Ape Man

Over at Marginal Revolution we read….

It was Jeffrey Sachs and Betsey Stevenson against myself and Will Wilkinson on the topic of whether America is failing in the pursuit of happiness. The Economist magazine was the sponsor and it was held in Gotham Hall in New York, which yes could have been out of a Batman movie.

Naturally, Tyler Cowen and Will Wilkinson won the debate. Mr. Sachs and Ms. Stevenson had overwhelming support from the crowd at the beginning of the debate (the debate was held in New York after all) but that was not enough to enable them to overcome the brilliance their opponents. Hooray for Mr. Cowen and Mr. Wilkinson! Down with the liberals!

But I have to say that I found the whole debate rather disturbing. Or rather, I should say that I find people who use happiness as a metric for judging a nation’s success disturbing. It always makes me feel as if people are being prepared to accept tyranny.

But let’s ignore my feelings for the time being. I can’t really argue against using happiness as metric on the grounds that it makes me unhappy for people do so. Instead, let us consider what the implications are of using happiness as metric.

First of all, what do happiness researchers mean by happiness?

As I understand it; happiness is a fundamentally amoral concept. Saying that a person is happy/unhappy is not a moral judgment. More to the point, it should be possible to come up with a biological definition of happiness in the same way that depression is now being defined in biological terms.

I think that economists are attracted to happiness research because it holds out the promise of having an objective biological standard that you can use to measure policy outcomes. Granted, right now happiness is self-reported and thus not objective. But there is no reason that it needs to stay that way. Besides, just because happiness is self-reported does not mean that it is a useless indicator any more then people’s self-reporting of pain is useless to medical professionals. In both cases, people are reporting a real biological phenomenon and there is no reason to dismiss what they say out of hand (though allowances should be made for cultural differences).

But why should economists want a biological means to measure policy outcomes? Whatever happened to physical measures of policy outcomes (i.e the increases or decreases in economic activity as measured in goods and services)?

The answer revolves around the truism that “money isn’t everything.” Even in the purely economic sense, it is obvious that people will sometimes voluntarily give up high paying jobs for low paying jobs in order to secure for themselves non-monetary benefits. In a small enough sample size this would cause aggregate goods and services to go down. Theoretically, then, a country with a slower GDP growth could be a more desirable place to live than a country with faster GDP growth.

Because of this theoretical possibility, economists have often been criticized for assuming that GDP growth is all. The argument is made that when economists (in particular neo-classical economists) evaluate policies solely on economists they wind up promoting policies that are actually harmful to people’s well being.

It is natural, then, that economists would look for a metric that could measure “everything.” It is also natural that they would turn to biological measures to do so. Are we not biological creatures? And is not happiness what we all strive towards?

But if people want to reject GDP growth (or lack thereof) as a measure of the success or failure of economic policies because they can give a misleading picture of what is actually good for people, then they should be even more leery of using happiness as a metric. What makes people happy is not necessarily good for them any more than having more material goods is necessarily good for them.

An analogy can be drawn to people’s appetite for food. Just because people have a natural biological desire for food does not mean that we should judge a policy’s success on the extent that it allowed people to indulge their biological appetite for food. That would be a policy that would encourage obesity.

If we use happiness as a metric, we risk similarly absurd policy outcomes. For example, why not put people on drugs that keeps them perpetually happy? Even if it shortens their life span somewhat, you still have increased the total happiness of your society. Even if the drugs increased people’s life spans, I would still argue that such a policy is harmful.

Such an example might seem extreme. But in a society that wants to drug up naturally active kids so that they will fit into the classroom environment better, it is not that farfetched.

But if Brave New World type scenarios seem like an unfair way to cast aspersions on happiness as a metric, why not look at the historical record? Take Adolf Hitler, for example.

As I understand it, the popularity of Hitler’s pre-war government had a lot to do with his success at making people happy without investing the time and effort to increase absolute wealth. That is to say, Hitler’s popularity did not come by increasing the amount of wealth in Germany, but rather he changed the Germans’ perception of their circumstances.

For example, I remember reading one study (which I don’t have time to find again for this short blog post) that showed that under Hitler, labor was actually worse off that it was under previous governments. Yet his popularity amongst the labor class actually grew even as they became worse off in absolute terms than they were previously. The authors of the study speculated that this was because their jobs became more secure even as their absolute income fell. (This was a natural result of the labor laws that Hitler passed early in his rule).

Was Hitler’s success at making people happy proof that his economic policies were beneficial to the German people?

Hitler might seem like an extreme example. But regardless of your ideological beliefs, you can find examples of things that make people happy that are not “good for them.” Conversely, you can find things that you think should make people happy but don’t. Will Wilkinson proves the latter point when he says…

The debate continues in my mind. At one point in the main event Stevenson cut me off to express incredulity that welfare benefits didn’t improve the average happiness of the unemployed. I certainly wasn’t making it up. I don’t know what explains the finding, but there are a number of reasons why this isn’t at all implausible.

