Sunday, August 31, 2008

A Picture is not an Argument*

Kevin Carter, 1994 Pulitzer Prize for feature photo

Poverty and hunger. Real people. Real suffering. Real problems.

In searching for a picture to include in this post, I found a plethora of heart-rending, ghastly and appalling photos of skeletal babies, children and mothers. Most were too awful to look at for very long let alone post on a blog dedicated to progress and hope. But pictures like these are so frequently used as a call to action, I wanted to use one as a call to stop and think.

This picture clearly illustrates a problem, and yet, it tells us nothing about the solution.

Listening to the speeches last week at the Democratic convention, reminded me again and again that we don’t need more pictures. We need solutions. Story after story was offered of hard times, suffering, jobs lost, difficulty affording gas, medical care, food, you-name-it. I assume the stories are real. My heart goes out to the people who are having such hard times in their lives. Yet, those emotional appeals are merely the verbal equivalent to the picture above.

A picture is not an argument, and neither is an image painted with words.

Those stories tell us nothing about why gas is expensive, why medical costs are high, why the economy is growing more slowly than in the past, why so many people are still going hungry. The speakers at the Democratic convention uniformly assume that the problem is “market failure” and a lack of government intervention. The solution, then, must be greater government management of the market. (I expect nothing significantly different from the Republicans.)

But is it? How do you know? Which polices promote growth and prosperity, and which hinder it? What are the forces which lead to higher wages and lower prices? Which conditions lead to an increasing standard of living for everyone, and which lead to stagnation and impoverishment?

Without a clear understanding of the laws of economics, it is impossible to answer those questions. You can no more build up an economy without understanding the laws of economics than you can build a bridge without understanding the laws of physics.

The solutions must take into account fundamental economic principles: the effects of supply and demand on prices, and of prices on purchase decisions; the role of profits in directing businesses to what consumers want and to the most efficient use of resources; the importance of resource efficiency to wealth creation and sustainable prosperity; the unavoidable effects of incentives in economic and political decisions; the role of the entrepreneur in making innovations affordable and available, risking personal loss in the hope of a chance at personal gain; the detrimental effects of allowing special interest pressure groups use the coercive power of government to meddle in the market, distorting prices and preventing free exchange between consenting adults.

Emotional appeals and colorful descriptions of a problem tell us nothing about the cause or its best solution. Unfortunately, these images are too frequently used to horrify us into acting immediately. These people truly are on the brink of death after all. Something must be done right away or they will die!! The amount of human suffering is incomprehensible, and to even try to comprehend is to feel overwhelmed.

We must not let our compassion lead us to hasty, uninformed action. No point in jumping in the river to save a drowning man unless you first know how to swim. To develop lasting, workable solutions to the problems of poverty, first learn the means of creating wealth. That means: understand and apply the laws of economics.

*The title of this post is taken from a lecture by Leonard Peikoff which analyzes in detail the dangers of substituting an appeal to emotion for an appeal to fact and reason.

There are an increasing number of books available which introduce basic economic concepts and principles. Two I recommend are Economics in One Lesson by Henry Hazlitt and Common Sense Economics by Gwartney, Stroup and Lee. Both are short, direct and pleasant to read.

Take the plunge. Let the solutions begin!!

Tuesday, August 19, 2008

Finite Resources vs. Infinite Resourcefulness

People and prosperity threaten the planet and our very existence!! We’re running out of oil! Of fresh water! Clean air!

“Glaciers are melting, plants and animals are being forced from their habitat, and the number of severe storms and droughts is increasing.” An Inconvenient Truth current website (1)

“Big squeeze on the world’s freshwater resources looms as populations mushroom and incomes rise. “Facing the Freshwater Crisis.” Scientific American August 2008

“World oil demand is surging as supplies approach their limits.” National Geographic, current website (2)

Our consumption is excessive. If we continue to consume our natural resources, there will be nothing left for the future.

Use less. Do it for the children!

