What will government look like after the fourth revolution?

“Democracy in Australia is sinking into a self-destructive spiral. The sickness at its heart is the demise of individual responsibility and expecting more from the state when the national interest says state responsibilities should be cut, not increased. Our democratic system now works to undermine economic progress.”

That is how Paul Kelly, Australia’s most widely respected journalist, concluded an article in The Australian a few weeks ago. The article entitled “Crisis time: We can take a stand – or solve a problem” (probably gated) was published on March 29.

As far as I can see there hasn’t been much public reaction to this article. Only a small proportion of the population read articles of this kind, and most readers would still feel complacent about the Australian economy and the future of democracy in this country. It will become easier to convince people that they should be alarmed about the self-destructive spiral when the crash is imminent. The malfunction began over a decade ago and it might be another decade, or more, before crunch time.

Some other informed commentators take a more optimistic view than Paul Kelly. For example, Gary Banks, former chairman of the Productivity Commission, acknowledges that policy development is now a problem. He has suggested the a “loss of policy capability within government – Commonwealth and State - is palpable and multidimensional”. He is hopeful, nevertheless, that the problem can be ameliorated by improvements to policy-making processes:

“Yet, if this diagnosis is correct, there is hope. Unlike the adverse changes evident in our parliaments and media, changes which are arguably reflective of changes in society itself, the decline in capability is not irreversible. Unless it is turned around, however, we cannot tell whether reform has truly become ‘too hard’, as many now seem to assume”.

A few years ago I was similarly optimistic. I still support efforts to improve policy capability within government. I agree with Gary that improvements to the policy-making system are an essential pre-condition for improvements in policy. However, I doubt whether much economic reform will be achievable until we see substantial changes in the rules of the political game that will provide political representatives with appropriate incentives to pursue the broader interests of the community, rather than the narrow interests that too many of them currently seek to protect. And, unfortunately, that seems unlikely to occur until a major economic crisis is upon us.

In his article, Paul Kelly drew inspiration from The Fourth Revolution: The global race to reinvent the state, by John Micklethwait and Adrian Wooldridge. 

The authors of this book make a case that western societies have seen three and a half revolutions in government over the last four centuries:

• The rise of the nation state in 17^th century Europe. Europe’s network of competing Leviathans threw up a system of ever-improving government.
• The rise of the liberal state in the 18^th and 19^th centuries following the American and French revolutions.
• The advent of the welfare state in the 20^th century.
• And the half revolution in the 1980s, associated with economic reforms promoting a partial return to classical liberalism in a few countries.

This history of the revolutions in government seems broadly accurate. Micklethwait and Wooldridge associate each of these revolutions with a notable contributor to ideas about government. In sequence, the four revolutionary thinkers they chose were: Thomas Hobbes, J S Mill, Beatrice Webb and Milton Friedman. It is possible to quibble about that choice, but I will refrain. I want to focus here on what the authors have to say about the fourth revolution.

The authors argue that the fourth revolution is occurring as a result of a confluence of three forces: failure, competition and opportunity.

• The West has to change because it is going broke:“Debt and demography mean that government in the rich world has to change. … For the foreseeable future the Western state will be in the business of taking things away – far more things than most people realize”
• Competition from the “Asian alternative” is prompting change:“Chinese-oriented Asia offers a new model of government that challenges two of the West’s most cherished values: universal suffrage and top-down generosity. This ‘Asian Alternative’ is an odd mixture of authoritarianism and small government, best symbolized by Singapore’s long-term ruler, Lee Kuan Yew”.
• There are opportunities to “do government” better: “New technologies offer a chance to improve government dramatically, but so does asking old questions such as the most basic question of all: “What is the state for?”

So, what will government look like after the fourth revolution? The authors would like to see greater individual liberty emerging as a consequence of reforms that reduce government spending and relieve governments of some of their responsibilities. I would too, but we need to be careful not to confuse what we hope will happen with what we see as most likely to happen.

Micklethwait and Wooldridge published their book a couple of years ago, but it was apparent even then that many voters were becoming cynical about politicians representing the mainstream political parties. The European Union had become a breeding ground for populists who were speaking out against “incompetent and arrogant elites”. Even then, that cynicism was also apparent elsewhere. The authors suggested:

“Such cynicism might be healthy if people wanted little from the government. But they continue to want a great deal. The result can be a toxic and unstable mixture: dependency on government on the one hand and disdain for government on the other”.

Perhaps the victories that the populists appear to be winning at the moment will cause the elites to become less complacent, and less incompetent and arrogant. The political cycle may be turning, as Tyler Cowan suggested in The Complacent Class (recently discussed here). Over the longer term, the elites may come to embrace dynamism, rather than protection of their professional turf, so we might see the battle lines being drawn more clearly between dynamism and stasis. That might correspond broadly to Tyler Cowan’s depiction of the political battle as between talent (human capital) and authoritarianism, stemming from underlying fears of disruption. Since this is also a battle between talented young people and fearful old people, in my view the odds favour talent in the longer term.

It would be easier to predict what government will look like after the fourth revolution if some western democracies provided models of a successful revolution in government. Micklethwait and Wooldridge suggest that reforms in Sweden, necessitated by economic crisis, have produced “a highly successful update of the old middle way”. New Zealand provides a model of what effective government can achieve following a natural disaster. The response to crisis in Sweden and New Zealand provides better protection for citizen’s rights than would adoption of something like Lee Kuan Yew’s model of technocratic government. However, democratic government in Sweden and New Zealand might well revert, within a few years, to taking upon itself more responsibilities, until another economic crisis ensues.

It seems to me that the fourth revolution is likely to involve changes in the rules of democratic politics. This might require constitutional change in some countries, but revolutionary change might be possible in Australia and other countries similarly afflicted by voter cynicism and political fragmentation, if the major parties were to adopt a convention for accountable government. What I have in mind is that the major parties should agree that whichever party wins government has a mandate from the people to implement the tax and expenditure policies it has taken to the election. What could be more democratic than that?

Does Henry George have the answer to funding basic income?

The idea of a government-funded basic income or social dividend has been around for at least a couple of centuries. It has been supported by some prominent advocates of individual liberty as well as by collectivists. For example, it was proposed as an alternative to existing welfare systems by Milton Friedman in the 1960s (as a negative income tax) and by Charles Murray (as an unconditional basic income for all adults) in In Our Hands, published in 2006. More recently Elon Musk among others, has suggested a government-provided unconditional and universal basic income (UBI) as a solution to the hypothetical problem of ensuring that people have adequate incomes when their jobs are displaced by automation.

