Tag Archives: Economics

Dune, Economics and Podcasts!

Loyal Followers!

The Falcon Files made friends this weekend with the great folks over at Geek Progress and the result was some great conversations on Political Economy, the Middle East and Dune. Click here to give it a listen and be sure to visit some of there other works.

 

Quick edit: It seems some people have had a problem with the links working and I’ll look into that. In the meantime here is a the site: geekprogress.com.

 

 

Limits to Growth III: The Steady State

If there are limits to growth and therefore how far our economies can grow what can be done about it? Economist Herman Daly has a possible answer in the Steady State Model.

“An economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance ‘throughput’, that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.”

Daly, Herman. 1991. Steady-State Economics, 2nd edition. Island Press, Washington, DC. p.17.

What Daly is describing is an economy that has reached a stable population level and a low-level of consumption. For most of human history our struggle has been about getting enough resources to survive but now we have surpassed that need. We have more than enough for everyone and are reaching the point where continuing to produce is a danger to us all.

The Steady State would be smaller in size, consumption and environmental impact as it would need less to sustain itself.  It’s as much a new form of economics as it is a new way of evaluating progress and value.  GDP would no longer be an adequate measurement  as production and consumption are not the pillars of progress in the Steady State.

The massive accumulation of wealth needn’t be the focus of a society and in face the Steady State requires that it not be.  Money could exist but massive accumulation tends to promote inequality which breeds an unstable society.

Achieving a steady state economy requires adherence to four basic rules or system principles:

  1. Maintain the health of ecosystems and the life-support services they provide.
  2. Extract renewable resources like fish and timber at a rate no faster than they can be regenerated.
  3. Consume non-renewable resources like fossil fuels and minerals at a rate no faster than they can be replaced by the discovery of renewable substitutes.
  4. Deposit wastes in the environment at a rate no faster than they can be safely assimilated.

The Steady State is a simple concept but politically is extremely difficult.  We’re not just discussing a policy change but instead a changing of principles and values.

Limits to Growth II: The Myth of Infinite Growth

stateofworldMore and more people have begun to question the possibility of human economies ability to grow forever.  The overuse of Earth’s natural resources as well as the destruction regional ecosystems and global ecosystems should tell us that something is wrong.  However many mainstream economists seem to not be concerned with these facts.  They are still claiming that economic growth is not only possible, it’s necessary to improve our well-being.  This maybe true in some cases–no one would argue that Uganda or Pakistan should not work for more economic growth but this distinction should not be generalized.

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The problem is that the whole model of macro-economic growth is built on a fatal flaw–we assume that we can grow forever. The theory states that the resources are fungible and substitutable simply put: “Natural resources are not an issue as long as our technology is improving.” This is not only irresponsible, it’s insane.

What will technology use if we run if we run out of the resource which we use to build the resources? Herman Daly put it nicely  “You can not build the same wooden house with half the wood just because you have more or better saws.”

The question now is one of responsibility: do we want to proceed with “business as usual” and naively assume that technology will solve all our problems and run the risk of a catastrophe? Or shall we back pedal and think about the development and balance of Western economies versus those of the developing world?

Limits to Growth Part I: GDP

 

SONY DSCWith President Obama’s new green policy that seeks to limit carbon emissions there has been and will continue to be heated discussions about the impact this law will have one economic growth in the U.S.

Inspired by these debates the next several posts will discuss the limits of growth, steady state economics, and how we measure growth.

GDP (gross domestic product) is a measure of economic activity which is narrowly understood however this does not stop politicians and policy makers from making welfare decisions and comparisons based on this data.  The basic argument goes like this: GDP is a proxy measurement of how much people can consume and consumption is a proxy measurement of well-being.  We therefore use GDP per capita for comparing welfare between nations and an increase in GDP as an indicator of social progress within a society.  This is a compelling case and we are used to hearing this from figures in authority and the media but it is misleading to think that a higher GDP leads to better social welfare.

