Economics, Politics & : Are the Sceptics Right?

Julian Hodge Institute of Applied Macroeconomics Annual Lecture Julian Hodge Bank Lecture, Cardiff, April 2008 Colin Robinson, Emeritus Professor of Economics, University of Surrey Colin Robinson worked for eleven years as a business economist, mainly in the oil industry, before being appointed in 1968 to the Chair of Economics at the University of Surrey, where he founded the Department of Economics and is now Emeritus Professor.

He is the sole or joint author of 25 books and monographs and over 160 journal papers and book chapters, including studies of the international oil, coal and gas markets, North Sea oil and gas, nuclear energy in Britain, British energy policy and various aspects of utility regulation. He has also edited numerous books, mainly in the utility regulation field.

He is a Fellow of the Royal Statistical Society, of the Society of Business Economists and of the Institute of Energy. He was named British Institute of Energy Economics ‘Economist of the Year’ in 1992 and in 1998 received from the International Association for Energy Economics its ‘Outstanding Contribution to the Profession and its Literature’ award.

From 1992 to 2002 he was Editorial Director of the Institute of Economic Affairs, in addition to his university post. He is a member of the IEA’s Academic Advisory Council and a Trustee of the Wincott Foundation.

Julian Hodge Institute of Applied Macroeconomics

In May 1999, Cardiff Business School and Julian Hodge Bank announced a major new initiative, the establishment of the Julian Hodge Institute of Applied Macroeconomics. The aim of the institute is to carry out research into the behaviour of the UK economy, and to study in particular its relationship with the other economies of Europe. This research has been given added urgency by the discussions on the future of the EU’s draft constitution. The new institute has aimed to develop research relevant to this important debate.

The institute’s director since it was founded has been Professor Patrick Minford, of Cardiff Business School, who is also the Economic Adviser to Julian Hodge Bank. The institute’s staff of researchers are mainly based in the school. Recent research has included studies of whether the UK should join the euro and of the economic costs and benefits from UK membership of the European Union. Some other topics have been the UK’s inflation and exchange rate behaviour and the relationship between growth and taxation. The institute also carries on the work of the Liverpool Research Group in Macroeconomics which Professor Minford founded and which has been based mainly in Cardiff for a number of years, producing forecasts and policy analysis of the UK and other major economies. Julian Hodge Bank Lecture, Cardiff, April 20081 Colin Robinson, Emeritus Professor of Economics, University of Surrey

Many people in this audience will believe that 1. The hypothesis and some broad significant changes in the world’s climate are issues already under way and that, in the medium to Put simply, the usual hypothesis about long term future, there will be further climate change is that emissions of carbon changes that will have catastrophic economic dioxide and other ‘greenhouse gases’, from and social consequences if action is not the use of energy and from other human taken in the near future to avert them. activities, will lead to a future trend towards Virtually all the world’s opinion leaders warming of the earth and consequential subscribe to that view. As one example of damage to economic and social life. this ‘doomsday view’, take the comments of There is general (though not universal) the UN Secretary-General, Ban Ki-moon who agreement that there has been some said of the scenarios in a report compiled by warming of the earth in the last hundred the Intergovernmental Panel on Climate years or so, but it is relatively modest4. The Change (IPCC)2 in November 2007, ‘These IPCC puts the increase in global annual scenes are as frightening as a science fiction mean temperature at around 0.75 degrees movie. But they are even more terrifying, centigrade over that period5. Future warming because they are real’3. Ban Ki-moon is has become the main focus of concern: talking about views of the future which there is a wide range of estimates, varying cannot in any accepted sense be ‘real’: his from about 1 to over 6 degrees C6, comment shows that the inevitability of comparing the end of the twentieth century severe climate change is now so taken for with the end of the twentyfirst century. granted that the future has become merged with the present.

1 Some very helpful comments on a draft of this lecture were made by Sir Ian Byatt, Professor David Henderson, Dr Eileen Marshall, Sir Alan Peacock and by participants in a seminar at Cardiff Business School. None of them is, of course, responsible for the lecture’s conclusions. 2 A joint subsidiary of two United Nations bodies, the World Meteorological Association and the UN Environment Programme. 3 Secretary-General’s address to the IPCC, 17 November 2007. The comment seems to refer partly to the IPCC’s scenarios and partly to the Secretary-General’s own observations of the apparent effects of climate change. 4 For a review for non –scientists of the problems involved in measuring temperatures and of assessing the scientific evidence see , An Appeal to Reason: A Cool Look at Global Warming, Duckworth Overlook, 2008. 5 IPCC, Climate Change 2007, Summary for Policymakers, page 2. 6 Ibid, page 7.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 1 Obviously, I cannot provide a critique of the same natural cycle, action now to curb hypothesis from a climate science viewpoint7 warming might well have perverse effects. but economists are in a position to comment The amplitude and length of any cycle are on some of the underlying methodological also critical issues. issues, on the economic and social consequences of climate change and on 1.2 The link with greenhouse gases possible policy responses and their effects. I There is scientific evidence that, other things begin by outlining the links in the chain that equal, increasing emissions of carbon dioxide lead to the view that climate change will be and other greenhouse gases will bring rising damaging and make some initial comments world temperatures. However, in the absence on them. of complete scientific knowledge, the list of the ‘other things’ and their effects is long but 1.1 A climate change trend? incomplete. There is considerable Since the climate is always changing, the controversy over the significance of damaging change hypothesis is difficult to man-made emissions, compared with all the pin down, but I was careful to specify it as other effects on temperature. Most climate implying a trend towards global warming. I scientists would, like most economists, take it that those who support the hypothesis readily admit that their models are gross must think there is a such a trend. If we were simplifications and that large areas of merely in the upward phase of a cycle, ignorance remain. Working out what happens caused by natural forces, presumably there when other things are constant is therefore would be much less cause for concern not easy and it seems that experience in the because, by definition, the direction of the twentieth century must lead to some doubts cycle would reverse and global warming about the exact causal link between would be replaced by global cooling. emissions and warming: despite continuously Determining whether warming is a trend or rising emissions during the century, the just part of a cycle is extremely difficult, given warming occurred in two periods (1920-1940 the apparent very long time scale of climatic and 1975-1998), with slight cooling in change, yet, from a policy point of view, the between the two periods and no clear trend distinction between trend and cycle is clearly in the last ten years or so. vital: if warming is to be replaced by cooling in the relatively near future, as part of the

7 For such a critique see Robert M. Carter et al, ‘The : A Dual Critique – Part 1 The Science’, in World Economics, Vol 7 No 4, Oct-Dec 2006.