That problem is hypothetical because it seems reasonable to expect - at a national level and over the longer term - that jobs displaced by automation will be replaced by more highly paid jobs. That is what happened with jobs displaced by mechanisation during the 19^th and 20^th centuries. No persuasive evidence has emerged to support the view that the effects of automation will differ in that respect. Nevertheless, UBIs might appear to be an attractive social/political insurance policy, just in case automation does result in widespread loss of income-earning opportunities.

The idea that one day most of the population will depend on UBIs as their main source of income strikes me as inherently unappealing. Historically, individual human flourishing has been closely related to the self-respect that comes from earning a living, which is absent when people are able to live on “sit-down money” – an appropirate term used by some Australian aborigines to describe welfare benefits.  Robert Colvile has provided references to research relating to disincentive impacts of UBIs in a recent FEE article.

I want to focus here on a question of practicability: Is there some easy way for a government raise sufficient additional revenue to fund a UBI to reinforce expectations that the benefits of future economic growth will be widely shared? How could substantial additional revenue be raised without stifling the economic growth process? As I contemplated those questions the thought crossed my mind that if I was back working in the Australian public service (heaven forbid!) and was asked to recommend a way to raise more tax revenue, I might suggest more reliance on taxes on the unimproved value of land, as proposed in Australia's Henry report, and as suggested much earlier by Henry George in Progress and Poverty (first published in 1879). Land taxes get a fair amount of support among economists, including some who write for The Economist.

At some point it occurred to me that I should actually read Progress and Poverty – or at least, the 2006 version, edited and abridged by Bob Drake – rather than rely on second hand reports. As I read about Henry George’s theory of wages and interest it became clearer to me why he was viewed as a crack-pot by some of the people who taught me economics. For example, by rearranging the identity, Production = Rent + Wages + Interest, he concludes: “wages and interest do not depend on what labour and capital produce – they depend on what is left after rent is taken out”. Of course, if you rearrange the terms another way, rent would appear as the residual after payment of wages and interest. Modern economists should not be overly critical, however, because George wrote Progress and Poverty before John Bates Clark had made his contribution to the marginal productivity theory of distribution - and Clark apparently attributed his conception of the marginal productivity of labour to George’s theory of rent.

Henry George provides an interesting discussion of the way site rent rises with economic development. He asks readers to imagine a vast unbounded savanna. Every acre seems as good as any other for the first family to arrive, so they make a home somewhere, anywhere. When other families arrive, one location is clearly better than the others, that is close to the family that has already settled. Having a neighbour provides opportunities for the families to help each other. As more people arrive, a village is established to enable people to obtain advantages from local specialization and trade. As the village grows into a town and then into a city, the productivity of the original land increases. As a consequence: “Rent – which measures the difference between this increased productivity and that of the least productive land in use – has increased accordingly”. The original owners of the land become rich “not from anything they have done, but from the increase in population”.

George recognised that advances in technology, improvements in manners and morals and government policy reforms (e.g. free trade) also increase the productivity of land, and increase rents.

Following David Ricardo and John Stuart Mill, George argued that a tax on rent would fall wholly on land owners. He went further, however, in suggesting that all rent could be taxed away for the benefit of society without ill-effect. He suggested that returns to labour would thereby be enhanced:

“When all rent is taken by taxation for the needs of the community, equality will be attained. No citizen will have an advantage over any other, except through personal industry, skill, and intelligence. People will gain what they fairly earn. Only then, and not until then, will labor get its full reward, and capital its natural return”.

Henry George was correct to argue that, from an economic efficiency perspective, rent taxes are superior to most other taxes because they have a smaller impact on productive effort and investment. However, it is hard to see how a large increase in land taxes could be viewed as providing an equitable sharing of tax burden. Consider two people who have equal wealth, the wealth of A is in entirely in land and the wealth of the B is entirely in shares in companies that do not own land. Would you view it to be equitable for a government to introduce a tax that would take away a large slice of the wealth of A, while leaving the wealth of B unaffected?

Perhaps that inequity could be overcome by announcing that the new land tax will only apply to future increases in land values. However, the deadweight costs of a tax on future increases in land values would not be negligible. For example, consider a firm that is planning to build a very fast train and considering whether a stopping point along the route should be at City X or City Y. The firm is buying land along the route because it needs to capture some of the expected appreciation in land values to make its investment worthwhile. The firm’s investment appraisal suggests that City X would be the best location. However, it subsequently learns that City X is contemplating a substantial tax on future increases in land values, while City Y has no such plans. That information obviously has potential to tip the balance in favour of City Y, resulting in a less efficient allocation of investment.

The potential deadweight costs of land taxes have been explored in more depth by others, including Bryan Caplan and Zachary Gochenour.

My bottom line: Land taxes are better than many existing taxes (much better than taxes on land transfers) but they don’t offer a costless way to fund the substantial additional revenue that would be required to fund an unconditional basic income sufficient to meet reasonable expectations of a widely-shared dividend from future economic growth. If land taxes can’t do it, I doubt whether any tax-transfer proposal can achieve that objective. One way or another, even when robots do most of the work currently done by humans, humans will still need to earn the bulk of the incomes they live on - including by inventing and improving robots, servicing and managing them, and owning them.

Does your constitution mandate free trade?

The Constitution of Australia, like that of the United States, mandates free trade – up to a point! Both constitutions mandate free trade between the states, and leave federal governments free to impose barriers to international trade to the extent that they wish.

It is debatable whether a constitutional requirement for free international trade would have made a huge difference to trade policy in either country. The requirements for free trade between the states have not guaranteed free trade between the states - judges have not always ruled against trade barriers imposed by states to protect local interests. Many judges seem to capable of being highly imaginative in their interpretation of concepts such as free trade.  

The relevant constitutional question is whether free trade is mandated by the real constitution - the set of dispositions that influence what most citizens will accept as legitimate actions by politicians and bureaucrats who make up the government. That depends ultimately on the views of individual citizens.

Why should your constitution mandate free trade?  I hope you share with me the belief that individuals have a natural right to engage freely in mutually beneficial transactions with one another, even though third parties may be disadvantaged. If so, you would probably consider it to be objectionable for a government to levy a discriminatory tax on the sales of the producer from whom you wish to purchase, in order to encourage you to purchase from a rival producer. You may well assert that you have a right to choose to buy from whatever source you wish, for whatever reasons you might have, free from any such third-party interference.

The logic of this argument does not cease to apply merely because buyers and sellers may be separated by national borders. National borders are artificial constructs that do not alter the natural right of individuals and firms to engage in mutually beneficial transactions. Donald Boudreaux has written persuasively on this topic: “International Trade Is Simply One Manifestation of Competition”.

