Once we had ‘peak coal’ too

Questioning the peak oil mantra can always be guaranteed to get someone in a lather. Steven commented on my blog (26 November) that the success rate of economists on the subject of resource depletion isn’t too good.

Well, actually it is.

As another commenter Steve W noted (24 November), Julian Simon handsomely won his bet with doomsayer Paul Erhlich that the prices of a basket of resources would fall rather than rise in real terms.

Interestingly, another respondent sent me this article by Lord Kelvin written in 1902.

Kelvin writes:

Coal is king of the industrial world. The king’s reign is limited. Sooner or later, it has been estimated that the world’s supply of coal will have been exhausted.

He goes on:

The enormous amount of coal required to run our great ocean steamships, our leviathans of the deep, and the innumerable factories of our cities is making such inroads upon the available store that nature cannot forever supply the demand. When all the coal of the earth is used, what then?

Kelvin’s answer:

Perplexed humanity confronted with the possibility of its industrial machinery being stopped for want of power, will be forced to turn from earth to air. In the world there is to be found a force that has stood man in good stead from time immemorial. Long before the days of the steam engine or the ocean liners, ships were wafted from shore to shore by means of the force that lurks in the air. The time will come – unless man’s ingenuity devises some means of replacing the exhausted coal supply with a fuel that will be equally efficacious – when the swift steaming greyhounds of the oceans will be dry-docked and their vitals torn out. Then the lightened ships will be fitted with the masts and sails of the old sailing days, and once more the seas will be dotted with vessels propelled by the method that is at present in decline.

Well, “man’s ingenuity” did find a way of replacing coal as a shipping fuel, and long before coal ran out.

But wait: Lord Kelvin had more ideas:

On land the effect of the exhaustion of the coal supply will be even more marked than on sea. Every building could be supplied with its own windmill, to use the motive power that wanders where it listeth on its roof top to turn wheels that will lift its elevators, generate electricity for its machinery; pump its water supply and do all that coal now makes possible in the machine room; sails on our factories, sails on our mills and in our shipyards to catch the slightest breath that blows and turn it into a means of moving the wheels of progress; wind power utilized everywhere as the servant of man, free for every one, working silently as a great force while the world sleeps.

Doesn’t that sound modern?  And doesn’t it sound just as fanciful today (in terms of replacing a large share of energy production) as it did a hundred years ago?

But Kelvin has a final idea:

Then, in the great land changes of the coalless age I see vast fields of vegetation planted especially to serve as fuel. Each agriculturist will have his own reservation where the family fuel will be grown; a new industry will be born – the cultivation of fuel.

Wow!  Al Gore thought that once too, but even he has acknowledged that much ethanol production has been a boondoggle that has displaced food production and hit people in poor countries hard.

Meanwhile coal, especially in cleaner forms, looks likely to be an important energy source for many years to come.

Teachers deserve better

This year New Zealand parents and the public at large have been witness to a number of unseemly events in education as teachers, the trusted educators of our children people who should be held in high esteem by society, have hit the headlines for all the wrong reasons.

Broadly, the situation has arisen from two issues:

• Teachers’ objection to national standards – a system designed to help parents understand their children’s educational progress, and which is official government policy (remember teachers are public servants).
• Teachers demanding, and striking for, higher salaries that are completely disproportionate to other sectors, having regard also to their recent pay rises – especially in the wake of the GFC.

Of course, not all teachers are implicated, but this is the danger with a highly unionised profession – the few acting on behalf of the many spread the opprobrium around.

Here are some examples of how this is playing out in the media:

• A Dominion Post editorial slammed teachers with the headline ‘Get back to work greedy teachers’.
  
• Blogger Whaleoil was leaked documents which show that the national standards boycott campaign is paid for by the principals’ associations – which are ultimately funded by the government and the taxpayer.
  
• The Dominion Post reports a group of insurgent principals contrived to “quietly take over” a school trustees association representing 90% of school boards in a bid to silence parents who support measuring their children’s performance through national standards.
• A principal compared the Minister of Education to Hitler.

Unfortunately, this has all reflected very badly on teachers.

Meanwhile, two interesting international reports have been published. Both show that teacher effectiveness is far more important than class size (another major teacher union issue here).

