In the following article, Joseph Stiglitz argues that power rather than competition is a better starting point for analysing the working of capitalism. People’s rewards depend less on their marginal product than on their power over labour or capital (or lack of it).
As inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works.
Thus the huge bonuses, often of millions of pounds per year, paid to many CEOs and other senior executives, are more a reflection of their power to set their bonuses, rather than of their contribution to their firms’ profitability. And these excessive rewards are not competed away.
Stiglitz examines how changes in technology and economic structure have led to the increase in power. Firms are more able to erect barriers to entry; network economies give advantages to incumbents; many firms, such as banks, are able to lobby governments to protect their market position; and many governments allow powerful vested interests to remain unchecked in the mistaken belief that market forces will provide the brakes on the accumulation and abuse of power. Monopoly profits persist and there is too little competition to erode them. Inequality deepens.
According to Stiglitz, the rationale for laissez-faire disappears if markets are based on entrenched power and exploitation.
Monopoly’s New Era Chazen Global Insights, Columbia Business School, Joseph Stiglitz (13/5/16)
- What are the barriers to entry that allow rewards for senior executives to grow more rapidly than median wages?
- What part have changes in technology played in the increase in inequality?
- How are the rewards to senior executives determined?
- Provide a critique of Stiglitz’ analysis from the perspective of a proponent of laissez-faire.
- If Stiglitz analysis is correct, what policy implications follow from it?
- How might markets which are currently dominated by big business be made more competitive?
- T0 what extent have the developments outlined by Stiglitz been helped or hindered by globalisation?
Two surveys have been released looking at the quality of life in cities and the levels of happiness of their residents. The first is a three-yearly Eurobarometer survey by the European Commission focusing on 83 European cities/conurbations. This survey finds that, despite growing concerns about immigration, terrorism and stagnant real incomes, levels of satisfaction have remained stable since the 2012 survey. In all except six cities, at least 80% of respondents say that they are satisfied to live in their city. The highest scores (above 98%) are in the north of Europe.
The second is the 2016 Quality of Life Survey (an annual survey) by the consultancy firm, Mercer. This looks at cities worldwide, particularly from the perspective of employees of multinational companies being placed abroad. The survey found that the top ten cities by quality of life include seven in Europe, and that the five safest cities in the world are all in Europe.
So what is it that makes the quality of life so high in many European cities, especially those in Germany, Austria, Switzerland, the Netherlands and Scandinavia? Is it that income per head is higher in these cities? In other words, is the quality of life related to GDP?
The answer is only loosely related to GDP. What seems more important is people’s income relative to other people and whether their income relative to other people is rising.
But people regard the quality of life in cities as depending on other factors than simple relative income. One factor common across all cities is household composition. People are least happy if they live on their own.
Other factors include: a feeling of safety; how well integrated different ethic and social groups are felt to be; the quality of public transport; the cleanliness of the city; health care provision and social services; the quality of schools and other educational establishments; sports facilities; cultural facilities; parks and other public spaces; the quality of shops, restaurants and other retail outlets; the quality and price of housing; the ease of getting a job; trust in fellow citizens; environmental factors, such as air quality, noise, traffic congestion and cleanliness; good governance of the city. The top three issues are health services, unemployment and education and training.
Although cities with higher incomes per head can usually afford to provide better services, there is only a loose correlation between income per head and quality of life in cities. Many of the factors affecting quality of life are not provided by the market but are provided publicly or are part of social interaction outside the market.
Happiness in Europe The Economist (25/2/16)
Happiness in Europe: What makes Europeans happy? It depends on where they live The Economist (27/2/16)
Rating Europe’s Most and Least Happy Cities CityLab, Feargus O’Sullivan (9/2/16)
Europe’s Nicest Cities Aren’t Its Happiest Ones Bloomberg, Therese Raphael (2/2/16)
Vienna named world’s top city for quality of life The Guardian, Patrick Collinson (23/2/16)
Vienna named world’s best city to live for quality of life, but London, New York and Paris fail to make top rankings Independent, Loulla-Mae Eleftheriou-Smith (23.2.16)
The world’s most liveable cities: London and Edinburgh rank in top 50 The Telegraph, Soo Kim (23/2/16)
Quality of Life in European Cities 2015 Flash Eurobarometer 41 (January 2016)
Quality of Life in European Cities 2015: Individual Country Reports Flash Eurobarometer 41 (January 2016) (This may take a short while to download.)