GDP is computed as the sum of all end-use goods and services made in an economy during a period of time weighted by their market prices.  Too illustrate if Pakistan began building war drones and hired many people for this skilled manufacturing their GDP would increase. However, would this necessarily make the people of Pakistan better off especially considering that many of those drones will be used on other Pakistanis in the northern region?  Simply put this proxy measure does not measure happiness or well-being it only measures what we can consume. From that definition its GDP is a pretty narrow measure of our daily lives and should be taken to be just that…limited. can-stock-photo_csp10758311

According to Richard Easterlin people do not become happier when they become richer and this has become known as the Easterlin Paradox.  There are many possibilities for why this is true including the idea that a threshold of affluence vs leisure time exists.  If you do not have time to enjoy the fruits of your labor will they truly make you happier? Has this new wealth increased your well-being? Or as Fred Hirsch suggests there could be a correlation between increasing affluence and increasing competition for “positional goods” that can be bought by anyone but not always everyone. This idea creates a consistent need to buy more and more.

Furthermore GDP does not take into account the limits of natural capital.  Since natural ecosystems provide resources like coal and oil and there are limits to them both in quantity and in negative impact these must be considered in the overall measurement.  This is called “greening GDP,” where we subtract the negative impacts from the total GDP. For instance the cost of the BP oil spill in man hours, clean up costs, oil revenues lost and negative effect on wildlife which in turn affects the lives of the locals would all be subtracted from the GDP of the U.S.

Even by measuring some negative outcomes of a consumer based economy as mentioned above GDP does not give us a clear look at well-being.  There have been several experiments that have attempted to tackle that issue such as the Gross National Happiness used in Bhutan. While this one is highly qualitative and has some issues it is a thoughtful approach by a government to measure their people’s well-being. Another is the Genuine Progress Indicator (GPI) which uses a long list of indicators to measure well-being ranging from air quality, crime, leisure time and personal wealth.  GPI also boils all those indicators into one neat number which economists love.

As an economist I’m not saying that we should abandon GDP altogether only that it should be taken as a small part of a larger picture.  A measure of a small piece in a large puzzle that is human well-being.  With that in mind, when politicians threaten to block legislation meant to protect the environment because it could hurt our GDP you should ask whether a high GDP is worth it.  In an economy where we have been taught to consume, GDP not only doesn’t reflect well-being…it could harm it.

 

 

Econ 101: Gas Tax

500px-Supply-and-demand.svgFor those of us who have not taken a survey econ course never fear…I’ll get you up to speed.  The graph above shows supply and demand curves.

The horizontal line (Q) is Quantity of a product or service and Q2 is a larger quantity (more supply) than Q1.  The vertical line “P” is Price to purchase the good or service.  P2 is a larger price than P1.

The blue line S is a supply curve for the product or service.  As with most supply curves is increases and tells us that as price (P) rises, the quantity (Q) of the product supplied also rises. Simply put if people are willing to pay more for pizza then more people will go into business selling pizza.  Common sense made difficult as a professor of mine used to say.

The line D1 is a demand curve for the product and tells us that as the price falls, the quantity Q of the product demanded rises. So, if the price of pizza drops more people will buy it.

The point where S crosses D1 is a market equilibrium, where the supply and demand for the product are equal. Easy to graph, hard to achieve.  If the price is below equilibrium, less of the product will be supplied resulting in a shortage and the price will rise.

Now, John McCain has proposed a Gas Tax holiday which would suspend federal gas taxes for three months.  The gas tax is 18.4 cents and 24.4 cents on diesel.  Some estimates have the government losing 10 billion in revenues.  McCain argues that the savings would trickle down to the consumer (you & I) and “help spread relief across the American economy.”

