reading appraisal - systems, info, prices (donahue, upward) v1.21

ENVS6115 Ecological Economics Kendal Donahue, Antony Upward

111

Week 4: Systems, Information and Prices

Seminar 5

Hayek, F. A. (1945). The Use of Knowledge in Society. The American Economic Review, 35(4), pp. 519-530.

Lawn, P. A. (2001). Scale, prices, and biophysical assessments. Ecological Economics, 38(3), 369-382.

Jan 27, 2011ES/ENVS 6115, Prof. Peter Victor,

York University, Faculty of Environmental Studies

(Please download to review extensive speakers notes)


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Challenges and Approach

• Which choice(s) of systems of using information will maximize welfare on a limited planet? – Is the market/pricing the only / best system for

achieving this?

• Challenge was to decide which perspective(s) to take– Decision: explore the elements of both articles related

to systems, information and prices are aligned with achievement of ecological and economic sustainability


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Synthesis – Policy Priority & Relevant Mechanisms

Controlling Throughput of “Earthbound” Energy

& Matter

Distributional Fairness

(Households)

Allocative Efficiency

(Firms)

Lawn

“Average” Canadian Economic Advisor Today

Hayek

➊➋➌= The priority / importance of policies relative to primacy of achieving sustainable optimal macro-economic scale* Wouldn’t It Be Nice If – i.e. we’d love to be able to do this, because we know it’s the right thing to do – but of course it can never happen† Balance depends on political perspective – left wing tends to favour national central planning on more occasions (though not exclusively) right wing the reverse

➋National Central Planning

➊Global Bio-Physical Central Planning

➌Market/Prices + Some National Central Planning

< ➌ “Impossible” but “Wistfully WIBNI”*

No opinion on “best” mechanism

Between ➊ & ➋

National Central Planning + Market/Prices †

➊Market/Prices + National Central Planning†

➊ Market/Prices only

➋Market/Prices with limited Central Planning

No opinion on priority or mechanism


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Socio-Econ-Political Historical Context is Key to Understanding Hayek

• Fascists, communists, dictatorships and democracies had all used centralized planning/controls of all kinds during the war

• Hayek attributed the rise of the vanquished fascists and dictatorships to centralization of planning†

• He believed he had “duty, which I must not evade”* to warn people that their belief in centralized planning was dangerously naive – YouTube - Friedrich Hayek's 'The Road to Serfdom'

in 5 Minutes* As quoted by Glenn Beck, Fox News, June 13, 2010† Oddly Hayek doesn’t appear to attribute their defeat to centralized planned


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Socio-Econ-Political Recent Context is also Important to Understanding Hayek

• The economic influence on Thatcher, Reagan, Freidman, Bush I/II and hence on their opposers

• Hayek’s case is “commonsensical” and hence easy for politicians to explain– Centralized planning (top down) is in opposition to personal freedom

(bottom up) and hence capitalism; thus centralized planning (or anything so ascribed) is un-American (i.e. against life, liberty and the pursuit of happiness)

– Common sense support is strengthened by “proof” offered by the:• Fall of centrally planned communist block (Europe)• The adoption of market economic policies (China)

• Hayek remains highly divisive along political lines – e.g. Glenn Beck Presents F A Hayek's "The Road to Serfdom"

So…First task in analysing Hayek: separate political and philosophical dogma, and the attacks and responses from his underlying scientific claims …


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Hayek Article Claims and Responses (Sub-set – 1 of 2)

1. The key economic problem, the management of material scarcity, is an information management problem

• Who has how much information, of what kind, when, and how do they obtain and know it

Excluding biophysical limits this appears valid

2. Central planners could conceivably have sufficient scientific* knowledge, but can never have sufficient social knowledge held by each individual Valid; examples in the article are good But, Hayek states the only choice between centralized and

decentralized planning is monopoly!• Ignores all example of successful macro-economic centralized

planning in increasing average welfare – e.g. healthcare• No “best of both worlds” option

* Includes all economic, social, biological, physical and pure science knowledge – theoretical and applied


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Hayek Article Claims and Responses (Sub-set – 2 of 2)

4. “The man on the spot” only needs some very limited information from outside his locality to decide what to do (p525, para 1)

• Prices convey this knowledge perfectly in all cases• Market / prices convey knowledge “equally” (p528 para 2)

