Friday, November 13, 2009

Who Might Run Industrial Policy?

It has been a while since I have last written a post, and the choice of subject matter for this post has proven to be a difficult decision. On the one hand, there is the ongoing tremors in the financial system, and on the other there are the global shifts, such as the unsubstantiated suggestion by China that they may allow the RMB to appreciate. Added to this, there is the ongoing ascent of the gold price, as investors and governments move into the asset of last resort, and the progressive decline in value of the $US. This from the Wall Street Times:
"The gold market is kind of surprising here," as it holds on to the psychologically important $1,100 level, said Ralph Preston, senior market analyst with Heritage West Financial.

Watching the dollar's next moves will be crucial, Preston said. "It's going to be interesting whether the dollar is developing a bottoming formation or if it is about to fall off a technical cliff."

I will leave such matters alone for this post, as they are being covered elsewhere. Instead I would like to focus on one of the widely utilised government stimuli; the cash for clunkers schemes. I am focusing on this subject, as the scheme has appeared to give a temporary reprieve in the downwards trajectory of many economies. My inspiration was an article in the Telegraph, in which Jeremy Warner analyses the impact of the stimulus on the UK economy.

The purpose of my post is to highlight the absolute foolishness of such government measures in relation to arguments for more government interventions in economies. A long while ago, in a discussion of GDP measures, I pointed out that Hurricane Katrina would have seen an uptick in US GDP. The destruction of infrastructure, housing and other assets would have led to increased activity in the economy, as business and government sought to replace the assets that were lost. In other words, the destruction of a hurricane would appear to be a positive boon for an economy. On such logic, bombing your own cities would be good for the economy.

As it is, we have seen a natural disaster replaced with a man made disaster. Each of the cars that has been scrapped early is an asset with a real value, and useful life. Just as a bridge being destroyed in a hurricane still has a useful potential lifespan, the same might be said of the cars that have been scrapped. Quite simply, the result is just the same.

In some ways it is an identical process to running a production line with a garbage compactor at the end of the production line. As each unit comes off the production line, the compactor simply crushes the item. The result of such a measure would be that the demand for the item might never be met, and the production line would be kept endlessly busy. Output would be maintained, GDP figures would be positive, and the economy would apparently be doing well as the result of this ongoing activity.

What I am discussing is not particularly original, and many other commentators have made similar observations. On this occasion, I am reiterating the point due to comments on my previous post. One of the regular commentators, writing under the name of Lord Keynes, made a robust defence of government intervention in the economy, proposing that governments develop industrial policy. What followed was a heated debate about the relative merits of government interventions, with both sides of the debate arguing their points vigorously.

In light of this debate, the purpose of this post is very simple. I have outlined the principles of a government policy, adopted in many countries, which is just a process of destroying useful assets - governments destroying something and suggesting that this is good for the economy. These governments include the same people in whom Lord Keynes appears to profess so much faith. These masters of our economic destiny actually think that premature destruction of assets is good for an economy. These are people who would count Hurricane Katrina as having had a positive impact upon an economy. Few would say such a thing directly (though I do recall that the Economist magazine came close to actually saying it), but they would see the positive GDP growth from the activity from Katrina as a 'good thing'.

My question is very simple. How can anyone have faith in these people? It is extraordinary that anyone might have faith in people with such bizarre beliefs. Really, can we trust these people with the widespread interventions in the economy, as proposed by Lord Keynes? The very same people who instigated the cash for clunkers policy would be the same people who would devise 'industrial policy'. Lord Keynes is not alone in having such faith in government interventions, and the worry is that those with his views are gaining ground. The advocates of ever more interventions, ever more shift of resource into government hands, are becoming ever more plentiful. That such beliefs are gaining ground is a real cause for worry.

26 comments:

  1. Some Initial Thoughts

    Your comments are right in some ways:

    My question is very simple. How can anyone have faith in these people? It is extraordinary that anyone might have faith in people with such bizarre beliefs.

    You are correct. No one should. I don't have any faith in present politicians and their neoliberal economists (some of whom have indeed briefly become “born-again” Keynesians, in the memorable phrasing of Steve Keen).

