Showing posts with label december 2012. Show all posts
Showing posts with label december 2012. Show all posts
Monday, 10 December 2012
Saving Economics from the Economists
by Ronald Coase, December 2012
Harvard Business Review
Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship. The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate.
That was not the case in the past. When modern economics was born, Adam Smith envisioned it as a study of the “nature and causes of the wealth of nations.” His seminal work, The Wealth of Nations, was widely read by businessmen, even though Smith disparaged them quite bluntly for their greed, shortsightedness, and other defects. The book also stirred up and guided debates among politicians on trade and other economic policies. The academic community in those days was small, and economists had to appeal to a broad audience. Even at the turn of the 20th century, Alfred Marshall managed to keep economics as “both a study of wealth and a branch of the study of man.” Economics remained relevant to industrialists.
In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter. Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.
This separation of economics from the working economy has severely damaged both the business community and the academic discipline. Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions. In times of crisis, when business leaders lose their self-confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment.
Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates. But because it is no longer firmly grounded in systematic empirical investigation of the working of the economy, it is hardly up to the task. During most of human history, households and tribes largely lived on their own subsistence economy; their connections to one another and the outside world were tenuous and intermittent. This changed completely with the rise of the commercial society. Today, a modern market economy with its ever-finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the working of markets and firms across various boundaries. At a time when the modern economy is becoming increasingly institutions-intensive, the reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy.
It is time to reengage the severely impoverished field of economics with the economy. Market economies springing up in China, India, Africa, and elsewhere herald a new era of entrepreneurship, and with it unprecedented opportunities for economists to study how the market economy gains its resilience in societies with cultural, institutional, and organizational diversities. But knowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.
Harvard Business Review
Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship. The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate.
That was not the case in the past. When modern economics was born, Adam Smith envisioned it as a study of the “nature and causes of the wealth of nations.” His seminal work, The Wealth of Nations, was widely read by businessmen, even though Smith disparaged them quite bluntly for their greed, shortsightedness, and other defects. The book also stirred up and guided debates among politicians on trade and other economic policies. The academic community in those days was small, and economists had to appeal to a broad audience. Even at the turn of the 20th century, Alfred Marshall managed to keep economics as “both a study of wealth and a branch of the study of man.” Economics remained relevant to industrialists.
In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter. Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.
The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate.
This separation of economics from the working economy has severely damaged both the business community and the academic discipline. Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions. In times of crisis, when business leaders lose their self-confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment.
Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates. But because it is no longer firmly grounded in systematic empirical investigation of the working of the economy, it is hardly up to the task. During most of human history, households and tribes largely lived on their own subsistence economy; their connections to one another and the outside world were tenuous and intermittent. This changed completely with the rise of the commercial society. Today, a modern market economy with its ever-finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the working of markets and firms across various boundaries. At a time when the modern economy is becoming increasingly institutions-intensive, the reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy.
It is time to reengage the severely impoverished field of economics with the economy. Market economies springing up in China, India, Africa, and elsewhere herald a new era of entrepreneurship, and with it unprecedented opportunities for economists to study how the market economy gains its resilience in societies with cultural, institutional, and organizational diversities. But knowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.
Resource Futures
Resources Futures
Chatham House ReportBernice Lee, Felix Preston, Jaakko Kooroshy, Rob Bailey and Glada Lahn, December 2012
Download Executive Summary here
Summary
- The spectre of resource insecurity has come back with a vengeance. The world is undergoing a period of intensified resource stress, driven in part by the scale and speed of demand growth from emerging economies and a decade of tight commodity markets. Poorly designed and short-sighted policies are also making things worse, not better. Whether or not resources are actually running out, the outlook is one of supply disruptions, volatile prices, accelerated environmental degradation and rising political tensions over resource access.
- Fears of resource scarcity are not new. On many occasions, higher rates of investment and improved technology have resolved the problem of the day, though often with additional environmental and social costs. With the maturation of technologies to access non-conventional gas and oil, as well as the global economic downturn, some analysts suggest that the resource boom of the past decade is coming to an end – especially in the extractive industries – and that resource-related tensions will ease.
- The hard truth is that many of the fundamental conditions that gave rise to the tight markets in the past ten years remain. In the case of food, the world remains only one or two bad harvests away from another global crisis. Lower prices in the meantime may simply trigger another bout of resource binge, especially in the large and growing developing countries.
- This report focuses on the new political economy of resources. It analyses the latest global trends in the production, trade and consumption of key raw materials or intermediate products and explores how defensive and offensive moves by governments and other stakeholders are creating new fault lines on top of existing weaknesses and uncertainties.
- The report also proposes a series of critical interventions, including new informal dialogues involving a group of systemically significant producer and consumer countries ('Resource 30' or R30) to tackle resource price volatility and to improve confidence and coordination in increasingly integrated globalresource markets.
Further Resources
Interactive WebsiteThe report's website features an interactive digital tool that shows the emerging economies that have become major centres of resource consumption, joining existing economic powers. The tool also graphically illustrates global interdependencies; the concentration of production in a handful of countries; new producers set to join the scene; and the new wave of consumers. In addition, there are examples of likely political, economic and environmental disruptions.
Project on Resources Futures.
http://www.chathamhouse.org/
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* Many leave Doha conference in despair
By Barbara Lewis and Alister Doyle
DOHA, Dec 9 (Reuters) - At the end of another lavishly-funded U.N. conference that yielded no progress on curbing greenhouse emissions, many of those most concerned about climate change are close to despair.