In a media release announcing the launch of the Grattan Institute’s Investing in Our Teachers, Investing in Our Economy, the author Dr Ben Jensen said:

Measures to improve teacher effectiveness will deliver better value for our children’s learning outcomes, improve Australia’s economic productivity and be a better use of public funds than reducing class sizes.

Improving teacher effectiveness benefits our children. Young people who stay in school longer can expect to earn an additional 8-10% per year for each additional year of education they undertake. A 10% improvement in teacher effectiveness would improve student performance and productivity, increasing Australia’s GDP by $90 billion by 2050.  

Another report by British think tank Reform echoes the need to focus on teacher performance:

The new Government wants to improve the quality of teaching. In July 2010, the Education Secretary Michael Gove told the Education Select Committee: “The single most important thing in education is improving the quality of the educational experience for each child by investing in higher-quality teaching … There is simply no way of generating educational improvement more effectively than by having the best qualified, most highly motivated and most talented teachers in the classroom. Everything should be driven by that.”

This is absolutely the right focus.  Academic research suggests that the difference in a pupil’s achievement between a high-performing teacher and a low-performing one could be more than three GCSE grades. The Coalition is right to move on from the debate about class size, which has a much smaller impact on pupils’ achievement than teacher quality.

As reported by the NZPA, class size was one of the ‘pivotal demands’ that the PPTA have held strikes over, yet both these studies indicate that teacher quality is far more important.

However, in New Zealand we don’t even measure teacher quality in any serious way – and quality teachers aren’t rewarded properly.

The answer is improved pay arrangements for teachers so as to reward performance.

Coincidentally, my attention was recently drawn to a post on Red Alert some time ago by MP Kelvin Davis titled Performance Pay for Teachers. He writes:

Roger Kerr made the comment, “How hard can it be? Surely schools aren’t that complex?”

I’m interested in the performance pay model Roger has in mind.

Well, it’s very straightforward – see this article of mine titled Teachers Should Be Rewarded for Performance that appeared in the Otago Daily Times. Essentially I argue that performance should be evaluated not by simplistic metrics (like test results) but by the kind of evaluation processes used in most other walks of life, especially other professions.

Teaching is an honourable calling. Unfortunately unions, and rogue individuals and groups, are besmirching the profession in New Zealand. They would do better to be more reasonable with their salary demands, accept national standards as official government policy (while continuing to debate their application), and open their minds to being paid according to their performance – like almost all other professions. It is in their interests. 

Let’s hope New Zealand policy makers take note of some of the recommendations in these two useful reports.

The full Grattan Institute report is here

The full Reform report is here

Going beyond national standards

Last year I wrote this article, ‘Two Cheers for National Standards’ (Otago Daily Times, 17 July 2009).

I supported the government’s move to introduce standards for literacy and numeracy at primary and intermediate schools, saying:

Such a move is long overdue.  In 1998, the Education Forum, comprising educationists and business sector representatives, published a report Policy Directions for Assessment at the Primary School Level, authored by Professor Alan Smithers, a distinguished British education adviser.

The Forum stated that “it is strongly in favour of national assessment in primary schools.  It fully recognises that accurate information and feedback have a major part to play in improving education performance.”

In effect, the state school system is an enormous government monopoly (which would benefit from competition).   We can’t expect it to perform well without objective performance data.

The article went on to talk about ‘league tables’, judging schools as opposed to students, the flawed outcomes-based curriculum, and the problem of consistent assessment of standards.

I concluded by saying:

Finally, standards are no silver bullet for upgrading education.

Perhaps the most important reform would be moves towards greater parental choice and competition in the system, and greater school autonomy.

Teacher quality (including teacher training, professional development and certification) is also vital, as is how better teachers are rewarded and under-performing teachers dealt with.

But the government’s national standards initiative deserves two cheers.

A recent video from the Cato Institute in Washington helped extend my thinking (the section I’m referring to starts from 5 minutes 30 seconds into the clip).

It was a talk on national education standards by former high school teacher Rep. Rob Bishop (the section I’m referring to starts from about 5 minutes 30 seconds into the clip).

He began by talking about the endless series of education initiatives aimed at dealing with America’s under-performing public schools – the War on Poverty, A Nation at Risk, No Child Left Behind, and now the Obama administration’s Race to the Top.

As with so many fads and fashions in education, none has worked, or worked well.  As Bishop says, the most common reaction of any public school teacher is to think, “This too shall pass”.

