Conservatism: Role of mental models, a quick look

By: Shahab Sabahi, Policy analyst in Energy Security and Policy Research Group

Conservatism is an ideology which values the status quo and accepts change only reluctantly and at a very slow pace [Adana, J.]. It is based upon the premise that human institutions are the product of a gradual process of experience or intrinsically existed, and that they have endured because they have proven to be effective over a long period of time. It follows that it would be most irresponsible to change these institutions and practices in any fundamental way [West, N.]. From conservatism’s view, it is not realistic to expect that workable new institutions and practices can be introduced to replace existing ones except through a long gradual process of experimentation. To do otherwise is to invite chaos. Where does this idea come from?

To answer the question above, I attempt to examine conservatism based on the human mental idea creation mechanism. People in all human societies create mental models of reality. The mental models attribute causality to factors; sometimes invisible ones; which make the world affairs more predictable and easy to understand. In earlier societies, these invisible forces were spirits and nature; today they are abstraction like scientific theories, socio-economic hypothesis. All world views and beliefs constitute a metal model of reality, in which observable events are attributed to either nonvisible or visible forces. Shared mental models are critical in facilitating large scale collective actions by setting common goals. Shared mental models are bases for social rules and shaping institutions, since the models often suggest clear rules for societies to follow. Oftentimes rules and institutions are enforced in the form of beliefs. They contain with considerable emotional elements and therefore are believed for intrinsic reasons and not simply because they are context related and accurate for just specific times. Intrinsic values are unchallengeable and thus become foundations for other sub-rules and institutions. Rules and institutions with intrinsic values are heritable, so they should be saved generation through generation by right people who understand the intrinsic values. They are always interpreted as effective rules as they continuously set parallel common goals, failure to one give a success for other one.    

All of this reinforces the fundamental conservatism, because with presence of beliefs and emotion, mental models of reality once adopted are hard to change in the light of new evidence that prove they are not working. 

 

 

“There is no way out of crude oil dependency”.

A review on the article :“Does biodiesel demand affect palm oil prices in Thailand?”

By: Shahab Sabahi, Policy analyst in Energy Security and Policy Research Group

In an article in the Journal of Energy for Sustainable Development, 2013; Chongprode Kochaphum et al examine the biodiesel development policy in Thailand. Through a lucid analysis, they caution few socio-economic impacts that the Thai biodiesel development plan would bring about. By employing demand-supply functions and analyzing the datasets of Thailand’s economy over the period 2006 and 2011, even if a short time span, they reveal that potential increases in the palm oil products would burden a net negative impact on the Thailand economy and society. However their findings show a reduction in crude oil import and a rise in farmer’s income as the positive impact of the biodiesel development policy. They, furthermore, highlight the degree to which net negative impacts are exacerbated when the crude oil price and demand for biodiesel increase with carrying out a sensitivity analysis.

The scope of Chongprode Kochaphum et al’s analysis was confined to the Thailand biodiesel domestic market and the import and export and related international trade variables were excluded [The article Page 2; Methodology, Price estimation]. This scope was implicitly disclosed a fact that a partial equilibrium and a static demand-supply analysis was employed by the article. Moreover this scope was formed an assumption which led to unrealistically calculation of average price. 

For the purpose of encouraging and opening fronts for future researches,  I would like to make few remarks on some of the article’s assumptions / views /conclusion statements as follows:

1.       The article introduced a term so-called “currency saving”. It appeared first in the article’s abstract without a definite definition. Readers might confuse the term with “balance of payment savings” which refers to national’s foreign current account. However the article clearly termed “currency saving” as “oil import reduction” [Page 2; Goal and scope of study]. With this definition, my perception from the article’s findings is that  

·         Biodiesel development will replace some “Volume” of the imported crude oil and does not necessarily translate to a “Surplus in balance of payment” by saving the “Monetary Value” of the imported crude oil. The article calculated its so-called “currency saving” with simply multiplying the average diesel price of the domestic  market by the replacement volume of diesel producing by palm oil instead of crude oil. The view failed to consider the facts firstly the Thai government pays “foreign hard currency” NOT “Thai Baht” to acquire “crude oil”  and the and secondly Thailand is a net imported crude oil commodity and the “Thailand balance of payment” whose status show “currency surplus” or “currency deficit” significantly links to the value of Thai Baht-US Dollar exchange rate. Make any judgment about “money currency saving” requires a broader international trade and finance consideration that the article’s scope falls short for taking them into the account. 