One might be tempted to argue that while happiness over the short term is not very good metric but happiness over the long term is. But that raises the question; what is the short term?

For example, let us say that a whole generation promises themselves all kinds of benefits when they get older but leaves the legal obligation to pay for those benefits to the next generation. Let us say that those promised benefits increase the happiness of this generation because it frees them from having to worry about their future. So for decades this policy increases happiness even though its price has not yet come due. Is happiness a good metric by which to measure the success of this policy?

I am not trying be overly dogmatic. Societies that people want to live in will generally tend to have higher GDP growth per person than societies that people don’t want to live in. Similarly, I don’t deny that well run societies are generally happier that poorly run societies.

But if what made people happy was always the best choice for a society, then all societies would be well run. The fact of the matter is that what makes you happy is not always the right choice. Stay too focused on happiness, and everything will end in disaster.

Yesterday, I said….

Now I can’t get away from the sneaking suspicion that what Cramer says on television is what the rich and powerful are saying behind closed doors. Call me paranoid, but I would not be surprised to see Cuomo get slapped down. If your are a glutton for punishment you can watch the video of Cramer crying about Cuomo below.

Today, the slapping down of Cuomo started.

I have never had much use for peak oil believers. Their arguments are generally not worth the time it takes to read them. But my arrogant dismissal of peak oil has been shaken by Stuart Staniford. Unlike most peak oilers, Mr. Staniford really gives you something to think about.

While I was reading Mr. Staniford’s latest post, it struck me that he was one of the few people who have truly shaken up my view of the world in recent years. When I was a teenager this would not have been so noteworthy. But as I get older, it seems like I have seen every argument a million times already. In that context, Mr. Staniford is like a breath of fresh air.

I may have already said as much in some past post. I am too tired to take the time to check my archives. My point in bringing it up again (if that is what I am doing) is twofold. First, I want to encourage people to read Mr. Staniford’s latest post. Second, I want to raise an issue that runs contrary to everything that Mr. Staniford has been discussing.

I believe that even if everything that Mr. Staniford says is true, oil prices could drop like a rock in real terms in the near future. I can imagine most of the oil producing countries falling on hard economic times. I can imagine people wondering why they ever thought oil scarcity was going to be a problem

Given that oil prices are fast closing in on 100 dollars a barrel, this seems like a pretty wild statement. After all, even Mr. Rapier thinks that oil producers are going to do very well in the decades to come and he is the most intelligent critic that Mr. Staniford has. How can oil producers possibly suffer in the world of declining oil production that Mr. Staniford predicts?

The answer is simple. If demand falls by more than production, oil prices will crater even if production is off its peak. Most peak oilers do not foresee this happening because they know more about the history of oil production than they do economics. They assume that oil producers will always have the whip hand.

But let us say that a severe global economic downturn causes oil demand to drop like a rock. If it drops faster than production is “naturally” dropping off due to “peak oil,” then producers will have to cut back on production just to keep the price of oil from falling. But even if they do that, the oil producers will still be pulling in less money than they were before because they will be selling less barrels of oil for the same price per barrel. This ought to be self evident, but for some people it is not.

Some peak oil believers seem to think that oil producers could just cut way back on production and cause oil prices to stay high enough that oil producers will still make the same amount of money as before the drop in demand.

But this is false. Such a course of action would only cause demand to drop still further and the oil producers would be right back where they started. There is no way that oil producers can escape from the fact that falling demand (relative to supply) equals falling income.

What most people forget is that the thing that has been keeping oil prices high is not the fact that supply has been leveling off, but the fact that demand has stayed strong. If demand fell in line with supply we would not have seen the price run ups. But it has not, so prices have had to rise high enough to price people out of the market.

If you can understand how the income for oil producers will go down if demand falls faster than supply, even if you buy the peak oil view of potential supply, you should be able to understand how this situation would lead to lower oil prices.

Let us say that you are a country like Iran or Venezuela. Both of these countries are spending everything they’ve got right now even though oil prices are high. If their oil income falls, their economies are going to fall right along with it. They have no cushion.

If you were in these countries’ shoes, would you cut production when demand dropped? Especially if much of the benefit to keeping prices high went to the bigger producers? No, you would produce every last drop that you could in an effort to keep your oil income from falling. Let the big guys make the production cuts.

Historically, this is what has broken OPEC pricing power in the past. And I don’t see any reason why it can’t happen again.

I only bring this up because more and more people seem to be investing their life’s savings around the idea that oil will always go up. That is not a bet I would want to make even if the peak oilers are right.