    The solution is to simply elect completely different people who bring completely different economists and economic advisors into government. Sack or replace bureaucrats who won't implement new policy.

    The school of economists vindicated by this crisis is the post Keynesian school.

    Appoint people like these:

    1.In Australia, Steve Keen of DebtWatch

    2.In the US, L. Randall Wray and the people from the post Keynesian
    Kansas City School at the University of Missouri.

    3. for the UK, the economists in the
    Post Keynesian Economics Study Group (PKSG).

    There are plenty of other experts in industrial policy. In the US, for instance, there is the outstanding Chalmers Johnson, an expert on Japanese industrial policy.

    Really, can we trust these people with the widespread interventions in the economy, as proposed by Lord Keynes?

    We wouldn’t. We would elect completely different people.

    I have outlined the principles of a government policy, adopted in many countries, which is just a process of destroying useful assets - governments destroying something and suggesting that this is good for the economy.

    But you ignore lots of other constructive aspects of government stimulus packages. For instance, what about the $16 billion US spent on R&D by Obama?

    You see no positive benefit to that at all?

    I hope to post a longer response soon on how to implement industrial policy.

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  2. The thing is, as with all govt interventions and State directions, that people tend to get in the way. What starts out as an 'Industrial Policy' of promoting certain sectors/companies soon becomes a reason to close down companies that are perceived to be working in a way that the State does not agree with.

    For example if the State invests in a technology, lets call it Betamax, and a private company invents a rival called, ooh, I don't know, VHS, there will always be the temptation to close down the rival, using all sorts of excuses - its for the national good, think of the jobs in State factories etc etc.

    This is why Socialism always ends up using coercion - first financial, then legal, and eventually the knock on the door at 4AM.

    Socialism is an evil that must be opposed at all opportunites. It is inimical to freedom.

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  3. CE, the way you describe it, you make it sound as though asset destruction would cause a permanent boost in GDP - as though there is something deeply paradoxical about it. Isn't it the case that any boost is temporary, and simply matched by an equal (or greater) decrease, later? The same goes for borrowing: yes GDP is boosted as borrowing increases, but recedes by the same amount, and more, as the loans are paid back (but of course the loans may have been invested wisely giving a net boost to GDP). In the long term maybe GDP is a reasonably sensible and rational measure.

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  4. Lemming: Thanks for the comment. To clarify, this kind of activity will not, of course, lead to any increase in actual wealth, but is destructive of wealth. As long as the activity is funded by the government, GDP will be influenced, but that just demonstrates the basic problem with GDP (as I have discussed before). You are quite right that there will be a decrease later. Sorry, a quick reply, but I hope that it clarifies the point.

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  5. Hi Mark. Thanks for your reply. I wasn't implying that you were suggesting that asset destruction caused a permanent increase in wealth, only that it looked as though it might be a permanent increase in GDP - as though GDP wasn't, in any way, a rational measure.

    But if, as George Soros suggests for example, bubbles can take 60 years or more to develop, it is clear that GDP doesn't really measure the wealth of an economy except over very long timescales.

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  6. Reply to Sobers

    The thing is, as with all govt interventions and State directions, that people tend to get in the way.

    This appears to be refuted by the fact that almost all public infrastructure is build to what you call “socialism.” The government constructs roads, bridges, freeways and harbours with tax payer money, and this is the most efficient way of doing it. Having private companies building several competing roads and bridges is just a waste of labour, resources and wealth, when a government agency can plan the construction of one bridge and build it.

    Socialism is an evil that must be opposed at all opportunites. It is inimical to freedom.

    What do you mean by “socialism”?

    If you mean a complete command economy (like the former communist states), then, yes, that kind of system leads to gross inefficiencies. If you mean a “mixed” economy with a government direction of an economy, especially during when recession happens, but with a large space for private enterprise, then that system is vindicated by history. The financial crisis has proved once and for all that unregulated financial markets led to disaster, and that the government needs to regulate them.