Limit. Limit. Limit. Do it for the poor!

A significant number of environmental concerns center on this fear of using up some important resource: oil, rainforest, fresh water, open space, biodiversity. The concern is genuine. The fears are real. People then work to pass laws which intentionally slow production and hinder (even prevent) consumption. The express purpose is to make us poorer in the short run with the hope of preventing poverty in the long run.

It’s common sense. Save today in order to have some available tomorrow. It’s how our bank accounts work, so it seems logical to apply the same reasoning to resource use. But there is a catch. All of economic history, up to and including today, demonstrates that the more we exploit our natural resources, the more available they become. (3-7) How can this possibly be? If we use our “limited, non-renewable resources” we have to end up with less, right?

Actually, no. And here is why.

We don’t simply “use up” existing resources; we constantly create them. We continually invent new processes, discover new sources, improve the efficiency of both use and extraction, while at the same time we discover cheaper, better alternatives.

The fact that a particular physical substance is finite is irrelevant. What is relevant is the process of finding ways
to meet human needs and desires. The solutions, and thus what we consider resources, are constantly changing. Oil was a nuisance, not a resource, until humans discovered a use for it.

In order to survive and flourish, human beings must succeed at fulfilling certain needs and desires. This can be accomplished in a multitude of ways using a multitude of materials. The requirements of life set the goals. How these goals are met does not depend on the existence or the availability of any particular material. Limits are placed not by the finiteness of a physical substance, but by the extent of our knowledge, of our wealth, and of our freedom. Knowledge. Wealth. Freedom. These are the factors which are essential to solving the problems we face.

“The Stone Age didn’t end because we ran out of stones.”

Think for a minute about how we have solved the problem of meeting basic needs throughout history:

Transportation: from walking to landing on the moon
Communication: from face-to-face conversations to the World Wide Web.
Food: from hunting and gathering to intravenous feeding and hydroponics.

Shelter: from finding a cave to building skyscrapers
Health care: from shamans to MRIs and neurosurgery.

How does progress happen? A synopsis of the process is provided by the main theme of Julian Simon’s book, The Ultimate Resource 2:

More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. The higher prices present opportunity and prompt inventors and entrepreneurs to search for solutions. Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run, the new developments leave us better off than if the problems had not arisen, that is, prices eventually become lower than before the scarcity occurred. (9)

This idea is not just theory. Economists and statisticians have long been analyzing the massive amounts of data collected on resource availability. The conclusion: our ability to solve the problems of human existence is ever-expanding. Resources have become less scarce and the world is a better place to live for more and more people. (3-7) Overall, we create more than we destroy as evidenced by the steady progress in human well being and there is no evidence for concluding that this trend can't and won't continue. Doomsday predictions have been with us since ancient times and they have consistently been proven wrong.

The science of economics has a crucial perspective to offer in the debates on resource scarcity and environmental policy. As economics professor Steven Horowitz explains, “The problem of scarcity –and how to handle it- are at the center of the discipline.” (10) The claim that resources are not finite goes against our common sense, but, that’s when science has the most to offer: when the facts, and their cause and effect connections, are counter-intuitive. What seems obvious may in fact be wrong. Science is what allows us to discriminate.

Economist Julian Simon refutes the environmentalist focus on "finite resources" with an extensive presentation of empirical evidence as well as a theoretical explanation for the long-term decrease in resource scarcity. He also offers several possibilities as to how we could continue to increase our supply of minerals, energy and food, while simultaneously improving the quality of our air and water. (3) Economist Dr. George Reisman offers both an economic and philosophic analysis of functionally unlimited resource availability in “Natural Resources and the Environment,” the third chapter of his treatise on economics. (11) Indur Goklany provides updates to the evidence that economic growth and environmental improvement go hand-in-hand.

