Per Bylund

Business Scholarship with a Swedish-Austrian Twist

Economics

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“Comparative Statics” and Global Warming

A “naive” part of economic science is called “comparative statics”. It is simply a mathematical way to analyze optimums – optimal production through optimal inputs, optimal outputs, and optimal profits. Since we do not yet have the tools to understand and thoroughly take all dynamic parameters to account when making decisions, this branch of economics makes decisions based on reasoning as:

if all parameters and variables are held constant except xi, then what xi should we choose to reach the optimum?

As a tool this may very well be useful, simply because all alternatives are utterly useless.

The major shortcoming of comparative statics is that it, as a tool for analysis and decision-making, provides guidance in an inherently dynamic world through inherently static means. It should be obvious that whatever the results of a comparative statics analysis, it is never correct. It does, however, provide a sense of “knowing” what happens and thus it is a basis for believed certainty in the environment, business or government body, where decisions are to be made.

What is important in a world of constant change is to make decisions, and to be as well-informed as possible. Not making a decision can often be more costly than making a decision that is wrong but can be corrected at a later time. Most businesses cannot continue functioning without making decisions, and thus the non-making of a decision generates costs and uncertainty for the time until the decision is finally made. The decision, in other words, is unescapable.

Such unescapable questions may be difficult to imagine, but they are not in any way uncommon. Imagine a business not making decisions such as:

  • – What output should we produce?
  • – How much output should be produced?
  • – How much input should be used?
  • – How should the production process be organized?
  • – How should our mix of labor and capital in the production process be?

It is quite easy to imagine what would happen to a business (or, for that matter, a government agency) that does not make decisions as to what to produce and how to produce it. It is also clear that not making a decision means whatever fixed costs still need to be covered, while extra costs are generated simply as an effect of the uncertainty caused by the non-decision.

Making a decision is thus beneficial, even if the decision itself is not the optimal decision. A poor decision is better than no decision, and correcting a bad decision may very well be less costly than the state of non-strategy arising from no decision at all. In this situation, comparative statics provides a means to make decisions that are not totally out of the blue. Based on the (faulty) assumption that all but the choice variable(s) can be fixed, one can mathematically calculate the optimum.

Sometimes having something to aim for is more important than knowing the target.

But comparative statics should not be accepted as a tool to discover The Truth. Understanding the limitations and shortcomings of this tool is essential for making the best use of it. Sometimes a business decision based the decision-maker’s hunch, but perhaps taking the results of comparative statics analysis under consideration, is better than the “naked” comparative statics recommendation. The reason for this, as has already been mentioned, is the world being inherently dynamic, a fact that is reasonably a basis of the “hunch”.

Comparative statics is however not only a means used in economic science, it is in essence a tool used by all sciences to draw conclusions of data and make predictions about the future. This kind of analysis offers guidance, but does not deliver the truth about the world and should never be relied upon to 100%. It should rather be a tool used for assistance when other means for understanding the world are unavailable or provide nothing but absurd recommendations.

The problem of static models

Theoretically, a static model could approximate the real world if all important variables are considered and made part of the model. In the study of a well-demarcated business firm, for example, most parameters are already known. We know most of the variables that are important for the decision to be made, and they are all part of the analysis: prices of inputs and outputs, quantities of inputs and outputs, the technology used in the production process, etc.

What we do not know is the market for inputs and outputs, and so we make assumptions that it is always possible to get more inputs and sell more outputs. We also assume it is possible to throw away whatever outputs we do not need, so that making more than the optimum is not a problem in the production model. These assumptions are known to be only partly correct – we know, for instance, that the prices of inputs may go up or down if our demand for them increases, and we know that we might not be able to sell larger quantities of outputs without lowering the price.

But these assumptions, even though they are important and have known shortcomings, do more good than they cause harm to the analysis. There may be costs associated with throwing away outputs produced in excess of the optimum, but such costs may not have a great effect on our decision (after all, we do not want to produce excess goods anyway!).

The situation would be considerably worse if we did not know the landscape in which we are to navigate – if we didn’t know the major variables and parameters in the world of the business firm, we would not be able to make predictions. At all. In such a situation, in a dynamic world that we do not understand, comparative statics would not only be useless – it would be a tool causing nothing but destruction if relied on.

Comparative statics and climate models

The latter situation is in essence what we see in the climate research. Scientists in this field repeatedly assert that the climate system on earth is very advanced and that we do not yet fully understand it. Actually, we do not understand fully the basic mechanisms in the system – we cannot distinguish cause from effect, and we cannot identify which variables are more important. The sad truth is that we simply don’t know. But we are learning.

