Sunday, July 6, 2008

Bob Murphy gets scarcity wrong and won't issue a correction

A month or so ago, my perpetual foil, Bob Murphy, wrote an op-ed that I had quite few criticisms about (Mises blog a little flaky right now), but it looks like, despite what I had thought previously, Bob doesn't feel he erred. Here is the part of Bob's op-ed that I found objectionable:

Yet despite the superficial resemblance, cap and trade isn’t really a free market. The number of permits is an arbitrary scarcity imposed by government fiat. In the real market, resource prices indicate genuine scarcity. ... But if the prices of oil, coal, and other fossil fuels explode because of a cap and trade program, this won’t reflect genuine economic scarcity.... This is no more a “market price” than if the government decided to sell people permits giving them permission to sneeze.

There's no getting around this. Bob very clearly claimed that paying higher prices due to government assigning emissions rights in a case where excessive emissions hurt others, does not reflect economic scarcity. This is wrong, as I have claimed before, because -- under the assumption that all of the climate science is in order -- CO2 emissions do, in the aggregate, cause others to forgo consumption. So there's a choice: either these people get to emit CO2, or these other people get to not be flooded, not have thermohaline circulation shut down, etc. Inability for both parties to engage the consumption patterns they both want, is exactly what is meant by scarcity (though some are confused by the fact that it's a different good for each party).

Lest we think his remarks were specific to a particular poorly-run assignment of atmospheric rights (and of course Bob has totally outlined his ideas elsewhere for what would be a valid division of the atmosphere, right?), he does us the favor of comparing it to sneeze permits.

In regard to that remark, Bob responded, after I criticized him:

This may have led some readers to conclude that I was saying the very nature of the situation rendered carbon permits as illegitimate property titles, the price of which could not possibly correspond to genuine economic scarcity. However, as Silas correctly notes, if James Hansen and the guys at [RealClimate] are right, then CO2 emissions affect others just as conventional pollution does. If one agrees that one can have property rights to a clean stream etc., then in principle one could have a property right to the atmosphere and this could spawn a market in which the right to inject CO2 into this property is sold.

He then goes on to defend, irrelevantly, his claim that cap and trade "is not a market solution", a term for which he seems to use a non-standard definition and didn't define. (Bob seems to have adopted Stephan Kinsella's tactic of switching which claim he's defending so as to make his opponents' points irrelevant. If that's not what he was doing, I apologize.) But of course, such arguments don't help defend the claim under dispute, on whether higher oil prices due to permits reflect scarcity. Even if Bob can successfully support the claim that cap-and-trade "is not a market solution", that still wouldn't mean the scarcity analysis is valid.

I welcome others to read the above links, and please tell me in the comments if you think Bob's original op-ed is correct about scarcity as written, or if you don't. I think that Bob did admit it should be corrected, and even if not, he should believe so. Because even if he really was just referring to the "too few" permits case, that still wouldn't save him: issuing too few permits would just mean that the higher prices now reflect "the fact that your CO2 emissions are causing flooding in the Netherlands, not just Bangladesh" (or whatever) -- that's still a reflection of scarcity, just in favor of a different adjudication of the conflict. (Interestingly, Bob has also often worried that governments would botch such programs by -- wait for it -- issuing too many permits, which makes his unintuitive clarification of his original remark all the more unexpected.)


Bob Murphy said...

I've done this elsewhere, but since Silas has started his own blog I guess I'll do it once more for the record.

Let's go through the offending quotation and see that it is far more nuanced than Silas believes:

Yet despite the superficial resemblance, cap and trade isn’t really a free market.

Does anyone doubt this? If the members of the US Congress define the cap and issue permits, do you need to know anything else when deciding if this is "really a free market"? If you are a minarchist, you might say, "Tell me more." But if you are an an-cap, how can the participation of the government in the scheme allow my above sentence to be false?

The number of permits is an arbitrary scarcity imposed by government fiat.

Again, how can Silas possibly argue with this? If government bureaucrats picked the price of a bottle of Pepsi, it would also be an arbitrary signal not reflecting economic scarcity.

However, I will admit that though the above sentence is perfectly defensible (relying on the socialist calculation point), it is misleading. Many readers probably thought I meant that even if CO2 were going to blow up the planet, that resources prices should in no way reflect this fact.

In the real market, resource prices indicate genuine scarcity. ... But if the prices of oil, coal, and other fossil fuels explode because of a cap and trade program, this won’t reflect genuine economic scarcity....

Silas continually ignores that word "explode." I totally stand by that. If I'm supposed to apologize for that, then not only is Silas expecting me (in ~700 word op ed intended for the layperson) to stipulate the IPCC consensus for the sake of argument, he also wants me to stipulate the Stern Report handling of the economics. This is because William Nordhaus and plenty of other economists think that with a market discount rate and sensible estimates of future climate damages etc., the optimal carbon tax is quite low in the beginning. So if the gov't implements policies that make the prices of oil and coal explode, then even Nordhaus would say, "This doesn't reflect economic scarcity."

This is no more a “market price” than if the government decided to sell people permits giving them permission to sneeze.

