protected monopoly interests, which are all varieties of government failure.

In “Peak Nonsense,” Michael Lynch concurs:

“And so here we go again on the trial of exhaustion theory, one step removed from the scientism of central planning where decline rates are projected and a social cost of depletion is calculated for an extraction tax. But it is all bad science. ”

There is no end to scarcity. It will always be with us, but we have not reached peak oil, peak fossil fuels, peak food, or peak anything. The dreary viewpoint credited to Jevons and Thomas Malthus is misguided as long as people remain free to engage in voluntary production and trade. The “peak” perspective serves the interest of statists who’d prefer to impose arbitrary limits on our productive potential.

How Can Innovation Improve the Environment?

27 Sunday Apr 2014

Posted by pnuetz in Uncategorized

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Club of Rome, Environment, Innovation, Limits to Growth, Matt Ridley, Scarcity

Matt Ridley has an nice essay emphasizing that The World’s Resources Aren’t Running Out. They won’t, and the reason is innovation. There is a phenomenon that strikes the environmental left as such an impossible paradox that they cannot see their way clear to understanding how the environmental problem has been and will be solved: economic growth brings wealth that allows us to afford the development of new, cleaner technologies, and those technologies in turn encourage more economic growth. To add a qualifier, it will be solved unless governments prevent markets from doing the work.