11 Jun 2018

The beginning of the end

borrowed wisdom is still wisdom
Greetings readers!

After 10 years, I am going to stop blogging at aguanomics.

I am doing this because I have written quite a bit -- perhaps too much -- on the political economy of water. I've enjoyed the process very much, learned a lot from readers' comments, and written two books on these topics.

Some of you may have noticed that I've posted less on water and more on other topics in recent years. I am going to formalize this shift by switching to a new blog -- The One Handed Economist -- that will give me more space for a range of topics, so this post is more of a comma than full stop.

In the next weeks, I am going to get OHE going as well as tidying up aguanomics by publishing The Best of Aguanomics, a book of posts for readers (new and old) to enjoy.

I know that it will be difficult to choose 100 or so posts out of the 6,000 that have gone up over the past 10 years, but I'm looking forward to uncovering gems and highlighting old favorites. (If you want to suggest any post, then please leave its link in the comments here!)

Thank you for your time, your support and your conversations over all these years.

Bottom line: All good things must come to an end, but this end allows a new beginning.

7 Jun 2018

Policy instability and the drive for change

While writing my paper on desalination, I came up with the idea that the stability of a government policy would depend on how close or distant it was from the public's ideal, i.e.,
...the mismatch between the incidence of costs and benefits indicates the degree of inefficiency and risk of collapse from economic, political or environmental
ruptures.
While discussing this idea in class, I scribbled out the following illustration of that idea:



The red line shows the amount of enthusiasm objectively supported by "science," which helps clarify if the public is too optimistic about the policy (e.g., recycling) or too pessimistic (e.g., nuclear power), but that discussion is secondary to the main point on stability, i.e., this figure:
As you can see -- and yes, it's a "no duh!" concept -- a government policy that veers too far from the diagonal is going to be unpopular, either because the policy is too weak or too strong relative to public preferences. These relative positions are important with non-democratic governments, as there are many ways in which an unhappy people can undermine or avoid an unpopular policy.

Why would politicians deviate from the public will?
  • Corruption: serving special interests
  • Ideology: personal beliefs over the beliefs of the people
  • Error: misunderstanding what the public wants.
In all cases, the further the deviation, the greater the instability of and/or damage from that policy.

Bottom line: A policy that fails to match public preferences is unlikely to last.

5 Jun 2018

Review: The Economy of Cities

Most people know Jane Jacobs as the best representative of the movement to save cities from cars. She was seen as the main opponent to Robert Moses's attempt to turn Manhattan into a (bigger) parking lot. By trade, Jacobs was a journalist, but she made her mark with The Death and Life of Great American Cities (1961), a masterpiece of urban sociology that generations of car-obsessed planners have ignored at their peril. In that book, Jacobs draws on experience of living in New York and common sense as she explains the ways that people build social bonds with strangers and neighbors, and how those bonds create the "social fabric" that defines vibrant, resilient and prosperous neighborhoods (more on bonding).

For a long time, I though these significant contributions to be the totality of Jacobs's work, but I was wrong -- in the most pleasant way, it turns out, as she wrote many other books. Her last, Dark Age Ahead (2007) was an early, and quite accurate, warning against the rise of illiberal forces. I enjoyed it immensely and turned to her for more to read.

The Economy of Cities (1969) appealed to me not just because of the topic, but also its vintage, as I was born in that year. The book turns out to be another excellent read, mostly because it brings Jacobs's original perspective to an important topic: how do cities grow and develop?

Before I move on, let me make a short note about this book's relative obscurity. Although I am hardly an expert of urbanism or urban economics, I would have expected to hear more about the ideas Jacobs discusses in this book, but it seems that those ideas have now become so firmly entrenched that they are no longer credited to her.*

And Jacobs herself was not the first to talk about the economies of cities. Adam Smith was probably also not the first, but his 1776 characterization of economies of scope and scale has stood the test of time:
As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for.

There are some sorts of industry, even of the lowest kind, which can be carried on no where but in a great town... [snip] In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker and brewer for his own family. In such situations we can scarce expect to find even a smith, a carpenter, or a mason, within less than twenty miles of another of the same trade... [snip]

As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland parts of the country.
Smith's observations on the size of the market more or less integrates an important element missing from basic economics, i.e., the importance of space and the transactions costs that arise with distance.** It is from this simple idea that Jacob's begins her book with her most controversial (?) idea, i.e., that cities predated agriculture and drove the agricultural revolution of 10,000 years ago.

There's very little evidence and no written records to support this idea, but I find it far more plausible than the commonly held idea that farmers produced surpluses and thus enabled specialised trades and a bureaucratic class to arise. Against this series of steps, Jacobs supposes that "cities" -- basically villages whose specialized traders and craftsmen stayed put -- existed alongside hunter-gather societies, each playing a complementary role to the other. Given this start, Jacobs then makes the entirely plausible guess that specialization in handling animals would lead to breeding, and specialization in handling seeds and other foods would lead to the selection of those with higher yields or more attractive qualities, with such "innovations" then being exported from the villages back into the wilds -- and eventually the fields that would be defended by city-dwellers rich enough to build walls, hire guards and so on.

This insight alone is worth reading the book, but there are more!