An obvious conclusion to be drawn about the study of climates is thus that models and tools sharing the characteristics of economics’ “comparative statics” method should prove worthless – potentially generating disinformation. Yet the climate hysteria and the alarmism about global warming and the “greenhouse effect” bases the predictions on such statistical models. The models, in turn, are based on unconfirmed assumptions and lack of understanding the basic mechanisms of the climate system.

This does not, however, mean that the study of climates is impossible in any way whereas economics is not. Climate change takes place in a system that is much more closed than the business firm – the climate system encompasses the Earth and the exogenous variables should be fairly known. Also, the climate system is in no way based on human beings acting, which – compared to economic science – should make climatology much less advanced and much more rule-based. What we study in a climate system are non-living automatic mechanisms, cause and effect nexuses.

The reason the climate system is not yet well-known is simply a result of the age of science. Whereas economics is a science that has literally been researched and pondered since the Ancient Greeks (if not before), the climate system has at best been studied for merely a century. The models predicting the climate system are based on temperature data collected only since the late 19th century – the models, methods, and predictions are therefore bound to include huge errors.

Actually, the climate debate supplies proof that this is so. We might think we know what is going on, but why then did people fear a “new ice age” in the 1970s and 30 years later they fear global warming? The global cooling bound to drag the world into another Ice Age was the scientific predicitons based on state of the art climate system models then, just like the predictions of floodings and a scorged Earth due to increased temperatures is what that very same field of research now claims is “true”.

Of course, we might consider the models now used much better than the models in the 1970s – we must, after all, have learned a lot in the three decades that have passed. And, indeed, we do know a lot more about the climate system today than we did 30 years ago. But the models still include quite a few blind spots. How does, for instance, magnetic radiation from the sun affect the climate system? This is a question not even asked just a few years back. But as anyone should know, the sun has a great effect on the habitability of this planet, the emergence and existence of life, as well as chronobiology.

Yes, the ices of the poles are melting. We know that. But we also know that the glaciers on the planet Mars are melting – and the melting on both planets seems to occur at the same time. That should tell us something.

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Illogical Free Market Logic

Matt Jenny of the Der freie Markt web site has translated one of my 2006 articles, originally published on Strike the Root, into German: Free Market Thinking: Not Applicable has become Denkweise des freien Marktes nicht anwendbar. 

Thanks to Matt I got a reason to go back and read this article, which is a rather short treatise on how “the free market” is used as argument in the political discourse. This topic is very interesting and extremely important, yet severely neglected in the libertarian discussion. Someone really should elaborate on it, so here’s a first attempt to do so.

The article mentioned above discusses a fundamentally important issue: what is the true meaning of “voluntary”? The immediate response to such a question would commonly be something like “a choice made according to the chooser’s individual interest (or apprehension thereof) without being restricted by other people using force.” Someone would plainly say it is whatever comes out of “free will.”

Well, to a certain extent I would agree. Most choices made according to the chooser’s own will would mean it is voluntary since it is a choice made without there having been force or threat thereof to make you choose it. In other words: if you would have chosen differently if you were allowed to choose freely, then it is not a voluntary choice. Most people would agree on this, but it really is the other side of the definition that is important: what you would not have chosen without being forced to.

Let’s say you have a number of options to choose from, what would constitute force in such a situation? What we’re looking at here is really what involuntary means, which might not necessarily mean the exact opposite of voluntary. I know how strange this sounds, but bear with me.

Choice, in its very essance, is always voluntary – having “no choice” does not exist in reality, only in our own minds. But from a political or philosophical this isn’t interesting. What is interesting is what there is to choose from. This is why we would say the choice was not voluntary if the most attractive options to the chooser are illegal, forbidden, or means you will get your ass kicked by that big guy over there.

Such involuntary choice-making does not necessarily mean there are fewer options available, but that the chooser’s ranking of the options has been forcefully tampered with. If someone says “go ahead and choose whatever you want, but if you choose number 32 I’ll kick your butt,” then that would mean there is an additional cost to number 32. That additional cost, in this case, is artificial since it is based on a rights violation – the person saying it is using the threat of force to make you choose in another way than you would have, had he or she not been there.

Thus, we could say involuntariness of choice exists where there is artificial, force-based cost added that will inevitably affect the way you rank the options.

An important part of this additional cost is often neglected: options that don’t even exist anymore, of which the chooser might even be ignorant, due to artificial, force-based cost added. What we have here requires a deeper analysis than the rather obvious definitions in the voluntary/involuntary discussion above. Could it be that a fully voluntary choice, i.e. a choice from a certain number of options made to 100% without added artificial, force-based cost to the decision, is still a forced decision?