He goes on to emphasise the limitations of standards and testing: “education is a subjective area, it is not an objective area.”  Moreover:

You cannot define a good school, you cannot define a good teacher, you cannot define a good education, but you know when you see it.  And as long as parents are satisfied, that ought to be the concept.

Bishop comes down on the side of parental choice – giving parents the freedom to decide where they want to send their children and rewarding schools and teachers accordingly.

He recounts a familiar objection to school choice raised by a state legislator in Georgia:

He said this idea of empowering parents may work but it won’t work in my district because the parents are too dumb.  I thought, but I did not have the guts to say, ‘they elected you didn’t they?’  I am totally opposed to that premise.  Parents are not too dumb.  Parents do care about their kids.  And even if you accepted the premise that parents are too dumb to make these decisions, the state is a poor replacement for the parent.

As far as I’m concerned those are killer arguments.

Going beyond national standards and introducing school choice – funding schools at the different levels (primary, intermediate, secondary) on the same basis according to enrolments – is the next logical education reform.  Two reports by an Inter-Party Working Group released early this year advocated such a move.

It’s not much use parents learning that their children are not achieving national standards if all they can do about it is complain to the school or stand for the board of trustees.

The real way to empower them is to provide them with the option of ‘exit’ as well as ‘voice’: to send their child to another school.  Isn’t that the option people as consumers have in practically every other area of their life?

Friday graph: the story of an unbalanced economy

This is a chart from a talk by Secretary to the Treasury John Whitehead last week.

It pinpoints a major economic weakness – the fact that the tradable sector of the economy (industries that export or compete with imports) has been largely stagnant over the past decade, while the non-tradable sector, of which the public sector is a large part, expanded.

One outcome is the large current account deficits prior to the GFC.  In the previous decade the growth of the two sectors was much more balanced.

Former finance minister Michael Cullen wrongly interpreted the external deficits as a savings deficiency on the part of New Zealanders.  A more important factor was the loss of international competitiveness as excessive government spending put pressure on interest rates and the exchange rate.

Reining in government spending is the single most important action the government can take to improve international competitiveness and export sector profitability and growth.

As John Whitehead warned, we are not as yet seeing the significant rebalancing needed in the economy – the shift of resources to tradables.

Click to enlarge

MMP Mythologising

Philip Temple is a Dunedin-based author of novels and children’s stories.

He has also been a long-time crusader for MMP.

Last week he had an article in the National Business Review that criticised an article on MMP by James Allan, a professor of law at the University of Queensland and formerly at the University of Otago, and a critic of the MMP system.

Mr Temple’s article was more fiction and fairytale than fact.

Start with his economic understanding, which seems almost non-existent.  He writes:

Professor Allan can’t make up his mind whether Helen Clark or MMP is responsible for New Zealand’s “relative decline in economic performance … Divide the blame up … in whatever proportions tickle your fancy.”

This is pretty slack thinking from a professor of law, especially when we have been reminded frequently that, after nine years of Clark and Cullen, New Zealand was better positioned to weather the global financial crisis than those FPP bastions, the UK and the US.”

Better positioned?  The Clark/Cullen legacy was a rate of productivity growth that has slumped to close to zero, an economy in recession before the GFC struck, and a string of budget deficits that will take years to correct.

The article goes on:

And what western country has weathered the current crisis best of all?  Why the home of MMP, Germany, with its endless coalitions.

Mr Temple seems to have overlooked our nearest neighbour Australia, and for that matter Canada, both of which sailed through the crisis better than others in the OECD.  Germany by contrast is in dire straits with weak banks and an anaemic growth outlook.  It only looks better than the sick economies that surround it.  The days of Germany as the ‘free market economic miracle’ are long gone.

Even more ludicrously, the article then says:

In any case, given that most of our economy is owned or part-owned by overseas interests, the fate of our economy is in others’ hands.

What rubbish!  Most New Zealand assets are owned by New Zealanders, globalisation is a worldwide phenomenon, and New Zealand is totally sovereign economically: our decisions on our own institutions (like our electoral system) and policies largely determine our economic fate.

In respect of institutions, MMP is a serious ball and chain on the economy.  Economic research indicates that proportional systems are associated with higher levels of government spending.  In New Zealand MMP has contributed to over-expanded government and to stalemate and compromise.  How many worthwhile economic reforms have happened under MMP?

When it comes to political arrangements, the article doesn’t get any better.