As thousands of delegates checked out of their air-conditioned hotel rooms in Doha to board their jets for home, some asked whether the U.N. system even made matters worse by providing cover for leaders to take no meaningful action.
Supporters say the U.N. process is still the only framework for global action. The United Nations also plays an essential role as the "central bank" for carbon trading schemes, such as the one set up by the European Union.
But unless rich and poor countries can inject urgency into their negotiations, they are heading for a diplomatic fiasco in 2015 - their next deadline for a new global deal.
"Much much more is needed if we are to save this process from being simply a process for the sake of process, a process that simply provides for talk and no action, a process that locks in the death of our nations, our people, and our children," said Kieren Keke, foreign minister of Nauru, who fears his Pacific island state could become uninhabitable.
The conference held in Qatar - the country that produces the largest per-capita volume of greenhouse gases in the world - agreed to extend the emissions-limiting Kyoto Protocol, which would have run out within weeks.
But Canada, Russia and Japan - where the protocol was signed 15 years ago - all abandoned the agreement. The United States never ratified it in the first place, and it excludes developing countries where emissions are growing most quickly.
Delegates flew home from Doha without securing a single new pledge to cut pollution from a major emitter.
So far, U.N. climate talks have missed just about every deadline. The rich nations of the world promised two decades ago to halt their rise in greenhouse gases. They failed. Next, they promised a sequel to Kyoto by 2009. They failed again.
Now they have a 2015 deadline to get a new global, binding deal in place, to enter into force after the extension of Kyoto expires in 2020. For the first time, it would apply to rich and poor countries alike. But with the world's nations divided over who must pay the cost, the task of reaching accord seems beyond the capabilities of the vast corps of international delegates.
Meanwhile, the world's weather is only getting more unstable. As the Doha talks dragged on, Typhoon Bopha in the Philippines left nearly 1,000 people dead or missing.
Hurricane Sandy last month was a reminder that even rich countries are not safe from extreme weather, which scientists say will become ever more common as the world heats up.
PROGRESS AT GROUND LEVEL
A series of reports released during the Doha talks said the world faced the prospect of 4 degrees Celsius (7.2F) of warming, rather than the 2 degree (3.6F) limit that nations adopted in 2010 as a maximum to avoid dangerous changes.
According to the World Bank, that would mean food and water shortages, habitats wiped out, coastal communities wrecked by rising seas, deserts spreading, and droughts both more frequent and severe. Most impact would be borne by the world's poorest.
"The alarm bells are going off all over the place," Alden Meyer, of the Union of Concerned Scientists, said. "We are in a crisis and treating it like a process where we can dither away for ever."
Action at ground level has had a positive impact, even as the U.N. dithers. Investment in carbon-free renewable energy hit a record $260 billion in 2011.
In the United States, the discovery of techniques to produce natural gas from shale has cut the cost of gas, which has reduced emissions from the world's biggest polluter by replacing coal, a bigger carbon emitter, for power generation.
But although U.S. emissions - nearly a quarter of the world's total - have fallen, for the world as a whole this year they are expected to rise by 2.6 percent, up by 58 percent since 1990. Emerging economies led by China and India account for most of the growth.
Although frustrated by days and nights of haggling, ministers still back the United Nations as part of the solution.
"It's clear to me that this process is the only global framework we have and since this is a global problem, it has to be addressed globally," Denmark's Energy Minister Martin Lidegaard told Reuters.
"But obviously, this can't stand alone. Nations can't continue to hide behind the process. There's a direct link between what we deliver at home and here. We desperately need to combine action by regions, municipalities, citizens with this global approach. That is becoming more and more evident."
Negotiators say ultimately politicians - distracted by other events - need to become engaged.
"It (the environment) is no longer on the front page with the political and financial crisis. That is the reason why heads of state have to turn to this," the European Union's chief negotiator Artur Runge-Metzger said.
CONVERTS
The conference is an easy target for cynics - not least because it was held in Qatar, a desert kingdom that exports carbon-producing fossil fuel and uses the proceeds to fund a lavish lifestyle for many of its 2.5 million people.
A country that burns fuel to desalinate water and build golf courses in the desert seems like an odd place to talk about curtailing consumption. But supporters say bringing producers like Qatar into the consensus for change is a step forward.
Business leaders are also getting involved.
"A lot of CEOs from the region have turned up. A lot of them are talking about sustainability and resource efficiency. That's no longer a dirty word," said Russel Mills, global director for energy and climate policy at Dow Chemical Co.
Dow, like many other big industrial firms, keeps a close eye on U.N. carbon policy because of the United Nations' role as "a kind of central bank" for pollution allowances.
The most developed carbon trading scheme is the European Union's, which has lurched from crisis to crisis. The value of EU Emissions Trading Scheme permits sank to a record low this month under the burden of surplus allowances during a recession.
But other jurisdictions such as Australia, California, South Korea and even China believe they can learn from Europe's mistakes and are developing their own emissions trading. Such schemes could be the planet's best hope of survival, and the United Nations is likely to play a role.
"Economy-wide carbon pricing, whether carbon taxes or cap and trade, is the only approach that can conceivably achieve the targets scientists advocate," Robert Stavins, a professor of business and government at Harvard in the United States, said.
"Also, it will be most the cost-effective and therefore in the long run the most politically-viable approach."
Still, even with the best of intentions, U.N. diplomats are unlikely ever to deliver change at the pace scientists seek.
"Science is demanding immediate and drastic action," Christiana Figueres, head of the U.N. Climate Change Secretariat, told Reuters. "Policy, economics and financing cannot move in drastic fashion