David Warsh: Addition by subtraction in climate debate

SOMERVILLE, Mass.

An op-ed in The Wall Street Journal last week, “Economists’ Statement on Carbon Dividends,’’ appeared under a headline reflecting the latest conventional wisdom on how to frame the issue of coping with atmospheric pollution (don’t call it a “carbon tax”). The bipartisan endorsement called for a revenue-neutral tax on carbon emissions, its proceeds to be returned to citizens in equal quarterly rebates, ensuring a progressive structure, administered by the Social Security Administration as an entitlement.

The proposal was signed by 27 laureates, including Robert Solow, Robert Lucas, Amartya Sen and Thomas Sargent; all four living chairs of the Federal Reserve Board (Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen), and fifteen former chairmen of the Council of Economic Advisers, including Michael Boskin, Martin Feldstein, N. Gregory Mankiw, Glenn Hubbard, Jason Furman, Austan Goolsbee, Christina Romer, and Laura Tyson. Former Treasury Secretary Lawrence Summers signed on as well.

Too fresh from their recognition last month to join in (or too obvious) were William Nordhaus and Paul Romer, both supporters. The signatories thus joined forces with a blue-ribbon group of multinational corporations and public interest organizations formed last summer as a Climate Leadership Council.

The economists’ list naturally invited a search for the missing.

Conspicuous by their absence among laureates were Joseph Stiglitz and Paul Krugman. Krugman earlier explained that he favored more salable policies. That the plan for carbon taxation was devised by George Shultz, Secretary of State under Ronald Reagan, and James Baker, who succeeded him under George H. W. Bush, may also account for some of their lack of enthusiasm.

A little less obviously missing were laureates James Heckman (absorbed in early childhood investment), and Vernon Smith (energy saving and CO2 sequestration, per the recommendation of the Copenhagen Consensus Center). Oliver Williamson, approaching 90, is less of a force than formerly. Christopher Pissarides and Jean Tirole stayed away from the issue, Tirole because he favors regulation by systems of cap-and-trade.

That leaves Robert Mundell, of Columbia University, recognized in 1999 for his work on exchange rates regimes and currency areas; and Edward Prescott, of Arizona State University and the Federal Reserve Bank of Minneapolis, who shared the economics prize in 2004 for work on business cycles. Both are favorites of the WSJ, having often expressed the view that raising taxes discourages economic growth, but neither has been involved to any great extent in the climate controversy. That leads in turn to WSJcolumnist Holman W. Jenkins, Jr., who has taken on the job of skeptic-in-chief.

Jenkins, 59, is a dependably lively presence on the editorial pages, a frequent skirmisher against views on climate change he considers wooly-headed or worse. Last week he was at it again, under the headline Big Names Bake a Climate Pie in the Sky. He disparaged the view that carbon emissions pose an immediate threat to global well-being; expressed skepticism of the motives of politicians and corporate lobbyists alike; and hinted at the existence of a proposal for tax reform, including a carbon tax, “to replace taxes that depress work, saving,” such that new technologies would develop to do things in less carbon-intensive ways. Presumably that is the subject of a future column.

At the moment, the editorial board of the WSJ is pretty much the only voice among the mainstream press, of skepticism about climate change in general; in opposition to carbon tax proposals in particular. In The Global Tax Revolt last month, the editorialists took note of the rejection of various attempts to impose a local carbon tax – in France, in Canada, in Washington State – and concluded,

[A]fter decades of global conferences, forests of reports, dire television documentaries, celebrity appeals, school-curriculum overhauls and media bludgeoning, voters don’t believe that climate change justifies policies that would raise their cost of living and hurt the economy.

On its weekly show on Fox New, editorial page editor Paul Gigot went further: he acknowledged elliptically that that “some of our friends” think that strong measures are required to address atmospheric pollution, “and even in theory, if you think about it from a free market point of view, a carbon tax would be the most efficient way of trying to actually slow down carbon emissions… but that seems to be something that the public really isn’t buying.” There is, he said, “a disconnect between elites and average voters that don’t trust the elites”

As usual, editorial page columnist Kimberly Strassel went further still. “Yes, intellectually, from a very wonky point of view,” she said, a carbon tax “may be an efficient way of raising revenues. But no one buys that you are actually get rid of other taxes if you institute a carbon tax, so they see it as an additional tax … There also not a belief that money raised from such a tax would actually be put into any kind of renewable energy or investment strategy for a smarter climate; they know it going to get redistributed and be a new pot for the Washington spenders to put into their own priorities…

What would a carbon tax actually cost ordinary consumers? That’s a question for another day – for many other days, starting with the 2020 elections, and in the decade beyond. In the meantime, the populist editorial page of the WSJ stands pretty much alone amongst elite opinion in America against carbon taxation as the major instrument of climate policy. Over the long haul, we’ll see what difference that makes. Reports of the demise of the establishment Republican Party may have been exaggerated.

