Pressure groups

A business unlike any other

According to Angela Knight, Chief Executive of the British Bankers' Association:

"A bank is like any other business - if its fixed operating costs go up then so does the price of its product."

Angela has provided a nice illustration of how (a) banks are not like any other business, and (b) she has the same grasp of business and economics as most other politicians.

Securing the UK's Energy Future (for us)

One thing leads to another. The APPGOPO report covered in the previous post refers to the first report by the UK Industry Taskforce on Peak Oil & Energy Security (ITPOES) on "The Oil Crunch: Securing the UK's Energy Future", which has been out for half a year, but I hadn't come across before.

The impact of peak oil isn't hard to anticipate. It's not a volume constriction, it's a price constriction (putting aside for the moment complications like EROEI and carbon impacts). We are more than halfway through the "easy oil". If demand exceeds supply of easy oil, as it will soon once economies start to grow again, the marginal supplies will come from increasingly expensive producers, which will drive up prices dramatically. Costs of carbon and the recursive effect on prices of low EROEI from more marginal production will exacerbate the price-impact. The threat is that we won't be able to afford to do many of the things that were fundamental to our economy, not that the oil couldn't be made available for a while longer if we could afford it. But it may feel like an insufficiency of oil, there not being much difference in practice between "not enough" and "not enough that we can afford".

What won't we be able to afford? Simple: road and air transport.* These two forms of transport are almost completely dependent (99%) on oil, and conversely, the vast majority of our oil consumption (75%) goes to transport (12% goes to non-energy uses like petrochemicals and plastics, less than 0.5% goes to electricity production, and the rest goes to heat). We could relatively easily replace oil in the other energy sectors, but on the road and in the air, we are not remotely ready for the dislocation of high oil prices.

So what do this small group of corporations, who have appointed themselves our spokesmen on this issue, have to say? Their assessment of the risk is well done, but (as usual when a handful of corporations get together on a mission) the solutions they favour are not.

"Peak oil is about much more than transport" (p.28). What a surprise. A group that contains a VILE company, a solar-panel supplier, two businesses in the construction sector, a search-engine provider (???), and three public-transport operators think that peak oil means we need more government intervention in lots of areas that have little to do with peak oil. For instance, they think we need much more solar power (and support to deliver it). They think we need much more (subsidy for) wind and nuclear power (coincidentally, Scottish & Southern Energy, their VILE-company member, has substantial plans for wind and nuclear). We need massive efforts to encourage (read: support) energy-efficient construction. And, on the transport front, we need greater emphasis on (support for) bus and rail public-transport options. The latter is not unreasonable (if self-interested and marginal), and they also promote some more obvious and sensible solutions for the long-run, like increased use of electric transport options, but they have a wilful determination to ignore the technical challenges, they have no suggestion for something as key as international air transport (other than that we shouldn't have any more of it), and they have lots of suggestions for stuff that is marginal at best but which happens to be of interest to their members. 

Their wilful ignorance of technical challenges, blind optimism, and enthusiasm for the irrelevant (if not downright unhelpful) reaches its peak with their espousal of a 100% renewable-energy objective (p.6).

"The renewables industry is confident that 100% renewables energy supply is possible in 20-40 years, according to the overwhelming consensus of participants at the Tenth Forum on Sustainable Energy, held in Barcelona in April. They should be given the opportunity to prove it."

This is backed up later (p.39) by reference to a number of studies (by renewables enthusiasts) claiming to show that 100% renewables is feasible.

Attack or surrender in the battle of ideas

In the long run, it's ideas that matter. And they aren't all equal. Truth is not subjective, and neither are right and wrong. Political tactics and novelty may seem all-important to the chattering class, but expedient can never make wrong right, or prevent reality from finding ways around illusion. Tactics and rhetoric can endlessly extend and exacerbate the harm that is done by bad ideas fighting a Canute-like battle against the tide of reality. They may prevent good ideas from being heard, understood and implemented. But they can't stop the effect that the true concept describes.

Most modern think-tanks are engaged in the political battle. Their ideas are superficial, inconsequential and often nonsensical, and developed in pursuit of a political objective, rather than the truth. Organisations like IPPR and Policy Exchange are window-dressing in the political shop-front. They may be effective in terms of short-term political influence (though effective may not be the right word to describe justifying concepts that their audience had already assumed to be true), but their shallow ideas will mostly fail in practice and be forgotten in due course.

The IEA exists for a different purpose. It exists to fight the intellectual, not the political battle. It does not trim its sails to the political wind. It has no political or commercial affiliation, although critics on the left often assume that it does, seeing everything through tribal eyes as they do. Its purpose is to preserve and promote the classical-liberal philosophy, and explore the ramifications of that philosophy for our understanding of policy, history, economy, society, etc.