Should an exception be made in situations where foreign governments subsidize their exports? No, if foreigners are sufficiently misguided to subsidize their exports there is no reason why domestic consumers should not benefit from any price reduction that this causes. In a market economy, if foreign subsidies result in an expansion of total imports, this can reasonably be expected to result in exchange rate and relative price adjustments to make exporting more profitable and bring about an expansion of exports. Production for the domestic market that is displaced by increased imports will be offset by increased export production.

Some economists still, no doubt, maintain that unilateral free trade is not optimal on grounds such as the optimal tariff argument, and the potential for the use of existing trade barriers as bargaining chips to obtain better access to foreign markets. Policy advisors who recommend departure from free trade to obtain such gains risk opening the way for much larger economic losses because they are dealing with fallible real-world governments, rather than the omniscient and benevolent governments assumed to exist in their economic models. In the real world of politics every departure from a simple rule opens up opportunities for interest groups to advance their interests at the expense of the broader community. 

However, there is one argument that makes it difficult for the real constitution to mandate free trade. With great reluctance, I am now willing to concede that it may be becoming more difficult for politicians to endorse free trade because many people are choosing to cast their votes for candidates who oppose it. Even though the gains from free trade vastly outweigh the losses, the uneven distribution of losses makes the outcomes of free trade seem unfair to many people. A substantial proportion of voters in many countries now seem to be saying that their disposition is to favour protection of existing jobs rather than the opportunities that free trade offers.

Over the longer term, the pursuit of policies to preserve existing jobs will, of course, be inimical to the specialization and technological progress which provide the basis for everyone’s future prosperity. Nevertheless, many voters and their representatives seem to be more concerned to preserve existing jobs than to promote future prosperity. Our democratic systems seem to be mutating from systems of social cooperation to promote the interests of everyone, to arenas for the “war of each against all” that Thomas Hobbes imagined as the only alternative to an all-powerful dictator “to keep them all in awe”. Are we powerless to prevent this war of each against all?

This poses the kind of constitutional dilemma discussed by one of the 20^th Century’s best economists, James M Buchanan, in The Limits of Liberty: Between Anarchy and Leviathan, 1975. Buchanan wrote:

“If there exist potential structural changes in legal order which might command acceptance by all members of the society, the status quo represents a social dilemma in the strict game-theoretic terminology. Even if we consider ourselves far removed from the genuine Hobbesian jungle, where life is brutish and short, the status quo contains within it elements or features that are in principle equivalent. Life in the here and now may be more brutish than need be, and certainly more nasty. If after examination and analysis, no such potential for change exists, the legal-constitutional order that we observe must be judged to be Pareto optimal, despite the possible presence of discontent among specific members in the body politic”.

Buchanan was particularly concerned about ways to reform the rules of the political game to promote fiscal responsibility. That problem has worsened since the 1970s. The type of reforms he hinted at involved agreement by those who sense that they are vulnerable to having wealth expropriated via the political process to a mechanism for limited wealth transfer on condition that others agree to rules that overtly limit governmentally directed fiscal transfers.

I doubt whether rules to promote fiscal responsibility are feasible in the absence of a broad consensus concerning the role of government in distribution of the benefits from economic progress. Perhaps that is also a context in which the real constitution can mandate free trade. Current proposals being advanced in various quarters for guaranteed minimum incomes are relevant to this discussion. It seems to me, however, that proposals to ensure widespread opportunities for those displaced by import competition and technological change to improve their skills, and earn higher incomes, are probably more deserving of support. I might try to spell out reasons for that view in a later post. 

What policies will be pursued by the author of "The Art of the Deal"?

After reading Trump:The Art of the Deal it seems to me that the best way to start thinking about how to answer this question is to ask yourself what Mr Trump could do to further promote his own reputation as a political leader. His policy choices are likely to be determined largely by the potential they offer for the further self-promotion required to enable him to win a second term in office.

Some may wonder why I see a book written about 30 years ago as providing guidance about Mr Trump’s current priorities. Although his co-author, Tony Schwartz, claims that he actually wrote the book, it is clear that Donald Trump strongly endorses the ideology of The Art of the Deal and sees his experience in negotiating business deals as highly relevant to the presidency. In announcing his candidature, he said: “We need a leader that wrote ‘The Art of the Deal’.”

The Art of the Deal conveys the impression that the prime motivating force in Mr Trump’s life is self-promotion. The book is itself a promotional exercise designed to enhance his reputation as a person with the capability of doing deals under difficult circumstances. Trump is the hero, using publicity as a weapon to defeat incompetent and evil opponents. He emphasizes the importance of giving the media a good story. He even views critical stories as providing valuable publicity. Most tellingly, he acknowledges:

“The final key to the way I promote is bravado. I play to people’s fantasies. People may not think big themselves, but they can still get excited by those who do. That is why a little hyperbole never hurts”.

If you think that makes Mr Trump sound more like a politician than a business leader, consider the way in which he emphasizes that it is important “to deliver the goods”:

“You can’t con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don’t deliver the goods, people will eventually catch on”.

The quoted passage is followed immediately by reference to two former presidents, Jimmy Carter and Ronald Reagan, as examples of leaders who were good at promotion, but not so good at delivering the goods. This guy obviously thinks like a political leader, but it remains to be seen whether he will be as good as Ronald Reagan at delivering policy outcomes that are worth having.

The new president will recognize that to have any chance at re-election he will have to deliver some of the “goods” expected by the people who voted him into office. There will no doubt be a flurry of activity to take specific actions he has proposed for his first 100 days. Over the next few years there will probably be some real policy change e.g. cuts in corporate tax cuts, increased infrastructure spending and more restrictive immigration policies. In the foreign policy arena, application of the Trump doctrine of doing deals with the big players might end up favouring closer relations with China, as well as Russia, despite recent anti-Chinese rhetoric. That might make life more difficult for China’s neighbours, but is probably preferable to the alternative of deepening tensions between the U.S. and China. In many other policy areas, including trade policy, we are likely to see major re-branding exercises, with little actual policy change. Every policy deal will have Trump’s name written all over it – just like his real estate developments!

When I decided to read The Art of the Deal one of my objectives was to see to what extent he sees deals as involving winners and losers rather than mutually beneficial outcomes. There is some of both.  A substantial component of the “art” endorsed by Trump is actually an entrepreneurial function that will be recognizable to fans of Austrian economics. The entrepreneur sees an opportunity to make a profit that others have not seen, and then proceeds to use his negotiation and management skills in pursuit of that profit. If the entrepreneur succeeds, many others also benefit, including original owners of sites and the air space above them, financiers, contractors, building workers, and the people who own or rent space in the building. Everyone involved can be a winner.