David Warsh, an economic historian and veteran columnist, is proprietor of Somerville-based economicprincipals.com, where this first ran.

David Warsh: 150 years of economists' drama

  The Nobel Prize for economics, granted the other day to Jean Tirole, of  the Toulouse School of Economics, capped a  20th Century drama whose story has barely begun to be told. I can describe it here only in the broadest way; thanks to the Swedes, the details will now gradually emerge, as did those of similar developments in the past. But some idea about the episodes’ broader place in the scheme of things, as it pertains to you, can be had by viewing it in historical perspective.

The story begins in the 1920s, in the years before John Maynard Keynes took center stage.  Edward Chamberlin (1899-1967) was a bright young graduate student who had come east from Iowa City to Harvard University with a firm grasp of railroad economics. His 1927 thesis developed what he called a theory of monopolistic competition:  a more realistic account, he said, of the behavior of companies in markets where sellers are few, industries he called oligopolies, and the prospect of more intelligent regulation.

In fact, Chamberlin was rediscovering ideas published by Augustin Cournot, in 1838, so the story of strategic economic behavior really begins then.  If you have a taste for historical detective work, read Secret Origins of Modern Microeconomics: Dupuit and the Engineers, by Robert B. Ekelund Jr. and Robert F Hébert (University of Chicago, 1999). In terms of the memories of the living, the story starts in the ’20s).

It took Chamberlin six years to get The Theory of Monopolistic Competition ready for the university press.  By then he was a Harvard professor.  By then, too, a young mother married to British economist Austin Robinson had developed a similar way of amending the prevailing dogma.  Joan Robinson (1903-83) obtained a job as an assistant lecturer at Cambridge University, from whose Girton College she had graduated a few years before. Her book, The Economics of Imperfect Competition, appeared in Britain just weeks apart from Chamberlin’s in the U.S.

Chamberlin and Robinson began a battle over whose critique  of standard theory would prevail.  (Harold Hotelling, of Columbia University, had joined the fray as well.) The excitement was enough to bring young Paul Samuelson to Harvard as a graduate student the autumn of 1935, but it didn’t last long.  Keynes’s General Theory of Employment, Interest and Money appeared the next year, and by 1938 monopolistic competition had been shouldered aside by the new “macroeconomics,” of which Samuelson became the avatar.

After the war, the literature that Chamberlin (but not Robinson)  had spawned mostly retreated into business schools, disguised as corporate strategy. Harvard economist Joseph Schumpeter joined a center for entrepreneurial studies just before he died. Harvard Prof. Edward Mason soldiered on, training a new generation of specialists (including Carl Kaysen) in industrial organization and development economics. Chamberlin and Robinson continued to bicker. Chamberlin never developed a second act; Robinson in the early ’50s began a bold but ultimately unsuccessful attempt to improve on Ricardo and Marx. (Samuelson later wrote that the Swedes had missed a chance when they failed to add Robinson’s name to the 1974 award to Gunnar Myrdal and Friedrich von Hayek, two other influential theorists of the ’30s.)

Meanwhile, leadership in industrial organization swung from Harvard to the University of Chicago, where George Stigler had nothing but contempt for Chamberlin.  The three central tenets of Chicago price theory, as Stigler described  them: that markets were more efficient  than was commonly supposed (advertising, for example, was signaling, a source of information); that competition was far harder to eliminate,and that regulators were easily influenced by those whom they regulated.  Twenty-five years of studies in these veins by Stigler, his colleagues and their students culminated in a Nobel Prize for Stigler, in 1982.  In his 1988 autobiography, Memoirs of an Unregulated Economist, he wrote that Chicago economics had conquered the field:  “By 1980 there remained scarcely a trace of the two Harvard traditions of Chamberlin and Mason in the work of current economists.”

