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If Dogs Run Free, Then Why Not We?

Dean Howard Smith

Northern Arizona University

July 4 1999

Chapter 4

If Dogs Run Free, Then Why Not We?

The dogs and pigeons fly up and they flutter around,

A man with a badge skips by,

Three fellas crawlin’ on their way back to work,

Nobody stops to ask why.

Then why not we? The human voice. The human soul. The human inquisition. The beauty, the meaningfulness and the questions of civilization. What can we be, what can we see, and what must we be? We use the tools of language, music, mathematics and visual expression in an attempt to answer these questions.

Then why do we? Pure evil. Desperation, starvation, mutilation, depravation and humiliation. Fifty young women and girls held captive and brutalized until the rumble of the oncoming “peacekeepers’” caravan cause the “soldiers” to dump the girls’ naked and mutilated bodies down the town’s wells.

How do we decide what to do and what not to do? Decisions can be as simple as which pair of shoes to wear or as complex as going to war. Billions of people make thousands of decisions everyday. We make these decisions individually, within family groups, at work, within our communities and within the global community. But the question remains how are these various decisions made?

In an article in 1999, as the millenium was about to turn, in a series of articles discussing “Reconstructing America’s Moral Order” in The Wilson Quarterly Paul Berman wrote:

In the last 20 years or so, and especially in the last 10, the world has undergone a set of very different experiences, good and bad, which are bound to cast a newer light on the old questions about universal destiny. It has become obvious that, all over the world in our present age, only one kind of economic system is capable of producing significant wealth – the system of regulated markets. … It has become obvious that only one kind of political system, the system of liberal democracy is capable in our present age of producing governments of great power and stability, and of inspiring imitation all over the world, as every continent can attest.

The combination of regulated markets and a liberal democracy allows for society to make decisions. As Berman points out, social evolution has proven that this combination is likely to be the only workable combination at present. The complex interactions of the global community at the turn of the millennium led us to the conclusion that individual consumers and producers making their own decisions in the context of regulated markets allows for the production of wealth. Similarly, representative democracy based on one vote per citizen allows societies to make decisions effectively and provide for stability. As Berman points out, more and more countries have been discovering this reality.

In order to understand how these decisions are made in a Social Democracy, it is important to understand how each system works. First, let’s look at a simple model of decision making. Imagine a simple world where we have to make decisions between the production and consumption of two items: art work and luxury cars. Our society has to decide how much of each good to produce.

We can conceive of this simple model by defining the Production Possibilities Frontier, or the PPF. The PPF shows all combinations of goods that a society can produce when all resources are used with maximum efficiency. The PPF is a concept that allows us to imagine the ideal. In our simple model we will use only two goods, but the concept of the PPF can be applied to any number of goods.

A resource is anything that can be used to produce something else or consumed directly. Examples of resources are natural resources like oil or intermediate resources such as steel.

When we discuss efficiency, we mean that resources are being used as well as possible. Technically, we define the production process as efficient when the amount of output is the maximum possible output given the resources being used. Resources are being used wisely and without waste.

Resources not being used are unemployed resources. The unemployment rate measures the number of unemployed people as a measure of the success of the economy, but other resources can also be unemployed if they are not used.

So, when society is using all available resources as efficiently as possible, then it can be said that society is on the PPF.

Global Warming by 2 Degrees

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Figure 1

In Figure 1, the two goods are luxury cars on the horizontal or X-axis and art work on the vertical or Y-axis. The PPF is shown with points A and B indicated. These points show the important concept of opportunity cost. Opportunity cost is the value of the next best foregone –what is given up - alternative. Obviously, in our two good world, in order to produce more luxury cars society must give up some art work and vice versa. In a more realistic world, the idea of opportunity cost is more involved.

Imagine you have $20 which is exactly the sale price of the new double CD by Limp Bizkit. You could spend your $20 on this CD or something else. You might consider the next best alternative as buying the new Korn CD. Your roommate might think the next best alternative as taking a date to the county fair. Your professor might think it would be nice to take the family out to McDonalds for dinner. Just how the next best alternative is evaluated depends on the individual.

Consider these examples. During graduate school, I won a teaching award which included a $500 prize. I contemplated the decision of purchasing either a CD player or a VCR. After looking at the various prices, and realizing that either machine would also involve purchasing CDs or video tapes, I bought a new set of golf clubs.

After my father passed away, I tried to set up a scholarship fund at my father’s alma mater. However, Canadian law would not allow the scholarship to be limited to high school graduates from the family reservation, so I bought a truck instead.

The idea of opportunity cost is central to the study of economics and the process of decision making. The PPF shows the possible choices that society has available. In order to make a rationale choice, the various possibilities must be examined. Let’s take a closer look.