    As for government intervention in the economy being inimical to “freedom”, that is a rather tired old claim. Pinochet’s Chile had one of the most free market economies in the world, but was run by a repressive, torturing, right-wing military dictatorship. There is no necessary connection between free market economics and democracy or freedom.

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  7. "As each unit comes off the production line, the compactor simply crushes the item. "

    It's worse, and crueller, than you portray. Each unit, ordinarily would be sold to a consumer, who would use for a number of years and then sell it on. This second hand market has been devastated. Poorer people, people who usually buy second hand, are going to be forced to pay more for a second hand product.

    Despicable.

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  8. Did I say Right wing governments could not be authoritarian too? No, I didn't, so don't bring up straw man arguments like that.

    There are indeed a few things the State can provide that the free market cannot, or not as efficiently - law, policing, defence etc. It can also pay for infrastructure(but not build it using its own s state run companies) more efficiently than the private sector can.

    That's about it. Other than doing those few basic public arena provisions, the State should butt out of everything else. The bureaucrats do NOT know what is the best allocation of resources in the economy - the most efficient method of that is market capitalism - the allocation of resources by the aggregation of everyones free and unencumbered decisions as to what they wish to spend their money on, and how they wish to earn it.

    Any system that removes freedom of choice (and that includes taking tax from people) is socialism. It is the concept that taking something from one person by force and giving it to another is good. Because force is the basis of socialism - you cannot tax people, or stop them from doing something you dislike without force as an underlying threat. If tax were voluntary who would pay it?


    As for the recent financial crash, it is not a failure of regulation - it is the very regulation that causes the failure. If banks and financial institutions were not regulated, and deposits guaranteed by govt fiat, would everyone in the system not take a lot more care? Have extra reserves for the bad times, taken less risks, instead of expecting the State to pick up the pieces? Banking has existed for centuries prior to financial regulation, and despite various booms and busts the system endured.

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  9. Up until the 20th century, the banking industry only served big time merchants.
    It was a tiny industry.There was no stock market, no derivatives market, or MBAs.But there was indebtness and peasentry on the countryside. Only the wealthy and skilled lived in cities.
    ***
    Sobers, you can't fight collectivism with collectivism.You make it as if matters who disproportionately controls the affairs of countries in western countries similar to America-- as if there's a difference between government ownership and ownership by a self-indulgent (merchant) ruling class are two diffferent things. A lot of people who run government come from the private sector or are financed by people from the private sector.They didn't go into politics because they cared about hard-working working people. Neither Microsoft, the teacher's unions, or the Girl Scout are looking out for the common good in the long run. They are looking out themselves. What's good for the common person? On one extreme, some of us think manufacturing is going to come back to America without American wages falling to about 8 cents an hour.They do not understand labor costs and taxes wil have to decrease by more than 90%. That's what's needed to happen for manufacturing to become competitive again. It doesn't matter how much training the workers went through--they're currently too expensive. They're not productive because they have all these "labor rights".Employers can't work them over like slaves the way they can in the developing world. )

    What do we do with people who don't prosper in a global economy as is now the case?
    If they don't find meaningul work, i.e. being a engineer or a medical professional...they're going to be making less than 30k...private school teachers make less than public countries. There's not a significant shortage in the trades, it's that trade programs are selective. Yet the immigrants can go around blue collar trade organizations. This brings begs the original question that hasn't been answered? What do you do with workers not suited to compete with mathematicans and project managers? Kill them? They serve no purpose alive other than to wipe the asses of an aging population. Keep them alive and they will most certainly become entitled and parasitic whether government or religious groups give them aid.

    When will capitalists admit that modern urbanization movements will quickly reach very real limitations? It's getting to a point that if a country doesn't have x amount of X people without an IQ above 120,with advanced competencies in the sciences, they will be looking at 12 percent unemployment.If that sounds bizzare, I suppose you haven't heard of people like Bill Gates bemoaning the lack of people in developed countries who have a 'talent' for mathematics or science. He'd love to hire Americans, but American doesn't and never did produce a lot of technical talent. The H-Bomb scientists were imported.
    I'd advise that those with stock to put my money into genetic engineering. The future is going to be more cerebral since technological complexity is exploding and there are still too many people not technically inclined,

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  10. you don't have to post the last comment. Let its contents percolate...there's not only a surplus of labor but a surplus of human life.