Resource development, economic progress and environmental improvement do not take place in a political vacuum. The connections between freedom, wealth and human-well being are documented and analyzed in at least two projects, the Economic Freedom of the World and the Index of Economic Freedom. Economic liberty, in particular the right to property, is an essential ingredient for releasing the potential of technology and innovation to solve the challenges we face. Here too, economists have much to add to our understanding on the mechanisms of resource (and wealth) creation. It is their stock and trade.

The finiteness of any specific physical resource is made irrelevant by the presence of the ultimate resource: human ingenuity unleashed in a free society.

(For details and an in-depth analysis, check out Simon and Reisman. For a short and to the point introductory explanation of the key ideas, check out the article by Horowitz. Since The Freeman allows reproduction of its articles, you can read the article posted in my blog below. )

3. Simon, Julian The Ultimate Resource 2 Princeton University Press, Princeton NJ, 1996
4. Moore, Stephen and Simon, Julian It’s Getting Better All the Time Cato Institute, Washington, D.C. 2000
5. Lomberg, Bjorn The Skeptical Environmentalist: Measuring the Real State of the World Cambridge University Press, 2001
6. Goklany, Indur The Improving State of the World: Why we are living longer, healthier, more comfortable lives on a cleaner planet. Cato Institute, Washington, D.C., 2007
7. Reisman, George Capitalism: A Treatise on Economics, Jameson Books, Ottawa, IL, 1996
8. I am working to locate the source of this quote and will add it when I find it.
9. Simon, 1996, pg 59
10. Horowitz, Steven "Economists and Scarcity" The Freeman, June 2008
11. Reisman, 1996, pg 63-6611. Reisman, 1996, pg 63-66

Economists and Scarcity

By Steven Horwitz

Steven Horwitz is a professor of economics at St. Lawrence University.

In a world where concerns about the environment and resources dominate political discussion and, for people like Al Gore, are a “generational mission [that gives] moral purpose” to our lives, thinking clearly about these issues is crucial. Economics can contribute to this discussion by providing its perspective on words such as “scarcity” and “resources,” which are often contested or misunderstood.

But how economists use those words is vulnerable to misunderstanding. For example, some environmentalists think that certain economists deny that scarcity even exists when they argue that we are not really running out of resources or that technology can solve any problem in this regard. The sorts of arguments criticized by the environmentalists are most closely connected with the work of the late Julian Simon, especially in his book The Ultimate Resource 2. However, the criticism reveals a misunderstanding of Simon’s and other market-friendly economists’ views.

It is certainly true that nonrenewable resources are limited in physical terms. From the perspective of the geologist, there is only “so much” oil to be extracted.

However, from the economist’s perspective, what matters is not physical quantity, but how efficiently a resource meets a human need. We care about oil because we want energy. If through new technology we can create the same or more energy with less oil, then in an important sense we have more oil than we had before. The existing quantity of oil can now serve more human needs. Moreover, falling costs of extraction can also lead us to find previously undiscovered oil or to tap into known supplies that had been too costly to reach.

So advances in technology do indeed matter, not because they abolish scarcity but because they enable us to stretch the resources we have so that they are functionally less scarce than they were before.

When we speak of improvements in technology, we really mean new and more efficient ways to achieve the ends to which the old resources were a means. New technology might enable us to use an existing resource, such as oil, more efficiently, but it can also provide a new solution to the same problem. For decades, the human voice and data were transmitted by copper wires. Eventually, copper’s price rose to where entrepreneurs had a strong incentive to find another way to provide the service. Eventually they developed sand-based fiber-optic cable, which can carry thousands of times the data for a fraction of the cost of copper. The development of the soft-sided beverage containers—juice boxes—is a similar story, and it is worth noting that their lighter weight reduces gasoline use per unit.

When economists say, “We will never run out of resources,” what they often mean is that faced with increasing scarcity of one resource, we will always find new solutions to the problem that that resource originally solved. In an important sense, the actual economic resource was not copper but “the ability to convey voice and data.” And that resource has become “less scarce” by the substitution of sand. This illustrates Simon’s point that the “ultimate resource” is the human ingenuity that finds new and better ways of using physical resources.