2 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics 1.3 Economic and social consequences alarmism in the first part of the lecture, at the Even if it could be established that there is a end I will accentuate the positive and clear warming trend caused by greenhouse suggest how it might be best to face a very gas emissions, there are still important uncertain future prospect. questions to be answered about the extent My starting point is to try to place the global to which natural adaptation will deal with any climate change debate in a more general economic and social consequences or context. whether, if action to combat the trend should be taken, what form it might take and what 2. The context the costs might be compared with the benefits. Some economists, such as Sir 2.1 The conventional wisdom Nicholas (now Lord) Stern, have attempted The first context takes us back to the ideas to answer these questions and to say what of John Kenneth Galbraith who, in The actions are required8. But, in the process, Affluent Society9, coined the term they have used some of the most heroic ‘conventional wisdom’ which in a nice phrase assumptions I have ever seen and tried to he described as ‘the name for the ideas peer into the far distant future. which are esteemed at any time for their Bearing in mind these broad issues, in the acceptability’. Galbraith went on to point out rest of the lecture I will try to deal with a that, since exposition of the conventional number of matters which seem important in wisdom ‘has the approval of those to whom deciding whether scepticism is justified about it is addressed’, it is always in great demand claims that damaging man-made climate and ‘it follows that a very large part of our change is in prospect. My purpose is not to social comment – and nearly all that is well say that there is no such prospect, but to regarded – is devoted at any time to argue that the sceptics should be taken articulating the conventional wisdom’. The seriously and that we should be careful not conventional wisdom is regarded as ‘more or to plunge into large-scale, expensive, less identical with sound scholarship’ and ‘its centrally run programmes to combat position is virtually impregnable.’ prospective climate change based on the Galbraith’s notion of the conventional wisdom assumption that we know more about the is a powerful one. The prevailing view that future than is possible. After making some damaging climate change is in progress and rather critical comments about climate

8 N.Stern, The Economics of Climate Change, HM Treasury, 2006. A recent modeling exercise, concentrating on macro economic effects of policies to combat climate change, is in the April 2008 World Economic Outlook of the International Monetary Fund. 9 John Kenneth Galbraith, The Affluent Society, Mentor Books, 1958. The quotations are from Chapter II.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 3 will become worse in the future is clearly a relatively few dissenters as though they had major element in the conventional wisdom of little substance. The activities of the media the early twentyfirst century. It is an idea, in therefore reinforce the position of this piece Galbraith’s words, ‘esteemed for its of conventional wisdom rendering it, in acceptability’, and it ‘has the approval of Galbraith’s phrase, ‘virtually impregnable’. those to whom it is addressed’. Its But does the damaging climate change exponents are regarded as ‘sound scholars’. hypothesis have the other characteristic Leaders of the movement (for such it is) implied by Galbraith’s analysis of the assure their followers and anyone who will conventional wisdom. Is it no more than the listen that ‘the science is settled’, a repetition of ideas that people want to hear dismissive phrase, intended to indicate that and essentially empty of intellectual content? their view is beyond challenge. Or should we take it seriously? I will revert to As always, the conventional wisdom is that issue after discussing other contextual spread and its pre-eminence is maintained, matters. by ‘intellectuals’ most of whom, as Hayek pointed out, are essentially ‘second hand 2.2 A religious movement? dealers in ideas’10 rather than original My second context relates to the nature of thinkers. Prominent among today’s second the climate change movement. One major hand dealers are the numerous members of problem to which I have already alluded, the media who provide comment on faced by anyone who expresses any degree contemporary issues. Almost all embrace the of scepticism about the damaging climate view that immediate and drastic government change hypothesis, is that the scientific action is required to offset damaging establishment regards anyone who questions man-made climate change. Their general line the consensus about climate change and its is that it is obvious that such change is under effects in much the same way as heretics are way and that it is the duty of people (or, at regarded by religious movements. Indeed, in least, other people) to change their life styles, many ways, upholders of the consensus view particularly away from activities once thought are a religious movement. As Sir Alan liberating but now regarded as damaging, Peacock has argued, they have their own such as air and motor vehicle travel. The prophets and they readily denounce media tend to support the leaders of the ‘unbelievers’11. Those prophets look far into movement, treating the arguments of the the future, using not oracular powers as did

10 F.A.Hayek, ‘The Intellectuals and Socialism’, University of Chicago Law Review, Spring 1949. 11 Alan Peacock, ‘Climate Change and Human Freedom’, in Colin Robinson (ed.) Climate Change and the Market Economy, Institute of Economic Affairs (forthcoming) 2008.

4 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics their forebears, but models which attempt to all. In the words of the eminent psychologist integrate scientific and economic variables; George A Kelly, they see dreadful events which can only be ‘As a matter of fact, no confirmed averted if the present generation repents of prediction can be taken as evidence that the sins that are the root cause of these one has struck bedrock truth. If one thinks events; and they propose means of of science as a simple digging operation atonement. On their view of the world, by which solid bits of truth are uncovered, scepticism is itself a sin. In an echo of earlier he is likely to be in for some times, the climate change prophets have in disappointments.’12 recent years tried to silence counter views and suppress dissent. August members of But the ‘science is settled’ view in effect the Royal Society, a body once noted for its assumes that bedrock truth has been struck cultivation of debate in science, are now in the case of the science of climate change. leaders of the ‘science is settled’ camp: the It replaces genuine scientific enquiry and only debate they consider to be legitimate is challenge by undue faith in the most recent about choice among the different forms of hypotheses. Karl Popper would certainly the centralised action they believe is required have had something to say about this to deal with the problems they foresee. attitude to hypotheses in scientific inquiry.13

Moreover, the scientific establishment has a Finally, on the ‘science is settled’ issue, it is view of scientific progress which seems worth quoting some views that were quite surprising in a historical context expressed about prospective climate change because it rests on the idea that any branch in the 1970s, when climate change fears of science discovers a ‘truth’ which then were a sub-plot in a world dominated by remains untouched as it moves on to find concern about an ‘energy crisis’. The other ‘truths’. Surely this is not an accurate consensus then among climate scientists description of scientific progress over the was the opposite of today’s: global cooling years which constantly questions hypotheses was the perceived threat14, as an article in and overturns them, often replacing them as Newsweek at the time made clear. they are discovered not to be the ‘truth’ after

12 George A Kelly, `Ontological acceleration’, in B.Maher, Clinical Psychology and Personality, John Wiley, New York, 1969. 13 Karl Popper, The Logic of Scientific Discovery, Routledge and Kegan Paul, 1959. 14 See, for example, Colin Robinson, `The Depletion of Energy Resources’ in D.W.Pearce (ed.) The Economics of Natural Resource Depletion, Macmillan, 1975.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 5 ‘The central fact is that after three these studies argue that the effect on world quarters of a century of extraordinarily temperature of man-made greenhouse gas mild conditions, the earth’s climate seems emissions is very small compared with the to be cooling down…Climatologists are effects of solar activity, which is the dominant pessimistic that political leaders will take influence, and that a cooling trend is in any action to compensate for the climatic prospect. change, or even to allay its effects. They concede that some of the more 2.3 Past apocalyptic forecasts spectacular solutions proposed such as My final context is based on the observation melting the arctic ice cap by covering it that supporters of the doomsday view about with black soot…might create problems climate change are usually so bound up in far greater than those they solve.’15 their own predictions of doom that they fail to recognise something very important – that Some climate scientists will claim that they they are part of the apocalyptic forecast now know much more about the climate so genre, which again has religious roots. we should not assume that the errors of Apocalyptic forecasting, of which predictions present predictions will be on the scale of of the dire consequences of climate change those associated with past predictions. That are one example, has a long history, which seems to me close to the ‘bedrock truth’ can be traced back at least to the Old idea of scientific discoveries. I suspect that Testament prophets17. The New Testament, there is a vast amount more that they do not of course, provides the somewhat more know and so it should be a matter of recent and more specific source document concern to those who now claim that ‘the for the genre, in the Revelation of St John science is settled’ in favour of global warming chapter 6, where the four horsemen that the opposite view was generally held represent the forces of man’s destruction and only thirty years ago. There still are adherents where, following catastrophic events, of the global cooling view whose papers have recently received more attention ‘…the kings of the earth, and the great men, because of the failure of world temperatures and the rich men, and the chief captains, and to rise in recent years and because some the mighty men, and every bondman, and recent studies have stressed the weight that every free man, hid themselves in the dens should be attached to natural variations in and in the rocks of the mountains’.18 climate16. As I understand them, many of

