Wednesday, May 28, 2008


Recently in the news there was a story about environmentalists targeting obese individuals as being major contributors to global warming. When the interviewer basically asked how an obese individual’s carbon footprint fromsitting on the couch all day compared with someone like a skinny Barbie girl that went to work, drove to a smoothie bar and had an organic smoothie, then drove to a climate controlled gym and spent 2 hours utilizing their electric powered equipment before stopping by the local organic market on the way home compared, they quickly changed the subject.

They immediately attacked meat consumption. I’ll admit, it is probably true that someone that eats a healthy well balanced diet probably has a lower carbon footprint than others. However, there is no reason that beef could not be part of a healthy diet, considering that there are 29 cuts of lean beef that have barley more than 1 gram more of saturated fat than a comparable serving of skinless chicken breast. In addition beef delivers many times more iron, zinc and vitamin B12.

It may be true that beef consumption requires more fuel to produce than say rice, but you are getting a lot more nutrition from beef than rice. Further, it does not make sense to focus so narrowly on one aspect of our lives when it comes to energy consumption and GHG’s ( greenhouse gas). We all know how much fossil fuel consumption and GHG production results from driving automobiles, but we don’t stop driving. Instead we focus on improving emissions and efficiency.

In the same way with beef, improvements in genetics, nutrition, and management will ( and have) lead to less pollution, and increased efficiency with regard to how much food we are getting from a given amount of animal units, land, water, and other resources ( especially compared to 'hormone free' and 'organic' meat production).

Despite rhetoric in the media, there is no scientific consensus to support the drastic sort of changes that these people want us to make in our lifestyles to combat climate change. If you read the IGPCC’s 4th Assessment report, all you will find is that there is a ‘consensus’ agreement that humans have contributed to increased temperatures over the last 100 years with about 90% certainty. When it comes to the changes to our environment, violent storms, draught, and loss of coastal areas, the consensus amounts to a coin toss. When economists take the consensus science about climate change into account, they find that the damage from implementing Kyoto style policies on a magnitude similar to what Al Gore or the ‘Stern Report’ advocates would be worse than doing nothing at all.

With congress debating a GHG emissions bill next week, let’s hope our political candidates and representatives are responsible about what they do in this regard.

Tuesday, May 13, 2008

Markets and Resource Allocation

The economic problem of society is more than just achieving an optimal or just allocation of resources. It is easy to formulate a ‘positive’ solution mathematically, where P = marginal rate of substitution between any two goods or factors of production, balancing the costs and benefits of some activity. It is easy to state a ‘normative’ solution of what we believe to be a ‘just’ or ‘fair’ distribution of resources.

However, according to Hayek, the information necessary for any solution for allocating resources in society is seldom sufficient for effective government or bureaucratic decision making:

“the knowledge and circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

The economic problem of society becomes “ the problem of the utilization of knowledge not given to anyone in its totality” but held by individuals.

Hayek proposes two methods for allocating resources 1) market prices and competition ( decentralized) 2) Planning ( total control by government or socialism)

The best system will be the one that is most effective at “putting at the disposal of a single authority (government) all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals (free markets) such additional knowledge as they need in order to enable them to fit their plans in with those of others”

How does Government Obtain its Information

Government obtains much of its decision making information through the gathering of data and statistical analysis. However, this data is aggregated and very static compared to the knowledge held by individuals, or the “knowledge of the particular circumstances of time and place.”

Because individuals are involved in ‘the rapid adaption to changes in the particular circumstances of time and place, and it would seem to follow that the ultimate decisions must be left to people who are familiar with these circumstances, who know directly of the relevant changes and the resources immediately available to meet them.” Only individuals have knowledge of “the relative importance of the particular things with which he is concerned.”

This sort of knowledge by its very nature according to Hayek “cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form.” There fore government decisions are inherently doomed to be made with poor information and error, measured in terms of costs to individual well being and preferences.

How can markets be used to make the best use of information critical for the use of resources?

Hayek has an answer in that “in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of individuals.”

Unlike with government, by making use of the price system, individuals do not have to directly possess all of the relevant knowledge in society to make decisions regarding the use of the resources at their disposal. Hayek states that is “because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated through all” This is due to the fact that everyone faces prices which reflect the relative tradeoffs between all of the possible alternative uses of resources.

Reference: F.A. Hayek. “The Use of Knowledge in Society.” The American Economic Review. Vol 35, No. 4 Sept 1945, p. 519-530.