Tag Archives: institutions

The social life of electricity, continued

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I devoured Then There Was Light: Stories Powered by the Rural Electrification Scheme in Ireland on my train journey back from the Bristol Festival of Economics yesterday. It’s a delightful collection of reminiscences about this scheme taking electrification to the countryside (ie most of Ireland) during the 1940s and into the 1950s. In fact, coverage only reached 100% of all the remote islands in 2000, and some hamlets were eventually depopulated as electricity never got to them.

The book is a reminder of what a poor and agrarian country Ireland was until, well EU accession really. The essays by men who worked digging post holes and driving trucks often start with the relief they felt on getting, not only a job, but one for a government body paying decent wages. Being hired for the work changed their lives. Most are written by people who spent at least part of their childhood in darkness lit only by candles and paraffin lamps, with mothers doing all the laundy by hand. One writer calls the scheme one of the most transformative events in Ireland’s 20th century history as a nation, and by the end of the book, this doesn’t seem like hyperbole.

It’s fasinating to read about the hesitations some people had: about the cost not only of getting hooked up to start with but also the vulnerability to having to make ongoing payments for power. For many new customers, this was the first regular bill payment they experienced; about the dangers – would it harm the cattle or burn down the house? And about whether it would change the character of life for the worse. Parish priests were often key advocates for electrification, and so were women, who quickly saw the potential benefits of electrical domestic appliances. The company also had a PR and sales team – the book has illustrations showing some of the demos and delightful adverts: “Electricity saves money in the farmyard!”

Above all, the book is a reminder that all technology is social. Not only do new technologies need complementary investments  – households paying for their internal wiring and switches, or street lights, for example – people have to be able to see the benefits as well as the costs (faster milking, no more washing by hand), and these often need demonstrating in practice before they are believed. Electricity in particular is also a social technology, involving collective decisions to create and sustain the incentives to make it function. The investments are long-term, they change places dramatically; and although the technology is now old, it is both essential and dangerous.

So it is that many countries still cannot provide a consistent universal electricity supply and even advanced economies experience power cuts and underinvestment. If western political systems lose their ability to create consensus and collective, long-term action there will be many bad consequences but one of them might well be disrupted electricity supplies. This is not alarmist: I spent chunks of my teenage years doing homework by candlelight too. We had the power stations and the wires, but not the social and political infrastructure in the years of unrest and strikes in the 1970s.

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Bank of England independence from Nigel Lawson

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This is a bit late but it has been in the back of my mind this week that Lord Lawson used to be keen on isolating central banks from political pressure. I remembered right. He made the case to a sceptical Margaret Thatcher, arguing it would give UK monetary policy an anchor that was necessary if the country was not to commit to an external anchor such as ERM membership. Here is Nigel Lawson in 1992, in his autobiography The View from Number 11:

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Nigel Lawson in 2016, about Mark Carney – a change of tune about the propriety of political pressure on an independent central bank, then:untitled

Corruption with Chinese characteristics

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As it happened, I read Minxin Pei’s China’s Crony Capitalism in the couple of days after I’d written this article about the importance of property rights in the Financial Times. In this interesting short book, Pei links the emergence of the rampant corruption in today’s China to “partial and incremental reforms of property rights associated with nominally state owned assets in the post-Tiananmen era.” These changes decentralized control over the assets to regional and local officials, without clarifying the ownership rights. The incentive was there, from the early 1990s, to exploit the lack of clarity. At about the same time, a political decentralization created the opportunity. The appointment system went from one where senior officials appointed people one and two ranks down, to one where each layer appointed the next layer down. A market for patronage emerged, which encouraged corruption because officials needed deals with private business to make the money to pay for their jobs. Finally, a fiscal reform enabled local governments to keep the proceeds from land sales while re-centralizing tax revenues to Beijing.

The book concludes: “It is inconceivable that the CCP can reform the political and economic institutions of crony capitalism because these are the very foundations of the regimes monopoly of power.” Even if the corrupt authoritarian regime were to fall, the book argues, liberal democracy would not be the outcome. Something more like Russia’s kleptocracy would emerge. Or will, rather. “The fragility of the institutions of the party state … raies fears that even modest reform efforts could unleash a revolution. The prospect of genuine market-oriented reform is equally unpromising because such a change would eliminate the rents for the ruling autocratic elites.” Any kind of change seems to spell collapse.

In another coincidence, as I finished this book, the FT’s Jamil Anderlini (author of a brilliant e-book about the rise and fall of Bo Xilai) published a big feature on neo-Maoism in China, which he portrays as am anti-elite, anti-inequality, populist movement in the same spirit as Trumpism, Brexiteering and right-wing and left-wing populism around the continent. Sobering stuff.

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Coase in theory and Coase in practice

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While out and about yesterday, I read a little book from the IEA that I’d only dipped into before, [amazon_link id=”0255367104″ target=”_blank” ]Forever Contemporary: The economics of Ronald Coase[/amazon_link], edited by Cento Veljanovski. It’s a useful introduction to Coase (although he wrote so clearly that there’s no excuse for not tackling his classic papers, The Nature of the Firm and The Problem of Social Cost.)