Quality of life in European Cities 2015: Data for Research Flash Eurobarometer 41 (January 2016)
2016 Quality of Living Rankings Mercer (23/2/16)
Western European Cities Top Quality of Living Ranking Mercer, Press Release (23/2/16)
- Why, do you think, is the quality of life is generally higher in (a) most northern European cities than most southern and eastern European ones; (b) most European cities rather than most north American ones?
- To what extent is (a) absolute real income per head; (b) relative real income per head an indicator of quality of living in cities?
- Why, do you think, are Italians less satisfied with the quality of life in their cities than residents of other western European countries?
- What factors affect your own quality of living? To what extent do they depend on the city/town/village/area where you live?
- Look at the list of factors above that affect quality of life in a given city. Put them in order of priority for you and identify any other factors not listed. To what extent do they depend on your age, your background, your income and your personal interests and tastes?
- Identify a particular city with which you are relatively familiar and assume that you were responsible for allocating the city’s budget. What would you spend more money on, what less and what the same? Provide a justification for your allocation.
- Discuss the following passage from the Bloomberg article: “What is striking is that there appears to be a correlation between those who report high levels of satisfaction and those who view foreigners in their city as an advantage. Conversely, respondents who complained loudest about transportation, public services, safety and other issues tended to view the presence of foreigners far less favorably.”
After two weeks of negotiations between the 195 countries attending the COP21 climate change conference in Paris, a deal has been reached on tackling climate change. Although the deal still has to be ratified by countries, this is a major step forward in limiting global warming. Before it can formally come into force, it must have been ratified by at least 55 countries, accounting for at least 55% of global greenhouse gas emissions.
The deal goes much further than previous agreements and includes the following:
||A limit on the increase in global temperatures to ‘well below’ 2°C above pre-industrial levels and efforts pursued to limit it to 1.5°C.
||A recognition that the pledges already made ahead of the conference by 186 countries and incorporated into the agreement are insufficient and will only limit global temperature rise to 2.7°C at best.
||Countries to update their emissions reductions commitments every five years – the first being in 2020. Such revised commitments should then be legally binding.
||A global ‘stocktake’ in 2023, and every five years thereafter, to monitor countries’ progress in meeting their commitments and to encourage them to make deeper cuts in emissions to reach the 1.5°C goal. This requires a process of measurement and verification of countries’ emissions.
||To reach a peak in greenhouse gas emissions as soon as possible and then to begin reducing them and to achieve a balance between sources and sinks of greenhouse gases (i.e. zero net emissions) in the second half of this century.
||Developed countries to provide the poorest developing countries with $100bn per year by 2020 to help them reduce emissions. This was agreed in Copenhagen, but will now be continued from 2020 to 2025, and by 2025 a new goal above $100bn per year will be agreed.
||The development of market mechanisms that would award tradable credits for green projects and emissions reductions.
||A recognition that the ‘loss and damage’ associated with climate-related disasters can be serious for many vulnerable developing countries (such as low-lying island states) and that this may require compensation. However, there is no legal liability on developed countries to provide such compensation.
Perhaps the major achievement at the conference was a universal recognition that the problem of global warming is serious and that action needs to be taken. Mutual self interest was the driving force in reaching the agreement, and although it is less binding on countries than many would have liked, it does mark a significant step forward in tackling climate change.
But why did the conference not go further? Why, if there was general agreement that global warming should be tackled and that global temperature rise should ideally be capped at 1.5°C, was there not a binding agreement on each country to apply this cap?
There are two reasons.
First, it is very difficult to predict the exact relationship, including its timing, between emissions and global temperature rise. Even if you could make limits to emissions binding, you could not make global temperature rise binding.
Second, even if there is general agreement about how much emissions should be reduced, there is no general agreement on the distribution of these reductions. Many countries want to do less themselves and others to do more. More specifically, poor countries want rich countries to do all the cutting while many continue to build more coal-fired power stations to provide the electricity to power economic development. The rich countries want the developing countries, especially the larger ones, such as China, India and Brazil to reduce their emissions, or at least the growth in their emissions.