And here is my trump card. In the alternate universe where Silas wants to hold our argument--namely, where I have agreed that CO2 emissions, if unregulated, will kill millions, and where we ignore all issues of transactions costs and other factors that might make CO2 property rights inefficient--then there would be property rights in sneezing.

So again, misleading perhaps, but a perfectly true statement, right Silas?

Since I think I have at least given a plausible defense of every syllable in the offending paragraph--and again, since this was an op ed intended to explain to Joe Sixpack wth is going on in Washington--I think I have defended my honor.

Silas Barta said...

After your latest response, Bob, it's still clear to me there's a substantive disagreement in addition to the disagreement over whether any reasonable person would interpret your op-ed to mean what you now claim it does.

First, to speak in general terms, I do not believe that the question of whether an inconvenience "reflects scarcity" hinges on any precise economic calculation of the optimal level of some activity. Scarcity simply refers to the condition in which achieving one end comes at the cost of achieving some other end. So with respect to interpersonal conflict, for an inconvenience to "reflect scarcity", it only needs to enable another's consumption (if only in a probabilistic sense). For example, being preventing from killing others reflects scarcity because by me not killing, others can live.

So yes, even if permits were extremely under-issued (which of course, was your primary concern, right?) the higher prices would reflect scarcity: fuel users would be making a *much bigger* sacrifice to allow a *much smaller* chance of catastrophic climate change.

But even if you and others disagree with the above definition of "reflects scarcity", it still doesn't follow that Nordhaus et al. would say the things you claim. He would still be a little more nuanced, i.e., "The first $X of added cost reflects scarcity, while the rest does not" though I seriously doubt he defines scarcity with respect to his favored policies.

Now, even granting whatever definition of scarcity you're using, it still doesn't follow that your op-ed lead more than it mislead. At no point did you give any indication that any price increase could ever reflect scarcity. (I think you agreed as much.) I can't see how any person would read, "if the price of fuels explode because of permits, that would reflect scarcity" yet immediately assume you meant "but at lower, non-explosive levels, that would reflect scarcity".

Further, I don't even think you're reading your own op-ed in context: the "explode" comment immediately followed what you tried to give as an example of "real scarcity" (i.e. a pipeline being attacked) and so the reader would think you were comparing one cause for price increase to another, NOT that you were placing any particular significance on whether the price "explodes" vs. whether it just "notches up".

"If an oil pipeline is attacked, the price of oil goes up, causing industry and consumers to economize on the commodity. This response is rational, because the available supply truly has gone down.

"But if the prices of oil, coal, and other fossil fuels explode because of a cap and trade program, this won’t reflect genuine economic scarcity. Consumers will be forced to restrict their use not because there is less supply available, but because of a number dreamed up by Washington bureaucrats."

So, at no point did you predicate that claim on over- or under-issue, or on any one economist's plan.

Finally, since the purpose of an analogy is to simplify, it's just not plausible that you were intending people to draw all the parallels you just now mentioned regarding the sneezing analogy, especially since the analogy hypothesized sneeze permits, as distinct from ordinary-breathing-permits.

Bob Murphy said...


You're right, I was trying to get the reader to agree with me that "this cap and trade stuff if freakin crazy!" I think it is.

But if you want to get super technical and concede things for the sake of argument (which btw is dangerous in an op ed because immediately 40% or more readers will think I'm saying I believe the IPCC forecasts), then you're still wrong, in my opinion. So I've got you in this world, and in the parallel universe too.

Silas, you don't seem to object to my ridicule of a proposal for the gov't to sell permits giving people permission to sneeze. But that would have to be legit, and in fact a "market solution," under the rules you have tried to enforce on my op ed.

Do you disagree with this? The difference between sneezing and burning a gallon of fuel (in terms of climate change) is one of degree, and you've already said it's illegitimate for me to dispute the alarmism on the science end. So OK, if we have to analyze cases where "in principle" there could be a market for CO2, then "in principle" people could have to pay to sneeze.

And so if Ted Kennedy wants to start charging us a quarter per sneeze next year, and then call this a "market solution," you will get mad if I reject that description, right?

Silas Barta said...

Bob, first of all, given how you're now backed into a corner and have all but admitted that your "helpful to laymen" op-ed mislead the readers, I suggest you adopt a more humble tone.

In all your smugness, you don't seem to want to answer the question I asked about your hypothetical: is this about permits to sneeze, as opposed to other forms of exhaling, on the grounds that it allows CO2? I'll assume you mean it that way.

Now, it is most decidedly not a matter of degree whether the alleged harms of CO2 justify permits for certain kinds of exhaling. There are numerous ideas for implementing rights in the atmosphere that make a principled distinction -- consistent with libertarian homesteading theory -- between burning fuel and breathing. As I have repeatedly warned you, several legitimate rights claims intersect in this issue. One of these is the "homesteading" that humanity has already performed on the atmosphere, and David Zetland has even discussed at length how these legitimate conflicting claims would, taken together, justify a breathing allowance.