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  11. Reply to Sobers 2

    The bureaucrats do NOT know what is the best allocation of resources in the economy - the most efficient method of that is market capitalism - the allocation of resources by the aggregation of everyones free and unencumbered decisions as to what they wish to spend their money on, and how they wish to earn it.

    The system I advocated is a mixed economy with a Keynesian macro-economic framework.
    Such a system does not require that bureaucrats know what is the best or perfect allocation of resources in the economy, as they are not running a command economy.

    But at the same time it is clearly the case the government planners do have a reasonably good idea of how the allocation of basic resources should be prioritised: and here your argument is severely undermined by the fact that government provision of public utilities is a fundamental method of allocating of resources in the economy.

    However, in the end, it is not the government or its bureaucrats that decide this, but the voting public of the nation that elects governments.

    People want clean drinking water, sewage, electricity, drainage, roads, bridges, freeways, and a public health care system. If a government severely failed in the provision of these services, it would be thrown out.
    The government prioritizes resource allocation when it builds such infrastructure, and, as you have already conceded above, it does so in a more efficient way than private enterprise.

    It seems absurd to deny that government provision of these services is a not fundamental allocation of resources.

    Market allocation does indeed work well for consumer goods, especially articles of fashionable consumption., but there is a large space for private enterprise in a mixed economy to provide these goods anyway.

    Any system that removes freedom of choice (and that includes taking tax from people) is socialism.

    An extraordinary statement.

    By such a definition of “socialism”, even a minimal libertarian state that just runs a justice system and defence force would be “socialist,” since the collection of its minimal taxes would still have to be enforced through coercion.

    Suppose I am a wealthy citizen in a libertarian state. I have enough money to pay for private security. I vehemently object to paying any taxes, even small ones through customs duties, to pay for the government’s national defence policy.

    Therefore under your definition even this minimal libertarian state would be “socialist”!!

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  12. Reply to Sobers 2 Continued

    Because force is the basis of socialism - you cannot tax people, or stop them from doing something you dislike without force as an underlying threat. If tax were voluntary who would pay it?

    But then even a libertarian state would require force. Who would pay tax in a libertarian state without such force? Even a minimal libertarian state with tiny taxes would still be “socialist.”

    Unless you are a free market anarchist like the late Murray Rothbard,
    and believe in the total privatization of all aspects of government, then your argument doesn’t work.

    You are also wrong that “force” is the basis of socialism. Force or coercion is a fundamental characteristic of all human society and relationships. It can be awful, immoral and illegitimate, or can it be justified.

    If your 3 year old child tries to run across a street in front of a speeding car, you as a parent are justified in using force to stop the child from running.

    If a person tries to kill you, then you can morally use force to protect yourself.

    Force or coercion can be either justified or unjustified.

    It is a basic characteristic of all government (libertarian or otherwise), because the government enforces the law and engages in national defence.

    Additional force or coercion by the state is legitimate (say in providing a public health system), only if it can be justified, and often it can be.

    And, by the way, you are actually wrong to say that if tax were voluntary, no nobody would pay it.

    If I lived in a state that agreed to provide basic services I wanted, I would choose it to continue paying tax, as would many socially conscious people on the left.

    It’s an utter myth that everyone is completely selfish and looks on the government as an alien force taking their money by violence.

    If anything, the coercion is necessary for free loaders who would otherwise take advantage of the public services and infrastructure we as a society will build in the future or that we have built up over generations through taxes.

    When I pay tax, I know it will be used to treat sick children: I don’t need a government forcing me to pay it.

    As for the recent financial crash, it is not a failure of regulation - it is the very regulation that causes the failure. If banks and financial institutions were not regulated, and deposits guaranteed by govt fiat, would everyone in the system not take a lot more care?

    No, they wouldn’t. And the proof of this is that when the US had no deposit insurance in the 1920s it didn’t prevent that crash of 1929, and the utter catastrophe of the Great Depression.