15 Newsweek, 28 April 1975. Julian Morris pointed out the Newsweek article to me. 16 An excellent source of information about such studies is Benny Peiser`s electronic network CCNet. 17 Colin Robinson, The Technology of Forecasting or the Forecasting of Technology, Surrey Papers in Economics, 1972. 18 Revelation, chapter 6, verse 15, King James (Authorised) version.

6 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics Although the events, foretold in Revelation, forecasts in the past suggests that, which caused everyone to hide are regardless of the precise nature of the particularly disastrous - the sun turns black, expected source of doom, there are the moon is like blood and the stars fall to underlying reasons why, periodically, such earth - subsequent history is littered with forecasts emerge. Rather than being forecasts which are recognisable as aberrations, they are evidently part of the belonging to same apocalyptic category in normal course of events. The explanations that dreadful events are foreseen unless are probably quite simple. First, as regards people repent from some sin. As already the supply side, the prophet of doom is a explained, latter-day prophets of doom can member of a profession which, as well as be seen in a quasi-religious context in which any money income it may earn, enjoys they provoke feelings of guilt and then psychic income from the effect of its propose means of atonement. A prophecies on its audience: individual characteristic sin is supposed lack of prophets may or may not be clothed in concern for future generations. So, for sackcloth and ashes but they enjoy supplying example, a recurring theme in the twentieth mental discomfort to their listeners or century was the claim that people were readers. exploiting the earth’s resources at a Second, and probably more important, the destructive rate which would leave insufficient apocalyptic forecast is a natural reaction to for future generations: atonement was by the pervading state of uncertainty which acknowledging the error of their ways and creates both anxiety and a demand for adopting policies, such as reducing rates of predictions. At any point in time, any depletion, which would leave more for their intelligent person can see numerous successors. The prevailing concern now is problems to which solutions have not yet essentially that people are using up too much appeared. That is so for the rather obvious of the earth’s environmental resources. Both reason that human ingenuity can, by views belong to an ecocentric tradition which definition, only be directed at solving stresses the value of the ‘natural’ problems after they have been perceived as environment and regards most human such. Consequently, an abundance of activities as damaging. I will come back to unsolved problems is the norm. It is not these views. difficult to find issues about which to be As each apocalyptic forecast emerges, there anxious - either that no solution is possible or is a tendency to regard it as unique, with little that, if it is possible, it will not appear in time. recognition that it belongs to a general class But the presence of unsolved problems is of predictions. But the prevalence of such not, in itself, particular cause for concern. In

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 7 the words of Dennis Gabor, ‘The problems of Of course, none of these observations about fifty years hence will not have to be solved by contexts should, on its own, lead us to our present-day technology but by that believe that the doomsday view is incorrect. which we shall possess in twenty or thirty But I think they should make reasonable years’ time’19 people enquire further about the extent to which it can be supported. Seen in this context, one way of regarding the apocalyptic forecast is as part of the 3. Centralised action and process by which unsolved problems are apocalyptic forecasts indeed solved. By raising awareness of an issue, the forecaster sets in motion forces Another characteristic of the apocalyptic that produce solutions. On this view, the forecast is that, as well as being a forecast, it apocalyptic forecaster – whether St John or, always contains a call to action. It comes in at a lower level, Sir Nicholas (now Lord) Stern two parts. Part one is the ‘conditional’ – is an unwitting part of the great machine forecast – what would happen on unchanged that stimulates human ingenuity into policy. Part two is the plan – what should be producing the advances in knowledge and its done to avoid the dire consequences which application that deal with the problems that the forecast has revealed. The latter-day always confront us. I shall return to that apocalyptic forecaster, when turning to the argument. plan, almost invariably recommends centralised solutions carried out by To summarise, the doomsday view of climate governments and international organisations. change should be placed within several It would be unusual, if not unprecedented, contexts. First, it has become part of the for someone, having seen the apocalypse, to conventional wisdom so that it is constantly recommend leaving solution of the foreseen reinforced by repetition. Second, it appears problems entirely to decentralised market to be similar to a religious faith, which thinks forces. He or she will be too impatient and it has uncovered a truth which should not be too distrustful of market processes to be questioned and which therefore tries to willing to permit decentralised forces to work suppress dissent. Finally, the view belongs to out ways of dealing with the perceived a general class of apocalyptic forecasts problem. Recommendations are usually for which appear periodically primarily because some direct government intervention in the problems naturally precede solutions. market, though the use of ‘market instruments’ (see below) may also be

19 Dennis Gabor, Inventing the Future, Secker and Warburg, 1963.

8 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics recommended. In either case the of self-interest by people in organisations that recommendation will be for national have a monopoly of policy-making is most government or international action so that unlikely to be to the public benefit. Public someone is seen to be doing something. choice theory – which is largely concerned with government as it is - has shown the But there is a serious problem with the view dangers of assuming, as much mainstream that centralised action, via governments and economic theory does, that politicians and international organisations, is required to bureaucrats, domestic and international, are avoid the apocalypse. This form of action wise, far-sighted and disinterested and will suffers from the same inherent problems as simply identify and then pursue the ‘public does central planning which, it is now almost good’20. universally acknowledged has, wherever it By contrast, the market system is essentially has been tried, failed. Briefly, there are two a massive problem-solving mechanism which reasons. First, the information required for it offers a continuous referendum on choices. to work – which is information about the Markets may appear to operate slowly and future – cannot be gathered by centralised ‘imperfectly’ but they do so surely. authorities. Information is not available off the Competitive markets are powerful adaptive shelf, to be collected together in Whitehall or systems which contain strong incentives to similar locations, because it is essentially solve the problems of the day, whether trivial decentralised and much of it is tacit. The or apparently serious. Unfortunately, the production and dissemination of information essence of the market’s functions is often are primarily market phenomena and the clouded by the mechanistic neo-classical suppression of markets, which is the models used by many economists which inevitable consequence of centralised action, concentrate on end-states of markets rather also suppresses the information that planners than the processes by which they adjust to would need if they were to operate change. successfully. One of the great insights in economics is The second problem is that, even if the Hayek’s – that competition is a process of information were available, the incentives to discovery, quite different from stylised deal with problems are lacking. There is no textbook models of competition which show Whitehall counterpart to the powerful the states of markets once competition has self-interest motives to solve problems that been exhausted. That insight is the key to exist in markets. On the contrary, the pursuit