Ignores: absolute scarcity; not everything is/should be priced• Hayek implies limits to pricing without being specific (p528, para 2)

4. The sum of actions of all persons acting in society for their individual benefit, based on in the information in prices plus their local social knowledge, yields the optimal plan for society (p526 para 1)

5. For natural capital the reason for a change in a price is not information required for an optimal decision (individually or for society) (p526, para 1)

Ignores: ethical issues of acting without knowing Ignores: absolute scarcity; not everything is/should be priced Ignores: people will plan differently in case of absolute scarcity


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Summary of Lawn

• Optimum vs. Maximum Scale of Economies within Bio-physical Limits

• It is important to be clear about The nature and relationships between elements of the bio-physical and socio-economic systems

• Without this understanding we can’t provide appropriate information to enable the optimum

• From our perspective article appears uncontroversial


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Lawn Article Claims (Sub-set)1. A macro-economy operating at the scale of earth’s bio-physical

limits will not be operating at the scale optimal for maximization of total and average human welfare (i.e maximum EEE*)• Limits to sustainable bio-physical stocks and flows, and psychic net

income

2. Determining the a.a. limitlimit situation requires bio-physical assessment of required stocks and

maximum sustainable flowsb. (smaller) optimaloptimal requires economic valuation, since this is a social /

economic question– Example of Australian economy

3. Making distinctions between bio-physical-socio-economic types of efficiency and growth enables identification of which socio-economic processes influence each• Using this understanding enables very specific policy recommendations

and priorities• These claims were used to structure of our earlier analysis

No Substantive Criticisms …. Only some quibbles

* EEE = Ecological Economic Efficiency


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Quibbles with Lawn*

1. Hayekian concerns for personal freedom and long term implications of sustainability for democratic institutions of the recommended policies not mentioned

2. Appears to over simplify sources of psychic income (p370 – last para, p372 – 1st para) and is vague about what limits to psychic net income might be in practice (p377 para 2)

3. Appears to ignore rebound effect when describing reasons for drop in sustainable net benefits in Australia after 1973 (p378, para 4)

4. Some (perhaps radical, even heretical) policy suggestions are introduced without acknowledging them as such

* Didn’t have an substantive criticisms of Lawn…hence we position these critiques as minor “quibbles”


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Overall Questions

• What questions do you have for us?

1. Where are we (Globally, Global North, Global South) now on the UC/UB/SNB graph?

2. Do you believe that central planning can work as Lawn suggests, given Hayek’s arguments against all central planning?

3. How could we quickly influence the opinions of the “average Canadian economic advisor” towards Lawn’s perspective?


12ENVS6115 Ecological Economics Tom Du #20722425, Antony Upward #211135423

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Appendix

Detailed Analysis of Articles


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Socio-Econ-Political Background for Hayek Writing in 1944/5

• War was still underway while writing (although D-Day had happened) – publication of article days after the war ended

• Fascists, communists, dictatorships and democracies had all used centralized planning of all kinds during the war

– Included production planning, price controls, rationing, etc.– Although the same techniques were used by the victors and the vanquished,

many in the victorious attributed their success to such techniques and wanted them to be continued

• Hayek attributed the rise of (at least) the vanquished fascists and dictatorships to centralization of planning†

– He worried that continuing their use post-victory by democratic socialist would inevitably lead the democracies to fascism / dictatorships

– His “duty, which I must not evade” was therefore to provide a rationale to connect the approach to planning which according to many in the democracies had “successfully won the war” (and not incidentally “solved” the problems of the depression) to the original rise of fascism in Germany and elsewhere

• Article was written around same time as Hayek’s classic ‘The Road to Serfdom’

– YouTube - Friedrich Hayek's 'The Road to Serfdom' in 5 Minutes– Article likely written in response to early criticism of ‘The Road to Serfdom’

* As quoted by Glenn Beck, Fox News, June 13, 2010† Oddly Hayek doesn’t appear to attribute their defeat to centralized planned


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Socio-Econ-Political Background for Interpreting Hayek Today

• Hayek’s economic work was wide ranging – The economic calculation problem– Spontaneous order– Investment and choice– The business cycle– Social and political philosophy, philosophy of science, and psychology