    The 19th century had severe and repeated financial crises, far worse than anything we ever had under the system of regulated finance (roughly from about 1945 to the1980s).

    I will respond on my blog soon with a post on why deregulation was a fundamental cause of this crisis.

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  13. For the role of financial deregulation in the 2008 financial crisis, see this excellent article:

    Root Cause Of The Economic Meltdown

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  14. Just another take?

    http://thearchdruidreport.blogspot.com/

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  15. Reply on Financial Regulation

    I have a new post on my blog on Financial Regulation:

    Financial Deregulation and Origin of the Financial Crisis of 2008

    A Sample:

    Some commentators blame Basel I and II as a major cause of the financial collapse.
    But if Basel I and II led inevitably to asset bubbles and financial collapse, then why has this not occurred in Canada?

    The answer is fairly simple: Canada, unlike many other Western countries, still has tight and effective banking regulation.

    That the role of Basel I and II in the present crisis is exaggerated is suggested by the fact that

    “Canadian banks were the first in the world to adopt risk-management approaches under the new international Basel II capital framework, which sets out rigorous requirements to ensure a bank holds adequate capital reserves appropriate to the risk it is exposed to through its lending and investment practices.

    Canada's banks offer haven in turbulent sea
    Vancouver Sun, Saturday, September 27, 2008


    Neither investment banks nor hedge funds (essentially the shadow banking sector) were really subject to Basel rules either, yet these were the sectors of the financial system where the crisis originated: thus it was the investment banks Bear Stearns and Lehman Brothers that first collapsed in 2008. Furthermore, even commercial banks could evade Basel by creating SIVs, which were not subject to Basel I and II capital regulations.

    All in all, this crisis was clearly caused by a spectacular failure of regulation.

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  16. @Sobers

    Socialism isn't inimicable to freedom, authoritarianism is.

    It's true that Socialism has tended to lead to authoritarianism when it starts to fail - but the same might be said of other schools of political ideology.

    Although I don't support socialism, I don't believe it's evil. It just doesn't work. And when it doesn't work, its masters try to 'force' it to work.

    Its the coercion that becomes necessary that's the real enemy of freedom and liberty.

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  17. Whatever the arguments between capitalists and socialists, they are all minor compared to the fact that at some point the oil supply will become so expensive that economic growth is not possible.

    As far as I can see, Lord Keynes is not addressing this at all (let's cram as many people into the country as possible in an attempt to grow our way out of recession), and obviously the capitalists cannot even contemplate the possibility: by definition their philosophy is that the market will provide.

    But what if the leaders of the world had grasped the problem after all? Short of imposing a single world government, what could they do to ensure that the masses would accept a steadily reducing standard of living without fighting wars, yet still compete with each other economically? What could work better than inventing a global threat that worsens the more energy is used? Using it, the masses could be played like a Stradivarius to achieve the winding down that would be necessary. Just a thought.

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  18. An interesting article on the BBC

    http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/11/new_name_for_a_new_economy.html

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  19. This site is an excellent learning resource if you pick out the right articles. The article here gives one perspective on some aspects of the Financial sector and how its predatory nature has been a destructive and growing influence since de-regulation.

    http://www.marketoracle.co.uk/Article15065.html

    Hugh

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  20. I must admit to being utterly depressed by the evident unfairness inflicted upon us, or rather anybody who is not in line for another massive and unwarranted bonus in the finance sector. 95% of the taxpayers' hard earned cash is being squandered on supporting the finance sector. And the few policies, such as the "cash for clunker" programs which have been adopted in several countries, result in assets being prematurely destroyed at the expense of the tax payer, once again.

    We are now at the edge of the precipice. Is the tax payer going to be forced to put all his future earnings on the future of a the minority of already stinking rich, or is somebody going to step up and commit themselves to stating, "stop. Now we want industry, production, long term jobs, technology and research".

    But I am depressed. I cannot see anybody stepping up to the podium and taking the banking industry by force.

    And trying to make a living and a future by working in industry, as I have, now looks like a futile attempt. My savings, my pension, my prudence, are being DESTROYED by the minute. ZIRP, QE, massive bailouts, currency devaluations.

