3 ms·

You're right to disconnect the cost, price, and value of a resource, but you seem to ignore that while computing the results you arrive at, and get nonsense con

You're right to disconnect the cost, price, and value of a resource, but you seem to ignore that while computing the results you arrive at, and get nonsense contaminating what would otherwise be a good point. As long as we're pretending to talk economics of any sort, orthodox or otherwise, the only cost that matters is the opportunity cost. All those millions of years replacing the oil in the ground? There's no opportunity cost to that. No one gave up any second-best alternative. That was just the ecosystem doing it's thing. And, it's a sunk cost, to boot. It is fact now. There is nothing to do about it. So the only questions that matter here are what is the best possible alternative that we could possibly imagine for the future which we give up by extracting this gallon of gasoline and how should we compare that to 2017 dollars (how to discount the future, or even whether to do so). If you think we can achieve output with same value as humanity currently regards 10 million bushels of corn by leaving just 1 gallon of gasoline's worth of petroleum in the ground, I'd like to hear why and how, because that's an extraordinary claim, and if they were actually real we could pay for a lot of alternative energy sources with these fantastical savings.

dredmorbius 10y ago
On the opportunity cost argument, consider a few alternative scenarios. How would you account for utilisation of a resource in the following circumstances: 1. You are in an office, with an office-supply cabinet. Your costs of accessing new supplies are the time it takes you to walk to the cabinet and obtain them. At some point, those supplies must be re-ordered. What is the property accounting mechanism for those supplies? 2. You've come into an inheritance. It represents the accumulated earnings of several lifetimes of your benefactors. You are limited to withdrawing a maximum amount of money in a given visit, and each visit requires cross-town travel and cab fare. How do you account for the depletion of this fund? Do you include your own time costs? The cab fare? An accounting for the depletion of the fund itself? An accounting of the costs of restoring withdrawn funds? How does this change if your own present earning potential is only a very small fraction of the current fund? If the fund represents, say, the equivalent if 5 million ancestors' lifetime earnings? 3. You and 63 others are in a lifeboat, floating adrift, a year from the nearest opportunity for rescue. There is food and water aboard the lifeboat, but only sufficient to keep a maximum of 16 alive for that period. How do you account for the usage and decide on allocation of those supplies? I'm well aware of opportunity costs, and of sunk costs. For the former, I'm fairly convinced that the opportunities are not fully enumerated in current accounting, and that the economic, financial, and legal doctrines as I've described briefly above are based on world-models strongly at odds with the actual world-state. Of sunk costs, I'm no longer convinced that the sunk-cost fallacy is entirely valid. Again, not an original idea -- spend some time looking up "sunk cost fallacy fallacy". Gwern's essay on the topic is among the more interesting: http://lesswrong.com/lw/9si/is_sunk_cost_fallacy_a_fallacy/ http://lesswrong.com/lw/9si/is_sunk_cost_fallacy_a_fallacy/ http://www.gwern.net/Sunk%20cost http://www.gwern.net/Sunk%20cost There are a number of dimensions of this, and I'm not convinced I've explored all of them, but in the specific case of fossil fuels, a particular problem is that there is no accounting for the depletion of the resource itself. At a time when present rates of consumption accounted for a millionth or less the total resource (NB: not "proved reserves" or "economic reserves"), as was documented by several authors of coal in the 1880s, that might have been excusable. Funny thing is that exponential rates of increase have ... increased, and even in the case of the most abundant fossil resource (coal), that millionfold supply-to-present-consumption