Mr Temple observes that you can get minority government under first-past-the-post (FPP) as well as under MMP, and cites recent elections in the United Kingdom and Australia.

That is disingenuous in the extreme.  Minority governments in those countries have occurred once every few decades; under MMP they are routine.

In response to Professor Allan’s criticism that after an election under MMP there is all sorts of horse-trading and bargaining between parties to try to form a coalition government, Mr Temple writes:

And as for the “horse-trading and bargaining,” at least this is out in the open and not behind two-party closed doors.

But there’s nothing wrong with debate and compromise within parties – that happens under MMP as well as FPP.  The point is that under MMP no party can assure its voters that it will deliver on its election promises.  Horse trading occurs after voters have had their say.  MMP institutionalises promise-breaking.  Think National’s commitment to abolish the Maori seats and the deal that it struck with the Maori Party.

The article goes on:

The list component also allows the inclusion of talented politicians who have expert skills to offer, over and above electorate legwork.  Transport Minister Stephen (sic) Joyce, a list MP, is a prime example of this benefit of MMP.

This is a fair point but it is not an unalloyed benefit.  All electoral systems have strengths and weaknesses.  MMP may throw up a Steven Joyce but it may also throw up an Alamein Kopu – candidates who would never get elected in a direct constituency vote.  Moreover, as the outstanding UK member of the European Parliament Daniel Hannan writes in his new book The New Road To Serfdom: A letter of warning to America:

In most European countries, where legislators are elected on party lists through proportional representa­tion, politicians are even further removed from their electorates. If you are near the top of your party list, you are effectively irremovable. So, naturally enough, you spend your time sucking up to the person who de­termines which position on that list you will occupy: your party leader. Once you have secured a high­ranking place, you are invulnerable to public opinion. Even if your party suffers a heavy defeat, you will still be in the national assembly and with a fair chance of being in government as a minor coalition partner.

This gets to the heart of the problem of MMP (and other proportional systems).  What is the key issue in considering any voting system?  The political philosopher Karl Popper concluded, rightly in my view, that it is the ability of the electorate to throw out a government it dislikes.  This almost always happens under FPP or similar systems; it often doesn’t under MMP or other PR systems.  We saw that in the very first MMP election in 1996: Winston Peters’ party gained votes in the expectation that it would not back National, but it turned around after the election and gave National three more years of power.

A final howler: Mr Temple writes:

The only small parties to have survived throughout since the advent of MMP in 1996 are the Greens and United’s Peter Dunne.

Last time I looked the ACT Party was still in parliament!

A footnote to the article states that Mr Temple has been given a Wallace Award by the Electoral Commission for his writing on electoral matters.  If this article is any indication of the quality of his work, and if the award involved money, taxpayers have been well and truly ripped off.

Has the ‘Peak Oil’ drama peaked?

Remember Peak Oil?  Just a few years ago Green Party leaders Jeanette Fitzsimons and Russell Norman routinely issued warnings about ‘the world running out of oil’ and told us that we needed to move freight off roads and on to shipping and rail, and commuters out of cars and on to trains, buses and bicycles.

They weren’t alone of course.  An April 2006 article in The Economist reported that:

For years a small group of geologists has been claiming that the world has started to grow short of oil, that alternatives cannot possible replace it and that an imminent peak in production will lead to economic disaster.  In recent months this view has gained wider acceptance on Wall Street and in the media.  Recent books on oil have bewailed the threat.  Every few weeks, its seems, “Out of Gas”, “The Empty Tank” and “The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel”, are joined by yet more gloomy titles.

How times change!  Just this month the following items have appeared in the international media (hat tip:  Global Warming Policy Foundation).

In the last few years, we’ve discovered the equivalent of two Saudi Arabias of oil in the form of natural gas in the United States. Not one, but two. –Aubrey McClendon, CBS, 14 November 2010

Just as it seemed that the world was running on fumes, giant oil fields were discovered off the coasts of Brazil and Africa, and Canadian oil sands projects expanded so fast, they now provide North America with more oil than Saudi Arabia. In addition, the United States has increased domestic oil production for the first time in a generation. Meanwhile, another wave of natural gas drilling has taken off in shale rock fields across the United States, and more shale gas drilling is just beginning in Europe and Asia. Energy experts now predict decades of residential and commercial power at reasonable prices. Simply put, the world of energy has once again been turned upside down. –The New York Times, 17 November 2010

