Monthly Archives: February 2024

Markets won’t save humanity

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In his series of books (Banking Across Boundaries, Rentier Capitalism, The New Enclosure, Our Lives in Their Portfolios) Brett Christophers has provided a forensic analysis of the fundamental plumbing of the global and (especially) UK economy. For example, the first of these identified the statistical construct of ‘financial intermediation services indirectly measured’ (FISIM) as an artefact inflating the apparent contribution of the financial sector to the economy and thus enhancing its political lobbying power. He was the first researcher to point out this consequence (and is cited in my GDP book). Our Lives in Their Portfolios assembles evidence on the scale and scope of private equity ownership of assets in the US and UK, and the adverse consequences for the ability of key infrastructure to provide continuing services.

He continues this grand project of analytically dissecting the neoliberal economic order (even before it has entirely died) – at its most extreme in the UK – in his new book, The Price is Wrong: Why Capitalism Won’t Save the Planet. The book is a persuasive assault on the idea that renewable energy generation has become cheap enough that capitalist self-interest will ensure the green transition without continuing government subsidy and regulation. The analysis has three key points.

First, as the legacy industry fossil fuel generation has high sunk costs and low investment needs, whereas renewables need upfront financial investment as high fixed and low marginal cost generators. Second, the once vertically-integrated electricity business now has a separate wholesale market into which generators sell power, so investors in renewables need to earn their return from selling electricity to the grid. Third, the habit (it seems to be no more) of pricing wholesale electricity at the highest marginal cost makes the potential return to renewables investment dependent on highly volatile prices. Without either feed-in-tariffs or contracts-for-difference to reduce the volatility, a more important purpose than subsidising the renewables generators, it is hard for the rate of return calculation to stack up.

The book has a lot of fascinating detail about the structure of electricity markets, in India China and elsewhere as well as the US, UK and EU. Other design details matter. For example, it matters who bears the cost of connecting new generators to the grid – if it is they themselves rather than spreading the cost over the industry, that is another obstacle to investors earning an adequate return on wind or solar. For wind and solar farms are generally located where land is cheap and the power has to get to where people live, but land is expensive.

All these factors mean that the data point underlying the claim that renewable energy is cheap enough for the market to deliver the energy transition is misleading. This is the ‘levellized cost of energy’ (LCOE) or average net present cost of electricity generation for a generator over its lifetime. Although their zero marginal cost (because the fuel is free) makes renewables attractive on this measure, it ignores the hurdle of the initial and separate calculation of the expected rate of return on the investment in generating capacity. A wind turbine is cheap to operate but costly to install – so how will the developer doing the installation make a profit?

The message I take away is the need to be super-careful about market design in energy. These are state-organised markets (as indeed are all, but even more so in this case). The detail sometimes swamps the thread of the argument, but I’d commend The Price is Wrong to anybody interested in energy transition, and in more broadly in the dysfunctions of modern capitalism.

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A supply-side prime minister

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It’s outside my usual territory but I enjoyed reading Harold Wilson: The Winner by Nick Thomas-Symonds. It’s an unashamedly positive biography of a Prime Minister of my childhood and teenage years, when my main awareness of him was the rather affectionate mimicry by comedian Mike Yarwood. One of the book’s key arguments is that Wilson deserves credit for keeping Britain out of the Vietnam War without falling out too badly with President Johnson.

The economics was more interesting to me. Wilson was an economist who had started out (before the 2nd World War took him into public service and then politics) as an Oxford don. So by academic measures he was a very good economist. Yet he’s associated with the devaluation of sterling and the UK’s postwar balance of payments problems and relative economic decline. On the other hand, he was an advocate of research and innovation (the ‘white heat of technological revolution’ speech), created a separate (from the Treasury) Department of Economic Affairs – as many advocate now – and was a pragmatic nationaliser and believer in active industrial policy (ditto). He thought as much about the supply side as demand management.

Any of the PMs of the pre-2010 past look like titans compared to their more recent successors. What’s also striking is the general calibre of their cabinets and advisors. Wilson had politicians like Denis Healey, Jim Callaghan, Barbara Castle, Richard Crossman and Tony Benn around him, substantial people with much experience outside parliament, intellectual depth, and cultural hinterlands. I wonder what the Wilson Cabinet elected in October 1964 would make of 2024?

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Be happy: think about the Nash Equilibrium

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I loved Kaushik Basu’s new book, Reason to be Happy: Why logical thinking is the key to a better life. Mind you, I love most everything he writes. It’s always incredibly thought-provoking. His Republic of Beliefs is one of the books I recommend to almost everyone.