The joke was on him.  Monopolistic competition was about to come roaring back, in the form of The Theory of Industrial Organization, published that same year by a young MIT PhD, Jean Tirole. He had written most of it as a researcher at the Ecole Nationale des Ponts et Chaussées, the very school of bridges and highways at which Jules Dupuit had pioneered price theory a century and a half earlier. Tirole returned to MIT as an assistant professor in 1984.

Interest in monopolistic competition had been building in Cambridge throughout the ’70s, owing to the possibility of coming to grips with strategic interaction  afforded by game theory.  Now a new microeconomics hit Chicago price theory head on, couched in the formal style of expression developed at MIT. Stigler knew the blow was coming, from “the major eastern schools and Stanford University”; it was “closely related in spirit  to Chamberlinian economics,” he wrote,  “much more rigorous (as well it should be fifty years later) but has not shown equal gains in empirical motivation or empirical applicability.”  Last week the Royal Swedish Academy of Sciences disagreed, awarding its prize in economics to Tirole,  32 years after the recognition of Stigler.

More drama unfolded in 1982, the year that four Stanford economists colloquially (and jokingly) known as “the Gang of Four” published a series of articles showing how incomplete information could be incorporated into all manner of problems in industrial organization, starting with what had become known as “the chain store problem” (clobber or accommodate the new entrant who  tries to enter your market?). The most important of these, Reputation and Imperfect Information, by David Kreps and Robert Wilson, and Predation, Reputation and Entry Deterrence, by Paul Milgrom and John Roberts, published simultaneously in the Journal of Economic Theory, showed how cooperative behavior could emerge and evanesce in everyday competitive settings.   The new models were tools that rendered Tirole’s subject dynamic, open to experiment and investigation.  Powerful and inexpensive computers suddenly yielded a means.  A green flag dropped on a decade of breakneck work on a “new empirical industrial organization.”

Not everyone welcomed the new style.  A new Handbook of Industrial Organization was dominated by Tirole’s work.  Sam  Peltzman, of the University of Chicago, reviewed it this way in 1991.

Here the reader is ushered into the City of Theory. This is an ethereal sort of place.  Policy makers and policy issue are very much in the background.  The businesspeople who dwell here are not the type who are troubled by details such as the best way to get something produced and delivered to customers. Rather they resemble chess players whose consuming passion is to divide their opponents’ grand strategy. When they do worry about dealings with subordinates or customers, strategic considerations are never far from their minds In part the reason in that there is not much of a legal system in the City of Theory, and in part that the subordinates and customers are fairly good chess players themselves. So many contracts are implicit and their provisions must be… compatible.

Over the course of the ’90s, policy makers and policy issues, corporations and their customers, came to be seen more and more as resembling the chess players that had been described by Tirole.  Deregulation opened a torrent of possibilities, from corporate restructurings to auctions to outsourcing and new compensation arrangements.  Practice was informed by theory; the strategic perspective carried the day.  By the end of the decade, the University of Chicago surrendered; it hired Roger Myerson away from Northwestern to teach game theory to the next generation of students; in 2007 Myerson shared a Nobel Prize himself with Eric Maskin and  Leonid Hurwicz for the work that had put Tirole in business.

In 1994 Tirole moved back to France.  Today he is chairman of the Toulouse School of Economics, where he consults widely on issues of regulation, especially in Europe.  He has become an expert on banking.  Joshua Gans, of the University of Toronto, compares Tirole’s impact on regulatory economics to that of Pasteur on public health; Peter Klein, of the University of Missouri, finds his Ecole Polytechnique/MIT style irritatingly abstract; Tyler Cowen lauds Tirole’s essays in behavior economics.

The worst thing that can be said of the Nobel is that, by freezing discussion until the returns are in and a decision has been made, it forces us to view current events in a rearview mirror. Perhaps that is just as well; sometimes the excitement isn’t sustained.  But by providing a series of focal points, the Nobel Prize in Economic Sciences renders unmistakably visible events that otherwise would be easy to miss. If Chamberlin and Robinson were around, they might stop arguing long enough to grump “We told you so” – perhaps even marvel at the verisimilitude that 90 years of ingenuity had wrought.

David Warsh is an economic historian, longtime financial journalist and proprietor of economicprincipals.com.