The word “revolution” is overused, but it’s truly appropriate when applied to these technological breakthroughs. Literally trillions of dollars’ worth of shale oil and gas can now be economically extracted. The implications are staggering. Oil production, too, in the U.S. will increase far beyond what experts thought possible a few short years ago. The Earth is awash in energy. –Steve Forbes, November 2010

Oil and gas will continue to be pillars for global energy supply for decades to come. The competitiveness of oil and gas and the scale at which they are produced mean that there are no readily available substitutes in either one year or 20 years. — James Burkhard, The New York Times, 17 November 2010

“When wind guys talk to each other,” said Michael Skelly, president of Clean Line Energy Partners, a developer of transmission lines for renewable energy, “they say, ‘Damn, what are we going to do about the price of natural gas?’” Without a government policy fixing a price on carbon emissions through a tax or cap and trade, the hydrocarbon bridge could go on and on without end. –The New York Times, 17 November 2010

In order to avoid higher electricity prices, Prague is slowing the solar power boom and is slapping a new tax on it. It will be the death knell for smaller operators – up to 1450 companies are seriously effected by the new tax. In the neighbouring country of Slovakia, an amendment to the Energy Law was adopted in May which has severely curtailed the potential for solar energy investment.  –Christoph Thanei, Die Presse, 17 November 2010

The Spanish government has launched a new regulatory framework that will result in subsidized tariffs for ground-mounted solar energy projects drop 45% this year, killing future investment in the trade, which industry leaders expect will be frozen in the next few years. In addition, approximately 75,000 jobs have been lost with countless firms moving abroad to find new growth opportunities. -–Renewable Energy World, 15 November 2010

Danish environmentalist Bjorn Lomborg suggested in his 2003 Sir Ronald Trotter Lecture for the Business  Roundtable that oil and substitutes like shale oil could cover current energy consumption levels for 5000 years.

He also noted that “Sheik Yamani, founder of the Organisation of Petroleum Exporting Countries (OPEC), has often pointed out that the oil age will come to an end but not for a lack of oil, just as the stone age came to an end but not for a lack of stones.  Humans search constantly for better alternatives.”

Provided markets are allowed to adjust to supply and demand trends, and are not distorted by government interventions based on false ‘peak oil’ premises, there is every likelihood of an eventual smooth transition to other energy sources.

Home thoughts from abroad

Melbourne University professor and member of the 2025 Taskforce Judith Sloan has an excellent article in The Australian today.

Entitled ‘New Zealand seems to have lost track of its reform agenda’, she writes:

New Zealanders are good at lots of things. Rugby, sailing, rowing, netball and film-making all spring to mind. But running a national economy does not appear to be one of their strengths.

On the income gap with Australia, she says:

Some commentators attribute New Zealand’s poor economic performance to its small size and distance from markets. The trouble with this explanation is [that] New Zealand has always been small and distant and so these characteristics cannot explain the growing gap.

She puts a finger on a key problem:

In Australia, there is broad-based acknowledgement of the benefits of the reforms undertaken by the Hawke-Keating and Howard governments. These involved removing import protection, financial sector deregulation, privatisation and other pro-competition measures.

By contrast,

New Zealand suffers from the consequences of an incomplete reform agenda. Public ownership remains prevalent, statutory marketing arrangements are still in place and the labour market has been re-regulated. There is even a single desk (monopoly) for the export of kiwi fruit.

Many New Zealanders think of Australia as a big government country, with governments at federal, state and local levels.

But as Judith points out:

The overall size of the public sector is considerably greater in New Zealand than in Australia. General government outlays as a percentage of GDP are around 45 per cent in New Zealand, some 10 percentage points higher than in Australia. Even if cyclical factors are taken into account, the relative size of the public sector in New Zealand is considerably larger than in Australia and has been growing particularly strongly since 2005, well before the GFC.

And the point here is that:

While there are exceptions, the higher the level of government activity in a country, the lower the rate of economic growth. And there is no example of a country with a public sector of equivalent size to NZ that has grown at the sustained rates needed to eliminate the per capita income gap between the two countries.