Reason to be Happy is not so much about logical thinking, although a constant theme is the advice not to waste emotional energy on things one can’t influence. I’d have used the word ‘strategic’ rather than ‘logical’. The book is an accessible and highly readable guide to using game theory both in personal or business life, and in policy. It has always amazed me how unstrategic so many people are, in the simple sense of not thinking about how other people will react to an action or statement. This is just as true of policymakers in government as business executives. Policy effectiveness would improve enormously from applying a game theoretic perspective at least as much as from behavioural insights. (I remember once in a meeting *of economists* pointing out that a certain set of decisions around the EU was the Nash equilibrium so why would we choose another course of action in the UK, and jaws around the table dropped. We chose the equilibrium strategy…)

Anyway, Reason to be Happy makes the practical sense of game theory very clear and gives loads of examples of games modelling situations in life. It also has a strong philosophical thread running through it, a kind of stoicism that the author describes as ‘determinism’. I particularly liked two sections. One describes how collective outcomes can deliver worse results for ‘bystanders’ to the game (such as future generations in the context of environmental impacts) even when some or even all of the players have highly moral motivations. This is due to each player’s payoffs and therefore strategies being altered when other players internalise the payoffs of the bystanders. The book labels this ‘Greta’s Dilemma’: moral intentions do not always lead to moral outcomes. The book also describes the obverse, ‘guilt shelters’, complex decision structures that enable individuals to avoid responsibility for bad outcomes; we are all too familiar with this in the case of corporations. (See also the excellent forthcoming book by Dan Davies, The Unaccountability Machine).

The other section I would pick out here in Reason to Be Happy is the one on the paradox that non-rational behaviour can be rational: the example here is labelled ‘the Traveller’s Dilemma’. Two travellers ask their airline for compensation for damage to an identical item. The airline proposes that each writes down a number between 2 and 100 as their estimate of its value. If they choose different numbers, the one with the lower figure gets that amount plus $2 and the other gets the same figure minus $2. The Nash equilibrium is that each writes down $2, assuming that each knows the other is rational: if one were to write $100, they could reason that claiming $99 instead would give them $101. But the other will know this and undercut them with $98 – and so on back to $2. Now, it is easy to see this is not in fact rational and that both players will see this. “The paradox in the reasoning remains unresolved,” Basu writes. I first came across something similar in Ariel Rubinstein’s wonderful Economic Fables. I suspect the resolution lies in the ambiguity of the word ‘rational’: formal logic versus contextual sense-making.

Reason to Be Happy is a lovely read. Its author points out in can be dipped into in chapter-sized chunks. It won’t turn its readers into stoics (or determinists) but might well spread strategic thinking.

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A bit less random reading

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I’m still reading through the slightly random pile mentioned in my previous post, and the latest has been The Good-Enough Life by Avram Alpert. As the author of a book called The Economics of Enough, I thought this one would be interesting. It threw me at the start by spending quite some pages on the difference between ‘great’ and ‘good-enough’ and why these terms don’t mean what everyone thinks they mean. This is not a wonderful writing tactic. (Of course, economists use terms that mean something different to other people, like rational, efficient, capital etc but tend not to bother explaining the distinctive disciplinary meaning.)

Anyway, what I took from the book in the end was an argument about the pernicious influence of positional goods (following Fred Hirsch’s classic work The Social Limits to Growth – ironically surprisingly highly priced) in the unequal capitalist system western economies have now, combined with advice about how to opt out of the rat race on a personal level, perhaps through religion – the author seems to be a Buddhist. This makes it a contrast to authors like Robert Frank who advocate societal action – taxing positional goods. It has a nice counter-argument to the ‘get as rich as you can then give (some) money away’ perspective; not only would this make us think well of the robber barons of the early 20th century, it also ignores the negative externalities arising from some individuals getting as rich as ever they can. But on the whole this is a book about individual mindset more than policy proposals.

It does have a lovely cover. I like the kintsugi metaphor.

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Random reading

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I polished off a couple of paperbacks in a batch Princeton University Press kindly sent me for doing some reviewing: Lost in Thought: The Hidden Pleasures of an Intellectual Life by Zena Hitz, and Why Size Matters: From Bacteria to Blue Whales by John Tyler Bonner. The latter was more my cup of tea – the former is more about spirituality than about reading and writing, and the author’s journey out of academia to a religious community and back again. Why Size Matters (first published in 2006 although this paperback is new) is very similar to Geoffrey West’s (2018) Scale, although shorter and focused on biology and ecology rather than society at large – although it does note the link in Adam Smith between the division of labour and the size of the market.

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