·         The value of Thai Baht had been appreciating about 26 percent during the period 2006 to 2011 [the Bank of Thailand statistics]. This development made importing crude oil would be cheaper than producing indigenous fuels production as the domestic business costs soared (Long Range Aggregated Supply LRAS)  and became more expensive, even with the presence of subsidy, to produce biodiesel and even cooking oil [the Bank of Thailand CPI and Total Factor Productivity report]. Indeed the Thailand economic growth and Direct Foreign Investment caused to boost upper the value of the Baht (an analysis on the Long Range Aggregated Supply can reveal the drivers of growth and price shift).  To consider effects of this development an “adjusting prices” mechanism is required. The effects of this development should be implicit in every “calculated average prices”. For the sake of estimating an “adjusted average diesel price” considering this mechanism, my rough calculation shows an “adjusted average diesel price” of between 4 to 7 Baht / liter instead of 16 Baht/liter that the article calculation assumed the latter one. Thus the positive contribution that the article called “currency saving” should be roughly halved (far less than half) than the article’s calculated figure which would shift the net cost-benefit balance in favor of more costs.    

2.       The article found that the price of cooking oil would increase in the Thailand domestic market. Since the article had excluded any impacts from importing cooking oil, they concluded a reduction in the net income of farmer.  If the exclusion assumption would be relaxed, a new conclusion might emerge which would be close to reality. In theory it is arguable. As the article calculated an increase of farmer income and a rise in the cooking oil price in domestic market, there would be a point in the time that imported cooking oil would be cheaper than the domestic one. This would create a dynamic to shift from consuming local cooking oil to imported one. This dynamic would play a trade-off between disposable income- consumption of farmers to a new improved balance status.

Therefore a reduction in net income of farmer may not be a conclusion. It depends on the value of the marginal propensity to consume and other socio-economic factors. The figures in an article “Wealth effects and Consumption in Thailand” in 2011 by Phurichai Rungcharoenkitkul -The Bank of Thailand, support this argument. 

However I would like draw my own conclusion from the article’s analysis:

 “There is no way out of crude oil dependency”.  

True, this is what the article’s findings revealed to me. The article sensitivity analysis has more stories to tell. The sensitivity analysis shows changes in crude oil prices will considerably shift the price of biodiesel which in its own determines that biodiesel production would be economically feasible or not.  Even demand of energy plays its role to make this new creature; biodiesel; being viable in an economy or not.

No matter if a nation is able to produce biodiesel and consequently, likely, cut its crude oil imports, the inconvenience truth is that  movements in crude oil market, determinants of monetary and foreign policies shape the nation’s energy security policy formulation [energy security which is defined “accessible, affordable and sustainable supply of energy”]

As long as this conventional source of “easy” energy is at hand and in part monetary policies pegs to this source of energy, indigenous biodiesel development remains a shadow in the economic system.

Struggle for status: Is it the character of the modern world’s territorial disputes?

By: Shahab Sabahi, policy analyst in Energy Security and Policy Research Group

In most of conflicts and disputes between nations over a specific region, one tries to search causes around the region’s natural resource capacity or its geostrategic advantage. Doubtlessly they could be necessary factors but may not be always sufficient. My argument is that if natural resources or geostrategic is ever the case the dispute could be settled down with a cooperative regime by rationales. However the dispute usually flares up that could end to a conflict. What might be sufficient condition?

By nature human being’s desire is not just limited to material resources but also recognition. By definition recognition is the acknowledgment of another human being’s dignity or otherwise understood to be status and worth. Status is relative rather than absolute, thus struggles for status are zero-sum competitions. In other words, one can have higher status only if everyone else has lower one.   When in a dispute struggle for recognition (e.g. the twenty first century territorial or social class disputes) comes forefront, a cooperative scheme and its recognizable gains, which are positive sum and allow players to enjoy, does not work.

In this situation struggle over relative status is the case in which a gain for one player is necessary a loss for another. It looks like the old game that was the clash of ideologies.

