Decisions Under Uncertainty

I found the following diagram from Mike Hulme's book interesting. It describes different ways of describing the risks from climate change (note the empowering nature of the national security frame).

Climate Change Frame
Audience Engaged
Scientific Uncertainty Frame
Those who don't want to change
National Security Frame
As above, but now inspired to act
Polar Bear Frame
Wildlife lovers
Money Frame
Politicians and the private sector
Catastrophe Frame
Those who are worried about the future
Justice and Equity Frame
Those with strong ethical leanings

Peter Dawe's comment that an entrepreneur is someone who makes decisions before knowing all the facts. I think we probably need more of an entrepreneurial attitude on this.

Source: Hulme (2009) 'Why we disagree about climate change: understanding controversy, inaction and opportunity', CUP (quoting Shanahan (2007) see http://tinyurl.com/ks3bme )

A Simple Macroeconomic View

Here's this from the Aleph blog, three years ago:
"Sometimes I think that the Keynesian and Austrian Schools of economic thought can be merged into a consistent synthesis that would disagree about the goals of policy, but largely agree on how economies work. One of the men that would help promote such an idea would be Hymen Minsky."
Here's an attempt to do just that:

1) Prices are sticky and markets (e.g. for labour) don't always clear; there is 'involuntary unemployment'. (Keynes) -- [Evidence? For example, graph of unemployment (x-axis) against inflation (y axis) 1990-2010 is approximately horizontal - ie big changes in unemployment without changes in inflation. the following graph is from Austalia]











2) Fractional reserve banking adds a second class (bank deposits) of money to the first (banknotes issued by the central bank). The second class of money, bank account money is usually created at the same time as debt, causing asset price inflation (Austrians); and deflation (Fisher) when the the two are cancelled out when de-leveraging.
3) Conventional economic thinking tends to ignore asset prices. But increases in credit money lead to increase in asset prices, and these lead to wealth effects which may add to economic instability.

To put it simply, markets (as currently constituted) don't always work, that's why you need a Keynesian response in a 'great depression' scenario. Some of the reasons that markets as currently constituted don't work may be 'Austrian' (ie the markets are distorted by the existence of fractional reserve banking), but the 'Austrian' message tends to be distorted as 'make markets freer, but ignore the privileges of the financial sector and the asset-owning sector', when these sectors are probably the most important distortions. However, there may be other reasons that 'markets don't work' apart from the 'Austrian' ones.

QE2 - Just Print Money

Why did I change from being a fiscal dove in 2008, asking for deficit spending, to being a fiscal hawk in 2010, arguing that UK needed to drastically reduce its deficit? One reason was the dramatic success of unconventional monetary policy or quantitative easing (QE). Printing money and pumping money into the economy seemed to inflate asset prices, making people feel richer and bringing the UK out of the recession.

The success of QE leads to two conclusions: firstly, fiscal policy need not take all of the load; secondly, it's very bad practice to finance deficits indefinitely with printing money, so if you are using QE, you should get the deficit down sharpish.

I agree broadly with the scale of the UK fiscal tightening (however I would have done it more with tax rises, and with wage cuts: I think the spending cuts may be somewhat unrealistic). But it seems inevitable that such as sustained tightening, copied elsewhere, may well lead the country back into recession. To argue otherwise is to base policy on hope rather than logical argument.

In order to prevent a double dip recession/depression I suggest:
a) create moderate inflation, through rises in indirect taxation such as VAT and carbon taxes
b) pre-emptively introduce further quantitative easing, so as to prevent a 'double dip' recession.

The bank of england needs to take account of the 'feedback' of fiscal tightening and act decisively to prevent a double-dip recession. In the future reserve requirements may need to be raised in order to mop up the money.