I’m an economist, I know nothing

One of the most difficult things about working in resource economics is being supposed to say something about stuff you actually haven’t a clue about. Does bottom trawling wreck the benthic ecosystem? How high are discard rates? Is the Plaice Box working? I don’t know, but to make an economic analysis I should.

It’s not like economics can’t deal with uncertainty. Sure, in the ideal situation we know everything: if A causes B, and we know the costs and benefits of A and B, we can do a cost-benefit analysis to tell whether A is a good idea. This is when the relation between A and B is deterministic. But mostly the relation between A and B is not.

The natural scientists could say “well, we don’t know for sure whether A leads to B, but what we can tell you is that the probability that A leads to B is 20%”. Most of the environmental economics textbooks call this risk, as opposed to uncertainty, which I will explain below. Risk is something we can deal with. For example, if B costs €100 then the expected value of the “B costs” of doing A is €20. You can also take into account that people don’t like risk, so perhaps they are willing to pay €25 to prevent B from happening if we do A. Note that this is €5 more than the expected value of the B costs; hence the costs of risk bearing are €5.

The natural scientists could also say “sorry, we have no idea. A could lead to B; it may also have no relation to B at all. We simply don’t know, and we can’t give you any probabilities either.” This is what the textbooks call uncertainty. Uncertainty is nastier to deal with (and, unfortunately, also more widespread) than risk. Under uncertainty all we could say is something like “if you do A, the worst that can happen is B; the best that can happen is no B.” There are strategies like maximin (choose the best of all worst outcomes), maximax (choose the best of all best outcomes), and minimax regret (choose the outcome that gives you, in the worst case, the least explaining to do), but that’s about all you can do.

The natural scientists could also say “it depends on who you ask. Some scientists say A probably leads to B, but others are not so sure. This is an ongoing debate in our field.” This is not so different from the previous case, and we could treat it similarly to uncertainty. Let’s call it a case of competing hypotheses.

The worst case, however, is where some scientists tell you “all the evidence suggests that A leads to B, and don’t let those evil impostors from the A institute tell you otherwise. They are paid by the A industry to deny our science.” No surprise that the A institute tells you that the idea that A could possibly lead to B is preposterous, and that anyone who claims that A leads to B is a leftist bureaucrat out to vilify the poor, hard-working entrepreneurs in the A industry, if not to establish an anti-A-ist communist state. Let’s call it a case of polarised hypotheses. Examples abound: genetically modified organisms, climate change, bottom trawling, MPAs.

The problem with polarised hypotheses is that the moment you choose to include a hypothesis in your uncertainty analysis you imply it is something to be taken seriously. I have no idea of climate science, and I don’t have the time to acquire all the knowledge that would enable me to distinguish the genuine scientists from the flat earthers. But I’m convinced that it is easy to take advantage of my ignorance, and that there are a lot of folks out there who try to do so. Is it a coincidence that one of the most prominent climate skeptics was once paid lavishly by the tobacco industry to deny the harmful effects of second-hand smoke? On the other hand, I’ve seen sufficient nonsense in the news (100 cod in the North Sea, all fish gone by 2048, dolphin meat in canned tuna) to be equally skeptical of the toxic combination of overzealous NGOs and lazy journalism.

So what do you do, as an ignorant economist who cannot fully judge the arguments? You check the messenger. Where does this person work? How much has he or she published, and in which journals? What is the disciplinary background of this person? (For example, one of the more prominent Dutch climate skeptics is an economist whose only peer-reviewed publications were in a journal specifically established to give climate skeptics the stage they can’t get elsewhere.) How much of what this person does is science and how much is advocacy? (I’m allergic to the kind of advocacy dressed as science that was behind, for example, the nonsensical claim that the planet’s ecosystem is worth $33 trillion every year. You can’t estimate this value, period.) I tend to pay much attention to contradictions: The Economist, for example, is an economically liberal newspaper that used to play down the threat of climate change, but nowadays it argues in favour of limiting greenhouse gas emissions. As far as I know Richard Tol, who is often quoted by climate skeptics, does not deny that greenhouse gas emissions are a problem. Funnily the skeptics never quote him on that; they only do so when he bashes wind power.