20 For example, Gordon Tullock, Arthur Seldon and Gordon Brady, Government: Whose Obedient Servant? Institute of Economic Affairs, 2000.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 9 understanding the problem-solving power of because it is the most recent and the one markets21. Competitive markets provide the which bears similarities to the concerns of information and the incentives which spark today, is the ‘energy crisis’ of the 1970s the discovery process in which human when there was a consensus that rapid ingenuity is exercised to deal with economic, depletion of energy resources (especially social and technological problems. crude oil), allied with the exploitation of Marketplace incentives, operating mainly monopoly power by the Organisation of through price signals, induce entrepreneurs Petroleum Exporting Countries (OPEC), to seek out and then exploit market would result in ever-rising energy prices. ‘The opportunities so as to make profits. days of cheap energy are gone for ever’ was Sometimes, entrepreneurial action may result the slogan of many commentators, unwise in no more than the discovery of a slightly enough to think they could see ‘for ever’ into cheaper way of making a product or a the future. There was near-universal slightly more efficient method of organising a agreement that only centralised action by firm. At other times, it may result in a major governments and international bodies could invention and its subsequent exploitation with avoid a major world energy crisis. In the global consequences. On a Hayekian view, event, despite the almost total absence of the apocalyptic forecaster/planner who the government and international action that believes he or she can see a long way into had been deemed so important, energy the future and has the answer to the world’s markets adjusted to the ‘crisis’ so that, within problems, substituting for and surpassing the ten years, the world was (by the mid 1980s) problem-solving capabilities of markets, has awash with oil and OPEC was meeting to try been misled into the ‘pretence of knowledge’22, to prop up crude oil prices. Instead of crude if not into a ‘fatal conceit’23. oil prices tripling in real terms by the end of the century, as had been the consensus of Of course, no one can be sure that there will forecasts in 1980, they began to decline always be an economic or technological fix almost as soon as the forecasts were made for every conceivable problem that ever and halved by the end of the century. Even arises. But past history, including the failure today, despite recent increases in crude of predicted catastrophes to materialise, prices, they are still only slightly higher in real suggests that market systems can act terms than in 198024. One of the interesting effectively to deal even with predicted global questions in the climate change debate, disasters. One particularly apposite example,

21 F.A.Hayek, ‘The Meaning of Competition’, in Individualism and Economic Order, George Routledge, 1948. 22 F.A.Hayek, ‘The Pretence of Knowledge’, Nobel Prize lecture, 1974. 23 F.A.Hayek, The Fatal Conceit, 1988. 24 BP’s Annual Statistical Review of Energy shows a series of crude oil prices back to the early days of oil exploration and discovery in the second half of the nineteenth century.

10 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics which I will come to later, is the extent to because they have short time horizons and which we can rely on market forces to deal do not pay sufficient regard to the interests of with any emerging problems associated with future generations - as the Stern review climate change. argues, their implicit discount rates are too high. I return to the discount rate issue later. 4. Modelling and uncertainty: the But there are good reasons why individuals example of the Stern Review and organisations do not habitually peer many years into the future and act on what At the root of most attempts to forecast cli­ they think they see. It is because, in practice, mate change and its effects are models it is not possible to see far into the future and which combine climatic factors with econom­ make enough sense of it to act usefully on ic variables. The British 2006 Stern review of the results. Inability, not unwillingness to look climate change is a notable example, includ­ into the far distant future is the issue. ing detailed modelling in a long and detailed Consequently people and organisations take report which looks ahead a very long way. limited views of the future, taking what action Different time horizons are used in different they can to anticipate future events but also places but they are all very distant. The adapting as they go along, using review explains, rules-of-thumb and other simple decision ‘The analysis of climate change requires, rules to muddle through in the presence of by its nature, that we look out over 50, uncertainty. With decentralised 100, 200 years and more.’ decision-making in markets, there are many (Executive Summary p x) views of the future and the forecasting problem is ‘solved’ imperfectly through It joins the Intergovernmental Panel on different forecasts, rules of thumb and Climate Change (IPCC), some of whose adaptation. Those who are broadly right are scenarios it uses, in taking a very long term more likely to make profits than those who view. Quite properly, in various places the are wrong. review expresses due caution about interpreting the results of modelling so far In the climate change case, the danger is ahead which requires ‘caution and humility’, that, given our very limited ability to foresee though by the time conclusions are drawn changes in climate, technology, the economy such reservations seem to fade. and society, long term views are more misleading than helpful. Human myopia Looking ahead for long periods is often cannot be overcome simply by well-meaning supposed to be virtuous. Both markets and attempts to build models that purport to peer governments are sometimes criticised decades and centuries ahead. Action taken

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 11 now, in anticipation of supposed long run modelling. Modelling is a valuable tool in trends, may concentrate on the wrong issues economics because it forces the conceptual and make matters worse rather than better. structures of models and their parameters to As explained earlier, centralised action, which be made clear. Moreover, as professional constitutes a large part of Stern’s forecasters know, in principle it permits recommendations, risks major mistakes. learning from experience in the sense that a Such action, by governments or international post-mortem on a forecast (which, except by organisations, concentrates on consensus chance, will be incorrect) will reveal whether views (which have frequently been wrong in structure or assumptions were at fault26. the past), creating information monopolies But when the system that is being modelled and suppressing dissenting opinions. It is poorly understood and the intention is to suffers from essentially the same problems make predictions over a very long period as now discredited central planning. ahead (so that huge unforeseeable changes Information monopoly has become a which affect model structures are likely) there particular problem in the case of climate is a clear danger that formal modelling will change. As David Henderson has pointed mislead. In the climate change case, the out, governments have allowed the Stern review, for example, uses some models Intergovernmental Panel on Climate Change that purport to ‘integrate’ climate models to become a near-monopoly as regards with models of economic and social linkages information and views about climate to climate change. Integrating two poorly change25. He has argued that the processes understood systems and making projections of the IPCC are flawed in various ways, but in for long periods ahead, far outside the range particular because its work is biased since of previous experience, moves the ‘forecasts’ those involved in its work are all ‘true into unknown territory, surrounded by believers’ that urgent action to tackle global massive uncertainty. Moreover, the danger is climate change is required. The scenarios that, because the models appear to be able published by the IPCC, which look forward to quantify the future, the results will be given almost a century, have certainly become very far more weight than is their due. Where influential in forming and reinforcing the these modelling exercises are discussed27, prevailing consensus about climate change. the Stern review acknowledges the uncertainties around its results. But caution In addition to the time horizon, there are seems to evaporate as the review goes on. underlying problems related to this kind of

25 In a number of papers. See, for example, David Henderson, `Governments and Climate Change: Questioning a Consensus’, in Colin Robinson (ed.) Climate Change and the Market Economy, op cit. 26 Colin Robinson, Business Forecasting: An Economic Approach, Nelson, 1970. 27 For example, Chapter 6