The added complication in the entrepreneurial art practiced by Donald Trump is the prevalence of  government regulation impacting on the property development that he has been involved in. As I was reading The Art of the Deal I began to realize that Donald Trump and Tony Schwartz were writing about the entrepreneurial function in rent-seeking environments – the highly regulated property development market in New York and gambling industry in Atlantic City. For the benefit of readers not familiar with the concept, the idea of a rent-seeking society was developed by Gordon Tullock and Anne Krueger to describe societies where government regulations play a large role in determining the distribution of incomes, and substantial resources are expended by individuals and groups – rent-seekers - lobbying to have the coercive powers of government used to their advantage at the expense of others. The U.S. is not one of the first countries that comes to mind when I think of rent-seeking societies, but rent-seeking is rife in the industries where Donald Trump learned the art of the deal.

I am not the first to recognize that The Art of the Deal is about entrepreneurship in rent-seeking environments:  Adam Davidson made similar observations in an article in the New York Times Magazine in March 2016. However, I don’t think Davidson’s view of Donald Trump was entirely accurate. He suggested that Donald Trump “is not just a rent-seeker himself; his whole worldview is based on a rent-seeking vision of the economy, in which there’s a fixed amount of wealth that can only be redistributed, never grow”. The Art of the Deal portrays Trump’s real estate development activities as being about adding value to sites rather than just obtaining benefit at the expense of others. Even allowing for his hyperbole, Trump seems to see his role as that of a capitalist hero, like a character out of an Ayn Rand novel, who is using his skills in self-promotion and his legal team to fight the rent-seekers who are trying to obstruct economic development.

When he talks about public policy issues Mr Trump sometimes seems to allow his desire to present himself as a person with a kind heart to get in the way of clear thinking:

“Unlike most developers, I don’t advocate eliminating rent control. I just think there ought to be a means test for anyone living in a rent-controlled apartment”.

I wonder whether Trump really sees rent-control as a good way to provide economic assistance to poor people. A cynic might suggest that his support for means tested rent control was a rent-seeking ploy to further his own interests in evicting wealthy tenants from the rent-controlled premises that he wanted to re-develop.

Adam Davidson might be close to the mark in suggesting that at an international level Donald Trump’s world view is governed by the idea that what one country gains another loses. Some passages in The Art of the Deal reflect that view. Trump claims that the Japanese “have become wealthier in large measure by screwing the United States with a self-serving trade policy that our political leaders have never been able to fully understand or counteract”. These days he expresses similar views about China.

 From an economic perspective, Donald Trump’s desire to put America’s interests first in trade policy would be desirable for Americans (as well as people elsewhere in the world) if only he knew where America’s interests lie. It is hard to believe that this builder of innovative modern buildings in New York thinks he can make America greater by transforming its manufacturing industry into a museum of mid 20^th century technology that can only survive sheltered behind high import barriers. If he sees America’s interests as providing widespread opportunities for Americans to enjoy greater prosperity, he should hire some competent economists to suggest what policies are most likely to contribute to that objective.

If Donald Trump believes his own rhetoric about asking lots of questions, keeping options open and thinking big, perhaps he could even end up as an advocate of unilateral free trade, rather than re-branded bilateral trade deals. In my view the odds are strongly against that, but it could happen! 

Postscript:

A couple of months later, I think I was excessively optimistic in suggesting that we are likely to see major re-branding exercises in trade policy with little actual policy change. There are two reasons for this. First, Trump’s most influential advisers strongly favour protectionism and will not be satisfied with the kind of re-branding that might satisfy the President. Second, as Barry Eichengreen has pointed out, Trump is likely to focus on trade policy because it is “the one set of economic policies a President can pursue without close congressional cooperation”.

It now looks as though the world might be about to enter a new era of trade protectionism. Some suggestions regarding appropriate Australian policy responses are in a later post.

Will neural lace save us from the super-intelligent robots?

Source: Gifts for professionals

If neural lace sounds like something out of a science fiction novel that is probably because that is where the idea originated. A couple of months ago, however, a group of scientists published a paper about injecting an ultra-fine mesh into brains to create neural lace. The mesh has been tested on mice, which survived the implantation and are thriving. Suggested uses for neural lace include “monitoring brain activity, delivering treatment for degenerative disorders like Parkinson’s, and even enhancing brain capabilities”.

In terms of economics, innovations to enhance brain capabilities seem to have many characteristics in common with other innovations. It seems reasonable to expect that, as with other successful technological advances, entrepreneurs developing the technology will initially be able to charge a high price for it. As suggested by Anders Sandberg, of the Future of Technology Institute at Oxford, the price of some brain enhancements (pills and gadgets) can be expected to fall as a result of competition, while the price of service-heavy enhancements (genetic engineering) is more likely to stay expensive. On that basis, there could be potential for the price of neural lace to fall fairly rapidly and for it to become widely used within a few decades, if it offers substantial benefits to users.

 Another reason to expect the price of neural lace to fall rapidly is that research in this area is likely to be undertaken in several different countries. It seems unlikely that the government of any one country will be able to protect the rents of entrepreneurs who develop the technology by suppressing international competition for a prolonged period.

Elon Musk’s proposal to develop neural lace to prevent humans becoming house pets of intelligent machines provides a further reason to expect neural lace to be priced for the mass market. Elon has several other highly ambitious projects on his plate, but he seems willing to add neural lace to the menu. His attitude: “Somebody’s got to do it. If somebody doesn’t do it, then I think I should do it”.

Elon Musk established OpenAI as a not-for-profit venture, so his neural lace project would presumably not be aimed at maximizing shareholder value. Perhaps Elon can attract sufficient potential investors (or donors) to be able to fund the necessary research and development.

So, why not join Elon’s fan club and help him begin work on neural lace as soon as possible to save our descendants from the robots? Michael Cook, a bioethicist, has given three good reasons to proceed cautiously:

“Take privacy. If you can hack a computer, you can hack a brain. Integrating your memories and cognitive activity with the internet allows other people to see what you are doing and thinking 24/7 — a kind of upscale parole bracelet.

Take autonomy. In our culture, this is the most cherished of our personal values. But once brains are integrated into an information network, they can be manipulated in increasingly sophisticated ways. And since technology always serves its owner, we could easily become the tools of Google or the government.

Take responsibility. There might be no crime, as the neural lace could shut down the ‘hardware’ whenever passions threaten to overwhelm social norms – as defined by the network.”