The article goes on to talk about New Zealand’s inferior policies such as interest-free student loans, ownership of KiwiRail, the Resource Management Act and the lack of public private partnerships: these “are almost unheard of in New Zealand.” Judith pinpoints the risks for New Zealand:

[T]he spanner in the works relates to the fact that New Zealand and Australia essentially have a common labour market. Trans-Tasman migration is completely unfettered. As a consequence of the income gap between the two countries, the flow of migrants is almost completely one-way, to the point that there are now about half a million New Zealanders living in Australia.

The consequences for New Zealand of this flow of people are both economic and social. Economic in the sense that there is little return to New Zealand for the investment in its citizens’ early years, and social in the sense that children (and grandchildren) live at a distance from their parents (grandparents) and possibly even barrack for the Wallabies!

She notes that the Key government has made modest moves in the right direction:

But if the aim is to close the gap with Australia by 2025 — and the taskforce of which I am a member will be recommending how to achieve this objective — modest policy is not nearly good enough.

Wise counsel from a good friend of this country.

  

O wad some Pow’r the giftie gie us

To see oursels as others see us!

 

The full article is here

The ‘Climategate’ Scandal Should Not Be A Surprise

An article I wrote for the Otago Daily Times published today:

Terence Kealey, Vice-Chancellor of the University of Buckingham in Britain, is an interesting and iconoclastic scholar.

A scientist (biochemist) himself, his book The Economic Laws of Scientific Research challenges the idea that science is a public good requiring government subsidies.

Last month I heard Professor Kealey speak at an academic conference in Australia.  His topic was the ‘Climategate’ scandal at the Climatic Research Unit of the University of East Anglia.  Subsequently, other global warming claims have been shown to be flawed, such as the disappearance of glaciers in the Himalayas predicted in the last IPCC report.

Kealey’s basic point was: Why should we be surprised about all this?  The assumption that scientists are always dispassionate seekers after truth is naïve, he argued.

Kealey reminded those who claim a scientific consensus about human-induced global warming of a similar consensus about eugenics – the science of controlled breeding – in the first half of the twentieth century.

We think of eugenics today as one of modern science’s most horrible perversions and associate it with Hitler and Nazism.  But eugenics ideas were once persuasive, as Kealey showed with quotes from well-known authors:

H G Wells (1901): “The swarms of black and brown and dirty-white and yellow people have to go.  It is their portion to die out and disappear.”
D H Lawrence (1921): “Three cheers for the inventors of poison gas.”

And the appalling George Bernard Shaw (1933): “Extermination must be put on a scientific basis if it is ever to be carried out humanely and thoroughly … if we desire a certain type of civilization and culture, we must exterminate the sort of people who do not fit into it.”

Such ‘scientific’ beliefs are dead today, but as Max Planck put it, “A new scientific truth does not triumph by convincing its opponents and making them see the light but rather because its opponents eventually die and a new generation grows up that is familiar with it.”

Kealey illustrated the lengths to which some scientists will go in order to silence ‘sceptics’ by a historical event involving Pythagoras (of the Theorem).
Pythagoras was a good scientist and he revered ‘rational’ numbers (whole numbers or whole fractions).  He believed that whole numbers underpinned the universe, from music to the movement of the planets.

But Pythagoras had a student called Hippasus who discovered that the square root of 2 is not a ‘rational’ number.  It is in fact an ‘irrational’ number and Hippasus showed that irrational numbers can never be definitively calculated.  This proof upset Pythagoras and he asked Hippasus to retract it.  But Hippasus refused, so Pythagoras had him drowned.

Kealey wryly commented, “I think Pythagoras went too far; I think that scientists should desist from killing each other or even from telling outright falsehoods.  But, like advocates in court, scientists can nonetheless be counted on to put forward only one very partial case … and no one should expect a scientist to be anything other than a biased advocate.”

Such partiality has long been a feature of the global warming debate.  One early proponent, the late Stephen Schneider, is notorious for saying, “To capture the public imagination, we have to offer up some scary scenarios, make simplified dramatic statements and little mention of any doubts one might have.  Each of us has to decide the right balance between being effective and being honest.”

Former US Vice-President Al Gore made that approach into an art form.  His film An Inconvenient Truth was found by a British court to contain nine significant errors in a context of “alarmism and exaggeration”.

In a leaked email, Climate Research Unit director Professor Phil Jones, referring to two papers that apparently falsified his work, wrote:  “I can’t see either of these papers being in the next IPCC report.  [New Zealand-born scientist] Kevin Trenberth and I will keep them out somehow – even if we have to redefine what the peer-group literature is!”