12 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics Towards the end we can observe examples 5. Markets and global environmental of a common phenomenon against which problems forecasters have to try to guard – that, Heroic attempts to quantify changes in because of the amount of effort they have climate and their effects centuries ahead give put into their predictions, they begin to a false impression that such quantification believe in their own results, no matter how can be helpful and suggest that the outlook shaky the foundations. Hence, on page 450 is more certain than it is. Nevertheless, one we read. should beware of jumping from the ‘This Review has made a compelling case deficiencies of the Stern Review and its ilk to for action – on both mitigation and the conclusion that future climate change is adaptation – demonstrating that the global not and cannot be a problem. It is conceiv­ economic costs of business as usual able that man-made climate change is paths are likely to far outweigh the costs occurring and that in the future it will cause of taking action to reduce the risks.’ difficulties unless preparations are made to offset or adapt to its effects. This is a sepa­ And, by page 572, there are ‘clear and rate issue that ought to be examined. strong conclusions’ about the dangers of government inaction which could lead to 5.1 Differences in principle between resource depletion and global ‘..risks of major disruption to economic environmental issues and social activity, on a scale similar to those associated with the great wars and In principle, there are reasons why global the economic depression of the first half environmental problems might be more of the 20th century’ difficult to solve via markets than the apparently similar resource depletion It is simply implausible to believe that the problems that have in the past caused alarm models that Stern uses can reveal sufficient but which markets have dealt with so about the future for any reasonable person to adequately. A significant difference in the draw such firm conclusions. Because the case of resource depletion is that there are models relate to systems about which there price signals that encourage changes in the is considerable ignorance and because they depletion rate in the ‘right’ direction, as I go so far ahead, it seems most unwise to have explained they did at the time of the suggest that they can indicate so certain a ‘energy crisis’ in the 1970s and early 1980s. long term future. For reasons discussed by Harold Hotelling in

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 13 a seminal paper in the 1930s28, changes in establish, as with the global environment price expectations and discount rates tend to which is not owned by anyone, is difficult to determine depletion rates (assuming ‘enclose’ and so has no one to defend it, a technology and resource deposits to be case can be made for collective action. The given). For example, if there is a perception argument is that there will be a ‘global com­ of increasing scarcity of a resource, future mons’ problem. Just as common land may prices are expected to be higher relative to be over-grazed because it has no owner, use costs than previously anticipated, and there of the environment will appear to be free as are two effects that increase the life of far as a polluter is concerned. Consequently, remaining resources. First, resource owners it is argued, there will be an external cost that cut current production, holding back is not fully taken into account by the market resources to reap the higher profits they and a tendency to overuse the environment expect from selling at increased future prices: as a sink for wastes. The natural environ­ as they reduce supply, current prices ment has ‘public good’ characteristics in that increase. Second, this increase in current people cannot be excluded from using it and prices induces consumers to reduce their so no charge can be made for that use. For demand. It was such effects that turned the such reasons, the Stern Review describes oil ‘scarcity’ of the 1970s to the oil ‘surplus’ climate change as the result of the ‘greatest of the 1980s. But these benign market market failure the world has ever seen’29. effects depend on the presence of The specific case for collective action is that appropriate market institutions, and in individuals and organisations that burn fossil particular on there being reasonably fuels have little incentive to reduce the emis­ clearly-defined and enforced property rights. sions of carbon dioxide that ensue because they bear merely the private costs of their 5.2 Property rights and market ‘failure’ actions (the price of the fuel and associated In general, provided property rights are clear costs): these private costs are less than the and are enforced, as they are or can be for full social costs of those actions, including many environmental assets, owners will the adverse impact on world climate. Hence, defend their rights against potential polluters the argument goes, the external costs should as they would against other intruders and be incorporated directly or indirectly by markets will work reasonably well. But where government, acting on behalf not only of property rights do not exist or are difficult to those of us alive now but future generations.

28 Harold Hotelling, `The Economics of Exhaustible Resources’, Journal of Political Economy, 39(2), 1931. 29 Stern, op cit, Introduction, page viii.

14 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics 6. Concern for future generations large amounts of coal now but, since we would have foregone all the investment and The question of concern for future technological advance associated with the generations is worth further discussion. The extraction of millions of tonnes of coal, in resource depletion case will again illustrate material terms we would be much worse off the issues. Throughout the twentieth century than we actually are. there was periodic concern about natural resource depletion. Since there is apparently Looking at the matter from the perspective of a finite stock of oil, coal, natural gas, the present day, when considering what we uranium, the metals etc, should we be using should forego for the benefit of future those stocks or should they be conserved for generations, we should think about relative future generations? It is a difficult question. levels of prosperity as between ourselves and First, which future generation are we future generations. The history of recent concerned about? Is it those living late in the centuries is of a strong economic growth twentyfirst century or, for example, those trend which, if continued, will mean that living in and around the year 3000? The looking ahead no farther than the last quarter actions we might want to take would be of the twentyfirst century, our successors will quite different depending which future be very much more prosperous than we are. generation is our prime concern. Second, Economic growth at a rate as low as 2 per what would we actually do? Usually it is cent per annum would quadruple income assumed that some stocks should be held levels compared with now. back for people living in the future. That is The prescription of the proponents of the not a straightforward strategy, first because doomsday view of climate change that we the amount that is set aside depends on how should invest heavily now to reduce the distant are the generations about which we prospects of damaging climate change in the are concerned, but second because keeping future parallels the view that, two hundred back resources for future generations is not and fifty years ago, people then alive should necessarily doing them a favour. have invested in coal reserves in the ground Think what would have happened if, two for our benefit. In effect, the proposal is that hundred and fifty years ago, at the relatively poor people now should reduce beginnings of the ‘industrial revolution’ in their incomes to benefit people in the future Britain, some central planners had decided who are likely to be very much richer. In that they ought to conserve Britain coal those terms, their ‘remedies’ look much less reserves for the benefit of people living in the appealing than when they say we must act early twentyfirst century. We would have very for the benefit of future generations.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 15 Economists like to pose these questions in governments to promote energy sources or terms of discount rates. At what rate should technologies that promise to reduce carbon the future be discounted? Some, like Stern, emissions. The two main candidates are think that the social time preference rate nuclear fission power and ‘renewable’ forms should be close to zero to reflect concern for of energy (those that do not diminish a future generations. That way, lie enormous capital stock), such as wind, solar, wave, problems. For the reason just given, there hydro power and biofuels, though there are seems little reason to weight intergenera­ also hopes for ‘clean coal’ technologies and tional transfers in favour of the wealthy. And, for technologies that would capture and store if it is argued that climate change projects in carbon. particular should benefit from a specially low In recent years, many governments in discount rate, all kinds of distortions are likely developed countries have been wary of to appear. A hidden effect, which may or permitting nuclear investment, partly because may not be an unintended consequence, is of the long history of over-optimistic cost that trying to incorporate in the economy a forecasts for nuclear power31, but principally discount rate that is much lower than firms because of the potential adverse effects actually use can only be done by a associated with nuclear fuel use and storage considerable expansion of the government that have made nuclear power unpopular sector which would either have to carry out with electorates. In the face of climate the necessary projects itself or raise funds in change fears, however, there are signs of a taxation to subsidise the private sector to do revival of interest in nuclear generation, in so30. Britain as elsewhere. 7. The policy response Renewable sources are already being promoted heavily. The British government, for What policy response would be appropriate, example, is providing large subsidies for wind given all the uncertainties about future power in the hope of reaching a target of 10 climate change and its effects? per cent of electricity generated from renewables by 2010, with an ‘aspiration’ of 7.1 Picking winners 20 per cent by 202032. The European One response would be direct action by Commission is setting even more ambitious