The answer is yes if force has limited the options available to the chooser. This is where many free-marketeers often get lost: they argue a choice made with no force added to the direct choice-making must be voluntary. But the conclusion doesn’t follow from the premises in this piece of reasoning. It is like saying you voluntarily chose to eat your food without knife and fork – because someone had stolen your cutlery. Are you voluntarily eating with your hands? Hardly.

This reasoning is fully applicable on the so-called free market logic argument. Yes, a choice might be voluntary and so it should be allowed and respected in the free market, but if the number of options have been forcefully limited the choice is not voluntary. In other words, choosing to work in a lousy job because all better options no longer exists due to government regulations means it is not a voluntary choice. It may very well be the best option available (that’s why you choose it), but it isn’t voluntary – it is made as an effect of rights having been violated.

This is where the left has it right, and the “free market” right has it wrong.

Champions of neo-capitalist globalization like Johan Norberg, author of In Defense of Global Capitalism, frequently argue that globalization brings better choices to poor people of poor nations, and that there is nothing wrong with it. Contrarily, they argue, this is the great prosperity-creating power of capitalism – and it brings wealth to these people voluntarily.

I do agree that globalization has created a number of options for people in poor nations, and that these options often are better than the existing. But it still doesn’t mean that the choice to work for, for instance, Shell in Nigeria or Nike in Viet Nam is nothing but voluntary. Actually, the greatness of these opportunities is partly due to the immense regulation and taxation of all other options – the previously available options were simply what the state “allowed.”

The reason a job for Nike is so well paid in poor countries is because it is indirectly subsidized through the regulation of the local markets – were local entrepreneurs and businesses allowed to act freely in a freed market nobody would choose to work for Nike (the pay would simply be too low).

The fallacy of the argument is perhaps easier to understand when discussing the situation for most poor people in the western, so-called liberal democracies. These people are forced to take a number of lousy jobs without good pay in order to survive. Yes, they do choose to work hard for almost nothing in order to stay afloat and put food on the table for their families to eat, but a free market would not limit their choices to “take this shitty job and pay your taxes or live in a cardboard box in an alley.”

A freed market wouldn’t, to begin with, make people work for monetary payment so that they can pay their taxes. It would be perfectly possible to live off the land somewhere if that would be your choice – this isn’t possible today simply because you have to make money to pay for taxes. So what we have here is a regulated force-based economy that takes the self-sustaining live-off-the-earth option out.

The same force-virus injected in the economy by the state makes it literally impossible to go from practically nothing to something. It becomes much, much harder to “travel” from one class to another – the regulated economy provides so much fewer options to the chooser than a freed economy would, that some become so desperate from this situtation that they resort to crime.

So free-market logic isn’t necessarily applicable on the command economy we are experiencing. It would be perfectly alright to say that someone made a “voluntary” choice to take a job they don’t really like and that cannot really provide a sufficient salary from the options available. But as champions of the free market we must realize that this person would likely have chosen very differently had the opportunities of the freed market been available to him.

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The Importance of Illusions

After having spent 28 hours traveling I seem to remember most things in a kind of blur – they blend with each other in a haze, making it almost impossible to separate one event from another. One thing is however very clear, and that is, I’m afraid, the only memory that will remain weeks or months from now: security checks.

Copenhagen’s international airport Kastrup, where my journey started, is incredibly “secure” in the “many annoying checks of people and their properties” sense. I do not remember how many times I was checked or “sweeped,” my identity was in question, or my luggage was searched – but I know this happened many, many times.

Arriving at Atlanta international airport meant a few more checks, and to get to my connecting flight to St. Louis I, like everybody else, had to take off my belt and shoes to have them x-rayed. I reckon my carry-on was x-rayed four or five times going from Copenhagen in Denmark to St. Louis, my papers were checked five times, and I had to stand in line for hours (literally) only to get harassed by grumpy men and women in uniform.

The costs of this bid to make flying safe and secure can be nothing but enormous. It is, in a sense, flattering that so much time and money is invested to make my traveling between two cities safe. And with such extensive security one would have to feel safe and secure, wouldn’t one?

No.

The problem with these checks is that they are very costly while they at the same time are likely to be quite worthless. It does feel like security is “tight” when flying, but that is nothing but an illusion caused by the great number of stops where passengers and their luggage is checked.