Here at home serious questions have been raised about the reliability of NIWA’s posted domestic temperature record – leading NIWA’s board to acknowledge the need to clarify the matter and publish the results.    

The integrity of climate science has taken a hit with Climategate and its sequels.  Scientific academies have been insisting on greater honesty and transparency.

Of course many reputable scientists continue to see a material risk of dangerous manmade warming.  I believe their case needs to be taken seriously – most scientists are honest.  But those in that camp should be the first to denounce exaggerated and erroneous claims by scientists that undermine confidence in their concerns.

On global warming it is nonsense to claim that “the science is settled”.  Scepticism about science is always in order – indeed it is the essence of scientific inquiry.

Friday graph: New Zealand/Australia productivity growth

Two charts here from the 2025 Taskforce’s latest report, together with the Taskforce’s commentary on them.

Click to enlarge

Figures 2.3 and 2.4 indicate that labour and multifactor productivity in the measured sector increased more in New Zealand than in Australia during the 1986 – 2008 period as a whole. However, it is also clear that New Zealand’s out-performance was essentially all over by 1995.  New Zealand has lost ground against Australia in respect of labour productivity growth since 1995, but notice that this was, initially at least, because growth in Australia accelerated. Since 1995, New Zealand has more or less held its own against Australia in respect of multifactor-productivity growth, although the growth rate in both countries has been minimal in recent years. But “holding our own” will not close the income gap with Australia.  To do that, New Zealand will need to generate a renewed focus on productivity, efficiency and growth.

Faster productivity growth isn’t the only thing that would close the income gap with Australia – higher workforce participation would also help – but it is the most important thing.

More on neoclassical economics

 Matt Nolan at TVHE blogs:

I have recently seen an increasing number of attacks on “neo-classical” economics from every section of the political spectrum.

Last week, I heard a number of commentators at the sustainable economics conference claim that neo-classical economics was:

1. Based on falsified views of the individual,
2. Static,
3. Had no supply side.

Then I saw an attack on “neo-classical economics” from Roger Kerr at the Business Roundtable (and more) which seemed to imply:

1. It ignores institutions,
2. It ignores transaction costs,
3. It is static.

I was surprised by these attacks.  More than surprised, I felt like the attacks were based on a straw man version of neo-classical economics – one that in many ways never existed, and if it was floating around it was during the 1950′s-1970′s when a lot of the focus was on a narrow neo-classical synthesis in macro theory.

 He concludes:

The reason I am so defensive about the definition of neo-classical economics is because people see it as the current core – which according to my definition it is.  Setting up an alternative definition of neo-classical economics and knocking it down is either equivalent to setting up a straw man to attack, or directly misleading people to make it sound like modern economists are incompetent.

My advice would be to stop defending neoclassical economics as being the ‘core’ of economic theory Matt.  By redefining the term to include all the developments in economics that you identify (and there are more) you drain the term of any useful meaning.  You’re right to defend “modern mainstream economics” instead.

I wrote this passage in 1986 as a kind of valedictory to the Treasury:

“In the domain of macroeconomics we have probably all noticed that we have been relearning and reinterpreting much of what we were taught in the 1950s and 1960s, and rediscovering and developing the key ideas of the more established and orthodox tradition of economics that have been found to have a sound microeconomic basis and public policy rationale … What is probably less apparent is that we have been relearning a good deal of the microeconomics that was also shunted up the wrong track around the same time.

For 50 years after Marshall, the dominant model of market behaviour in most centres of learning outside the sphere of influence of the Austrian school was the perfectly competitive version, with its assumptions of full knowledge, zero transaction costs and no market power on the part of firms and individuals.  The central interest was in equilibrium properties, with marginal anything being equal to marginal everything else.  The vision of this ideal world was essentially a static one; real time did not enter into it.

As intellectual abstractions, the refined versions of the perfect competition model are a tour de force, and even illuminating up to a point.  The trouble for policy purposes is that the model leaves out much that is critical in the real world, extending far beyond features such as economies of scale, which were always recognised as qualifications.  Confronted with a host of situations in which its ‘nirvana’ properties do not hold, theorists initially devoted enormous intellectual effort to exploring the so-called economics of imperfect competition.  Much of this also originated in Cambridge, and focused in particular on monopoly and oligopoly.  The view that monopoly was a pervasive problem attained great influence, further undermining faith in the competitive economy and strengthening interest in anti-trust and planning.