Although technology can fix things, it does not exist in a vacuum. Technological solutions emerge because the right economic institutions are in place. The market provides signals which inform people that a resource is growing more scarce and provide incentives to address the problem. Even some critics of environmentalist arguments forget this point. The role of institutions is clear where technology has not stopped resource depletion, such as overfishing, because the absence of private property and meaningful prices has created a “tragedy of the commons.” The tragedy is that no one has an incentive to husband the resource. This is not a failure of technology but a lack of proper institutions. If the commons are privatized, incentives will exist to develop resource-conserving technologies.

The Central Concern of Economics

What’s so absurd about the criticism of economists for not caring about resource scarcity is that the problem of scarcity—and how to handle it—are at the center of the discipline. The whole case for free markets is about allocating resources most efficiently to push back scarcity and communicating when a resource has become so scarce that we need to cut our use and find substitutes. That’s what market prices determined through the exchange of private property do. This is also why many economists have concerns about the institutional changes advocated by many environmentalists. Limits on property ownership undermine the very processes that would solve many of the problems they identify.

Can it be proven that technology will always provide an alternative when a resource becomes too scarce? Not in any rationalistic sense. We can offer lots of arguments from theory and history, but we cannot guarantee it 100 percent. However, the evidence and theory overwhelmingly indicate that we do not run out of resources when market institutions are in place and people are more or less free. Certainly markets do not solve problems perfectly, but imperfections do not make alternative institutions better. They may well be worse.

Scarcity is like gravity: it is omnipresent, and much of our lives is a struggle to find ways to overcome it. The existence of elevators and airplanes is not evidence that gravity is a myth. They are attempts to defy its very reality. Elevators improve our lives by giving us a way to push back at gravity and reduce the ways it frustrates our efforts.

Market institutions enable us to push back at scarcity as much as possible, much as elevators push back at gravity, and in so doing, make it considerably easier for individuals to achieve their myriad goals.

Some critics of the economic arguments for markets also suggest that economists dismiss scarcity whenever they claim that markets are positive-sum “games.” It is true that economists understand that exchange creates wealth for all parties, while the critics seem to believe that any gains are offset by losses, even that the wealth of the few causes the poverty of the rest. At first glance, one can see why this criticism might be valid: how does exchange create wealth out of nowhere? Does that not seem to suggest we are not acknowledging scarcity?

Not at all. In the short run, exchange—whether a trade between two people or an act of production that trades inputs for outputs—makes people better off. This results not by creating more physical stuff but by rearranging what exists to make it more valuable to human beings. While we each think we’re better off when we make an exchange, mutual benefit does not require a denial of scarcity; rather, exchange is one more way we push back against it.

This mutual benefit reinforces the point that value is a product of human minds, not of the objective physical world. In fact, we cannot even understand the concept “resource” without recognizing this point. For most of human history oil was a nuisance. People didn’t want land with oil on it because it polluted the soil. However, once human minds realized that it could be converted to energy, it became a resource, and as we begin to create substitutes for it, as with copper wire, it will become less of a resource. From an economic perspective, what makes something a resource and what determines its scarcity is the interplay between its physical quantity and the human mind’s perception that it can satisfy human wants.

In the longer run, the benefits of exchange, when combined with the institutions of the market, create the wealth that people can save in order to finance the investments that will lead to better and cheaper products for exchange. Real, tangible economic growth happens—not just for the wealthy, but for all. Again, we stretch the resources we do have even farther.Theory aside, it would also be hard to deny that several centuries of more or less free markets have produced a tremendous rise in the living standards of the poorest people in the West. The same is beginning to happen elsewhere. To argue that the wealth of the wealthy is the cause of the poverty of the poor (the “some win at the expense of others” argument) flies in the face of historical facts.

