Monday, May 28, 2007

The burning world

"The difference between science and economics is that science attempts to understand the behaviour of nature, while economics attempts to understand the behaviour of models. And many of these models have no relation to any state of nature that has ever existed on this planet."

That, in a nutshell, is the message of Thomas Legendre's remarkable novel The Burning, recently published in paperback in the UK. It's a campus novel which embeds an unorthodox economic polemic inside the usual academic and sexual shenanigans. Apart from some intrusive stylistic tics, it's a much more engaging and well-written story than one initially expects from the introduction of the protagonist:
His name was Logan Smith and he had just earned a Ph.D. in Economics at the University of Pennsylvania and he wasn't going to sleep in his hotel room tonight.

But it's this embedded critique of the neo-classical orthodoxy that distinguishes the book (although, perhaps unsurprisingly, its cover and blurb obscure this major aspect of the work). Legendre draws on the work of Nicholas Georgescu-Roegen to argue that energy and entropy considerations impose fundamental limits on models of economic growth. Coming from a physics background, that does indeed seem obvious (I've often thought the same myself, at least), but it's not something you'll see acknowledged in mainstream economics in any significant way.

Legendre, via his fictional economics and astrophysics PhDs, focuses on energy constraints, but there's also increasing awareness - among materials scientists and geologists, if not among economists - about constraints imposed by specific limited resources. Research published in this week's New Scientist details the rapid consumption of limited resources of metals - from rare elements like gallium and indium, to commonplace materials like copper and silver. Ironically, this places severe limitations on the spread of clean technologies such as solar panels and fuel cells, as well as many other growth technologies:
as [Tom Graedel of Yale University] points out in a paper published last year (Proceedings of the National Academy of Sciences, vol 103, p 1209), "Virgin stocks of several metals appear inadequate to sustain the modern 'developed world' quality of life for all of Earth's people under contemporary technology." And when resources run short, conflict is often not far behind.

Of course, economics has its supply-and-demand models for this sort of thing, but the nice clean orthodox theories generally don't consider the implications for macro growth, or the possibility of technological limitations, or the general human mess of it all. In a real ashes-to-ashes detail, researchers are looking at reclaiming platinum, emitted in trace quantities from vehicle catalytic converters, from the dust accumulating in road-sweepers.

Less scrupulous operators are already responding to scarcity-driven price rises for some common metals through some creative reclamation. In another detail that would fit nicely into a moderately apocalyptic novel, the Guardian today reports that copper thieves, stealing cables and pipes for scrap value, are causing havoc for railway operators and other infrastructure providers, and are even being blamed for a gas explosion that destroyed a house in Bradford. The metal's likely destination is China, as that colossal country invests in its own infrastructure in a bid to reach US levels of production and consumption. At this rate, we're going to need a bigger planet.

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Friday, May 25, 2007

Cleantech bubbles again

Following the recent cleantech report from US analysts Lux Research (as mentioned below), Rob Day of the excellent Cleantech Investing blog sits down with Lux's Matthew Nordan to talk about possible bubbles:

It’s certainly true that the press loves downside stories. We’ve tried to be pretty specific about the two subsegments where we see an excessively high ratio of money and enthusiasm to opportunity: solar and biofuels. It’s hard to look at, for example, New Enterprise Associates’ pursuit of SolFocus and not see flashbacks to the Internet in the late 1990s[...]
Solar and biofuels get outsized attention because they are easy to understand (everyone’s seen a solar cell and everybody’s pumped gas), they’re both experiencing big technology shifts (crystalline silicon to thin-film and corn/cane to cellulosic), they both have government incentives and news flow working in their favor, they both have established valuation comparables (you’re not creating a new category), and they both have enormous headroom for growth – solar was 0.02% of U.S. energy last year! There aren’t many other subsegments where all of these factors line up.

A very good point. Not that this particular corner of the press is overly fond on 'downside stories', of course...

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Monday, May 21, 2007

Ride a black swan

I've just been reading Nassim Nicholas Taleb's long-awaited new book, The Black Swan: The Impact of the Highly Improbable (I say long-awaited - New Scientist was plugging it as imminent nearly a year ago, and Taleb manages to get an apology for lateness into the text itself).

As the follow-up to Taleb's landmark Fooled By Randomness (a book whose ideas are sadly more widely referenced than acted on), it's been getting plenty of press - for example, this by Oliver Burkeman in the Guardian - so I don't need to repeat its arguments here (basically it's all to do with non-normal distributions for many events and phenomena, not least asset price movements). It covers more ground than the earlier book and is perhaps a bit less coherent, but it's still a pretty great read with a much-needed message. Remarkably for a 300-page polemic about statistics and orthodoxies, it's never dull. Actually, I'm wondering whether I should be worried that I found the closing technical section - which Taleb recommends that most readers can happily skip - the most interesting and provocative.