Elon Musk’s claim that humans are already cyborgs should be rejected. The fact that we, as individuals, may have a presence on social media does not mean that we have ceased to be uniquely human. Individuals can have brain implants and still be uniquely human.

Neural lace will not be worth having unless it can be developed in such a way as to enable humans to protect the privacy, autonomy and responsibility that is integral to their individual flourishing.  

Will the Ems flourish?

You should be interested in this question because some of your descendants might become Ems during the next century or so. 

Ems are the human-like robots that will be created by emulation of human brains. The emulation process will involve scanning an individual’s brain to record its particular cell features and connections and then building a computer model that processes signals according to those same features and connections. Ems will think, feel and behave like the humans from whom they are created. They will assume they have consciousness and free will, just as humans do.

That view of Ems is presented by Robin Hanson in his recently published book, The Age of Em.

The Age of Em is not the most difficult book I have ever tried to read, but of all the books I can claim to have actually finished reading, I have possibly had greatest difficulty finishing this one. It wasn’t the technical material in the book that put me off. Robin has explained enough of it well enough for non-technical readers like me to get the gist of the scenario being portrayed. I just became bored reading about the Ems. I persisted only because I feel that more of us (humans) should be taking an interest in the future of human-like entities.

Others also seem to have become bored reading about the Ems. In the Finale of his book Robin indicates that a “who cares” attitude was common among people who read early drafts of the book, and among those who declined to read. It would certainly have been easier for me to adopt that attitude than to finish reading the book.

In writing about the Ems, Robin Hanson has attempted to predict what is likely to happen, rather than to present a vision of what he would like to happen. He suggests that the Ems will mostly live in a few tall, hot, densely packed cities, which will seem harshly functional when viewed in physical reality, but will look spectacular and stunningly beautiful in virtual reality. Humans will live far from the Em cities, mostly enjoying a comfortable life on their Em-economy investments.

A distinguishing characteristic of the Em economy will be the ability of Ems to replicate themselves at relatively low cost. Robin suggests that there will be enough Ems willing to make copies of themselves to greatly lower wages to a level near the full cost of computer hardware needed to run Em brains. Under that Malthusian scenario, wages of most Ems will be so low that they will barely be able to afford to exist, even though they will be working hard half or more of their waking hours.

Most Ems will have office jobs, and work and play in spectacular virtual realities. Many of them will enjoy high status during their working lives because they will have mental capacities many times those of human brains. They will be slowed down after retirement, but will have the opportunity to live for as long as Em civilization persists.

Robin suggests that the Em future, as he portrays it, might look pretty good in terms of utilitarian evaluation criteria. Even with wages close to subsistence levels, Ems would have great opportunities for entertainment via virtual reality, and they would live long lives. If there are many billions or perhaps even trillions of them, as Robin suggests, utilitarian calculus would conclude that the Age of the Ems would see a big increase in total happiness relative to our world today.

That view seems to me to highlight the deficiencies of crude utilitarianism. The quality of life of the typical Em, as portrayed by Robin, strikes me as being lamentable. I predict that most humans faced with the choice of whether to live such a life, or the life of an average human, would choose to live the life of a human. Since Ems would inherit our values, I predict that most of them would also reject the life offered by their hot houses of virtual reality in favour of a more authentic life closer to nature. The choices involved are similar to those posed by Robert Nozick in his famous experience machine thought experiment (discussed previously on this blog in a post that has recently been re-published on Common Sense Ethics).

That brings me to what seems to me to be a major flaw in the scenario that Robin Hanson posits. I think he misjudges human values and preferences when he suggests that large numbers of humans and Ems would be willing to make copies of themselves under circumstances where Em wages were low and falling. As advances in technology have made it easier for humans to exert greater control over their own reproduction they have used that power to ensure their offspring have good prospects to have lives they will value. Ems might view their replication decisions differently, but I don’t see why they would choose to bring into the world large numbers of twins earning subsistence wages.

The other problem I have with Robin’s scenario is that I think he may be too pessimistic about the potential for Ems to increase their productivity by expanding their use of non-Em robots, as an alternative to replicating themselves. As Ems obtain more advanced capital to work with (including non-Em robots) their marginal productivity could be expected to rise, thus tending to raise wage rates.

This book is based on the assumption that brain emulation is likely to happen before artificial machine intelligence develops to the point where machines will achieve broad human level abilities. I don’t have the technical competence to comment on whether that is likely. Some issues relating to the latter possibility were discussed in my review of Nick Bostrom’s book, Superintelligence. The idea that human-like robots may be created through brain emulation at some time during the next century does not fill me with joy, but life might be better for humans (and Ems) if the Ems are created before the intelligent machines, so they can prevent them from running amok.

Despite my reservations about this book, I recommend that readers should buy it in order to give Robin Hanson appropriate encouragement for his efforts in attempting to foresee the future of human-like creatures. An even better reason to buy the book is to try assess for yourself whether Robin’s base-line scenario is plausible.

Will machine intelligence threaten life, liberty and the pursuit of happiness?

This post has nothing to do with the influence of political party machines on current election campaigns.

As some readers will already know, Nick Bostrom’s book, Superintelligence, discusses the challenge presented by the potential for machine brains to surpass human brains in general intelligence. Bostrom does not claim that is imminent, but he suggests it is somewhat likely to happen sometime this century. After AI has surpassed human intelligence, the author fears that an initial superintelligence might soon afterwards obtain a decisive strategic advantage and pose a threat to human life. There have been several good reviews of Superintelligence, including one by Ronald Bailey in Reason.

How could a machine programmed by humans come to threaten human life? Some examples mentioned by Bostrom imply that it would be quite easy for that to occur by accident. For example, a machine that was given the simple objective of maximizing the production of paperclips could seek to acquire an unlimited amount of physical resources and to eliminate potential threats, including humans who are likely to try to prevent it from achieving its goal.

People like Bill Gates and Elon Musk, who could not be viewed as technophobes, argue that the threats posed by superintelligence should be taken seriously. That didn’t stop me asking myself why anyone in their right mind would program a machine to maximize the number of paperclips. Any sensible businessman would ensure that the machine was programmed with a profit-making objective, rather than a production objective. I have to acknowledge, however, that would still leave the problem of ensuring that the superintelligence doesn’t use unethical means to eliminate competitors. 

There is also the problem that some of the people developing AI might be crazy, or antipathetic towards humans. For example, it does not seem beyond the bounds of possibility that a group of extreme Greenies might seek to develop a superintelligence that would pursue the selfless goal of restoring the natural environment to its condition prior to the Anthropocene.