relationship has fallen to a factor of perhaps 100x. In other mineral resources we're looking at far smaller numbers (I've referenced a few such lists at https://reddit.com/r/dredmorbius https://reddit.com/r/dredmorbius). The problem with economic accounting such as you suggest -- best possible alternatives, future value, current prices, real currency -- is that it seems to me the accounting fails on multiple premises. Hotelling, incidentally, proposes just this in his 1931 paper, and it's one of several places in which I feel his analysis fails. H.L. Gray, "Rent Under the Assumption of Exhaustibility" (1914) describes Ricardo's conclusions: 1. Price should increase over time. 2. Spot price is set by the highest cost-of-extraction mine. 3. Owners with lower costs earn a differential rent. The 2nd and 3rd conclusions match observed experiences in oil especially -- a resource with exceptionally good pricing history, dating to 1859 (see, e.g., BP's annual statistical review), and a global market due to its exceptionally low worldwide transport costs of ~1% of product value. The first does not. What oil shows instead is a tremendous price volatility, up until roughly 1945, followed by a long-term declining trend, through 1973, followed by another period of exceedingly high volatility. Something appears wrong with the model. For insights to this I strongly recommend chapter 13 of Daniel Yergin's The Prize, and the establishment of production quotas in the US (with global significance for the reasons above) under the Texas Railroad Commission and US Department of Interior, in 1931. There's both the tremendous price volatility and low prices (to $0.02/bbl nominal) prior to the arrangement, and stability since. Explaining the gap through 1945, I'll suggest the Great Depression and WWII, but once those hurdles were cleared, the period 1945 - 1973 was one of unparalleled economic stability and growth most especially within the United States. I also see the cost, price, and value dynamics as in play, and in particular, failures under specific conditions of price to reflect costs (backwards-S supply curves being a principle component) as throwing a wrench into the works. The assumption that market prices for extractive goods are correctly obtained strikes me as false. Which gets to the point that there are in fact several distinct conditions in which prices are assessed. I'm still thinking this through, so I'm not settled on a final list, though Smith offers a guide: 1. The price of commodities: goods produced anually on a renewable basis. 2. The price (wages) of labour 3. The price of stocks: an accumulation of goods, depleted over time 4. Rents: a price for time-based right-of-access which otherwise does not deplete a resource. What Smith points out is that the long-term price must cover the long-term costs of a good or resource, and that whilst market prices may not reflect this, often for extended periods of time, that such is ultimately not a sustainable circumstance. I've suggested that the proper relationship, in which costs are seen as "total factors of production", is C <= P < V That is, your costs must be less than (and at equilibrium, equal to) the market price, which is strictly less than value. In the short term, this relation can fail, though that reflects a problematic circumstance. Again, 19th c. economists discussed such things, 20th and 21st c. not so much. I'm not particularly convinced of the first inequality, as entropy increases, hence the cost would be less than the price, strictly. But within an open system, we're considering alternative flows, which may offer a better model. Another analogue I like to refer to is that of whalefall, and the benthic communities which spring up around the episodic but bounded resource bounties which result. Over the course of about a century, a successive set of scavengers extract energy and nutrients from the whale's flesh, blubber, and ultimately bone. But the one thing those communities do not do is sustain themselves. When the bounty, the accumulated savings, is spent down, they expire, and it's but a few prospecting individuals who manage to found the next such community.