[amazon_image id=”0255367104″ link=”true” target=”_blank” size=”medium” ]Forever Contemporary: The Economics of Ronald Coase (Readings in Political Economy)[/amazon_image]

The book has chapters providing a biography and a general overview, and then several looking at the applications of Coaseian thinking in different areas such as water, environmental protection, public goods provision, financial markets and even the sharing economy. It starts with the Coase theorem: that when property rights are clearly assigned and there are no transactions costs (such as those involved in acquiring information, negotiating, monitoring compliance etc), then there are no externalities leading to a divergence between private and social costs: the parties involved will negotiate their way to the efficient outcome. ‘Externalities’ are symmetric, he argued: if you claim a right to clean air, you are costing me the opportunity to pollute. Who compensates whom will depend how the property rights are assigned. If you indeed have your clean air right, I will have to bargain with you to pay you for the pollution; if I have the right to produce emissions, you will have to pay me to desist.

Coase made it clear he took the existence of transaction costs very seriously, and argued that every situation had to be carefully assessed to determine the most welfare-enhancing course of action. He certainly challenged the market failure framework established by Pigou, still used to consider the rationale for public policy interventions. Coase has often been taken to say more generally that it’s always best to leave it to the market, because people can bargain their way to solutions – and that is certainly the interpretation this volume puts on him, as you would perhaps expect from the IEA.

I think one has instead to take Coase at face value, and in each situation look at the incentives people face and the transaction costs involved in private bargaining and in the public sector alike – this determined empiricism is why I like Coase so much. As the essay here by Stephen Davies notes: “The boundaries of what is possible in this regard have shifted over time.” The useful bibliography of Coase’s work shows how seriously he took his own conclusion that you have to look in detail at each industry, its history and specificities before pontificating; as is well known, he described anything else as ‘blackboard economics’. Indeed, the people who arguably took him most seriously were the later Nobel winners, Elinor Ostrom and Oliver Williamson, who each in their won way focused on the detail of the institutions that exist to co-ordinate individual actions.

In a nice case study, Davies looks at how turnpike roads – toll roads- were the common means to expand Britain’s main road network in the late 18th and early 19th century. They were an example of club goods – non-rival in consumption, but excludable. Later of course in the UK roads came to be considered a pure public good to be provided by the state. Now we have one toll motorway, and some talk of more. Other countries, including statist France, have many toll roads. There is no right answer.

The book ends with a chapter on the sharing economy, a very interesting essay on the implications of a large decline in certain transactions costs.

There won’t be much here that is new to people who are already familiar with Coase, but – with the caution about its free market slant – it is a clear and accessible guide for students. And available free online as a pdf.

On Seeing Like A State

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A tweet by @sclopit (Stefano Bertolo), exclaiming that

sclopit
in other news, I recently spent a couple of days with a large group of budding policy makers who had never heard of http://t.co/vX6k4IxxNE
06/09/2015 07:16

sent me to my bookshelf to have a look through [amazon_link id=”0300078153″ target=”_blank” ]Seeing Like A State[/amazon_link] by James Scott again. The subtitle describes at one level the book’s subject: “How Certain Schemes to Improve the Human Condition Have Failed.” It looks in some detail at a range of idealistic state schemes, from the ujamaa villages in Nyerere’s Tanzania and the city planning of Le Corbusier quasi-implemented in Brasilia – as opposed to the organic unplanned living cities celebrated by [amazon_link id=”067974195X” target=”_blank” ]Jane Jacobs[/amazon_link] – to Soviet collectivization.

[amazon_image id=”0300078153″ link=”true” target=”_blank” size=”medium” ]Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (The Institution for Social and Policy Studies)[/amazon_image]

The book then draws together its themes from analysing each specific kind of failure, each an example of the failure of ‘high modernism’ in its over-abstraction from detailed contextual understanding. By high modernism, he means: “A strong, one might even say muscle-bound, version of the self confidence in scientific and technical progress, the expansion of production, the growing satisfaction of human needs, the mastery of nature (including human nature) and above all the rational design of social order commensurate with scientific understanding of natural laws.” Step forward the least attractive, most hubristic version of 20th century economics.

“We have repeatedly observed the natual and social failures of thin, formulaic simplifications imposed through the agency of state power,” Scott writes. To blame: “utilitarian commercial and fiscal logic.” Large-scale social processes are too complicated to plan for. Scott celebrates practical, local knowledge, improvisation.

He does not, however, advocate abandoning the idealism that drove such projects, or leaving everything to “the market”. His advice is summed up in four rules of thumb:

Take small steps

Favour reversibility

Plan on surprises

Rely on human inventiveness

Above all, policymaker, do not think that you are all-knowing while your subjects are know-nothings. Don’t plan for abstract citizens, all uniform. Remember that context is everything.

Since [amazon_link id=”0300078153″ target=”_blank” ]Seeing Like A State[/amazon_link] was published in 1998 there have been a number of other reminders of the messy complexity of reality. One good recent one was Colander and Kupers in [amazon_link id=”B010CLT0OI” target=”_blank” ]Complexity and The Art of Public Policy[/amazon_link]. And of  course the theme is an old on, dating at least to Hayek’s 1945 AER paper The Use of Knowledge in Society, its theme brilliantly dramatized in Francis Spufford’s [amazon_link id=”B00B9ZDDCC” target=”_blank” ]Red Plenty[/amazon_link].

But if you’ve never had chance to read [amazon_link id=”0300078153″ target=”_blank” ]Seeing Like A State[/amazon_link], I, like Stefano, think it is an essential book.

PS Speaking of economics in this context, I am itching to write my review of Dani Rodrik’s [amazon_link id=”0393246418″ target=”_blank” ]Economics Rules[/amazon_link], on 21st century economics, and see people have started to comment on it. But the letter with the proof says not before 13 October so I’ll hold out at least a little longer.