Will @RichardJMurphy please learn some goddam fucking economics!

No, seriously, this man, Richard Murphy, writes reports and gives advice on how the economy should be run. He\’s spent several years setting himself up as an all purpose guru for hard of thinking lefties.

And as we all know I disagree with him on many things. But this really does take the cake. He\’s showing himself to be entirely, totally and completely, ignorant of the very subject he\’s attempting to pontificate upon. It\’s such an egregious error that he should be laughed out of the room whenever he opens his mouth on anything at all to do with economics. And this isn\’t just neoliberal abuse from me: this is a plain statement of obvious fact. The man\’s gargantuanly ignorant.

Richard Murphy [email protected] 2h

RT @tomharrismp: \”I want to adopt a rational, science-based approach to fracking.\” > That\’s the neoliberal way to environmental destruction
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Yer what? Science is neoliberal these days? Rationality is? What in buggery is the man talking about?

@tomharrismp Objective, rational and scientific are the key words of Cartesian, reductionist thinking. Invariably misses externalities

Eh? I think he\’s getting a little confused here between markets, which do indeed miss externalities, and rationality and science, which don\’t. Easy words to get confused with each other I\’m sure.

Richard Murphy [email protected] 1h

@rf_mccarthy @TomHarrisMP Cost / benefit analysis is typical exercise in dismissing externalities – hence environmental destruction

Ah, yes, that is where he\’s ignorant then. Completely, totally and alarmingly ignorant.

In the hope of being able to put him right (after all, he does have influence among the mad and we\’d prefer him to be informed rather than not) let us walk through the basics of this.

We do indeed have something called externalities. This is a technical word and it means things and effects that are not (in this limited sense of that technical meaning) included in market prices and thus do not influence the incentives that market participants face.

There are both positive externalities (one form of which is public goods) and also negative externalities. The classic case of the latter is pollution. If the polluter doesn\’t have to pay for the pollution being made then there will be too much pollution made. For he\’s not having to bear the costs of it: other people are, but they\’re not party to the market transaction leading to the pollution.

This is bad: it\’s acceptable to intervene in the system to make sure that externalities are properly accounted for. Long time readers will note that I support a carbon tax to account for the externalities of CO2 emissions for example. You know, like Nick Stern?

We also have something called a cost benefit analysis. This is where we add up all of the costs of something and compare it to all of the benefits of that thing. And the crucial feature of a cost benefit analysis is that we do not simply look at the market prices and incentives. For we know very well that there can be all sorts of externalities. That\’s why we\’re doing the cost benefit analysis of course: because we know that a simple look at markets won\’t tell us all about those externalities.

Indeed, a cost benefit analysis is one of the things that we\’ve got to do before we can work out whether and how to intervene in order to get those externalities accounted for.

I give you one example, the cost benefit analysis of the Severn Barrage. This looked at, of course, the cost of building the various forms of the barrage. It also looked at the costs of not building (or perhaps benefits of not) gas turbines to produce the same power. And at the fines the country wouldn\’t have to pay by not emitting CO2 from those gas turbines. And the costs of gas and….and, crucially, the externalities of the two different forms of energy generation. One externality (ie, one not included in market prices) would be the loss of wetlands in the estuary for birds to wade eat and nest in. This isn\’t a monetary cost but it is a cost of the barrage. It\’s, in fact, an externality of the barrage.

Similarly on the gas calculations they included the cost of CO2 emissions. This is an externality, this is not included in market calculations. But it is included in our cost benefit analysis because that\’s why we\’re doing a C&B: to look at all of the costs and benefits, not just those acknowledged monetarily through the market.

Or we might think of the Stern Review. It\’s really just a big C&B looking at the externalities of the use of fossil fuels. You know, those bits that aren\’t included in current market prices. Which is where we get the recommendation from that we should include them in market prices by adding a carbon tax. And the calculation of $80 a tonne comes from the consideration of all of the externalities.

Murphy is simply totally wrong here. He\’s got himself 180 degrees opposed to the truth. A cost benefit analysis is how we include externalities, not how we reject them. For because externalities are not included in market prices, us calling them externalities because they are not, then we cannot simply look at market prices to tell us what to do. We need to do a full cost benefit analysis, including those things that are not included in market prices: the externalities.

As a matter of minor interest Richard Murphy has proudly told us all that he ignored his economics lectures after the first term. They were so obviously wrong as to be of no merit. It might be worth his revisiting a basic textbook before he tries to tell us all how the world should be run, don\’t you think?