Most of Superintelligence is devoted to a discussion of the difficulty of designing superintelligence so that it would not be a threat to humans. While reading the book I felt that at times I was reading about the problems of designing a god – an enormously powerful entity that would govern our lives. For example, if the AI is given the seemingly innocuous goal of making us all happy it might arrange for us to have electrodes implanted in the pleasure centres of our brains, or perhaps even upload our minds to computers and then administer the digital equivalent of a drug to make us ecstatically happy all the time.

At other times I felt the problems being discussed were more like those which might be involved in establishing the characteristics of a good society. Bostrom seems to favour AI being given a goal such as maximizing our coherent extrapolated volition (CEV). As I understand it the CEV concept implies that if we knew more and thought faster our individual views about the nature of a good society would converge, so that a consensus could be discovered. The author explains that the CEV approach does not require that all ways of life, moral codes, or personal values be blended together into a stew. The CEV dynamic “is only supposed to act when our wishes cohere”.

The CEV concept has some appeal to me because it seems consistent with my own efforts to describe the characteristics of a good society in the most popular post on this blog. However, it does not require superintelligence to identify those characteristics. It would not be difficult to establish through existing survey methods that the vast majority of humans want to live in peace, to have opportunities to live for a happy lives and to have some degree of security to protect against misfortunes. The problem is in ensuring that a superintelligence would interpret such objectives in a manner consistent with individual human flourishing.

The main reservation I have about Superintelligence is that it does not contain much discussion about defence against malevolent AI. As I see it, it is probably worthwhile to undertake collaborative efforts to avoid the accidental development of machine intelligence in ways that might not be benign. But such efforts are not likely to prevent the AI being used unethically by people with nefarious objectives. Our defences against cyber-attack will need to be strengthened to protect against malevolent AI.

We need a Superintelligence dedicated to defending our individual rights. But we should be careful what we wish for! Once upon a time, a few centuries ago, some enlightened people set about establishing forms of government dedicated to protecting life, liberty and the pursuit of happiness. We ended up with warfare/welfare states.

How did you react to the appointment of a Minister for Happiness in the UAE?

I chuckled. My initial reaction was that the appointment didn’t seem to be the kind of thing that should be taken seriously. But I wondered what the motives of the UAE government might be.

Some commentators have suggested that the appointment of a Minister for Happiness in the UAE was Orwellian. That sent me looking to see whether Orwell had a Ministry of Happiness in Nineteen Eighty-Four. He didn’t. He had ministries of love, peace, plenty and truth. The distinguishing characteristic of each those ministries was the pursuit of policies that were the opposite of what was implied by the label. For example, the Ministry of Love pursued enforced loyalty to Big Brother through policies of fear and repression.

If North Korea establishes a Minister for Happiness it would be reasonable to presume an Orwellian motive, but I doubt that applies to the UAE.

I am not sure that the Orwellian motive even applies to the establishment of a Ministry of Supreme Social Happiness by president Nicolas Maduro of Venezuela in 2013. His motive was probably to distract people from the decline in their economic well-being, occurring even then as a consequence of the government’s economic mismanagement. It is unlikely that the Ministry is helping people to feel any less miserable as the Venezuelan economy now collapses around them, with falling crude oil prices adding to their woes.

Given the fall in oil prices over the last year, the distraction motive might also help to explain the appointment of a happiness minister in the UAE. The IMF has reduced its growth forecasts for the UAE, even though it is more diversified than many other oil-producing countries in the Middle East. The fall in oil prices is causing fiscal deficits to rise and the government is responding by reigning in government spending. The flow-on effects of this might make life more difficult for the large expatriate community (83.5% of the population) most of whom are from South Asia.

In announcing the appointment of a minister for happiness, the UAE prime minister, Sheikh Mohammed bin Rashid al-Maktoum, claimed that the objective was to "align and drive government policy to create social good and satisfaction". The appointed minister, Ahood Al Roumi, was previously Director-General of the prime minister’s department and will apparently retain that position.

The appointment is part of a government shake-up involving appointment of more young ministers and more females. Women now make up more than one-third of all ministers in the government. The government of the UAE has previously announced the vision for their country to be among the best in the world in the Human Development Index HDI and to be “the happiest of all nations”. The UAE currently ranks 41st of the 188 countries included in the HDI.

It is tempting to dismiss all that as window dressing, but there is a chance that the government of the UAE is actually trying to find a way forward toward a better society. In terms of the “good society” indicators I used in Free to Flourish there is a lot of room for improvement in the UAE, even though it stacks up better than a lot of other countries. Of the 110 countries included in the analysis, the UAE ranks 39^th in terms of peacefulness, 24^th in terms of opportunity and 17^th in terms of economic security.

It will be interesting to observe whether Ahood Al Roumi attempts to use her new role to make the UAE a better society. 

Will robots replace human labour and reduce real wage levels?

The potential impact of technological change on real wage levels in high-income countries seems to me to be more important than some other questions about the future that attract more public attention. In particular, the future of real wages must be much more important than income distribution, since there is not much evidence that income distribution has a significant impact on the well-being of the mass of the population. Real wage levels have traditionally determined how the mass of the population live their lives – how well they eat, the standard of housing they are able to afford, how much leisure they can afford, their ability to travel and so forth.

I made as similar point about the relative importance of real wages levels and income distribution last year in my review of Thomas Piketty’s book, Capital in the Twenty-First Century. I asked:

“What happens if technological progress makes capital a close substitute for labour? If a substantial component of the capital of the future can be thought of as a work-force of robots, the economic consequences might be a little bit like introducing slave labour to compete with the existing workforce. Real wages might fall under such a scenario, even though national income could be expected to continue to rise.”

I then went on to refer to an article on this blog a few years ago in which I asked: Will history judge Marx to have been right about the effects of technological progress on income distribution? Looking back now, I think the answer I gave was not too bad - but it was not particularly enlightening.

In trying to consider how to give a better answer I have been trying to come to terms with some maths in economic models relating to bias in technological change (including in a master’s thesis on technological change and capital labour substitution in Australian agriculture that I wrote over 40 years ago) and some relevant empirical research. I think some of this stuff is helping me to understand what might be going on, but in trying to explain it (even to myself) it is more useful to refer to some very simple economic models that can be described verbally.

The place I start is to consider what would happen if technological change consisted entirely of the introduction of robots that are very close substitutes for humans with respect to all attributes relevant to production processes. I then consider some implications of the deficiencies of that model.