Then there is the difference between what countries vaguely pledge at a global conference and what they actually do domestically. Many developed countries are keen to take advantage of currently cheap fossil fuels to power economic growth. They are also still investing in alternative sources of fossil fuels, such as through fracking.
As we said in the previous blog, game theory can shed some useful insights into the nature and outcome of climate negotiations. ‘The global optimum may be for a strong agreement, binding on all countries. The Nash equilibrium, however, may be a situation where countries push for their own interests at the expense of others, with the final agreement being much more minimalistic.’
‘Minimalistic’ may be too strong a description of the outcomes of the Paris conference. But they could have been stronger. Nevertheless, judged by the outcomes of previous climate conferences, the deal could still be described as ‘historic’.
With landmark climate accord, world marks turn from fossil fuels Reuters (13/12/15)
COP21 climate change summit reaches deal in Paris BBC News (13/12/15)
COP21: Paris climate deal is ‘best chance to save planet’ BBC News (13/12/15)
COP21: Climate change deal’s winners and losers BBC News, Matt McGrath (13/12/15)
The Five Key Decisions Made in the UN Climate Deal in Paris Bloomberg, video: Nathaniel Bullard; article: Ewa Krukowska and Alex Morales (12/12/15)
The key factors in getting a deal in Paris BBC News on YouTube, Tom Burke (13/12/15)
COP21 agreement: All you need to know about Paris climate change deal Hindustan Times, Chetan Chauhan (13/12/15)
COP21: Paris agreement formally adopted Financial Times, Pilita Clark and Michael Stothard (12/12/15)
Let’s hail the Paris climate change agreement and get to work Financial Times, Jeffrey Sachs (12/12/15)
COP21: Public-private collaboration key to climate targets Financial Times, Nicholas Stern (13/12/15)
Paris climate change agreement: the deal at a glance The Telegraph, Emily Gosden (12/12/15)
Climate Accord Is a Healing Step, if Not a Cure New York Times, Justin Gillis (12/12/15)
Paris Agreement Ushers in End of the Fossil Fuel Era Slate, Eric Holthaus (12/12/15)
Paris Agreement: the reaction Business Green, James Murray and Jessica Shankleman (12/12/15)
World’s First Global Deal to Combat Climate Change Adopted in Paris Scientific American, David Biello (12/12/15)
COP21: Paris climate deal ‘our best chance to save the planet’, says Obama Independent, Tom Bawden (13/12/15)
Grand promises of Paris climate deal undermined by squalid retrenchments The Guardian, George Monbiot (12/12/15)
Paris Agreement on climate change: the good, the bad, and the ugly The Conversation, Henrik Selin and Adil Najam (14/12/15)
COP21: James Hansen, the father of climate change awareness, claims Paris agreement is a ‘fraud’ Independent, Caroline Mortimer (14/12/15)
Paris climate agreement: More hot air won’t save us from oblivion Sydney Morning Herald, Peter Hartcher (15/12/15)
Adoption of the Paris Agreement United Nations Framework Convention on Climate Change (12/12/15)
- Could the market ever lead to a reduction in greenhouse gas emissions? Explain.
- What are the main strengths and weaknesses of the Paris agreement?
- Is it in rich countries’ interests to help poorer countries to achieve reductions in greenhouse gas emissions?
- How might countries reduce the production of fossil fuels? Are they likely to want to do this? Explain.
- Is a ‘cap and trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
- What is the best way of financing investment in renewable energy?
The Paris Climate Change Conference (COP21) is under way. At the opening on November 30, 150 Heads of State gathered in Paris, most of whom addressed the conference. With representatives from 195 countries and observers from a range of organisations, the conference is set to last until 11 December. Optimism is relatively high that a legally binding and universal agreement will be reached, with the aim of keeping global warming below 2°C – what is generally regarded as a ‘safe’ limit.
But although it is hoped that a successor to the Kyoto Protocol of 1997 will be put in place, there are many problems in getting so many countries to agree. They may all wish to reduce global warming, but there is disagreement on how it should be achieved and how the burden should be shared between countries.