Being the dismal science that econ is, it’s impossible to say what the results of this gas tax holiday would be in reality.   However here are some more believable scenarios:

  • Assuming we are currently at a market equilibrium (debatable given how much gas prices change) reducing the cost of gas will increase demand which could increase supply but since summertime gas supply is mostly fixed…supply cannot increase. So price will rise but not supply and the benefits will go to the oil companies.
  • The tax reduction will be split between the producers and the consumers (you & I). In a real reduction of price, demand will rise raising the price slightly but not as much as in the first scenario.  This will increase consumption and therefore increase U.S. carbon footprint.

Either scenario seems like a losing proposition to me but it does make for a good speech.

Orcs, Trade & Slaves : The Economics of Mordor

url  You would be hard pressed to complain about the imagination and creativity that went into making Tolkein’s Lord of the Rings trilogy which includes languages, deep and intricate histories and even detailed maps.  However Tolkien was undeniably better at history than economics which brings us to this week’s question….where did the orcs get their food?

As the map above illustrates, Mordor is a farmers nightmare.  Depicted as an ashen wasteland where nothing grows, no rivers run through it and the ground is littered with rocky fissures with little to no rain fall, we can safely assume that Mordor is not an agricultural power house.  With that in mind the Dark Lord must have been trading with an outside power.

url-1                                                                                           In order for the balance of trade to work, Mordor must have something of value to trade as its hard to threaten with an army that someone else feeds.  It’s hard to imagine that the orcs were highly skilled labor, but they could have been exporting swords.  Sauron had mines, and forges so the mass production of swords could easily function as an export good.  Keep in mind that Mordor’s political system is that of a dictatorship, so there’s no need to pay the orcs just keep them fed.  This frees up any capital you might gain from exports to be spent on food supplies, after all even the Dark Lord’s army marches on its stomach.   Trade seems likely for Mordor, orcs farming is odd if not impossible, but it comes with its own difficulties.

Mordor is landlocked and surrounded on three sides by suspiciously straight lines of mountains.  While these natural boundaries are ideal for fending off attackers, it does make trade precarious and expensive.  In the North-West there is the active volcano of Gorgoroth, from which no rivers run,  to the South East lies the undrinkable bitter Sea of Nurmen, thus,  all trade must travel by land which is 14 times more expensive than by sea.  Mordor is beginning to look more and more like a closed economy  typically plagued with underdevelopment.

For the sake of argument let us assume that the balance for trade was struck between one neighboring nation and Mordor. In order for Modor’s economy to work they would need to have constant wars to keep up the demand for swords.  If Sauron were to not start a war surely morale would drop, followed by an economic meltdown and starvation.

Slaves are certainly a possible answer and the effiiceny of slave agriculture sparks heated debate.  In a slave system can there be any specialization of labor? Studies have shown that individuals work better with rest and I doubt that many slaves get time off from work. Furthermore farming is extremely difficult…wouldn’t the slaves do as little as possible just to avoid punishment?   Robert Fogel and Stanley Engerman contest these ideas in their book Time on the Cross which discusses the economy of the U.S. south on the eve of the Civil War. Time on the Cross argues that the plantation system was more complicated and that it was extremely efficient and that the southern states economy was on rise as the Civil War approached.  Engerman and Fogel’s findings have been debated and some have been discredited by historians Herbert Gutman and Peter Kolchin who write that Time on the Cross focuses on one plantation and ignores the human abuses that occurred in that time period.

While Mordor would have no concern for it’s slaves  it does raise the question of the slave trade. There doesn’t appear to be any slaves in the rest of Middle Earth so where are they coming from? Are they captured men and women? Who regulates them? It’s doubtful that the orcs could regulate a team of farmers forced or not to work so even with forced agricultural labor Mordor won’t be productive.

With this economic model in mind its hard to imagine what the orcs get out of serving Sauron.  The fiery eye upon the mountain and ring wraiths may not care if the lands are covered with sulfur and ash but the orcs must eat.  What on Middle-Earth are they thinking serving a Lord who rules over a bankrupt nation with no imports? Even in the conquest of Gondor the lands will be turned into a similar wasteland so there’s no prospect for future riches.