As I wrote earlier, the consequences might be like introducing slave labour to compete with the existing workforce. Real wages might fall under such a scenario, but we should not be too hasty in reaching that conclusion.

It appears obvious that an increase in the supply of labour will cause the price to fall. People with rudimentary economics training might think of it in terms of the law of diminishing returns. As you add more labour, keeping other factors of production unchanged, the marginal productivity of labour tends to fall and this is accompanied by a fall in real wages. Of course, it is not even necessary to have a rudimentary knowledge of economics to grasp the idea that an influx of migrants which resulted in a substantial increase in supply of labour could reduce wage rates of workers.

The problem with that analysis is that it is unreasonable to expect other factors of production to remain unchanged in the face of an expansion in labour supply. An increase in quantity of labour will tend to raise the rate of return on capital (by raising the marginal productivity of capital) and thus provide an incentive for further investment. If the supply of capital is sufficiently elastic, real wages need not fall as a consequence of the increase in labour supply.

The potential for an expansion in labour supply to be consistent with higher living standards comes as no surprise to anyone familiar with empirical modelling of the economic effects of migration. For example, a recent study undertaken for Australia suggests that immigration has a strongly positive impact on labour participation, employment and wage levels.

So, in economic terms it seems that we would not have too much to worry about from an influx of robots who were just like humans.

However, the model of technological change I have presented above is deficient in several respects. One major deficiency is that technological progress consists of much more than introduction of machines that perform similar functions to humans. It also involves technical innovations that enable humans to do their jobs better and the introduction of superior consumer goods. If we take a broader view of technological change there is less room to fear that it might result in lower real wages.

Another major deficiency of the model is that it fails to recognize that the replacement of human labour by non-human labour is an ongoing process rather than a new phenomenon. Nick Rowe explained it this way a few years ago:

“Horses were once like robots. Horses could do a lot of the same work that humans could do. Humans and horses can pull things, if you feed them. But then mechanical horses, called tractors, were invented, that could pull heavier things with cheaper food. Tractors pushed horses' wages below subsistence, so the horse population declined.

The robot horse displaced horses, just as horses displaced humans from all the jobs where humans pulled things. But humans, unlike horses, can do lots of other jobs beside pulling things. Humans are very versatile. Horses can't really do anything except pull things. So humans switched to doing other jobs, while horses couldn't. And the marginal product of labour, and hence wages in those other jobs, increased. Horses and tractors were complementary factors to human labour in those other jobs.

But that won't happen if robots are invented that really are just like humans, and can do all the jobs that humans can do. Robots that are just like humans would be just like slaves, rather than like tractors and horses.”

What we are seeing now is robots that are displacing humans from a range of activities and freeing them to do things that robots can’t do - just as horses did. There are adjustment problems for people in the affected industries, but the impact on average real wages is likely to be positive. Over time, superior robots are likely to be invented that will replace the initial series of robots, just as tractors displaced horses. If robots can eventually reproduce like crazy, their capacity to live off “the smell of an oily rag” might mean that wages in many industries in which humans are currently employed will be driven below human subsistence levels.

 

However, it seems unlikely that robots will ever be viewed by humans as close substitutes for human labour with respect to all attributes relevant to all economic activities. My guess is that many humans will show a strong preference for some goods with a high human labour input e.g. home produced food, restaurant meals and beverages that are served by humans, live music by local musicians, handicrafts and works of art produced by humans, and some manufactured goods that individual humans have designed specifically for themselves or friends and relatives.

My bottom line is that over the next few decades the impact of robots in replacing human labour is likely to be a relatively small part of the total impact of technological change on the quality of life. Rather than worrying about robots replacing human labour perhaps we should be more concerned that the rate of technological progress may be slowing down. I will turn to that question in my next post.

Postscript:

I would like to draw attention to comments by Jim Belshaw (see below). Since the discussion may be of wider interest I will reproduce the main points here:

Jim:  Doesn't the evidence suggest that we have a higher proportion of the population employed in lower wage jobs and a higher proportion joining the ranks of the longer term unemployed? I accept that part of the impact is distributional and timing.

Winton: The evidence you refer to is one of the reasons I have been thinking about technological change and productivity growth. Some of the move to lower paid jobs and less job security could be associated with adjustment to technological change i.e. the timing problem you refer to. Some could also be associated with lower productivity growth and insufficient investment.
If tech change is a big factor I would expect it to be affecting older people, with young people finding it easy to pick up jobs created by new technologies. We do see older workers losing jobs, but we also see young people finding it more difficult to find employment.

Jim: We have seen lots of cases of older people losing jobs and dropping out of the work force. That was a particular feature of the early nineties adjustment. However, older workers are also more likely to be in "secure" jobs and to have been there for a time. There is a higher separation cost for the firm. This was a feature of Germany ten years back.
It is actually not clear to me how many jobs have been created by new technology compared to jobs lost. I am no Ned Ludd. I am well aware of previous cases (the industrial revolution is a huge example) where the application of new technology has produced long term gains. I would also agree and have been worried by what I perceive to be the slow-down in technological advance.
But we seem to be in a situation now where technological improvement is dominated by refinement, process improvement and cost reduction. I used to argue that we didn't need to worry about that because Government and community services broadly defined would redistribute benefits. Then and now there were just so many things that could be done to improve the quality of life.
I accept that was a naive view, partly because of globalisation, partly because of a cut-back in what Government might do. Realistically, the wealthier countries have to accept that they have reached a wealth peak, that competition will limit their gains while redistributing wealth to others.

Winton: I would have expected the cost reduction to have resulted in profitable investment opportunities and an accompanying expansion of employment opportunities. It doesn't seem to have happened and I don't really know why at this stage. I find it hard to perceive of cost reductions that do not increase profitability of investment. Perhaps we have reached the satiation point that Keynes wrote about, but I doubt it. 

Jim:  On Keynes, I doubt it too. I think one key issue with cost reductions lies in sustainability. There has been a problem with cost reductions designed to maximise immediate impact that have actually reduced value over the longer term.
There is also an issue that cost reductions increase the yield on what we do now but do not affect the yield on future investments. Increased profitability may increase the capacity to invest, but there is no necessary reason why additional investment should follow.
A recent RBA paper (referred to in a post on Jim’s blog) outlined the way in which investment decision processes (hurdle rates, pay back periods) might impede investment now. However, there is a timing issue here. If you accept that firm decision making processes have a degree of rationality, once firms are convinced that low inflation and lower interest rates will last for the immediate future, then the hurdle rate will come down.
The industrial revolution was based on the creation of mass markets. One of the difficulties in the thinning out of the middle class in many Western countries lies in the reduction of those markets. However, the mass market is growing elsewhere with economic development and globalisation. Investment rates in those countries are higher.