30 For a discussion of the discount rate issue in climate modeling see Ian Byatt,`Weighing the Present against the Future’ in Robinson, Climate Change and the Market Economy, op cit. 31 Colin Robinson and Eileen Marshall, `Can a New Nuclear Programme be Justified’, Economic Affairs June 2006. 32 These various targets and measures to try to achieve them are set out in DTI , Our Energy Future – Creating a Low Carbon Economy, Cm 5761, 2003; DTI, The Energy\Challenge, July 2006; and Department for Business, Enterprise and Regulatory Reform, Energy White Paper, May 2007.See also David Simpson, `The Economics and Politics of Wind Power, in C.Robinson (ed), Regulating Utilities and Promoting Competition, Edward Elgar, 2006.

16 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics targets that would involve member states of specific failings of particular Ministers but increasing the share of renewables in their for much deeper reasons of principle energy (not electricity) supplies to 20 per cent involving inherent information failures and the by 2020. Another form of direct government influence of pressure groups. Some of the action, but on the demand rather than the climate change ‘winners’ that have been supply side, is to try to persuade consumers picked are already being seen as ‘losers’ – to use less energy by subsidising home for example biofuels, where there are serious insulation and other means of “conservation”. doubts whether certain biofuels will actually All manner of restrictions on people’s result in net carbon-saving compared with freedom to choose fuels and technologies the alternatives. Unintended consequences are now being imposed, with five year are also appearing, as again in the case of ‘carbon budgets’ in the background (under biofuels, where government support seems a proposed new Climate Change Act), in an to have resulted in rising food prices because attempt to influence consumers to change of the increased demand for land to grow their ways in directions the government these crops. Nuclear power is another thinks desirable. Every effort is being made, ‘winner’ that may not be all that it seems: an for example, to make owners of ‘gas accident anywhere could cause such an guzzling’ cars feel guilty and to tax them adverse reaction that there might be heavily. widespread shutdowns or derating of operating reactors. The problem with direct promotional action for particular fuels, with subsidised energy Analyses of climate change policy which urge conservation and with regulation to enforce direct action by governments are silent on behaviour is that such measures do not these issues of principle about the ability of address the basic property rights issue that is government to take successful direct action at the root of the apparent climate change to promote particular energy sources. They problem. Instead, it involves government in ignore the economic analysis of government the difficult process of ‘picking winners’, action, exemplified in ‘public choice’ theory34, whether that ‘winner’ is nuclear power, or and the Hayekian view of competitive renewable energy or energy conservation or markets. some apparently promising technology. Past The Hayekian critique of government action, attempts at picking winners have been as explained earlier, emphasises the role of notoriously unsuccessful33, not just because markets as discovery processes which

33 For example, David Myddelton, They Meant Well…IEA Hobart Paper 160, 2007. 34 As developed principally by James Buchanan and Gordon Tullock, though the public choice approach has its roots in the work of David Hume and Adam Smith. See Alan Peacock, Public Choice in Analytical and Historical Perspective, CUP, 1992.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 17 produce information and embody powerful 7.2 Using economic instruments incentives to solve incipient problems which If we rule out direct action by governments, governments cannot match. It is for the reasons just suggested, we are left complemented by the public choice critique with an approach which is more appealing to which suggests that the chances are low that mainstream economists because it governments will improve welfare by addresses the property rights problem. That attempts to pick winners. Governments are is to apply standard microeconomic theory not disinterested servants of the public good. by introducing some general ‘economic’ or They are complex organisations, where ‘market’ instrument that will take into self-interest is likely to play a major part in account the externality and will then allow the decision-making, and they are, for example, market to adjust without being constrained susceptible to the influence of pressure by the views of the government about which groups (unmentioned and apparently energy sources are most acceptable and unrecognised in the Stern Review) which are how much energy should be conserved35. likely to be very influential in pushing their own interests when governments are known One such instrument would be a ‘’ to be searching for technologies to support. – a tax on fuel that varies according to the As explained earlier, governments face the carbon emissions produced when the fuel is most serious problem of central planners – burned - which would attempt to move the that they cannot gather the information they price of carbon-emitting activities closer to need, which is essentially decentralised and what they ‘should’ be. Another instrument would have been produced by markets had it would be a carbon trading scheme under not been suppressed by government which permits to emit specified amounts of intervention. Into the vacuum come pressure carbon are allocated (preferably by auction36) groups that supply information that supports and trading of those permits encourages their causes and ‘blinds with science’. efficiency in reducing emissions: such a Consequently government policies, far from scheme would allow a price of carbon to being pursued in the ‘public interest’ are emerge. Carbon trading is favoured in the frequently significantly biased in favour of Stern Review and there were experiments pressure groups. with such schemes before one was introduced by the European Union in January 200537.

35 Eileen C Marshall, `Energy Regulation and Competition after the White Paper’ in C.Robinson (ed) Governments, Competition and Utility Regulation, Edward Elgar, 2005. 36 Allocation other than by auction invites lobbying, as in the case of the allocation of North Sea exploration and production licenses of which few have been auctioned. 37 C.C. Nicholson, `Emissions Trading: A Market Instrument for Our Times’, in Governments, Competition and Utility Regulation, op cit.

18 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics Using market instruments, such as carbon damaging. But, to guard against possible taxes or carbon trading, should reduce the damaging climate change, we could take potential for government failure, as compared counter action by pricing carbon, either by with direct government action. However, so taxing it or by establishing carbon trading far governments seem unwilling to rely on schemes. market instruments and instead insist on At this point, mainstream economic theory trying to pick some winners as well. For has no more to say. But we should have example, both the British government and qualms about stopping analysis at this point. the EU authorities are setting targets for I understand the view of economists who ‘winners’ (such as renewables) as well as make the case for ‘market instruments’, using carbon trading. The whole point of particularly if their case is that, once such carbon trading is that it should put a price on instruments are established, direct action by carbon, thus leaving producers and governments is both unnecessary and consumers free to decide what fuels should undesirable. Nevertheless, we should be used and avoiding the need for further recognise that there is an element of government intervention to determine fuel misrepresentation in the term ‘market’ choices. There should be no need, for instrument. Carbon taxes and carbon trading instance, for governments to decide whether could just as well be labelled ‘interventionist’ or not there should be nuclear power instruments. In one case, the government programmes. sets a price and lets the quantity of carbon adjust: in the other case, it sets a quantity 7.3 A case for collective action? and lets the price of carbon adjust. I am To summarise, there is a theoretical case for reminded of Ely Devons’ definition of collective action (which could include action government as ‘the art of taking decisions in by governments and international a state of relative ignorance’38. Whether it is organisations or voluntary action) where there setting prices or quantities, a government is appear to be particularly damaging acting in ignorance of what the price or the environmental effects that cannot be reduced quantity ‘should’ be. Real-world governments by the allocation of property rights. invariably fail both in their diagnoses and their Anthropogenic global climate change may be prescriptions and their actions result in an example. We do not know whether it will unintended consequences. occur and, if it does, whether it will be