There are several difficult economic issues in the negotiations. The first is the size and impact of the external costs of emissions. When a country burns fossil fuels, the benefits are almost entirely confined to residents of that county. However, the environmental costs are largely external to that country and only a relatively small fraction is borne by that country and hardly at all by the polluters themselves, unless there is a carbon tax or other form or penalty in place. The problem is that the atmosphere is a common resource and without collective action – national or international – it will be overused.
The second problem is one of distribution. Politicians may agree in principle that a solution is necessary which is equitable between nations, but there is considerable disagreement on what is meant by ‘equitable’ in this context. As the third Guardian article below puts it:
The most important hurdle could be over whether industrialised countries like the US, UK and Japan, which have contributed the most to the historical build-up of emissions, should be obliged to cut more than developing countries. India, on behalf of many poor countries, will argue that there must be “differentiation” between rich and poor; but the US wants targets that are applicable to all. A collision is inevitable.
A third problem is that of uncertainty. Although there is general agreement among scientists that human action is contributing to global warming, there is less agreement on the precise magnitude of the causal relationships. There is also uncertainty over the likely effects of specific emissions reductions. This uncertainty can then be used by governments which are unwilling to commit too much to emissions reductions.
A fourth difficulty arises from the intertemporal distribution of costs and benefits of emissions reductions. The costs are born immediately action is taken. Carbon taxes or charges, or subsidies to renewables, or caps on emissions, all involve higher energy prices and/or higher taxes. The flows of benefits (or lower costs), however, of reduced emissions are not likely to be fully experienced for a very long time. But governments, whether democratic or dictatorships, tend to have a relatively short time horizon, governed by the electoral cycle or the likelihood of staying in power. True, governments may not be solely concerned with power and many politicians may have genuine desires to tackle climate change, but their political survival is still likely to be a major determinant of their actions.
Of course, if there is strong public opinion in favour of action to reduce emissions, governments are likely to respond to this. Indeed, all the expressions of public support for action ahead of the conference from all around the world, do give some hope for a strong agreement at the Paris conference. Nevertheless, there is still widespread scepticism in many countries over the relationship between human action and climate change, and many argue that the costs of policies to tackle climate change exceed the benefits.
Game theory can shed some insights into the difficulties ahead for the negotiators. The global optimum may be for a strong agreement, binding on all countries. The Nash equilibrium, however, may be a situation where countries push for their own interests at the expense of others, with the final agreement being much more minimalistic.
There do, however, seem to be more reasons to be cheerful at this summit that at previous ones. But negotiations are likely to be hard and protracted over the coming days.
Videos and webcasts
Paris Climate Conference: The Big Picture Wall Street Journal on YouTube, Jason Bellini (30/11/15)
Why is the Paris UN climate summit important? PwC, Leo Johnson (14/10/15)
Paris climate change summit 2015: ‘the near impossible task’ Channel 4 News on YouTube, Tom Clarke (30/11/15)
COP21: Rallies mark start of Paris climate summit BBC News, David Shukman (29/11/15)
With climate at ‘breaking point’, leaders urge breakthrough in Paris Reuters, Bruce Wallace and Alister Doyle (1/12/15)
COP21: Paris conference could be climate turning point, says Obama BBC News (30/11/15)
Leaders meet to reach new agreement on climate change BBC News, David Shukman (30/11/15)
Poll: Growing Doubts Over Climate Change Causes Sky News, Thomas Moore (30/11/15)
Paris climate protesters banned but 10,000 shoes remain The Guardian (29/11/15)
COP-21 climate deal in Paris spells end of the fossil era The Telegraph, Ambrose Evans-Pritchard (29/11/15)
Is there an economic case for tackling climate change? BBC News, Andrew Walker (28/11/15)
World Leaders in Paris Vow to Overcome Divisions on Climate Change Wall Street Journal, William Horobin and William Mauldin (30/11/15)
Experts discuss how to build a carbon-free energy industry The Guardian, Tim Smedley (25/11/15)
Africa could lead world on green energy, says IEA head The Guardian, Anna Leach (11/11/15)
Climate change talks: five reasons to be cheerful or fearful The Guardian, John Vidal (30/11/15)
The Paris climate change summit, explained in 4 charts The Washington Post, Philip Bump (30/11/15)
Why This Goal To Curb Climate Change ‘Is Not Ideal’ Huffington Post, Jacqueline Howard (30/11/15)
Paris climate change talks: What the different groups attending expect from these crucial meetings Independent, Tom Bawden (29/11/15)
UN Climate Change Conference: World Leaders Call For Price On CO2 Emissions Despite Uphill Battle At Paris Summit International Business Times, Maria Gallucci (30/11/15)
World Bank, six nations call for a price on carbon SBS (Australia) (1/12/15)
Uruguay makes dramatic shift to nearly 95% electricity from clean energy The Guardian, Jonathan Watts (3/12/15)
- Why is COP21 considered to be so significant?