Winton: There are some interesting ideas there that are particularly relevant to Australia.
Another thought that has occurred to me is that a fair amount of the cost reduction is occurring in industries that are attempting to survive against competition from the free content available on the Internet. Think of the news media as an example. The internet is a major innovation providing substantial benefits, but causing a great disruption to the capitalist system as we once knew it. This is also part of the story about the apparent decline in the rate of productivity growth in the wealthy countries - the output of the Internet is not measured very well.

There has been a fair amount written around this topic but I have not yet come across anything that puts the pieces of the puzzle together in a coherent way.

What is the appropriate discount rate to use in assessing climate change mitigation policies?

The correct answer, in my view, is that the appropriate discount rate depends on the kind of policy that is being considered. If that answer seems odd to you then there is a good chance you have not yet read Mark Harrison’s paper entitled ‘Addressing Wellbeing in the Longer-Term: a Review of Intergenerational Equity and Discount Rates in Climate Change Analysis’. The paper was published last year in Measuring and Promoting Wellbeing, a collection of essays in honour of Ian Castles (an Australian who deserved to be honoured highly for his work on measurement of wellbeing).

The kind of policy that was evaluated in the famous cost benefit study by Nicholas Stern (and the subsequent study by Ross Garnaut) involves imposing some kind of tax (perhaps via a cap and trade mechanism) on carbon emissions in order to improve the well-being of future generations. Stern and Garnaut assume that economic growth will continue even in the absence of policies to mitigate carbon emissions and global warming, resulting in much higher average income levels in future (3.6 times higher 100 years from now in Stern’s projection).

Photo by Robin Ellis. Some rights reserved.

The carbon tax that this kind of modelling exercise suggests to be appropriate is highly sensitive to the discount rate that is used to determine the present value of mitigation efforts. The use of a low discount rate suggests that strong immediate action is warranted to mitigate climate change, whereas a higher discount rate suggests that the most appropriate course of action is to begin with a very low carbon tax and raise it gradually. In an illustrative example Harrison shows that with a discount rate of 1.35%, as assumed by Stern, the optimal current carbon tax is $78.48 per tonne, whereas with a discount rate of 6% it is only $0.88.

The discount rates used by Stern and Garnaut are an application of the social welfare function approach. Social welfare functions necessarily embody ethical judgements, even though such judgements are hidden beneath empirical facts in some versions of the, so called, Ramsey formula used by climate change modellers. Opinions differ on what ethical judgements are appropriate and discount rates can vary widely depending on what assumptions are made. Harrison demonstrates that the Ramsey formula gives estimates of a risk free discount rate ranging from 0.24% to 11% under the range of parameter values used in a variety of studies over the past decade.

At this point some readers will probably be throwing up, while others will be wondering what discount rates would be consistent with ethical judgements that they would be prepared to endorse. One way to consider whether you would be prepared to pay a carbon tax costing you $x per month in order to make your great grandchildren better off is to ask yourself whether you would prefer to make a financial investment of the same amount each month into some kind of trust for their benefit. The answer you obtain by considering opportunity costs in this way is equivalent to discounting the real money value of the benefits of climate change mitigation by the rate of return that you could expect to obtain on the alternative investment – presumably higher than the average real long term bond rate over the past 20 years or so.

One possible objection to this approach is that the rate of return on alternative investments will incorporate an element of compensation for risk, which is not appropriate in considering public investments such as climate change mitigation. The response which Mark Harrison provides is to point out that investment in climate change mitigation are far from risk free. There is a great deal of uncertainty about future costs and benefits of such policies. Most obviously, if you decide to vote for the carbon tax option you have no guarantee that people in other countries will pull their weight by imposing similar taxes on their citizens.

Some of you will by now be thinking that the cost benefit framework outlined above must be a load of garbage because you remain concerned about climate change, even though you would prefer to invest money for the benefit of your great grandchildren rather than to pay a carbon tax. If you are concerned about climate change, you are unlikely to be concerned that your great grandchildren will suffer losses that you could compensate for by increasing your savings rate by a small amount. The chances are that you (like me) will be concerned about the remote possibility that your great grandchildren might suffer from having to live with potentially catastrophic climate change outcomes.

Mark Harrison points out that by explicitly accounting for risk, rather than assuming it away, we can distinguish between policies that reduce risk and those that don’t. Mitigation policies that are potentially effective in averting disasters should be subjected to a discount rate that is below the risk-free rate because they pay off at a time when returns on other assets are low or negative, and when willingness to pay is great.

So, my conclusion:

•  the most appropriate discount rate to use to evaluate policies such as carbon taxes is the long-term average of real market rates of return on capital; and  
• the most appropriate discount rate to use to evaluate policies directed more specifically toward averting disasters - such as public investment in research to develop low-cost ways to removing greenhouse gases from the atmosphere - should be lower than the long-term average of real government bond rates.

In the unlikely event that we are faced with something close to the worst case climate scenario, our current policies to encourage adoption of inefficient alternative energy options are unlikely to avert catastrophe.  If the objective is to reduce the risk of catastrophe we should be using an evaluation methodology that helps us to choose the lowest cost method of achieving that objective.

Postscript:

There seems to be increasing awareness that we should be asking how we can insure against the worst climate change outcomes at lowest cost. Martin Wolf has published a relevant article entitled ‘Climate actions hould be seen as insurance’, in which he discusses Climate Shock, a new book by Gernot Wagner of the Environmental Defense Fund and Martin Weitzman of Harvard University. There has been a fairly favourable review of Climate Shock by William Nordhaus in the New York Review of Books.

I get the impression that the authors of Climate Shock have come to the conclusion that the best form of insurance is to reduce CO2 emissions as rapidly as possible. They rule out engineering solutions directed toward managing solar radiation (probably for good reasons) but it is not clear whether they have considered the potential benefits of research into ways to take greenhouse gases out of the atmosphere.

It is also unclear whether urgent action is justified, given the fact that when global warming resumes it will probably have positive net economic benefits for a few more years. I expect the variance of potential outcomes is not as great over the next decade or so as it is when we look further into the future.

The review article by William Nordhaus offers a solution to the free rider problem in international negotiations in the form of a climate change club  imposing trade sanctions on countries that are perceived to be laggards. That kind of thinking makes me wonder whether the science of climate change might turn out to be less important for a country like Australia than foreign policy and trade considerations. The formation of a climate change club seems a more worrying prospect at the moment than the potential for an increased incidence of droughts and bushfires.