    And for every hard earned Pound of mine that is being eaten away, I get the nasty feeling the investment banks are making ten times that in pseudo-pounds. Pounds which have not been earned through labour and production, but through using tax payers' money to place humongous bets, in the sure and safe knowledge that their own money is not at risk.

    How far can all this continue?

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  21. Reply to Lemming

    Whatever the arguments between capitalists and socialists, they are all minor compared to the fact that at some point the oil supply will become so expensive that economic growth is not possible. As far as I can see, Lord Keynes is not addressing this at all

    The solution to peak oil is large government investments now in alternative energy sources.

    There have been exciting developments in improving the efficiency of solar power, and some scientists think that large-scale viable solar power is only 20 years away.

    Then there are hydrogen fuel cells.

    And of course the holy grail: nuclear fusion energy.

    There is also the possibility of nuclear fusion-fission hybrid energy in the short term.

    All of these technologies won’t be created by private enterprise: you need the resources of government to make large breakthroughs in technology, just as nuclear fission was invented by huge government programs. The Obninsk Nuclear Power Plant, for instance, was the first nuclear power plant to generate electricity for a power grid, and was built in the Soviet Union in 1954.

    And yet we have libertarians and other free market idiots proclaiming that governments cannot do anything productive.

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  22. Here's a good interview with Noam Chomsky on role of the state sector in US economic development:

    There's a lot of wailing now about "socializing" the economy by bailing out financial institutions .... But the core of the economy relies very heavily on the state sector, and transparently so. So for example to take the last economic boom which was based on information technology -- where did that come from? Computers and the Internet. Computers and the Internet were almost entirely within the state system for about 30 years -- research, development, procurement, other devices -- before they were finally handed over to private enterprise for profit-making. It wasn't an instantaneous switch, but that's roughly the picture. And that's the picture pretty much for the core of the economy ... After the Second World War, the substantial period of economic growth which I mentioned (1948-1971) was very largely based on the dynamic state sector and that remains true.

    http://www.chomsky.info/interviews/20090210.htm

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  23. @Steve Tierney:

    Socialism cannot exist without coercion. There will always be people who do not agree with the concept, or the practical implementation of it. If they are free to do their own thing - run their own business in competition to the State-run enterprises for example, or stand in elections against the Socialist candidate, then Socialism falls.

    The only way you can make socialism 'work' is to force it upon people and punish people who step out of line.
    In a free society you are free to be as socialist as you like, just as long as its voluntary. Set up a commune if you want. Pool all your income and redistribute it according to need. Fine by me. Just don't force me to do the same by law and ultimately by force.

    @ Lemming:

    The market has the ultimate answer to energy supply - its called price. As supply falls, and demand rises, price increases. As price increases this encourages a) conservation b) substitution, c)production of previous uneconomic reserves.

    This was seen in practice in 2008 when petrol went to nearly £1-50/litre. People drove less, rode bicycles, took trains etc. If such prices persisted, or rose to even higher levels the effects would be even greater. Human ingenuity will move mountains if the profit motive is high enough. Let the market decide the price, and human greed will produce the solution.

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  24. @Sobers and Lord Keynes

    Never mind oil, I caught a few minutes of Newsnight tonight where they were discussing how China has cornered the market in rare earth metals - which are essential for practically every new technology or alternative energy scheme. They will control the price, and it is projected that in a few years China's own demands for these materials will exceed the global supply. Back to the drawing board! We infinitely ingenious Westerners have got a lot of innovating to do.

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  25. The market has the ultimate answer to energy supply - its called price. As supply falls, and demand rises, price increases. As price increases this encourages a) conservation b) substitution, c)production of previous uneconomic reserves.... Human ingenuity will move mountains if the profit motive is high enough

    By the time the price is this high, it will cause severe costs to economic output and activity.
    It is far more efficient to have government plan for it now and to create the alternative technologies.
    The truth is that "human ingenuity will move mountains" when it is organised and funded by the power of government.
    The creation of nuclear fission, space travel and the sequencing of the human genome are all testimonies to that.

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