Yes, I know science is not made by majority votes, but that doesn’t mean that I should take into account every pseudoscientist with an opinion. And I know that reputation isn’t everything, and that many revolutionary insights were first ridiculed, but I can’t be a master of all. So I have little choice but to listen to the mainstream.

That’s all I’m going to say about the 100 cod story

I know, a lot has been said already about the nonsensical story that there is only 100 cod left, but there is one thing I hadn’t even noticed back then. The Telegraph gave its article the following title:

Just 100 cod left in North Sea

Then the subtitle said:

Overfishing has left fewer than 100 adult cod in the North Sea, it was reported.

This is different than “100 cod” – not all are adult. Perhaps the author changed his or her mind as he/she went along writing the article. Perhaps by fewer than 100 adults he/she meant to say something like 98 adults, which leaves 2 juveniles… Nevermind. The caption under the figure in the article said:

Not a single cod aged over 13 was caught in the North Sea last year.

Most cod is mature before the age of six.

Joris’ latest adventure

Joris Luyendijk is one of my favourite journalists. As a student he stayed in Cairo for a year, which resulted in a very insightful book on the views of young Egyptians. As far as I know the book only appeared in Dutch, but its title is roughly translated as “A good man sometimes hits his wife”, which is a quote of one of his female (!) fellow students who insisted she would leave a man who did not occasionally hit her. After working as a correspondent in the Middle East he made many people lose their faith in foreign journalism with his book “People like us: Misrepresenting the Middle East”. He is a bit of a maverick in journalism world.

But now he has traded the Middle East for another battle field: banking. His blog on the Guardian website features several in-depth interviews with people working in what must be the most hated industry of our time. I must admit it gets tedious after a while: most of the interviewees insist they are doing very complex stuff, they work insane hours, what they are doing is very different from those cowboys down the street so don’t accuse them of gambling away your pension money, bla bla bla. You can also put question marks over the goals of the blog. Although it is presented as an anthropological study I doubt whether an anthropology journal would accept a paper on such a biased sample of the population (or I would lose faith in anthropology as much as I have in foreign journalism). The interviewees come to Joris on a voluntary basis, whereas most bankers (anyway the most high-ranking ones) have signed all kinds of non-disclosure contracts with their bosses. So the ones coming to Joris are either frustrated with their current or former employers, or they are foot soldiers with little insight into what happens at the top. And how many bankers read the Guardian? (How many social workers read the Wall Street Journal?)

Nevertheless it is an insightful blog as it gives at least a glimpse of what it must be like to work in banking. What strikes me most is the diversity in companies, products and jobs, and the culture that seems to combine gung-ho chauvinism (it’s not an easy working environment for women) with almost perfect colour blindness (several bankers from Asian or African descent say what they like most about the sector is its ethnic diversity). But more insightful than the interviews themselves are the comments. Some are from those few bankers who do read the Guardian, and their views help looking at the content from a different angle. The sheer vitriol expressed by the majority of commenters, however, is another interesting learning experience – at least now I know about the Peterloo Massacre. Apparently, to the average Guardian reader, bankers bathe in the blood of little children to keep their skin smooth. Or something like that.

My views tend to be on the boring side of this debate. As most interviewees stress, banking is a hugely diverse sector. Holding all bankers responsible for the current mess is like holding all manufacturing responsible when a fireworks factory blows up. This does not mean there is nothing wrong with some sectors within banking. Greg Smith’s j’accuse against Goldman Sachs illustrates that there can be huge information asymmetries in banking, i.e. one party in a transaction knows a lot more about the product being sold than the other party, which opens the possibility for a lot of rip-offs. My economics textbooks tell me that competition should drive out the not-so-knowledgable parties in favour of the well-informed ones. It does not explain, however, why this does not happen. In my view all kinds of market failures (transaction costs, mostly) and the fact that many of the less knowledgable parties are governmental bodies make that there are still plenty of suckers (‘muppets’ in banker lingo) around. Economics has ignored this fact for too long: we should do more field work, observe what happens, and develop a better understanding of factors like transaction costs, information asymmetry, and so on.