38 Ely Devons, `Economists and the Public’, Lloyds Bank Review, July 1965.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 19 The problem of ignorance is compounded in freedom (in effect, an external cost of the climate change case. If there is to be government action). centralised action to combat climate change To sharpen discussion, take the neglected it should be international – otherwise, question of whether, even if there is genuine activities will migrate to areas where control evidence of damaging climate change, of emissions is relatively lax (thus possibly governments can be trusted to act effectively. increasing world emissions if, for example, Or will they give priority to appearing to be there are inherent reasons why energy is doing something, as they did in the energy used less efficiently in those areas). But, at ‘crises’ of the 1970s? There is a great deal of the international level, the ignorance problem political posturing going on at present about is maximised because the ‘centre’ where climate change policy. In the EU, for decisions are being made is even farther example, summits and other gatherings away from where the information resides result in grand declarations about targets for than is ‘Whitehall’. Moreover, international big cuts in carbon emissions in the very co-operative action is frequently undermined distant future. Nevertheless, at the same because of the incentives participants have time, member country leaders are to ‘cheat’, letting others bear the burden of undermining the targets they set collectively adjustment whilst they participate as free by lobbying to make sure that their countries riders. It is perhaps significant that the one or industries within their countries are treated example we have of a major carbon trading as ‘special cases’ that do not have to meet scheme - the European Emissions Trading the targets. The case for collective action Scheme - has been subject to such severe hinges on the idea that, in the absence of government failure that it may now be difficult clear property rights, the market will not work to rescue it from the discredit in which it well because there will be numerous free stands. riders. But most EU governments are at As far as government action is concerned, present ‘cheating’ and trying to obtain a free even if it relates only to the introduction of ride by letting their fellow member states ‘market’ instruments, there is a multitude of bear the costs of any carbon reductions. The possible problems. Given that it is setting same is true of the numerous international taxes or allowable amounts of pollution in a gatherings where politicians consider state of ignorance, how confident can we be successors to the Kyoto agreement. that the net effect of action will be Political leaders clearly want to gather the welfare-improving? Then there is the question electoral benefits of being seen to be ‘green’ of whether, if governments act, there will be a without actually imposing on their electorates significant encroachment on people’s

20 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics the costs of doing so. It is tempting to set external costs of government action. They very long term targets – such as reducing are genuine ‘automatic stabilisers’ which greenhouse gas emissions by 60 per cent by work whether central authorities will them to 2050 (or possibly 80 per cent, as some or not. would like), supported by five year carbon Even apparently massive problems – such as reduction targets, as the British government those foreseen in energy markets in the has done. But these targets go far beyond 1970s and early 1980s – tend to yield to any horizon in which present-day politicians market forces. Most mainstream economists are interested and should, I think, be treated assume that appropriate market institutions with great suspicion. In general, if there is to do not exist in the climate change case be an improvement in the market outcome because of the property rights problem I resulting from government action, the mentioned earlier, but that view can be government in question needs to be questioned. Even in cases where goods far-sighted, wise, able to identify the ‘public appear to be ‘public’, it may be that the interest’ and willing to pursue it. It is not, I degree of ‘publicness’ is exaggerated. An think, unduly cynical to question whether example is the case of energy security which either governments in representative political is often characterised as a public good but systems or international bureaucracies have which, in practice, is largely incorporated in such characteristics. markets because consumers and producers are very conscious of security and therefore 7.4 Can markets deal with the climate regard it as a characteristic of an energy change problem? good or service for which they are willing to By contrast, well-functioning markets with pay. Energy markets will therefore, through appropriate institutions tend to produce the interactions of consumers and producers, benign reactions to emerging problems. Even provide security.39 though the vast majority of intellectuals think One can argue along similar lines about the only of centralised action, there are great natural environment. It appears to be a public benefits in market responses, which permit good for the reasons I have mentioned, but gradual and flexible adjustment to perceived what if there is general concern that it is problems, which tend to act in the right becoming over-used? It is not necessarily direction (if not always as quickly as idealists irrational for people to contribute to the might wish) and which avoid the restrictions provision of ‘public goods’, even though they on freedom which are one of the principal

39 Colin Robinson, `The Economics of Energy Security’: Is Import Dependence a Problem?’, Competition and Regulation in Network Industries, Vol 8 No 4, 2007.

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 21 know they are supporting free riders, if the concerned that there will be damaging provision is regarded as sufficiently important. climate change in the future unless In Anthony de Jasay’s words, ‘…if the public something is done, it will demand and will be good is valuable enough, it is potentially supplied goods and services that are rational for non-altruists to contribute to it’40. deemed ‘green’ (in the sense of reducing They are concerned that otherwise the public greenhouse emissions). Market forces will good will not be provided. thus tend to correct any emerging climate change problem. The ‘perpetual referendum’ If there is sufficient concern about over-use which constitutes the market - which means of the environment, the effect will be as if it that people are voting every day by were owned. Actions by individuals are expressing their preferences - will produce characterised not so much by narrow votes for ‘green’ outcomes which producers, self-interest (in the self-centred sense) but by in their own self-interest, ‘not from broader interests which include concern for benevolence’41, will satisfy. family, friends and descendants. Let us assume that a large part of the population is Already, we can see such reactions all very concerned about the world in which around us. A surprising amount of marketing their children and grandchildren will grow up. now revolves around ‘green’ claims from This seems to me a reasonable assumption, suppliers of goods and services that they are though different from what is implicitly reducing their ‘carbon footprints’. No doubt assumed by many people who work in the some claims are false and others are climate change field who often display a exaggerated, but the important thing is that rather elitist and patronising attitude to their actions to mitigate climate change and its fellow citizens, as though concern for future effects are now regarded as potentially generations were purely their own preserve profitable. Consequently, a market reaction in and must be forced on to the hoi polloi. favour of ‘green’ goods and services is under way. It may be ‘imperfect’ and halting but, if In circumstances where there is widespread you regard the pursuit of profit as a more concern by individuals for future generations, certain mechanism for getting things done one would expect that both consumers and than action through the political process, this producers (the latter both spontaneously and market reaction is to be welcomed. As I as a reaction to the views of consumers) indicated earlier, forecasts of adverse effects would act in ways they perceive would from climate change may, provided they are protect their successors. If, rightly or wrongly, not too exaggerated, have the beneficial a significant part of the population is