There is no reason whatsoever to presume more terrorists (I assume terrorism is what they are trying to stifle with these check-ups) are stopped from carrying out their heinous deeds just because passengers’ luggage is check three or four times instead of one. Things don’t change simply because you decide to have another look at them – if there wasn’t a bomb in my bag a minute ago there won’t be one there two hours later either if I was in a controlled environment where it isn’t possible to find bombs. Also, my papers will be the same when checked by security officer #3 as they were when checked by security officers #1 and #2.

The only reason for having repeated checks is that the environment cannot be trusted – if someone is likely to get a bomb into the airport and give it to me, I would be able to have a bomb at security check #2 even if I had no bomb at security check #1. But this would also mean there is no reason to have security checks at all, since someone could pass a bomb to anyone at any time if this was the case.

So the security checks are really worthless unless the environment, in this case the airport, can be fully trusted to always be free of bombs (or whatever they are trying to be free of).

But this isn’t the only problem of these security checks – the real problem is that as soon as the checks are established, the real “bad guys” (whoever they are) will try other ways of accomplishing their goals (whatever they may be). It isn’t reasonable to assume a would-be hijacker will try to get a knife through the x-rays to hijack a plane – he or she would, if hijacking the plane is important enough (and I assume it is, otherwise they wouldn’t risk it), try other strategies.

If making a plane crash is the goal, getting explosives onto the aircraft might be a first thing to try. When it becomes harder to do this, other ways are tried. It might be easier to get a pilot and a fighter jet to shoot down the aircraft instead. And if that is too difficult one might try to shoot it down from the ground. Or the engines can be tampered with. Or the pilots can be fed a poison that will cause certain death in a certain time. If that doesn’t work, then one or many passengers could be infected with a virus causing nasty symptoms in a certain time frame that will cause panic on the aircraft.

The simple truth is: if there is a will, there is a way. Repeating the same procedure doesn’t make the procedure itself less likely to fail – it is rather the opposite: if a certain kind of control procedure is repeated, those wanting to avoid being spotted will have greater incentives to try other methods.

So what are the repeated security checks at airports really about – what or who are they for?

I think the increasing harassment of people traveling by air is nothing but a very expensive way of making people believe someone is doing something. There is fear involved in this issue on two levels: passengers’ fear of terrorism and the government’s fear of being accused for not doing enough.

Passengers’ fear of terrorism is based on the media’s over-reporting on the terror threats (you are, after all, many times more likely to die from a car accident or cancer than from terrorism), and this fear ultimately makes people call for security. Since airplanes were used in the terrorist attacks on 9/11, it is easy to think airplanes may be used in another such attack. This, in turn, makes the air transportation industry very exposed to threats that under normal circumstances could and should be ruled off. But if a greater part of the market fears there is a lack of security when flying great losses can result but from ill-founded rumors that “something” might happen. There is simply a lot at stake; a whole industry can die out.

This risk is of course of importance to those running and profiting from the airlines. But it is at least as important for the government, since a sudden drop in market demand for airline services means a huge technological retrogression in society (which means bad publicity for “the nation”) as well as increased unemployment creating a basis for increased social conflict and causing greater pressure on public finances.

It should thus be concluded that from the point of view of government and airline capital “something” must be done. It should also be concluded that it doesn’t really matter, at least not to the two interests mentioned, that this something is effective, but it must at least create a feeling of security when flying.

If everybody about to board an aircraft is stopped once and asked for papers, they will realize that something is done. But if they are stopped multiple times, when entering the airport, when approaching and entering the gate, and when boarding the plane, then the apprehension of these controls is not that the one and same thing happens over and over – what most people will feel as a result of repeated checks is that security is tighter than if they were stopped only once.

Looking at this from a different point of view, it becomes obvious that the “tightened security” at our airports is nothing but a costly attempt to create an illusion of security rather than a real strategy to make flying safe. The fact is that government-enforced security at airports is fundamentally a reaction to an event that has already taken place. There is no reason to believe the crooks will use the same method again even though it was, in their eyes, successful; they should be more likely to use another – and thus less expected – strategy next time.

What is needed is thus a proactive approach where intelligence efforts and knowledge of what these groups might do next should be important. Doing the same kind of routine multiple times at airports should have minimal effect on security.

But the illusion does serve a purpose: it creates an alibi for the government and the airline corporations. The latter could lose everything from another such attack while the former can gain a whole lot if people’s fears are translated into support for increased powers to “do something,” which means abolished limitations on government powers and restricted or repealed political rights of the citizenry.

The illusion of tighter security at airports is thus a result of mainly two things: the airline corporations playing on the defense to keep the industry alive, and government playing on the offense to gain powers. The costs of this are paid for by passengers spending hours having their bodies and bags searched and their privacy intruded, and taxpayers having to pick up the bill.

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