Uncharted Territory

February 11, 2009

Ice, Fire and the MPC

Filed under: Complex decisions, Credit crisis, Economics, Global warming, Reflections — Tim Joslin @ 3:56 pm

A number of us have noticed our concern for climate change becoming crowded out by the other Big CC – the credit crisis.  I therefore resolved to try to make some connections between the two.  And there are relationships on many levels.

This post is intended to be the first of a series (I’m trying to make them a bit shorter) exploring common problems with the decision-making process as regards addressing both the CC problems.

The CCs are extremely difficult problems to solve, not just because they are complex, but because, not only do we generally disagree over what the problem is, as well as whether we can or should do anything about it, it’s also not clear who is responsible for what aspects of solving them!  I’ll look at these issues another time, but, even if there we no issues with the decision-making process – if there was a benevolent dictator whose decision was final – we’d still be in difficulty, because, as complex problems, both CCs share the property of openness.

What do I mean by “openness”, in plain language?  Maybe I can try to encapsulate the idea by saying that with both the economy and the climate you never know when you’ve got to the bottom of an issue.  There is always the possibility that you haven’t included all the necessary factors affecting what you are trying to control.

Let’s take a couple of examples.

Back in the 1970s there were those who feared we were on the brink of a new Ice Age.  I was quite enthusiastic about this theory at the time, as I hoped this would lead to my school being closed, at least for a few days.  My view – the position championed by William Ruddiman – is that these scientists had the right idea, as far as it went.  If it hadn’t been for human activity before and since the Industrial Revolution, it seems very likely that the climate would have been in a cooling phase during the whole of human history.  The problem is that the Ice Age alarmists were operating within what is sometimes termed a closed system.  They weren’t wrong, as such, they were just taking no account of greenhouse gas emissions.  In fact in the battle between ice and fire, the human timescale of global warming caused by fossil-fuel burning meant it would inevitably overwhelm the gelogical timescale of the Ice Age cycle.

A parallel I see was the dilemma of the UK’s Monetary Policy Committee (MPC) a year or so ago.  Should they have been increasing interest rates to combat inflation or reducing them to try to head off a recession caused by the credit crunch?  They were threatened by both an inflationary fire and and the ice of a steep drop off in economic activity resulting from a banking crisis.  My point is that both sides – the hawkish majority of anti-inflation warriors and the doves led by David Blanchflower –  were right on their own terms.  If the banking system had not blown a gasket then the asset and commodity price bubbles would have caused general inflation.   Perhaps Blanchflower, working in the US near the epicentre of the financial meltdown, was able to see the coming recession more clearly than the rest of the MPC who were continually reading about increased wage demands in the UK.  Maybe the conclusions the MPC majority drew were correct in terms of the information available to them.

It’s difficult to make progress by reasoned argument against any entrenched position, but even more so when both sides are in the right on their own terms.  It is even more difficult, of course, when a closed system is institutionalised – defining an entire profession or discipline – and/or incorporated into mathematical tools or computer models.

And failure to correctly define a problem can be disastrous even when you think you are solving the problem.  The banking system has become the focus of efforts to resolve the credit crisis and prevent a recurrence.  One idea is to require banks to retain more capital during the good years, as a buffer for use in the bad years.  There’s been much water under the bridge since I previously expressed some scepticism, but I still feel inclined to say: “Be careful what you wish for”. Counterfactuals are difficult, but who’s to say the banking crisis hasn’t been a safety-valve for the global economy?  Maybe if asset prices had continued to rise, or even maintained the peaks they reached in 2008, we would now be seeing battles for higher wages and the start of the sort of inflation that turned the 1970s into a Lost Decade for the UK and many other economies.  I said it before, and again I see no need to fundamentally revise my position: there’s no reason why we can’t recover (or at least economic growth to resume) reasonably quickly from this shock.  There’s no poison – such as inflation – that will linger in the system for years and years.

In the realm of climate change, closed system thinking affects (for example) those proposing geo-engineering solutions.  Ideas such as space mirrors to reflect heat away from the Earth are entirely superficial.  Such solutions receive vast amounts of publicity will not return the climate to what it was before global warming – because the distribution of heat would be different – but have a much more serious problem.  They ignore the effect of elevated CO2 levels on marine life (in particular) which is becoming more and more apparent as an environmental disaster in itself.

What can we do?  Maybe all we can try to do is to be a little more self-aware.  Louder alarm bells should start ringing when someone questions whether everything has been taken into account.  Perhaps we also need to explore ways of helping generalists have a greater influence in public debate, addressing the risk of specialists using their detailed knowledge to score points and “blind us with science”.

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1 Comment »

  1. […] to resume lending are successful – I don’t really see why they shouldn’t be, though inflation may start to appear relatively quickly. The following are likely to […]

    Pingback by Counterfactual Conundrums « Uncharted Territory — February 25, 2009 @ 7:48 pm


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