In the real world economy Mordor would be riddled with debt.  Orcs would become refugees streaming westward in hopes of employment in Gondor.  Rather than closing its gates to invading armies Minas Tirith would be coping with huge numbers of immigrants.  Orcs would hire themselves out as labor for a square meal and a days pay while the mounted bands of Rohirrim would patrol the borders and turn back those looking for a better life.  Dark Lord or not Sauron would have to borrow heavily to keep Mordor from emptying of its populace. One ring or not, the real power is in the purse strings.

Dune: What SciFi Can Tell Us About Why Nations Fail

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The Science Fiction masterpiece written by Frank Herbert was largely based on the Bedouin and Arab cultures throughout the Middle East and the extractive political economics that drive conflict today. For those of you unfamiliar with the story here is a brief description….

On the desert planet Arrakis, there is a very precious commodity called the Spice.  This commodity is only found on the inhospitable planet and is necessary for interstellar travel.  The intergalatic trade guild, CHOAM, requires it and uses a baron from another planet to extract it. There are two warring families the Atreides and the Harrokens, both competing for the rights to the spice and the native inhabitants are the Fremen, tribal nomads who have learned to survive the harsh environment.  The Emperor sides with the Harrokens, Paul Atreides father dies and Paul is exiled, where he allies with the Fremen. From there they wage war and Paul eventually becomes their just ruler.

It borrows much from Islam such as Hajj and Jihad (the Bulterian Jihad against sentient machines) and Paul Atriedes character is clearly modeled after desert prophets like Jesus, Moses and Muhammad. Furthermore off shoots of of Islam develop including Zensunni and Zenshia which are hybrids of Zen Buddhism Sunni Islam and Shia Isalm respectively.

The Arab language is very prevalent throughout the book, such as the Aba, a loose robe worn by the Fremen and is typically black, can be loosely translated to the Abaya, the traditional female dress for centuries. Some have argued that the word Arrakis, the planet of Dune is derived from the Arabic word Raqs meaning to dance, however this is only true in some dialects and seems to be a remote possibility.

From a economic development stand point, Dune represents an excellent example of extractive economics.  While the spice is a valued commodity and arguably the most important export in the galaxy as it is required for travel, the Arrakis natives remain improvised.  The largest threat to their lives seems to be a lack of water, something that could be easily traded for given the balance of trade. All technology on Arrakis had been built around saving water, even the dead were drained and their fluids given back to the tribe. They are shocked to hear that Paul comes from a planet where water falls from the sky into giant pools of water that surround land. A student of economics would ask why something that has low demand in once place, Paul’s planet, and has such a high demand in another is not being traded?  Why is it that people with access to such an amazing natural resource like spice, are deprived of something that could be traded so cheaply?

The answer comes down to good governance and self rule something James Robinson and Daron Acemoglu discuss here. By establishing extractive institutions such as the Baron or Western Oil companies, you have stymied development and laid the ground work for corrupt governments.  The Fremen are unable to capitalize on the trade imbalance simply because they are not governing themselves, the trade guild governs them with no interest in building an economy only extracting a commodity. This is similar to economics of Egypt under Hosni Mubarak who was supported by western powers for decades while the economic opportunities of the Egyptian people crumbled.

Some would argue that the spice lead to a paradox of plenty, or a resource curse where natural resources are more of a curse than a blessing to a nation’s economy.  Primarily OPEC countries are used to make this argument by comparing their GDP with their vast resources in oil, but little is taken into account of the extractive institutions that plagued the region for many years. Without examining institutions that govern whether it be interstellar empires, western oil companies, or corrupt governments we cannot understand the struggles of people today.

Whether Frank Herbert foresaw the debates of transparency or the political uprisings in the Middle East today, we will never know as he is dead. However, Dune remains one of the best examples of Arab culture and political economy in Science Fiction today.