Does economic growth need to end?

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Undercover Economist

What are the limits to economic growth — and have we already recklessly exceeded them? Such questions were raised (again) recently by (another) alarming report about climate change. Many of my environmentalist friends are convinced that economic growth itself is the fundamental problem.

It was a timely moment, then, to give a Nobel Prize to two economists who’ve tackled that question head on. William Nordhaus and Paul Romer have tried to find ways to understand the invisible and sometimes ineffable causes and consequences of growth.

The modern world produces two things in abundance: carbon dioxide and ideas. Both swirl around, defying our attempts at control. We’d like more ideas but already have more than enough carbon dioxide. The future of humankind may depend on a strange race: can we keep living standards rising yet restrain consumption of resources and production of pollutants?

Economics being economics, Nordhaus and Romer received their prizes for technical achievements in economic modelling. Mr Nordhaus analysed the interaction between climate change and the economy; Mr Romer developed an elegant way to model innovation as an intrinsic part of the growth process, rather than falling from heaven. These are impressive intellectual accomplishments, but my fascination with both men concerns some of their more informal work.

In one of the economics papers I truly love, Mr Nordhaus tracked the price of illumination over the millennia, from the days when people could create light only with a campfire, through the time when they would use beef tallow — or clean, bright-burning spermaceti oil from whales — to the invention and improvement of incandescent bulbs.

Mr Nordhaus chopped and burnt wood, and tested antique lamps with a Minolta light meter. He concluded that in Babylonian times, a day’s hard work would produce enough to light a room for 10 minutes. By the end of the 20th century, the return on a day’s labour had improved from 10 minutes of light to 10 years. That is the kind of progress that gives one hope for us all.

The environmental toll paid for that light has also plummeted, which is good news for the whales and good news for us. Perhaps it really might be possible to enjoy the comforts of modernity without destroying the planet.

Since the early 1960s, UK carbon dioxide emissions per person have almost halved, yet the country’s economic output per person has tripled in real terms. This is partly due to moving production abroad, but most of it is from producing more value with fewer physical resources and a lot less coal.

That is where Mr Romer comes in. Like Mr Nordhaus, he is impressed by our capacity to make (and then take for granted) innovative progress and argues that there is room for much more. Consider the compact, self-repairing, mobile, renewable-resource-powered chemical reactor that we call a “cow”. Courtesy of evolution, it is vastly more impressive than human-designed facilities. This elegance, suggests Mr Romer, tells us that there is plenty of room for us to do things better.

That is also true for the institutions that produce new ideas. While Mr Romer’s prizewinning work makes particular assumptions about who pays for new ideas and who benefits when they are produced, his informal writing and policy work highlights that these things cannot be taken for granted. He wrote not long ago that “only a failure of imagination” allows us to conclude that in today’s universities, intellectual property rules and scientific norms we have perfected the way we develop and diffuse new ideas.

We should constantly be searching for better ways to do things — as Mr Romer himself did with a successful foray into digital learning, ahead of the trend, and later with his bold and controversial push for “ charter cities”, in which a country with weak institutions might outsource the governance of a greenfield city site to Canada or Norway.

In particular, we should do more to encourage innovation that attacks the climate change problem. It is conceivable that we will manage to solve the problem anyway, courtesy of dramatic progress in the cost of solar power and battery storage. If so, that is luck that we have done precious little to earn. The most obvious first step (among several worth trying) is a stiff tax on carbon dioxide emissions. That would encourage everything from clean energy to putting on a thermal vest in the cold.

There is still every reason to believe that material progress is consistent with the survival of the ecosystem. Human ingenuity is astonishing. It would be nice if policymakers tried harder to direct it toward low-carbon energy.

If policymakers matched climate change talk with action, my guess — just a guess — is that we would find that the transition to a vastly cleaner economy is smooth. I realise that my friends mean well when they demand that economic growth must stop, and soon. But I am pretty sure that they are wrong — and that their pessimism merely convinces others to do nothing.

Written for and first published in the Financial Times on 12 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback, and coincidentally the final, triumphant chapter is all about Bill Nordhaus’s work on the cost of light. Feel free to order online or through your local bookshop.