Social logic and status competition

By Shahab Sabahi, Energy and Environment for Development – Policy Research Group

 

Social logic influences humans’ choice for lifestyle. By definition, in society level, people make decisions by using a social logic that is based on norms and the expectations of society. Social logic is enormously swayed by policy choice and the fabrication of the conventional wisdom [The Affluent Society; J.K. Galbraith] which are in the hands of governments, elites or interest groups.

This essay has no intention to elaborate on how rationalists and constructivists see social logic. Rather it argues consequences of using social logic when it manifested in the form of trends, fashions, belief, and particularly in the form of societal status completion. 

For society as a whole, the major benefit of status competition is that continuously raises demands for goods and services. It legitimates the expansion of existing markets and consumption. Furthermore status competition requires the introduction of new goods and services. It, in turn, inspires the supply side of the economy to increase the production and to carry out innovation. Ever-last demand and innovation [creative destructive, J. Schumpeter] are two pillars of a capitalistic economy. Thus, status competition is inevitably essential for perpetuating economic growth.

However there are also disadvantages that arise from status competition, let alone environmental impacts, such as individual’s internal conflict. Status competition may differently affect dominate and subordinate members of society. There is a vast literature on the competition-driven-individual’s stress in the field of biology. Stress, as lab experience reports has testified is a sign that a living object is growing increasingly unfit for the environment in which it lives. A. R. Wallace’s research showed when a living object and its environment are no longer a good match, either should give, and it is always the former.

In long term, the person who exposes to prolonged stress would lose its competition ability. Research shows person who experiences stresses or radical changes has large chance to hold high level of cortisol in its body at the cost of reduction in testosterone. Cortisol is a chemical inside bodies that is released in response to stressful events, while testosterone is essential steroid for boosting competition (research articles in Social psychology field).

According to the above argument, eventually status competition washes away its earlier economic benefits and leaves behind an ineffective consumption-centered society.

Perhaps social logic should influence individual’s decision towards a higher quality, instead of status, competition.   

Capital, Energy and Capitalism

By Shahab Sabahi, Energy and Environment for Development – Policy Research Group

The emergence of capitalism in human history was a natural event and, just like other large scale natural events, it had positive and negative side-effect. How did this evolutionary process set in? How did the discovery of fossil energy amplify this process? What might put the growth of the process in standstill or derail the process’s prevailing trajectory?
Modern society no longer needs human slaves or a social organization based on distinct classes. Investments in useful energy instead of human and land investments has been the key to modern capitalist society. Substituting capital for human activity makes it possible to maintain a certain pattern of growth in modern society, in which only a tiny fraction of human activity is invested in those specialized compartments generating surplus. In modern society, physical capital that powered by fossil energy have taken the place of humans in preindustrial society. Fossil energy provides an extraordinary power level controlled by humans that has dramatically reduced overhead costs of generation.  By continuously accumulating capital, developed societies managed to lift the constraints that previously prevented the decoupling of economic growth from investments of human-energy-centered supply activities.

The continuous increase in capitalization to ease the biophysical limitation never arrived to crash against the existence of an external constraint. By adoption of fossil energy used by the growing capital supported the strategy of continuously lifting internal constraints on the energy input supply [M. Giampietro and K. Mayumi]. The abundant availability and accessibility of fossil energy removed the historical external constraints that is, the impossibility of expanding capital, that used to be colonized land, as much as necessary and permitted humans to control quantities of energy unthinkable in preindustrial times. The move from land-tied energy inputs to fossil energy opened up the era of exploitation of concentrated flows of energy carriers. But, what would be the next possible stage, when there would be no possibility of taking advantage of accumulated capital. History tells, an analogous, all empires initially organized effective and powerful army but reached at a point either internal capability diminished to a point that no longer could handle the empire power level or no more small realms left to conquer. Internal capability of system or external constraints brings the system to a point that no incentive exists for building up or expanding capital. The bottleneck faced to get a larger capability is to guarantee achieving a larger power level. The larger power level leads to the more capital accumulation, and it implies the more quality concentrated energy source should be used.

It was the extraordinary strength of concentrated energy in the form of fossil energy that makes it possible to successfully implement the ideological imperatives of maximization of profit and perpetual growth. The acceptance of this ideology translated into a powerful and simple strategy “survival of the fittest” [A. Lotka].  