Taleb firmly places his chips with Benoit Mandelbrot, to whom the book is dedicated, and his work on scaleable distributions. For more on this and Mandelbrot's other work in economics, see my interview with the man himself from 2003.

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Carbon politics, and alternative introductions

As always, some interesting papers in the new issue of the Post-Autistic Economics Review.

Donald MacKenzie of the University of Edinburgh discusses (in a paper originally published in the London Review of Books) the political economy of emissions trading, a subject I discussed immediately below. It's an interesting look at the political machinations behind the introduction and implementation of such schemes, notably the US sulphur-dioxide programme and the more recent European Emissions Trading Scheme. He doesn't spend much time on the pros and cons of trading versus the alternative approach of taxation, apart from noting the greater political difficulties of the latter:
What pushed Europe towards trading rather than the initially preferred carbon tax is in good part an idiosyncratic feature of the political procedures of the European Union. Tax measures require unanimity: a single dissenting country can block them. Emissions trading, in contrast, counts as an environmental, not a tax matter. That takes it into the terrain of ‘qualified majority voting’ [...] A plan for a Europe-wide carbon tax had foundered in the early 1990s in the face of vehement opposition from industry and from particular member states (notably the UK), and its advocates knew that if they tried to revive it the unanimity rule meant they were unlikely to succeed.

MacKenzie also addresses some of the instinctive objections to emissions trading:
many people, especially on the political left, have an instinctive dislike of the idea of emissions trading. Amongst its roots is a variant of what the economic sociologist Viviana Zelizer calls the ‘hostile worlds’ doctrine. She’s concerned with the worlds of economic relations and of intimacy. There, the ‘hostile worlds’ doctrine is that the intrusion of economic considerations corrupts intimacy, and conversely that kinship and other intimate relations need to be stopped from corrupting what should be impersonal economic transactions [...] In my view, Zelizer’s open-mindedness should also be applied to emissions trading. Just as economic relations and intimacy aren’t necessarily at odds, we shouldn’t assume a priori that market pricing is detrimental to environmental stewardship.

Meanwhile, the PAER leads with an update from Arjo Klamer, Deirdre McCloskey and Stephen Ziliak on their alternative introductory textbook for economics, The Economic Conversation:
We want to produce a book that reflects the actual conversation of economics, Samuelsonian to Post-Autistic. Our web site intends to nurture an already worldwide community of teachers and students who believe there's more than one way to skin an intellectual cat - and that a fair and public hearing of the alternatives is crucial to the health of the economic conversation.
We don't expect to be the next Samuelson. Market share would be nice - we openly admit to a profit motive! - but it’s not our main goal. After all, that's one of the leading points in the Post-Autistic movement, that human goals are multiple and cannot be reduced in most cases to Prudence Only or to Mr. Max U or to any of the other formulas for sociopathy recommended by the Samuelsonians.

Sounds like exactly the kind of introductory text I wanted not too long ago.

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Tuesday, May 15, 2007

Carbon trading - not all that great

The Guardian reports on Blair-backed proposals for a new generation of international carbon trading schemes to help reduce greenhouse gas emissions. Even Dubya's close to getting on side on this one, apparently:
The plan would involve setting up a network of carbon trading schemes and is one of five main proposals drawn up by the Germans and British ahead of the G8 summit next month[...]
Under the new trading plans, China and India would not face binding targets; instead they would be allowed to continue their extraordinary economic growth in exchange for a commitment to establish national cap and trade schemes to cover some of their most heavily polluting industrial sectors, such as metals processing and cement manufacturing.
Companies in these sectors would be granted permits to emit carbon dioxide and other gases, in the hope they would rather reduce pollution than pay for permits. The idea is based on a scheme covering power generators and heavy industry that operates in Europe under Kyoto.
Further cap and trade schemes - this time with binding targets and penalties for non-compliance - would be set up to cover carbon pollution in developed countries, including the US and Australia, which have refused to sign up to Kyoto. These could be along national, regional or sectorial lines, officials said, with carbon credits eventually traded between different schemes using exchange rates similar to currency conversions, with the goal of placing a global price tag on pollution.

Last week's Economist also had a favourable story on carbon trading schemes, based on a recent World Bank report:
The benefit of this approach over regulation is that the businesses which can reduce their emissions at the lowest cost do the bulk of the adjustment. Perverse incentives that can often hamper environmental regulations may also be avoided.
These schemes are large, and growing. Last year, carbon-trading markets grew to $30 billion, three times bigger than the previous year. Trading was dominated by permits issued under Europe’s emissions trading scheme but a voluntary private market worth $100m has also evolved.

Funnily enough, many economists (primarily in the US) are arguing that such a Coasian rights-based approach isn't actually all that suitable for tackling global greenhouse gas emissions, largely because of the size and complexity of the market. More attention is again being paid to straight taxation on carbon dioxide and the other GHGs, in something closer to the classic Pigovian approach.