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Exploitative algorithms are using tricks as old as haggling at the bazaar

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http://timharford.com/?p=4843

Undercover Economist

A few years ago I received a text message from my mobile phone network informing me of the good news that I was already on the cheapest possible tariff. They should have let sleeping dogs lie: I called their bluff, and within minutes they offered a cheaper one. Another time, I quit only to receive phone calls pleading for forgiveness and offering me an iPad if only I’d come back. It was like being in an emotionally abusive relationship with Santa Claus.

Nobody wants to feel that they are being taken for a fool. It is hardly surprising, then, that the UK business secretary Greg Clark has made some noise about his plans to scrutinise how firms may use big data or other digital tools to produce “abusive outcomes” such as exploiting loyal customers.

Another review is under way courtesy of the UK’s Civil Aviation Authority into how budget airlines “use algorithms” to seat families separately if they don’t pay extra for assigned seats. You and I don’t want to be on the sharp end of an exploitative algorithm, do we?

There seems no harm in having a good hard think about how well competition works in a data-rich age. Customers have new tools at their disposal to find the best deals; companies, in response, can pick off lucrative customers like stray wildebeest, offering hidden discounts to some, even targeting adverts and offers by sex or race.

Yet the striking thing about the concerns of consumer champions is that for all the digital window-dressing, this struggle is as old as haggling at the bazaar.

When companies take time and trouble to make their wares less attractive, we call this “product sabotage”. Printers may come in a high-cost professional version and a lower-cost home version with a chip to slow it down. “Value” supermarket pasta or rice is packaged to look like famine relief. And airlines may split families who do not pay extra — a practice that hardly requires a mysterious “algorithm”.

In each case, the company is seeking a premium from premium customers while grasping for volume by offering low prices to the masses. In order to achieve both goals, it may need to damage the mass-market offering. If the cheap product is insufficiently dreadful, the risk is that even wealthy customers may buy it.

The economist Jules-Emile Dupuit spotted an example in 19th-century France. “It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage . . . that some company or other has open carriages,” he wrote of the railways. “What the company is trying to do is prevent the passengers who can pay the second-class fee from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich.”

The problem, then, is more than 150 years old. And it is not clear that the situation would be improved by insisting on equal treatment for all passengers. The railway company (or airline) might then offer only the first-class service at the first-class prices, perhaps even higher.

This is aggravating, no doubt. But the root of the problem is that the company has some market power, which allows it to squeeze customers and raise prices. The product sabotage is the symptom — and not necessarily a harmful one.

What of the idea that loyal customers are exploited rather than rewarded? That was my experience with the phone companies, but the infuriating practice is, again, not new. Every time I shave I can praise King Camp Gillette for inventing the disposable razor blade, and curse him for embracing the pricing model of cheap razor, expensive blades. What is that, if not a penalty for loyalty?

In truth the word “loyalty” leads us astray here. Any profit-seeking company will want to exploit customers who never walk away, so considerable effort is devoted both to identifying those customers and to inducing them not to look elsewhere.

“Loyalty cards”, whether an airline gold card or a rubber-stamped bit of cardboard from your local espresso bar, are designed to persuade high-volume, high-value customers both to identify themselves and to stick around. The result is a less competitive market in which everyone pays a higher price.

It is possible that in the initial scramble to sign up new customers, companies reward them so lavishly as to compensate them in advance for years or decades of locked-in high prices. But it’s not likely.

Who loses out from such behaviour? Understandably, we worry about “vulnerable” consumers. But for the companies, their target is clear: they will try to price-gouge the customers most likely to pay. Often, those customers will be rich and busy, while the ones who enjoy the bargains will be poorer and have more time to shop around. That is no calamity. When the victim is a lonely octogenarian in the early stages of dementia, the cat-and-mouse game between producer and consumer takes on a cruel and tragic edge.

Regulators are right to be vigilant. Still — the very fact that such tricks are as old as commerce itself suggest that we will not succeed in stamping them out. Buyer, beware.

Written for and first published in the Financial Times on 5 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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