One important implication of city-led innovation is that it rebukes governments that focus on rural development. Jacobs's advice would be "leave them alone to follow and learn from cities," but many governments subsidize, direct and protect rural areas in a crude attempt to develop them. Such strategy not only wastes resources and encourages corruption, it also retards urban and rural innovation. (Note that this pattern is not falsified by China's post-1980 rural-led development, as the Party would not have dared to give economic freedom to cities first.)

Her next major point is that cities need to innovate if they are to survive. This means that "company towns" are likely only to last as long as their companies. In the book, she mentions how Detroit was a dynamo compared to Pittsburgh because it had so many industries to Pittsburgh's steel-dominated economy. With another 45 years of history, we now see how Detroit failed when its car industry stumbled, and Pittsburgh has "come back" through diversification. It's hard to remain king of the hill!

Part of this thought that Jacobs spends some time on is the way that various players in supply chain must be competitive to service world-class firms, which means that they are also likely to be exporters, and thus the source of extra profits, jobs and prosperity. It is thus that Jacobs, with justification, highlights cities as the specialized engines increasing the Wealth of Nations. (Some might claim that countries can grown rich on agriculture, but the richest countries have stepped away from that sector.) She called this dynamic "import replacement" -- meaning that local firms would cut out distant suppliers to local producers/exporters. Her definition is realistic as the way cities grow and more realistic as a description of how to encourage than "import substitution," which depends on preventing foreign firms from supplying intermediate goods, in the hope that local firms would be able to fill the gap.*** The implication is that cities don't depend on ports or river access to grow, but a mix of older and younger industries that can export goods based on imported materials and innovate new goods and services as older enterprises decline.

Finally (for now, but not the book), she looks into the future from 1969 to predict that cities would be able to mine their resources, a prediction decades ahead of modern pundits of industrial ecology and the circular economy. How would she get such an important insight? She saw cities as ecosystems rather than engineered or master-planned spaces beloved of the command and control crowd se fought for decades.

Bottom line: I give this book FIVE STARS. Read it for the sheer pleasure of joining Jacobs on an exploration of how our urban economies evolve.

For all my reviews, go here.

* This contemporary review [pdf] notes her iconoclastic insights. This piece discusses how economists put her ideas ("Jacobs externalities") into play.  Google scholar shows either 89 or 7000k+ citations of this book. I checked a few and she was not cited, so the algorithm is confused. I'd love to see a decent list of economists who have cited her.

** In our daily lives, it's easy to see how urban sprawl and congestion increases the transaction costs of  commuting and communicating with others in cities, which is why sprawl is bad for market efficiency and innovation. For some people, cars promise to "collapse space" but most of that promise has been lost in traffic jams caused by everyone else pursuing the same idea. It's that dynamic that underpins my claim that cities should be for people, not cars, a position of whose righteousness I experience every time I ride my bike through Amsterdam.

***  Import substitution is often linked to failure and poverty in poorer countries. Import replacement is more effective but not the same as laissez-faire: countries can still use transition periods to gradually expose their local industries to stronger and/or subsidized competition from abroad.

4 Jun 2018

Private charity can't replace the welfare state

Russ Roberts (of EconTalk fame) is fond of calling for less welfare and more private charity. His claim that private charity is more likely to get to the right people makes sense to me, but I think he underestimates the likelihood that voluntary contributions will be adequate to replace funds "confiscated" via taxes.*

According to this site, 2015 US federal spending on social security, unemployment, health, and labor costs ["charity for the vulnerable"] was $2.33 trillion, or over 60% of total spending. (These numbers do not include massive local and state spending on similar categories.) Meanwhile, total charitable giving was about $370 billion, or about 16% of the federal spend.

But what about the "effectiveness" of charitable giving? While some of it is self-serving, I agree that many smaller donors would mean fewer big mistakes, I also know that those donors would send money where it suited them rather than where it was "needed," as people are far more generous to "people like me" than the average, anonymous citizen.

Overall, I don't think charitable giving would rise by a factor of 6, if spending (and thus taxes) were cut back.  The problem -- as usual -- is freeriding, which is much easier with voluntary contributions than it is with taxes.**

Bottom line: Every society needs a social safety net if it is going to call itself developed. In most countries those safety nets rely on complex bureaucracies and mandatory taxes to bring benefits to all citizens who qualify. In some cases, those programs can be improved (replacing means-testing with universal basic income or dividing security from savings [pdf]), but all systems will need to rely on taxes if they are going to deliver the quality of services the average citizen and voter expects.

* I tried to find the podcast where I made a comment on this matter, but my google-fu is weak.

** After Trump's corporate tax cut, "companies spent 37 times as much on stock buybacks than they did on bonuses and increased wages for workers." I paid 37 percent of my income in various taxes last year in the Netherlands, and I am happy to pay into a functional system :)

1 Jun 2018

Friday party!

These advertisements are from the May 1933 issue of National Geographic Magazine. My father was born that month (he just turned 85!), and these provide some perspective on how much life has changed in his lifetime. (For more on those changes, read "conversation with my dad part 1" and "part 2").




The same issue, by coincidence, has an article on flying [pdf] that explains how the "means of the rich" were coming to the people. My dad, by the way, was taking the ship between Canada and England in the 1950s. By the 1960s, my mom was flying from Hawaii to Europe, via New York where she met my dad :)