William Nordhaus of Yale University, for instance, argues in this discussion paper that the structure of costs and benefits of the climate change problem innately favour a price-based approach - a combination of non-linearities in emission reductions, costs and benefits, and remaining (and probably unavoidable) uncertainties means that trading schemes are likely to create much more undesirable volatility in carbon pricing, reducing the effectiveness of any international scheme. Nordhaus rather advocates a harmonised carbon tax, "a dynamically efficient Pigovian tax that balances the discounted social marginal costs and marginal benefits of additional emissions". Such a tax would increase real carbon prices by between two and four per cent per annum, he estimates.

Inevitably, politics rears its head here. A globally harmonised carbon tax is likely to be resisted by governments protective of their national powers - given a choice between a carbon tax and a less efficient market scheme, policy-makers may opt for the latter as there is less obvious cost to the electorate. And in general, national policy-makers are likely to be deterred by the potential costs of implementing any pricing scheme if the benefits are unlikely to be felt before the next electoral cycle – or indeed in the next generation.

Meanwhile, carbon trading has been embraced by corporates who've figured that with a little lobbying resulting in less than perfect market design, as with the early European emissions trading scheme, it can be a nice little earner without actually requiring much work to clean up their act. And now it seems the White House is putting its weight behind such schemes. If I can be excused a touch of cynicism, it doesn't exactly inspire confidence in achieving the necessary reductions, does it?

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Cleantech bubbles on

Couple of weeks late on this one, but the Guardian only picked it up yesterday - further warnings about a developing cleantech investment bubble:
According to Lux Research, which has just completed a comprehensive report on the sector, "the warning signs of a bubble are flashing in the energy technology segment, where initial public offering values and venture capital deployments more than doubled last year – setting the stage for a boom and bust".
Lux reported around 930 startups in global solar energy and biofuels arena and that some 200 of them have received some venture capital money[...]
Says Michael Holman, a senior analyst at Lux: "I think from looking at the sheer amount of money that is being invested right now we have to think that a lot of that money is now chasing after some opportunities it wouldn't be in a more sober climate."
Later stage institutional investors have also been caught up in the hype. Lux reported that in the energy segment where IPO value rose from $1.6bn in 2005 to $4.1bn in 2006.

Lux press release here, and further info here.

As I mentioned below, I'll shortly be working on a dissertation examining share price characteristics in the UK listed cleantech sector. The worry isn't that the companies winning too much investment are actually crap, as was the case in the dotcom bubble, but that when the bubble bursts, some decent companies developing much-needed technologies will be taken down with it. The costs of the bubble bursting will be high - what it needs is just to have a some (clean) air taking out of it.

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Monday, May 14, 2007

Brown towns

Big Gordon puts sustainable regional development at the centre of his policy menu (presumably designed to help distance him from the less popular aspects of Blairism), with proposals for five new 'eco-towns' to be built on brownfield sites around the country.

It's a headline-grabbing initiative, combining leftish/green sustainability with property-owning rhetoric for Middle England. There's no doubt that more new homes are needed, and brownfield redevelopment is the only way to go, but one wonders if the initiative will include anything that wouldn't be happening anyway.

The first (and so far only) named site is an ex-MoD base at Oakington in Cambridgeshire, which was bought by English Partnerships for a 'sustainable' 10,000-home development last year. I'd be surprised if none of the schemes in the former South Yorkshire coalfields aren't swiftly adapted to join the programme, if it happens - maybe the housing development alongside the Advanced Manufacturing Park on the 750-acre Waverley site on the Sheffield/Rotherham borders, again headed by English Partnerships.

Might even consider moving for that. It'd make the dear lady wife's commute a lot shorter and, if the concept does catch on, there's surely a book to be written about the development of and life in a shiny green Brown town.

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Wednesday, May 02, 2007

Gamesmanship theory

Intriguing paper by Stuart Macdonald of the University of Sheffield and Jacqueline Kam of Bristol on the politics of journal publication in their own field of Management Studies. Shockingly, they find the whole area rife with gamesmanship, with who publishes what where apparently more important than the actual content.

From their abstract:
Pressure to publish in [quality] journals and the triumph of managerialism over professionalism in the modern university have undermined peer review. In consequence, the same old hands are publishing the same old ideas in the same old journals. Quality journals must be taken much less seriously if there is ever to be any real enthusiasm for new ideas from new blood in Management Studies[...] Cunning and calculation now support scholarship in Management Studies. Gamesmanship will remain common until the rewards for publishing attach to the content of papers, to what is published rather than where it is published. We propose a Tinkerbell Solution: without belief in the value of a paper in a quality journal, the game is no longer worth playing.
[Stuart Macdonald and Jacqueline Kam, 'Ring a Ring o' Roses: Quality Journals and Gamesmanship in Management Studies', Journal of Management Studies, 44, 4, 2007, pp.640-655]

Still, such gamesmanship doesn't seem entirely alien to the practice of Management. And of course, such practices couldn't possibly be so dominant in other fields - could they?

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