- For what reasons is there hope for a binding agreement to limit global warming to 2°C?
- What would be the effect on global warming of the commitments made by more than 180 countries prior to the conference?
- What market failings contribute towards the problem of global warming?
- Why, if all countries want to achieve a binding agreement at the Paris conference, is it likely to be so difficult to achieve?
- Explain what is meant by a ‘Nash equilibrium’ and how the concept is relevant to international negotiations.
- Why is China investing heavily in solar power?
- Could Africa lead the world in green energy?
- Is a ‘cap and trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
- What is the best way of financing investment in renewable energy?
- How does the structure/order of the Paris conference differ from previous COPs? Is such a structure more likely to achieve substantial results?
In December, most of the countries of the world will meet in Paris at the 21st annual United Nations Conference of the Parties (COP) on climate change. COP21 ‘will, for the first time in over 20 years of UN negotiations, aim to achieve a legally binding and universal agreement on climate, with the aim of keeping global warming below 2°C.’
When the Copenhagen conference (COP15) ended in disagreement in 2009, few people thought that the increase in renewable energy would be anything like sufficient to prevent global temperatures rising more than 2°C. But things have dramatically changed in the intervening six years.
Solar power and other renewables have increased dramatically and the technology for the cleaner burning of fossil fuels, including carbon capture and storage, has developed rapidly.
But perhaps the most important change has been the attitudes of governments. No longer is it a case of Europe and other developed countries moving in the direction of renewables, while developing countries, and, in particular, China and India, argue that their economic development requires a rapid expansion of coal-fired power stations. Now China, India and many other emerging countries are rapidly developing their renewable sectors. This is partly driven by the fall in the costs of renewables and partly by worries that climate change will directly effect them. Now the ‘pro-coal’ countries are in a minority.
And industry is realising that significant profit is to be made from the development and installation of power plants using renewable energy. This is driving both R&D and investment. As the Telegraph article, linked below, points out, in 2009 ‘the International Energy Agency (IEA) was still predicting that solar power would struggle to reach 20 gigawatts by now. Few could have foretold that it would in fact explode to 180 gigawatts – over three times Britain’s total power output – as costs plummeted, and that almost half of all new electricity installed in the US in 2013 and 2014 would come from solar’.
So is this a good news story? Will real progress be made at COP21 in Paris? The articles explore the issues.
Paris climate deal to ignite a $90 trillion energy revolution The Telegraph, Ambrose Evans-Pritchard (28/10/15)
OP21 deal critical for low-carbon economy Japan Times, Carlos Ghosn (29/10/15)
Is Solar Without Subsidies Now Viable? Oilprice.com, Michael McDonald (22/10/15)
The road to Paris and beyond Centre for Climate Change Economics and Policy, Grantham Research Institute on Climate Change and the Environment (LSE), Rodney Boyd, Fergus Green and Nicholas Stern (August 2015)
Energy and Climate Change International Energy Agency (October 2015)
- What are the drivers for a move from fossil fuels to renewables? Are they similar dirvers in both developed and developing countries?
- What externalities are involved in energy production (a) from fossil fuels; (b) from renewables?
- What policies can be adopted to internalise the externalities?
- What are the merits and problems of a carbon trading scheme? What determines its effectiveness in reducing CO2 emissions?
- Why are more and more investors moving into the renewable energy sector? Could this become a speculative bubble? Explain.
- How might game theory help to explain the process and outcomes of international negotiations over climate change and energy use?