So no, admitting the harms of CO2 does not immediately get you a world where you have to pay to exhale. You would already be aware of this if you had spent one second actually attacking the difficult issue of how to resolve all the rights that come into conflict with respect to the atmosphere. However, you have made perfectly clear that you are far more interested in giving trite dismissals of the painstaking work others have performed -- in atmospheric sciences, legal theory, mechanism design, and economics -- that has implications that you'd rather not deal with.

So then, what if politicians decided to put cap-and-trade on one very narrow kind of carbon emission that became very intrusive? Yes, I'd call it a market solution. It would be a very poor market solution, and not actually *solve*, but insofar as ideas can be called solutions, and since it uses pricing and quasi-ownership, then yes, it count as a market solution.

The trouble is that you're making the (very rookie) mistake of tagging on all kinds of positive connotations to a term, and then screaming bloody murder when people use it normally. A "market solution" does not mean a "good" or "morally acceptable" solution. What clouds some people's intuitions on this is the intersection of the moral claims with the economic ones, which is why I recommend you check out this post.

What I think you mean to say is that cap-and-trade is not a "free market, libertarian" solution.

But then looking at that question, or the more substantive question of whether C&T is bad, you would still be wrong. I've explain the arguments before about how C&T could be consistent with libertarianism. And is the politicians' plan good? I accept that it *can* be. Even if the permits are underissued (which is your worry, wait no it isn't, wait, yes it is), they still reflect a real scarcity -- they just tilt the scales too much toward one party, but there is a winner at the other end of that sacrifice. I would say that underissuing would be analogous to excesively low standards for what it takes to homestead something.

Therefore, the choice we are faced with is between:

-A world in which there are no property rights, but the warlords in power take random, arbitrary measures to curtail excessive resource use and the fallout if they fail to so prevent.
-A world in which the warlords in power announce and enforce well-defined property rights, but exercise extreme favoritism toward homesteaders.

We all want perfection, but given the choice I want the latter and you want the former. Does that about sum it up?

TokyoTom said...

Bob, while you've got some legitimate points, your continued mental gymnastics in order to defend your rather cheap rhetorical position that government-priced carbon would not "reflect genuine economic scarcity".

While there are a myriad reasons to suppose that prices resulting from government mandates will not ACCURATELY reflect the "true" value of the resource at issue (the government tends to underprice resources, from resource and hard rock extraction royalties to grazing permits to park user fees), prices that result from cap and trade or carbon taxes would still more or less reflect the scarcity (the costs associated with using the atmopshere as a GHG dump). Your argument that there is NO reflection works only if GHGs have no affect on climate whatsoever (as even universally positive impacts impose adaptation costs and lead to some loss of value).



Silas Barta said...

Wait, timeout, what legitimate points did Bob have? Name one.

gcallah said...

"There's no getting around this. Bob very clearly claimed that paying higher prices due to government assigning emissions rights in a case where excessive emissions hurt others, does not reflect economic scarcity."

Silas, I finally decided to see what this argument is about, and upon doing so, it's obvious that Bob is quite right, and you are quite wrong. Bob is not saying, as you claim he is:
1) Government sets the price for military protection, therefore
2) Military protection is not scarce.

He is saying:
1) Government sets the price for military protection, therefore
2) That price does not track the true scarcity of that service (i.e., it is an arbitrary rather than a market price).

Just so with cap and trade.

Silas Barta said...

Gene: Under the proposal, government would set the quantity, not the price, and the quantity is, at least potentially, non-arbitrary. It is a function of what the earth can take before vital systems are shut down and regions are flooded. (A physical rather than economic constraint.)

Further, Bob's op-ed was ridiculing the idea that any positive price for emissions rights could reflect scarcity. He claims now that it was only referring to "high" prices for emission rights (which I've argued still doesn't save his claim) but it requires near mind-reading capabilities to infer that from the op-ed.

And any time Bob has tried to defend his position that positive prices for carbon emission rights couldn't reflect scarcity, he's forced to defend a different position, i.e. the more nebulous one of whether cap and trade "is a market solution". (See his first blogged response.)

What has so enraged me about his op-ed is that Bob casually dismisses not only the severity of CO2 harms, but also the existence of victims! He wrote as if all the science claiming that in X years, entire regions will flood, just doesn't exist -- even as he accepts it for purposes of argument!

TokyoTom said...

The difference between sneezing and burning a gallon of fuel (in terms of climate change) is one of degree

This is either disingenuous or you simply don`t see the difference between activities that release fossilized carbon and those that simply recycle atmospheric carbon. Human respiration is an obvious example of the latter.

TokyoTom said...

Gene, that the government doesn`t price well the resources that it sells is a rather pedestrian observation and so it hardly the point that Silas or I protest.

Rather, it was Bob`s rather obvious rhetorical excess. The fact that the government`s price is not a true market price doesn`t mean that the price doesn`t "reflect" ANY real scarcity. Instead, the government`s price is either too low or too high - as in what it charges for the electricity, water, policing or defense services it provides/foists on us.

The fact that the atmosphere and climate have values is not at issue is it? Such values - and the absence of property rights in a commons setting - is what gives anyone an incentive to bother to discuss these issues.