At least, that's what I understand the purpose of the IEA to be, and that is why I am proud to support it. So what am I to make of the following bit of tittle-tattle in this month's Prospect magazine?

"the grandest name on the right, the libertarian Institute of Economic Affairs (IEA), finds itself in crisis. This June it gave director John Blundell the heave-ho. Officially, it was time for the long-serving Blundell to move on. Unofficially, his failure to impress team Cameron took its toll."

John's departure was indeed unheralded, and there has been little effort to pretend that the usual platitudes are the real reason for his departure. Despite the absence of any more credible explanation, I was prepared to give the trustees the benefit of the doubt that they had good reason and had made the change in the best interests of the Institute and its objectives. But "failure to impress team Cameron" is not a good reason, and bringing in someone more to team Cameron's taste would not be in the best interests of the Institute.

The most likely explanation is that Prospect's diarist is talking out of his backside. He goes on to attribute Philip Blond's departure from Demos to the fact that "senior Cameroons were unconvinced by Blond's philosophical style". I don't know whether Prospect has an inside line at Demos, but it's unlikely that it has one at the IEA (they're not exactly on the same philsophical wave-length). The juxtaposition of these stories makes it look like the author wants to puff the influence of the Cameroons, whether at their instigation or not we cannot know. One gets the impression that it wouldn't be out of character.

But in the unlikely event that there is some substance to this rumour, the trustees would have made a serious misjudgment. We would be in quis custodiet ipsos custodes territory. Not because they decided it was time for a new Director, but because of the reason for that decision, and what that would imply for the direction they wanted the Institute to take in future. The IEA should not seek the approval of the Cameroons or any other group. The IEA should promote its principles and ideas as strongly as possible, but it is largely out of the IEA's control whether those principles and ideas find favour with leading political figures. After all, only for a small part of its history has the IEA found itself in this happy position. Should they have replaced Ralph Harris or Arthur Seldon because their ideas didn't generally impress Harold Macmillan or Ted Heath? If the IEA finds itself in philosophical opposition to the dominant group in the Conservative party, far from seeking approval and compromise, it should do its best to reveal why that group's philosophy is mistaken, and to provide intellectual artillery for those in any party (or none) who agree with the IEA's point of view, whether or not they are in control of the party.

Too many Cameroons have been soaked in the swamp of paternalism and positivism that is an Oxbridge or LSE human-sciences education. Too few of them have spent long enough outside politics to gain a first-hand understanding of the pernicious effects of well-intentioned government intervention. There is nothing that anyone at the IEA or elsewhere can do about that except point out their errors, promote a better alternative, and wait either for a conversion or (more likely) for their failure and replacement.

The public-choice incentives of the economics profession

I am a supporter of and enthusiast for the Institute of Economic Affairs (IEA), the leading free-market think-tank. So I was shocked to read, in what I think is the best post I have seen on Guido's site, that the IEA's Shadow Monetary Policy Committee (SMPC) are unanimously in favour of a policy of Quantitative Easing (QE).

The IEA was founded after Anthony Fisher sought the advice of Friedrich Hayek on what to do about the increasingly socialist trend of British politics after the war. Hayek advised him not to go into politics, but to try to change the intellectual climate, to fight the battle of ideas. So Fisher founded the IEA to fight this battle, recruiting Arthur Seldon and Ralph Harris as the thinker and persuader of his organisation, and with Hayek as a substantial intellectual influence.

Hayek was a leading figure in the Austrian school of economics (to which I adhere). Hayek and any self-respecting Austrian would be profoundly opposed to QE. The school believes in removing the power of governments to manipulate their currencies, whether through commitment to a genuine gold standard (as advocated by Hayek's mentor and my hero, Ludwig von Mises, and by Hayek himself originally), or through denationalising money and creating a system of competing currencies (as became Hayek's preferred option). The IEA published works by Hayek and others to this effect, and Seldon advocated the approach. In this, as in other respects, Austrian economics was a significant part of the IEA's challenge to the leftwards trend of politics in the UK, which ultimately came to fruition with the election of the Thatcher government in 1979.

It wasn't the only influence. Milton Friedman and the monetarist approach became increasingly influential on the IEA and on the Conservative Party. But Hayek and the Austrian school remained important influences on both groups. Which is why it is such a shock to find that the Hayekian view has been completely marginalized in the SMPC.

I know that the Hayekian perspective has not been marginalized in broader IEA circles (though it is somewhat embattled). So why is it not represented on the SMPC? The answer, it seems, is that it is increasingly hard to find economists in the UK who hold to the Austrian (or at least sound-money) view, particularly in the macro-economic, monetary-policy field. The sound-money tradition - the attitude that once distinguished us from our more profligate neighbours to north and south in Scotland and France* - has almost disappeared from British academic circles. In fact, I am told there are only two credible contenders - Kevin Dowd and Anthony Evans. I don't know why neither of them has been invited onto the SMPC, but it is admittedly a small pool compared to the massed ranks of monetarists.