Societies that were faster in accumulating capital and securing the flow of energy have won the battle for control over more energy. In fact they could generate more useful work, and approach to higher power level. As a consequence, they were able to use more resources than others. There is nothing fundamentally wrong with this strategy. As a matter of fact it represents exactly the series of event expected in the evolution of living systems.

 Perhaps in future, the story of mutual success for accumulating capital and fossil energy-oriented growth would reach to its end. Though now, voices for the risk of climate change and exploitation of natural resources are widely ignored, a bitter competition on securing the supply of fossil energy is ongoing and it will strain supply-demand balance of these crucial treasures for capitalism. The competition will pose an external constraint for fossil fuel supply (scarcity goes higher), and it will get more hostile when adding the fact that nations are confined in their own ability of diplomacy to get cheap energy.

Governments with Visions in Conflict

By Shahab Sabahi – Energy and Environment for Development – Research Group

One of the principal roles of government is to ensure that long term public goods are not undermined by short term private interests. Governments also desire to protect social justice, and sometimes at least rhetorically ecosystem. Further, governments are bound to the pursuit of economic growth.

To drive the latter task, governments ought to, as the conventional macroeconomic wisdom urges, be so active in championing the pursuit of unbounded consumer freedom, often elevating consumer sovereignty above social goals and actively encouraging the expansion of the market even if it is necessary, in private areas of individuals. Contrary, the first two roles require governments intervene, either implicitly or explicitly, to protect common goods from spread of the market and guarantee the redistribution of wealth.

There is a real sense of policy-goals competition. Under prevailing political economic logic, it is clear that for stabilizing the macroeconomics, economic growth is indispensable. Governments, therefore, are bound to prioritize economic growth, even with compromising other goals.

It means, since the consumption expansion, spending extension, and depleting natural resources assure the social stability, governments never take serious measures to encourage society-wide savings, support small community-based businesses, and never intervene to stop exploitation of natural resources (by the way,  governments love to fund researches on sustainable development).  They simply say “people can spend more, so they would be happy, won’t they?”  

Are you happy?

Labor Productivity: Fear of social instability and the dream of economic growth

By: Shahab Sabahi, Energy and Environment for Development – Research Group

The conventional macroeconomic model implies when demand for goods and services falls, revenues to firms are reduced, leading to job losses and reduced investment. Reduced investment leads to a lower capital stock which, together with a lower labor input, in turn reduces the productive capability of an economy. Public revenues also fall, debt increases and the economic system has a tendency to become unstable. This logic supports the fundamental idea of rising and continuing consumption growth for long term economic stability.  

The model argues that a lasting consumption growth is feasible. It provides a formulation the key relationship between supply and demand. In a simple way, it says, income is calculated as labor input multiplies by the productivity of labor. In this simple formulation the dependency on capital, technological progress, efficiency and resources is all rolled into the factor of labor productivity. Thus labor productivity can be thought of as the average amount of income generated by an hour of labor input. In effect, if the labor input remains constant then growth is determined merely by the increase in the labor productivity. In capitalism, labor productivity is expected to grow over time, as technologies advance. It benefits the supply-side by increasing output and eliminating the need for additional expensive labor input. Furthermore, this increase in income, the model advocator believes, promises society-wide prosperity.  Though in the real world, the evidence tells different story

If labor productivity grows in a larger pace than labor input growth rate (e.g. aging population or purposefully reducing the share of expensive labor input in production), the only way to stabiles economic output, in long term, is by reducing further the labor input that means accepting some underemployment. Not only unemployment leads to low consumption demand which in return undermines the economic system, but it destabilizes the society.  

By persisting only in the idea of improving labor productivity and continuing consumption growth, we just try to mend the economy. Particularly it is the case for developed countries. Mending economy may work for a while but soon or later it will stall. There is no doubt that continuing labor productivity improvement is essential. But the question is about its pace. Its growth rate should be in harmony with labor input growth rate. It is not easy sailing, but few strategies have been adopted by governments; such as work-time sharing which, look promising toward a long term social stability. We should discuss more about this subject before getting fooled by another version of this complex macroeconomic model.