I was an econ major in college. If you read news you get a heavy dose of macroeconomics. Interest rates, inflation, unemployment. You’d think having studied it you’d have an advantage. The advantage is this — you can safely ignore its predictions. Move on, nothing to see here.
Macro is voodoo.
It’s “important but not knowable”. Need proof? Check out this humorous take on what happens when interest rates rise. I’ll wait.
Ok, did you get all that? Now consider this. I got really good grades in my major writing stuff just like that. Sure, I peppered the prose with boldfaced textbook words and I would stop before outright contradicting myself. But do that for 10 pages of those small blue-lined exam booklets and voila: 4.0! It’s a bullshit major. I’m not proud of feeling like I gamed a credential, so perhaps confessing to you is a small penance.
That said, microeconomics is worth a look. I’m assured that success in business demands you understand supply/demand, price elasticity, opportunity costs, competition, revenues, and profits. The good news is you can pick that up without a TA’s handholding. As opposed to, say, chemistry. Khan Academy and your hipster Erlenmeyer flask ain’t gonna cut it, Marie Curie.
Micro helps you reason through problems. It’s another lens to filter the world through and it’s definitely more predictive than the non-linear “Rube Goldberg” macro machine. Let’s use an example excerpted from Russ Roberts’ economic romance novel Invisible Heart.
He poses the following:
I’ll give you a hint. You don’t need any more information. If you know the answer it is because you reasoned like an economist. I never said it required more horsepower to think like an economist. It’s just a different lens.
If you are stumped then consider Robert’s thought exercise.
I gave you a room full of pistachio nuts in the shell. It’s a big room, say the size of a classroom. The room is filled with pistachio nuts up to a height of five feet. There are millions of them. Welcome to the Nut Room. The nuts in this room are yours for the taking. Any time you want to come in here and help yourself, there is no charge. Bring your friends if you’d like. Just wade in and have a pistachio party.
“You’re happy because you love pistachio nuts. Outside the Nut Room, they’re expensive. Inside, they’re free. There’s only one rule in the Nut Room. As you eat the nuts, you’ve got to leave the shells in the room. You can’t take them out with you. At first, that’s no problem. For the first few days and maybe weeks and months, the pistachios are plentiful. But as the years go by, it takes longer and longer to find a pistachio. The shells start getting in the way. You come in with your friends and you spend hours wading through the shells of pistachios you’ve already eaten in order to find one containing a nut. Your friends say, we’ve got to stop meeting like this. ‘Why?’ you ask. ‘Don’t you like free pistachio nuts?’ And what do your friends say in response?”
In other words, the price of finding the nuts has exceeded the price of just getting them at a store. The price rationed demand.
So what about the oil?
“Remember the pistachios!”
You will never run out of oil. The price of finding the marginal barrel will become high enough that people will find cheaper sources of energy before they ever extract the final barrel. By thinking like a microeconomist you were able to see that the relative price of substitutes meant the supply of oil was not headed to zero with a slope of negative one. It’s a curved line that never approaches zero.
Let’s use an economic lens to explore facets of another modern problem: waste management.
It’s a complex problem
We subscribe to writer and investor Jared Dillian’s daily market letter, The Daily Dirtnap. Recently he wrote:
“Here’s how the unintended consequences kick in. First of all, we have discovered that plastic bag bans are not as effective as intended, because people were re-using the plastic grocery bags for trash cans around the house, and now they have to buy plastic bags, which are bigger and thicker, to line their trash cans at home. It is estimated that 30% of the plastic that was eliminated at the grocery store is being reintroduced at home. Many people have pointed out that paper bags are even worse for the environment than plastic bags, because more energy is consumed in their creation, so New Jersey went whole hog and wants to ban them altogether. Yet there are more unintended consequences. Apparently making cloth bags is REALLY destructive to the environment, and you have to use one LOTS of times to offset the use of plastic or paper, and typically what will happen is that people will lose them, show up to the grocery store, and buy more.”
Unintended consequences are a reliable sign that you are dealing with a complex system.
It’s a big problem
Wired on the scale of the waste problem:
- Humans individually discard 5 lbs per day of waste
- 95% of waste comes from manufacturing processes. Before humans even get their finished goods.
- There is 3mm metric tons of waste per day; this is expected to double within a decade
- We even create space waste. In orbit and in the ocean.
- 29,000 other pieces of space junk invisibly circling us, along with over 1,700 active satellites.
- The U.S. Air Force has been tracking orbital debris, which is mostly made up of spent rocket stages and decommissioned satellites, and keeps a record of any object larger than a baseball. Why? A one-centimeter object moving at orbital speed could penetrate the International Space Station’s shields or disable a spacecraft. The impact would have the energy equivalent of an exploding hand grenade.
- In the Pacific Ocean, Point Nemo serves as a spacecraft cemetery. Chosen for its remoteness (the closest land mass is nearly 2,400 kilometers away). It is where international space agencies discard large space objects that don’t burn up in the atmosphere upon re-entry. Over 260 spacecraft are buried there.