Poverty and early death have been the norm throughout history. The power of private property, free exchange, and markets to change that norm has been the single most progressive force in human history. Scarcity is all too real and causes all too much human suffering, which is why we need genuine market institutions to continue to reduce its effects, especially on those who suffer most.

Horowitz, Steven "Economists and Scarcity" The Freeman, June 2008

Saturday, August 16, 2008

News Flash!! Climate is Changing!

Climate is changing, but then it always has. That is not controversial. It certainly isn’t news.

Nonetheless, we are daily treated to articles like a recent Op-Ed by Thomas Friedman in the New York Times which adds nothing to our understanding of the climate situation. His wonderful descriptions of Greenland and individual impressions of how the weather has changed tell us nothing about the cause of those changes. Friedman's use of these images to paint a tragic picture of changing climate is simply an emotional appeal which takes as a given that human CO2 emissions are the cause.

But is it? What is the evidence? Friedman offers none. Does the science actually support the conclusion that human CO2 emissions are causing harmful climate change? Or have we just been inundated by decades of repetition so that now we accept it as true in spite of the fact its scientific status is still controversial?

Stop. Think. On what scientific facts and climate theory are you basing your opinions? Are you familiar with the major scientific challenges to the current “consensus” on anthropogenic (human-caused) climate change? Is there validity to the data and arguments presented by those who disagree (also here and here) with both the conclusions of the Intergovernmental Panel on Climate Change as well with the very process that generates that body’s science and its Summary for Policy Makers? What are the criticisms being offered to the standard view of catastrophic global warming? Is there any merit to those criticisms? What do you actually know, as opposed to what have you heard?

One simple question to consider: Is the average global temperature increasing?

It depends. What time frame are you considering?

The earth’s temperature has been changing ever since it formed. From a 600 million year perspective, we are currently in a relatively cool phase. (*)

Figure 1 Average Global Temperature 600 million years to present

If you look at the temperature record for the past 400,000 years, we are currently at an interglacial temperature peak.

Figure 2 Temperature difference over the past 400,000 years

A close up examination of temperature estimates for the last 3000 years shows us emerging from the Little Ice Age.

Figure 3 Surface Temperature of the past 3000 years

Zooming in to the last 150 years shows two periods of warming: 1900-1940 and 1960-2000.

Figure 4 Average temperature difference for the past 140 years

The first warming period occurred before any significant change in atmospheric CO2 and had to occur for some other reason. So why so much confidence that the second warming period is caused by human CO2 emissions?

Proponents of CO2-induced global temperature change frequently refer to a pair of charts which demonstrate a remarkable correlation between historical CO2 levels and global temperature. Figure 5 Temperature and CO2 for the past 400,000 years

These charts tell us nothing about which is cause and which is effect. It could be either. However, let’s zoom out from this view of the last 400,000 years and look at our best estimates of CO2 and temperature over the past 600 million years.
Figure 6 Temperature and CO2 over the past 600 million years

The correlation no longer is so clear.

Fact: there is no general theory of climate which adequately explains changes past or present. There is much that is understood, but crucial areas are poorly understood. Complexity in and of itself is not a reason for skepticism, but climate science is both complex and young. There are large gaps in our knowledge, not just of data but of the fundamental principles which are operating: the roles of ocean currents, cloud cover, precipitation, water-vapor feedback, cosmic rays. Even by estimates of the IPCC, much of our scientific level of understanding is “low.”

Why this topic in a blog on wealth? Because the promoters of catastrophic anthropogenic global warming are telling us that we need to drastically reduce our consumption of energy in order to save the planet. The economic effects of mandating the switch away from fossil fuels to more expensive energy alternatives will be devastating to the millions of people living “at the margin.” Be sure you adequately understand the science before you vote to condemn them to poverty, or worse.

And be on the look out for articles like Friedman’s which are mere emotional appeals promoting a political solution without addressing the controversial aspects of the underlying science.

(*) Figures 1-6 taken from “A Global Warming Primer” by the National Center for Policy Analysis. The primary sources for the data are cited at the end of the Primer.