40 Anthony de Jasay, `Public goods theory’ in Peter J.Boettke (ed.) The Elgar Companion to Austrian Economics, Edward Elgar, 1994. 41 Adam Smith, The Wealth of Nations, Book 1, Chapter 11

22 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics effect of stimulating decentralised action the climate change ‘problem’. They distrust through markets. their fellow citizens and, like all pressure groups (and they are one now) would like to This decentralised action will promote the see their own views implemented through the discovery, through the exercise of human medium of government. They characterise ingenuity, of means of adjusting to the the market forces route as a ‘do-nothing’ prospect of adverse climate change. approach. It is certainly not that. It relies on Adjustment to that prospect can, in principle, the reactions of millions of people and it take two main forms. First, it can stimulate seems to me perfectly possible that the actions that make such change less likely. decentralised market forces I have described, Second, it can promote adaptation to any which result from the expression of people’s change that still occurs. Obviously, we preferences, are capable of overcoming the cannot see now the details of the adjustment major obstacle to adjustment away from any process since those details are yet to be global environmental issues that may be discovered. We can, however, anticipate that emerging - the absence of property rights in the ‘greening’ of consumer preferences will, that global environmental (the global so long as it is the prevailing tendency, lead commons problem). The absence of an to declining greenhouse gas emissions per owner of the global environment will cease to unit of output, switching of fuel choices away be a serious problem if a large body of from high carbon-emitting sources and the people in effect become substitute owners related investments in buildings, plant, and therefore guardians of the natural equipment and vehicles that will provide the environment. greener products and services. These effects of voluntary action are very much the same 8. Conclusions: the apocalypse and as those sought by proponents of centralised practical policy action. But they seem to me to have a surer prospect of success since they rely on the In practical policy terms, once the superior information and more clearcut apocalyptic forecast is seen in context and incentives that markets generally provide, the likely failures of government action are compared with political and bureaucratic recognised, the case for urgent, centralised processes. action against climate change seems much less convincing than the conventional Of course, would-be centralisers, including wisdom of the day would have it. One does almost all those who carry out research in not have to be a ‘climate change denier’ to the climate change field, do not like the idea that market forces could be left to cope with

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 23 see that a degree of scepticism about the at present when we can see a spontaneous present consensus might be in order. In that market reaction in favour of ‘green’ products sense, I think that the sceptics are right. and services. The call for centralised action is Most likely, now – as in the past – many much more about the appearance of being analysts have become carried away by the busy than about useful action against climate results of their models, which purport to look change. It runs the risks of major errors, even into a far distant future, and have convinced in the direction of policy, and one should themselves that they must embark on a remember that centralised action is always crusade to enlighten others. Dissent must be difficult to change, even marginally, let alone discouraged and indeed, in a mild version of reverse if circumstances require. the Inquisition, the views of anyone who Economists who propose reliance on questions the conventional wisdom should markets to deal with natural resource and be disregarded and, if possible, suppressed. environmental problems are sometimes In such a climate, we need scepticism even if accused of being Panglossian42. But it brings condemnation by the top echelons remember what is the alternative. I suspect of the Royal Society. the true descendants of Dr Pangloss are those who have faith in very long term On a cooler view of climate change, a more forecasts of climate change and its effects constructive approach would be to recognise and who think that, in the face of recent the huge uncertainties that exist and to seek experience and examples they can see all flexible means of dealing with the problems round them, centralised action is the answer. that may arise. Direct promotion by In practice, if damaging man-made climate governments of particular ways of ‘solving’ change is in prospect, the only real hope of the perceived problems is unlikely to succeed avoiding the damage is probably through and is only too likely to have unfortunate market responses: the chances of effective side-effects, including constraints on action by governments and international individual freedom. Market instruments, such bodies seem to me very low. as carbon trading systems or carbon taxes are preferable to direct government action, A big advantage of relying on markets is their but they involve significant intervention flexibility and adaptability. Views about global without the knowledge on which to base that warming will change. It may appear a more action. I doubt whether they can be justified serious issue than now, in which case

40 Anthony de Jasay, `Public goods theory’ in Peter J.Boettke (ed.) The Elgar Companion to Austrian Economics, Edward Elgar, 1994. 41 Adam Smith, The Wealth of Nations, Book 1, Chapter 11 42 Dr Pangloss is a character in Voltaire`s `Candide’ who is excessively optimistic.

24 Annual Lecture 2008 Julian Hodge Institute of Applied Macroeconomics markets will enhance the profitability of communities on courses which are very ‘greenery’, so reacting in the ‘right’ direction. difficult to change as the views of climate Or it may seem less serious, so that scientists change. The late Arthur Seldon ‘greenery’ starts to go out of fashion and the once said that, given all the pressures there market again reacts in the right direction. are for government to expand and all the Can we be so confident that the big adverse effects of such expansion, when programmes now being urged by the climate considering policy we should ‘take a risk on change alarmists would show a similar under-government’43. Those were wise words degree of adaptability to changing and, in my view, directly applicable to the circumstances? They are all too likely to set present debate about climate change policy.

43 Arthur Seldon, The Dilemma of Democracy, Institute of Economic Affairs, 1998, Introduction

Julian Hodge Institute of Applied Macroeconomics Annual Lecture 2008 25 A history of past lectures

The first Julian Hodge Institute of Applied Macroeconomics Lecture was delivered in 2000. Since this time the lecture series held in Cardiff, has included some of the world's leading economists.

2000 - Sir Alan Walters - former Chief Economic Adviser to Mrs (now Lady) Margaret Thatcher. 2001 - Professor Otmar Issing - Board Member and Chief Economist, European Central Bank 2002 - Sir Alan Budd - Member of the Bank of England's Monetary Policy Committee and Chief Economic Adviser to the Treasury from 1991-1997. 2003 - Professor Bennett T. McCallum - H.J. Heinz Professor of Economics at Carnegie Mellon University, Pittsburgh. 2004 - Professor Danny Quah - Professor of Economics at the London School of Economics and Political Science (LSE). 2005 - Professor Nicholas Crafts - Professor of Economic History at the London School of Economics (LSE). 2006 - Ludovit Odor - Member of the Bank Board of the National Bank of Slovakia.

2007 - Paul De Grauwe - Professor of international Economics at the University of Leuven, Belgium.

Before this a series of lectures associated with Sir Julian Hodge commenced in 1970 entitled the Jane Hodge Memorial Lectures. 1970 - The Rt. Hon. Sir Leslie O'Brien GBE , Governor of the Bank of England. 1971 - M. Pierre - Paul Schweitzer, Managing Director of the International Monetary Fund (IMF). 1973 - David Rockefeller LLD, PhD, Chairman, Chase Manhattan Bank. 1973 - H.R.H. The Prince Philip Duke of Edinburgh. 1976 - His Excellency Sheikh Ahmed Zaki Yamani. 1984 - Robin Leigh Pemberton, Governor of the Bank of England. 1990 - Sir George Blunden, Deputy Governor of the Bank of England

The Julian Hodge Institute of Applied Macroeconomics therefore carries on the very proud tradition of promoting debate and understanding of present day economic issues.