Economic

The horrible destruction that has taken place in Chile and Haiti offers a fascinating contrast. Haiti was hit with a 7.0 richter scale earthquake and roughly 230,000 people died in January 2010. Chile was hit with a 8.8 richter scale earthquake and as of now roughly 1000 people are reported dead. The richter scale is a base 10 log scale --- so the shaking amplitude of the Chile quake was almost 100 times larger than the Haiti quake.

How could a much worse quake cause much less death? One answer is simply luck that the Hatian quake struck a major population center. But, we know that Chile's city of Concepcion was close to the epi-center.

My favorite explanation is discussed in My 2005 paper on deaths from disasters . Using data for nations all over the world, I documented the benefits of economic development. Richer nations suffer fewer deaths from the "same quality" shock.

Now, the open question is "why"?

Explanation #1: The Quality of Government

Richer governments can enforce building codes and quality building codes protect the public.


Explanation #2: Richer people

Richer people live in newer, higher quality structures and this protects them. The structures are built of higher quality (no collapsing cement).

Richer people often live at lower density (outside of a Manhattan or a Tokyo) and this reduces risk.

There is a synergy between #1 and #2. Richer nations tend to have a more educated populace. The educated are better able to monitor their politicians and this provides an incentive for self interested politicians to actually act in the public's interest. The role of the media in "policing" politicians remains an active question in modern economics. Researchers at the London School of Economics have done some of the best research on this topic.

This piece about China's demand for natural resources got me thinking again about the broad topic of "limits to growth". As world population and per-capita incomes rise, and given our global desire to achieve the "American Dream", could we exhaust our finite stocks of non-renewable resources? In Collapse, Jared Diamond argues that there are many historical case studies that suggest that the answer is "yes".

In a 2007 Wall Street Journal Debate, I offered this "witty" reply.

"Matthew Kahn writes: Imagine a world where everyone in China and India achieves our living standards. In this world, with 7 billion people, if each drives a Hummer 10,000 miles per year, then the world would need 7 trillion gallons of gasoline to meet this aggregate demand. Now, that's an ecological footprint!

Now, the New York Times recently reported that the Sun will only shine for another 7.59 billion years. Even so, if the rest of the world achieves the "American Dream" and attempts to drive their Hummers until the sun finally flickers and dims, we are clearly going to need a lot of gas.

Still, it's important to note that expectations of such future scarcity create incentives to innovate. Implicit in the work of authors such as Jared Diamond is a type of mass-behavioral-economics myopia where he and a few other "wise men" are the only ones aware of the coming day of scarcity. I am more democratic and optimistic that, if there is a future arbitrage opportunity, a few ambitious young capitalists will seek out a profit and be ready with the next "Toyota Prius" to help mitigate future scarcity challenges."

Re-reading this quote, I'm now worried that this was my best writing and now its all downhill.

I was trying to emphasize a counter-intuitive point. Economists always question the "conventional wisdom" because this wisdom tends to downplay the power of incentives. Under "business as usual", of course it is the case that rising demand will exhaust a finite supply. But, the whole field of "rational expectations" in modern economics is based on the idea that self interested households and firms plan ahead and use all available current information to plan for future scenarios. The innovation sector is a crucial part of modern capitalism.

China and India's ongoing growth is a credible signal that resource demand will rise --- if this is predicted to lead to rising resources prices over time then this creates sharp innovation incentives to devise substitutes for the increasingly scarce natural resources. The net result of this innovation activity, caused by the need to find substitutes for increasingly scarce fossil fuels, will be a "green economy". Thus, we owe China. Its anticipated appetite for energy will green the world!