As with the attack on Keynesian macroeconomics, the challenge to the regulatory wave of the 1930s that flowed from perceptions of ubiquitous ‘market failures’ took time to develop.  Initial critiques of intervention on market failure grounds involved two main propositions.  One was to draw attention to the ‘grass is always greener’ fallacy.  Critics pointed out that the fact that some market outcomes are not perfect (judged against some abstract ideal, in reality not attainable under any form of economic organisation) did not necessarily mean that governments can improve on them.  ‘Government failure’ came to be recognised as a problem often at least as severe as market failure – especially given human fallibility and the incentives involved in public decision making.  As one writer has put it, the fact that a fish can’t fly doesn’t mean that a rhinoceros can do any better.  The second critique recognised that most interventions involved costs as well as benefits.  When the test that the benefits would outweigh the costs was applied, many interventions failed, or should have failed, to pass.  Empirical studies also called into question the importance of earlier perspectives;  for example Stigler summarises the conclusions of a large amount of quantitative research in noting that ‘The evidence that monopoly is important is negligible, and the evidence that it is a quite minor influence on the workings of the economy is large’.

However, the development of microeconomic theory has gone far beyond these initial counterattacks on ideas of imperfect competition.  A large body of research has stressed the need to incorporate an understanding of incentive mechanisms, principal/agent problems, voting behaviour, uncertainty, and information, transaction and adjustment costs into any useful model of economic behaviour.  The ‘new’ economics of organisation – which goes back at least to Coase’s initial work on the theory of the firm – has pointed out that the long-standing preoccupation of economists with the allocation of resources in atomistic markets is an unsound and unbalanced view of social activity.  The insight that markets and organisations are alternative economic arrangements whose relative efficiency depends on transactions costs, broadly defined, has led to a long overdue interest in the systems of incentives that motivate behaviour in organisations, and to the development of modern agency theory.  The literature on ‘contestable’ markets has merged to supplement the competitive market model by showing that the openness of a market to potential competition may be more important than the structure of an industry – the number of firms in it – in determining production efficiency.  What contestability and transaction costs economics has shown is that competition and competitive outcomes are (a) complex, and (b) not dependent on the atomistic assumptions of perfect competition.  Finally, a renewed interest in entrepreneurship and the dynamic effects of competition in promoting the search for new knowledge and innovations has further exposed the limitations of static microeconomic theory.

The point to be stressed in surveying these developments in microeconomic thinking is not the problem of abstract models.  All models, including those that encompass costs of information, transactions and other complex aspects of business structure and conduct, are abstractions.  The problem has been the facts or behaviour that some economists have attempted to explain with over-simplified models, and the policy prescriptions they have adduced.  The traditional models have simply not provided us with enough microanalytic insights to help us understand individual transactions, which is what we must attempt to do if we want to improve outcomes in some way.

The most refined development of neoclassical Marshallian economics was the Arrow-Debreu model.  As one commentator has noted:

In its most elegant form neoclassical economics is epitomised by the idealised, frictionless, Arrow-Debreu model which provides necessary and sufficient conditions for a competitive equilibrium to be a Pareto optimum.  The dominant presumption in the profession was for a long time, and is still largely the case in the public sector today I suspect, that any departure from the idealised situation (eg of MC = P) is a market failure that will stop the Pareto conditions from holding.  Since this part of neoclassical economics implicitly assumed that government was perfect (eg property rights were perfectly well defined and contracts perfectly enforced and there were no deadweight costs of taxation) the bias towards intervention was strong. 

So my position is that neoclassical economics has a lot to offer, but that its application to policy by economists has a lot to answer for.  At the micro level, perhaps the bit I hate most is competition policy – premised as it is on the notion of static ‘perfect competition’.  The critical Schumpeterian notion of dynamic efficiency potentially undermines the entire static efficiency case – so in practice it is essentially confined to the ‘too hard’ basket. 

 For a fuller critique, see this article by Wolfgang Kasper, What’s Wrong with Neoclassical Orthodoxy?

I‘m not surprised by what you heard at the sustainable economics conference.  Some fair points may have been made (eg that neoclassical economics is static) but for many the term is just lumped in with other labels (like neoliberal, monetarist and Chicago economics) by anti-market critics who do not understand economics.