It’s an ethically-charged problem
This week I found myself learning about the nuance in the market for discards. Here’s Adam Minter author of Junkyard Planet: Travels in the Billion Dollar Trash Trade and Secondhand addressing the notion that rich countries “dump” to poor countries.
Here’s the problem with the “dumping” narrative. At the moment, the cost of sending a forty-foot shipping container of discarded plastics from the Port of Los Angeles to Port Klang, Malaysia (where many of California’s plastic exports are heading since China’s restrictions on imports), is roughly $1,200. Meanwhile, the cost of “tipping” a ton of solid waste into an L.A.-area landfill is around $52 per ton. That’s a problematic pair of numbers if you’re committed to explaining waste exports as externalization. After all, if it’s cheaper to “dump” in Los Angeles than to “dump” in Malaysia – why are plastic recyclers in Los Angeles “dumping” in Port Klang?
The answer should be obvious: the plastics aren’t being dumped, they’re being purchased by someone in Malaysia (who, like an Amazon customer, also pays the freight). And the reason they’re willing to put up that money is because the plastic has value as a raw material for manufacturing or re-use.
In the two decades I’ve covered the transglobal trade in discards, I’ve yet to see a shipping container of discards “dumped” on a developing country. In every case, the material in the containers was purchased and imported for more than what it would cost to “dump” at home. Of course, the discards weren’t always processed or used in a way that conforms to health, safety, and environmental standards found in many developed countries.
If all you saw was a map with arrows indicating garbage flows, and you had an ideological lens you saw rich people exploiting poor people. An economic lens would have suspected arbitrage first. Follow the money. Results flow from incentives. This doesn’t mean there aren’t moralistic issues. Those issues are a worthy conversation but are not the pertinent ones for explaining what we observe. In fact Minter, an expert in how we understand waste, echoes Dillian’s recognition of trade-offs.
Minter: Over the years I’ve come to the conclusion that consumers actually care more about how their stuff is discarded, than how it is manufactured. I think there’s a limit to how much outrage an activist can generate over how stuff is manufactured. Everyone is already compromised, and you can only push people so far in terms of guilt before they shut down.
So are our grandchildren going to drown in our accumulating waste?
“Remember the pistachios!”
The price of removing the waste will approach a point where it will be highly profitable to find solutions just like the waste importers in Malaysia found profitable ways to recycle rich nation’s refuse. It has not been a profitable gamble to bet against human enterprise.
Just look at the history of poop.
Paraphrasing and quoting from the second part of the Wired article:
By the 1800’s, cities were drowning in human excrement. In NYC, those brownstone stoops were intended to let you stay above the filth and smell. Pigs roamed the Big Apple to deal with the feces and in fact Wall Street got its name frame the barriers used to keep the pigs at bay. In Paris, citizens were required to dig “cesspools” in their yards which further concentrated the problem and spread illness. The Chinese did as the Malaysian traders did, they turned a waste product into an asset. They transported human feces, aka “night soil”, to the countryside to be used as fertilizer. “One person’s excrement is enough to fertilize and grow over 200 kilograms of cereals a year.” In Japan, excrement became “a high priced commodity with commerce flowing from landlords to farmers.”
In the Guano War from 1864-1866, Spain tried to re-possess it guano (seabird excrement) from the former colonies of Peru and Chile. Guano is 35x more effective as fertilizer than barnyard manure.
“The Americans, eager to secure their own sources of guano, passed the Guano Islands Act on August 18, 1856, essentially allowing the United States to lay claim to any island they found with guano deposits.” (These laws are still in force today.)
By 1900, it was clear that sources of manure were being depleted faster than they could be replenished.
Ok, so we are at a point in history that nations are fighting over poop, to use as fertilizer so they can feed their citizens. The price of fertilizer is now costing human life. A very steep price.
Enter the Haber-Bosch process: the greatest invention no one has ever heard of. While plants can fix nitrogen, the abundant supplies of nitrogen in the atmosphere are not bioavailable to humans since the bonds binding nitrogen atoms are so strong. The Haber-Bosch process is an industrial process which can generate enough energy to convert atmospheric nitrogen into a form we can use as fertilizer.
If you’ve ever wondered how the human population jumped in a single century from 1.6 billion people in 1900 to over 7.6 billion today, it is because we no longer use manure to grow food. This form of fixed nitrogen, in combination with the development of pesticides and new crop varieties, brought in what’s known as the green revolution. Humans had tamed the earth, and their numbers exploded as a result. We could feed ourselves in a whole new way, by turning air into food with the use of synthetic fertilizer. The Germans called it Brot aus Luft. “Bread from air”. Today, half of the nitrogen in your DNA comes from a Haber-Bosch factory.
Going back to the waste problem. Are we going to drown in waste?
Minter discusses the advances on the horizon, for example, chemical processes which promise to restore discarded clothes into re-useable threads. I’ll generalize: look for an escalation of costs, whether in dollars or social well-being, for a solution not far around the corner. The doomsday prognosticator is selling you something else.