dredmorbius 10y ago

On the opportunity cost argument, consider a few alternative scenarios. How would you account for utilisation of a resource in the following circumstances: 1. You are in an office, with an office-supply cabinet. Your costs of accessing new supplies are the time it takes you to walk to the cabinet and obtain them. At some point, those supplies must be re-ordered. What is the property accounting mechanism for those supplies? 2. You've come into an inheritance. It represents the accumulated earnings of several lifetimes of your benefactors. You are limited to withdrawing a maximum amount of money in a given visit, and each visit requires cross-town travel and cab fare. How do you account for the depletion of this fund? Do you include your own time costs? The cab fare? An accounting for the depletion of the fund itself? An accounting of the costs of restoring withdrawn funds? How does this change if your own present earning potential is only a very small fraction of the current fund? If the fund represents, say, the equivalent if 5 million ancestors' lifetime earnings? 3. You and 63 others are in a lifeboat, floating adrift, a year from the nearest opportunity for rescue. There is food and water aboard the lifeboat, but only sufficient to keep a maximum of 16 alive for that period. How do you account for the usage and decide on allocation of those supplies? I'm well aware of opportunity costs, and of sunk costs. For the former, I'm fairly convinced that the opportunities are not fully enumerated in current accounting, and that the economic, financial, and legal doctrines as I've described briefly above are based on world-models strongly at odds with the actual world-state. Of sunk costs, I'm no longer convinced that the sunk-cost fallacy is entirely valid. Again, not an original idea -- spend some time looking up "sunk cost fallacy fallacy". Gwern's essay on the topic is among the more interesting: http://lesswrong.com/lw/9si/is_sunk_cost_fallacy_a_fallacy/ http://lesswrong.com/lw/9si/is_sunk_cost_fallacy_a_fallacy/ http://www.gwern.net/Sunk%20cost http://www.gwern.net/Sunk%20cost There are a number of dimensions of this, and I'm not convinced I've explored all of them, but in the specific case of fossil fuels, a particular problem is that there is no accounting for the depletion of the resource itself. At a time when present rates of consumption accounted for a millionth or less the total resource (NB: not "proved reserves" or "economic reserves"), as was documented by several authors of coal in the 1880s, that might have been excusable. Funny thing is that exponential rates of increase have ... increased, and even in the case of the most abundant fossil resource (coal), that millionfold supply-to-present-consumption relationship has fallen to a factor of perhaps 100x. In other mineral resources we're looking at far smaller numbers (I've referenced a few such lists at https://reddit.com/r/dredmorbius https://reddit.com/r/dredmorbius). The problem with economic accounting such as you suggest -- best possible alternatives, future value, current prices, real currency -- is that it seems to me the accounting fails on multiple premises. Hotelling, incidentally, proposes just this in his 1931 paper, and it's one of several places in which I feel his analysis fails. H.L. Gray, "Rent Under the Assumption of Exhaustibility" (1914) describes Ricardo's conclusions: 1. Price should increase over time. 2. Spot price is set by the highest cost-of-extraction mine. 3. Owners with lower costs earn a differential rent. The 2nd and 3rd conclusions match observed experiences in oil especially -- a resource with exceptionally good pricing history, dating to 1859 (see, e.g., BP's annual statistical review), and a global market due to its exceptionally low worldwide transport costs of ~1% of product value. The first does not. What oil shows instead is a tremendous price volatility, up until roughly 1945, followed by a long-term declining trend, through 1973, followed by another period of exceedingly high volatility. Something appears wrong with the model. For insights to this I strongly recommend chapter 13 of Daniel Yergin's The Prize, and the establishment of production quotas in the US (with global significance for the reasons above) under the Texas Railroad Commission and US Department of Interior, in 1931. There's both the tremendous price volatility and low prices (to $0.02/bbl nominal) prior to the arrangement, and stability since. Explaining the gap through 1945, I'll suggest the Great Depression and WWII, but once those hurdles were cleared, the period 1945 - 1973 was one of unparalleled economic stability and growth most especially within the United States. I also see the cost, price, and value dynamics as in play, and in particular, failures under specific conditions of price to reflect costs (backwards-S supply curves being a principle component) as throwing a wrench into the works. The assumption that market prices for extractive goods are correctly obtained strikes me as false. Which gets to the point that there are in fact several distinct conditions in which prices are assessed. I'm still thinking this through, so I'm not settled on a final list, though Smith offers a guide: 1. The price of commodities: goods produced anually on a renewable basis. 2. The price (wages) of labour 3. The price of stocks: an accumulation of goods, depleted over time 4. Rents: a price for time-based right-of-access which otherwise does not deplete a resource. What Smith points out is that the long-term price must cover the long-term costs of a good or resource, and that whilst market prices may not reflect this, often for extended periods of time, that such is ultimately not a sustainable circumstance. I've suggested that the proper relationship, in which costs are seen as "total factors of production", is C <= P < V That is, your costs must be less than (and at equilibrium, equal to) the market price, which is strictly less than value. In the short term, this relation can fail, though that reflects a problematic circumstance. Again, 19th c. economists discussed such things, 20th and 21st c. not so much. I'm not particularly convinced of the first inequality, as entropy increases, hence the cost would be less than the price, strictly. But within an open system, we're considering alternative flows, which may offer a better model. Another analogue I like to refer to is that of whalefall, and the benthic communities which spring up around the episodic but bounded resource bounties which result. Over the course of about a century, a successive set of scavengers extract energy and nutrients from the whale's flesh, blubber, and ultimately bone. But the one thing those communities do not do is sustain themselves. When the bounty, the accumulated savings, is spent down, they expire, and it's but a few prospecting individuals who manage to found the next such community.