• Key (perhaps the) economic influence on Thatcher, Reagan, Freidman– Policies based on his thinking were (and continue to be) implemented world-wide– At its core Hayek’s case is commonsensical and hence easy for politicians to

explain• Centralized planning (top down) is in opposition to personal freedom (bottom up) and

hence capitalism; hence centralized planning (or anything so ascribed) is un-American (i.e. against life, liberty and the pursuit of happiness)

– Common sense support is strengthened by the “proof” that market pricing is superior to centralized planning due to the fall of communism in late 1980’s

• Was and remains divisive along political lines – Glenn Beck Presents F A Hayek's "The Road to Serfdom"

First task in analysing: separate out political and philosophical posturing, as well as the attacks and responses from the economic claims in question


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Article Claims (1 of 2)

1. The key economic problem, the management of material scarcity, is an information management problem• Who has how much information, of what kind, when, and how

do they obtain and know it

2. Central planning could conceivably have sufficient scientific* knowledge, but can never have sufficient social knowledge held by each individual

3. The social knowledge of individuals looses its information content in aggregation– In time, it changes quickly, invalidating it before aggregation is

complete– By place, averages remove the very information required for

decisions

* Includes all economic, social, biological, physical and pure science knowledge – theoretical and applied

See speakers notes for suggested responses to these claims


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Article Claims (2 of 2)4. “The man on the spot” still needs some very limited scientific*

knowledge from outside his locality to decide what to do (p525, para 1)

– Prices convey this knowledge perfectly in all cases– Market / prices convey knowledge “equally” (p528 para 2)

5. The sum of actions of all persons acting in society for their individual benefit, based on in the information in prices plus their local social knowledge, yields the optimal plan for society (p526 para 1)

6. For natural capital the reason for a change in a price is not information required for an optimal decision (individually or for society) (p526, para 1)

7. Social science’s theoretical problem is that “civilization advances by extended the number of important operations which we can perform without thinking about them”

See speakers notes for suggested responses to these claims


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Lawn: Optimum vs. Maximum Scale of Economies within Bio-physical Limits• From our perspective article appears uncontroversial• Summary

– It is important to be clear about the nature and relationships between elements of the bio-physical and economic systems in order to provide the most appropriate kinds of information to enable the optimal decision making strategies and processes

• Claims:1. A macro-economy operating at the scale of earth’s bio-physical limits will not be

operating at the scale optimum for maximization of total and average human welfare

2. Determining the limit situation requires bio-physical assessment of required stocks and maximum sustainable flows

• There is no purpose of economic valuation in the limit since the required flow from these stocks happens outside the edge of the monetary economy

• It is possible for a centralized planning body to gather this information and set these limits (disagree with Hayek) (Implied)

• Hence, (Pigouvian) taxes can not be effective at setting and ensuring compliance to these limits (p380)

3. Determining the (smaller) optimal situation does require economic valuation, since this is a social / economic question

• Requires valuation of stocks and flows within the economy in order to allow market based pricing and incentive mechanisms to work (agree, at least partially with Hayek), albeit within imposed limits of bio-physical material and energy flows


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Lawn - Summary (Cont’d)4. By making clear distinctions between types of efficiencies and growths in the

bio-physical-economic system it is possible to clearly identify which socio-economic processes influence each, and hence provide highly directive policy recommendations

• Applicable socio-economic processes (p374-section 4) include:– Redistribution and institution building to impact “service efficiency” via un-cancelled benefits

(ratio 1)– Social and natural science technology research, development and application to impact

“maintenance efficiency” and “exploitive efficiency” and “growth efficiency” un-cancelled costs (ratio 2, 3, 4)

• Policy recommendations must be implemented in a specific sequence based on relationships between these efficiencies in order to stop rebound effect (Jevons paradox) (p379)1. Control throughput of non-solar energy and all matter via bio-physically quantified limits2. Ensure optimal distributional efficiency via rights, privileges, taxes, transfers, assurance

bonds, licenses3. Ensure increasing allocative efficiency via market prices and bio-physical valuation

5. There are limits not only to sustainable bio-physical stocks and flows, but also to maximum levels of psychic net income

6. Innovative policy instruments (assurance bonds, transferable birth licenses) are required and can be effective

• Article proof– Australian case study

reading appraisal - systems, info, prices (donahue, upward) v1.21

Economy & Finance