Austrian economists have an excellent record of forecasting future outcomes. The approach avoids the unreal abstraction that causes many people to doubt the value and truth of economics. Its conclusions and lessons are more important than ever, and experience provides ever more illustrations of the failure of the leading mathematical, interventionist schools of economics - Keynesianism and monetarism, which actually have more in common with each other than do monetarism and Austrian-school economics. And yet British universities and academics have almost completely eliminated it from the syllabus. Why should that be?

It occurs to me that there is a good public-choice explanation for this. Public-choice theory is the name given to Buchanan and Tulloch's extension of economics into the political realm. Conventional political studies and socialist philosophy viewed policy-makers as well-intentioned, well-informed, altruists. They were interested only in doing right, and the challenge was merely to establish what was right. Buchanan and Tulloch pointed out that politicians and other public-sector employees are actually subject to economic forces in the same way that market participants are subject. For instance, they have powerful incentives to favour the short-term over the long-term and to favour activism over laissez-faire.

But economists, whether employed by universities, government departments, or in large commercial organisations, have similar incentives. Not many economists get hired for telling their potential employers that markets are unpredictable, uncontrollable and best left to their own devices.

Commercial organisations will want economists who can make cases why the government should intervene in their sector in a way that is advantageous to their employer, or how they can best manipulate their position in the market to maximise profits.

The civil service will not want its economists to tell politicians that their interventions are at best pointless and usually harmful, and that market corrections are necessary and good for the economy and should be allowed to play themselves out. The civil service will want economists who can draw up schemes that satisfy politicians' desire to be seen to be doing something about whatever issue arises.

Universities will want economists whose papers influence policy (and which are therefore, by definition, activist). They will want economists whose views and specialities maximise the chances of obtaining research grants.

Monetarists appear to have the answers. Their analysis and policy prescriptions can vie with the Keynesians and other neo-classical, mathematical schools for the favour of those who pay the bills.

Not so Austrians. Austrians reject the idea that policy can improve the outcome of markets, other than through the creation of an institutional framework that protects property rights and enables exchange. This is of no earthly use to rent-seeking businesses, vote-seeking politicians, or grant-seeking universities. So Austrians are gradually, over time, driven from these organisations. The very people who could have told banks that there is no such thing as a free lunch, governments that monetary, trade and budget imbalances eventually have to unwind, and universities that economics must be based on sound philosophy and not just mathematical models of scenarios where all the reality has been abstracted out, are not there to give this advice, because it is deeply inconvenient.

So Austrians must live in the real world. This is good for understanding how economies really work, rather than how they ought to work if only pesky humans could be more like the models predict. But it is bad for influencing policy, in a world where the value of your advice is not measured by the strength of the argument but by your station in life.

That is where organisations like the IEA should come in. Let's hope that they see sense and correct the bias towards monetarism on the SMPC. And let's hope against hope that some balance and philosophy can be miraculously restored to the study of economics in the UK. After all, haven't we just found out that the world doesn't work quite like Gordon's favourite - neo-classical endogenous growth theory - would expect?

I suggest that the IEA, to show that its heart is still in the right place, should publish a public-choice analysis of the incentives acting on the economics profession. But which economist would be brave enough to carry out the study? 

Paying for controversy

There has been condemnation today of the stale news (perhaps pumped up to make the new IPCC report more interesting) that the ExxonMobil-funded American Enterprise Institute (AEI) have been offering to fund research questioning the orthodoxy of climate-change science. The Guardian, which "broke" the story, did not see fit to provide the full text of any of the letters sent by the AEI, so we are left to imagine how bad they must have been from the few excerpts provided. These consisted of:

  • a claim that the IPCC are "resistant to reasonable criticism and dissent and prone to summary conclusions that are poorly supported by the analytical work";
  • a request for essays that "thoughtfully explore the limitations of climate model outputs";
  • a figure ($10,000) that would be paid to scientists and economists who provided such essays;
  • a quote from Kenneth Green, the author of the AEI letters offering such funding, defending the offer on the basis that "right now, the whole debate is polarised. One group says that anyone with doubts whatsoever are deniers and the other group is saying that anyone who wants to take action is alarmist. We don't think that approach has a lot of utility for intelligent policy."

Shocking stuff. If these are the highlights, one can only imagine how much more damning would have been the complete letter. How dare anyone in the energy industry fund research that dared thoughtfully to question the intellectual orthodoxy? What right have we to expect the IPCC to pay attention to "reasonable criticism" or to provide thorough analytical support for their conclusions?