Tuesday, April 28, 2009

Simonian position

I find Julian Simon's position to be somewhat contradictory: humans are the essential resource, check, and using ingenuity will come up with creative means to gain in the face of scarcity, check.

But he seems to take a view that naturally imposed constraints will naturally be overcome, while artificial (i.e. chosen) constraints are bad. Will not all constraints lead to creative innovation? Is this not one of the key findings of economics? Is it not true that the past is not prologue - and we better not bank on overcoming a given problem?

I understand that additional constraints seem like the last thing we want - nature is niggardly enough, but is it not worth being open about potential gains?

We can all agree that the intended effects of constraints are often not what occurs, but are Pigou taxes and regulation bad by default? For example, many free marketers seem to want to say that constraints on trade, for example, lead to poor outcomes across the board. I agree, mostly, and we also have to be careful and clear in discussing things, as many are prone to dislike free trade and other economic principles and hold on to their biases. But consider the example of France/Britian trade barriers on wine - this lead to both great British beer and excellent French wine. The lesson seems to be that a constraint can be overcome and add value, one may question if the overall effect was worth it and the loss in wealth overcomes this tasty benifit. But there it is.

Now onto resource scarity - we all know oil is a dwindling resource. We also know that the "oil revolution" made huge HUGE impact for the better on our society. It is hard to clearly see just how much oil has improved our lives, and every day I learn more and more amazing things related to this, and things fundamentally related to oil that I didn't realize (i.e. consider the huge amout of chemicals and fertalizers and other materials made cheaply from oil, we also can see a "chemical" revolution in our society that is dependent on the supply of cheap oil). Oil is literally like manna from heaven - it sustains our society and is exteamly energy dense.

We have no viable means to replace oil. Yes, we may find something(s) to do so. But oil is probabally the single most valuable resource (other than people and the fundamentals, i.e. food, etc.) to our society. Oil is literally wealth.

Is it not reasonable to at least consider a Pigou tax on oil, to help spawn efforts to replace and preserve it? Neccessity is not the mother of invention, opportunity is. Might it not be in our best interest to increase the amount of time that we have the opportunity to find a relacement?

The state is not going away any time soon, but if we shifted from income/business taxes to "carbon" taxes in an (attempted) neutral manner we would have incentives placed to spur innovation on preserving and finding subsitutes. Best is the enemy of better - a Pigou tax on carbon is better than an income tax. Perhaps no tax at all would be best (though this is really an undecidable thing until post play analysis - expectation value would suggest a Pigou tax would be in our best interest) but better is important, and doing what is viable and better is what one should push for. Even getting people thinking about Pigou taxes would shift attitudes towards taxes - post a "Pigou revolution" would people be as willing to incure income taxes, or other taxes not justified in and of themselves? Forcing political classes to at least pretend to justify things would be an important development. Seeing just how hard it is to actually justify a tax would make more people aware of the complexity of society, and perhaps some appreciation of liberty and just how sweet we have it right now.

Consider just how much oil has impacted our wealth - how much we gain from this. It is a mind boggling blessing. Now consider human ingenouity in overcoming constraints. Perhaps it is time to shift the incentive structure to reward ingenuity where it matters in an extreamly important and deep way to humans - perserving and extending the great wealth we are blessed with at this time in history.

Simon made very important contributions - and his view is positive and productive, but the view - as often presented - must be nauanced with some hard truths: we may not get suitable subsitutes for oil (need and desire does not influence outcome), and self imposed contraints are often good in the long run (such as the student who forces constant study instead of assuming an all nighter will get them by). Yes, yes - many people are overly pessimistic, but lets not try to get a realistic average by being naively optimistic, many people discount economics before even pretending to listen and trying to understand, but lets not undercut our position with policies and statements that don't feel right because they ignore truths most feel. And yes, those self imposed constraints have real costs. But would you counsel a student to study?

We can sip one of our excellent choices in beer (or wine if you prefer) and think on this - should we constrain ourselves intentionally?


  1. There's a difference between constraining yourself and constraining others.

    A market economy is naturally restraining (if demand increases relative to supply, prices go up, incentivizing costly search and extraction of that resource or the development of alternatives).

    Let's say we put a high tax on oil, to encourage the development of alternatives. A few problems pop to mind. One, it is probably cheaper to lobby the government in order to get a tax exemption than it is to genuinely invest in alternatives. Two, the government has demonstrated a willingness to aggressively use Pigou taxes on things it considers to be of high importance -- if you are an entrepreneur and a proper Bayesian you will consider that significant investment in the extraction or development of things that are of high importance (like fuel sources).

    This is actually along the lines of some of my current research, except instead of focusing on Pigou taxes on, say, carbon, it critiques the wisdom of a high land value tax of the style recommended by Georgists.

  2. I re-read my comment and it doesn't make sense. I meant to say

    "if you are an entrepreneur and a proper Bayesian you will consider that before making significant investment in the extraction or development of things that are of high importance (like fuel sources)."

    As an analogue.. say I am raising cattle and the government believes that with an exponentially increasing population, the land required to raise cattle (or close, existing substitutes like pigs) is soon (maybe this century) going to become very valuable. They want to encourage everyone to start thinking about the coming limitation of land for livestock and skyrocketing price of beef sure to follow, and encourage the production of alternative protein sources, so they instate a very high livestock tax. My cattle business starts to hurt and I consider other business opportunities.

    Option A, I could join the farm lobby and try to get the tax repealed or, since I am a big farmer, maybe just try to get an exception for my farm and enjoy the suppressed competition.

    Option B, I could invest in soy and the promising new "technology" of soy that actually tastes like meat.

    Option C, I could just invest my money elsewhere in a business with no history of punitive taxation.

    Moving people to option B is the goal of the Pigouvian central planner. But I think people will find A or C more attractive. You now have a good reason to figure that the government might put a tax on soy. Plus, investing in soy is a major risk because people might not like it, especially compared to another alternative that comes out.

  3. Zac,

    I agree: gaming the system, lobbying, and simply moving elsewhere are factors. However, since energy is an input to essentially everything the Pigou tax will cause efficiency to be looked at more, and since energy is an input to everything it would be lucrative to find another source. Energy is not like most products, since it is needed by basically everyone. Shifting from income tax to carbon would also provide a further incentive to seek out conservation, research, etc.

    The problem is that the market restrains things, but the market restrains based on the current (as perceived by economic actors) situation - costs are bound to go up, but the question is: can one find a suitable replacement once this happens? The market does not plan for the future, although it is a highly effective way of planning for the now.

    Since searches are difficult, and a suitable replacement may not even exist, adding to the market restrain - in order to conserve as well as induce incentive prior to market reaction - is prudent.

    Of course if one is the only one undertaking the Pigou tax one is sharply limited in how strong one can make it (one simply could harm ones economy, while the rest of the world happily burns up all the oil... then you get the worse of both worlds).

    "Option B, I could invest in soy and the promising new "technology" of soy that actually tastes like meat." - I just watched Soylent Green. Mmmm....