Figure 2

Figure 2 shows the same PPF as above. Point A shows one possible combination of cars and art work: L1 and W1. Point B shows another possible combination of cars and art work: L2 and W2. Let’s say society is currently producing at point A, but prefers to have more cars. The opportunity cost of L2-L1 cars is measured by the difference W1-W2. Without going into all the technical details, it is known that society typically faces increasing opportunity costs. The Law of Increasing Costs indicates that as society produces more and more of one good, it must give up more and more of the other good for each unit of the first good. In other words, the opportunity cost increases as more of one product is produced.

Figure 3

In Figure 3, a third Point C is indicated. The difference between L2-L1 and L3-L2 is the same number of cars, but notice how the difference between W1-W2 is smaller than between W2-W3. This shows that the opportunity cost of cars increase as more cars are produced. Thus the PPF has a curvature to it where the slope gets increasingly steep as more and more cars are produced.

The PPF shows some other interesting ideas: attainability, unemployment and inefficiency.

Figure 4

Figure 4 shows points A-D. Points A and B are both on the PPF. In other words, these are available options where all resources are being used efficiently.

Point C is outside the PPF: this point is unattainable given the available resources and technology. Society could produce either combination L1 and W1 or combination L2 and W2 but not combination L2 and W1. Since the PPF shows all points that are efficient, points outside the PPF are unattainable to society. Either additional resources need developing or better production methods need inventing.

Point D is inside the PPF. This combination, L1 and W2, is available to society, but it is not desirable. Society could produce more cars and move to Point B, or it could produce more art and move to Point A, or it could produce more of both and move to some point between the two - or any other point on the PPF. Point D shows that one or two things must be true: either society has unemployed resources and/or resources are being used inefficiently.

This simple two dimensional world does not include time as a decision variable. More advanced modeling allows for the introduction of time and the concept of sustainable harvesting of resources. So, in the current context, being inside the PPF does not mean we are saving resources for later.

Thus the PPF points to two important questions that society must answer. 1) how does society structure a production system such that production is pushed out to the PPF and 2) where on the PPF does society locate? These are the fundamental questions that any society must answer. The structure of the political system and the economic system determine the production methods and production choices made by society. If the political and economic systems combine to push the production system toward the desirable answer to these two questions, then the combination is a good one. If the combination of the political and economic systems results in unemployment, inefficiency or an undesirable combination of output, then the social structure is similarly undesirable and needs replacing. As Berman points out in the quote above, the combination of a regulated market economy and a liberal democracy appears to be the combination needed as the millennium turned.

A regulated market economy is one where individual producers make their own decisions within the scope of various regulations and restrictions. The government does not tell the individual producer what to produce or how to produce the output. Regulations and restrictions may limit what can be produced or how items can be produced, but no one tells anyone how to produce what. The regulations or restrictions may limit how items are produced by restricting certain labor practices, such as minimum wage and child labor laws, or environmental actions, such as the Clean Air and Clean Water Acts. Other restrictions may limit what can be produced. For instance, you couldn’t start building nuclear bombs in your basement. Some restrictions limit who can produce various goods and services. For instance, you have to meet certain qualifications before you start selling your services as a heart surgeon. Finally, zoning laws may restrict where certain items are produced. For instance, liquor stores cannot be located next to schools. But as long as the producer follows those rules, anything that comes to mind can be produced and offered for sale.

In a regulated market economy producers are said to be profit maximizers. The purpose of the business is to make as much money as possible given the regulations and restrictions. For the most part, this quest for profit is beneficial for society because it leads to efficiency and full employment of resources. As will be discussed below, when the quest for profits leads to detrimental results, regulations and restriction may be put into place via the political system.

How can greedy money-grubbing business people be good for society? Recall Point D in Figure 4. When resources are being used inefficiently, the business is spending more on resources than is necessary. Recall, at Point D, the same resources can be used to produce more “stuff”. An alternative way of looking at this point is to say the same amount of “stuff” can be produced with fewer resources, and thus at a lower cost.

Since producers are all trying to attract customers, a firm that is being inefficient faces higher costs than its efficient competitors. So either the firm must charge a higher price to cover these costs or its price does not cover the cost of production. If the firm charges a higher price, it will loose customers and eventually have to quit the business. If the firm charges the same price as the competition, but this is not enough to cover cost, then the firm will also have to go out of business. The only option the firm has, if it wants to stay in business, is to redesign the production process and become efficient.

Another way of thinking about efficiency is to say the firm is producing its output at the lowest possible cost and is therefore able to charge the lowest possible price. Since all firms in a regulated market economy are searching for profits, they are also searching for efficiency. In other words, the competition between firms in a regulated market economy pushes society out toward the PPF.

But what about when firms go out of business and resources become unemployed? Well, remember, there are few restrictions placed on what firms can produce, so someone is going to realize that resources are not being used and will come up with an innovative idea to use them. One of the best examples of this process is the recycling industry. As little as 20 years ago, plastic bottles and aluminum cans were simply viewed as trash. These things were not viewed as resources, they were simply discarded. But then some enterprising individuals thought about it and realized that used plastic bottles could be a resource to produce other items. The limited restrictions placed on individual entrepreneurs in a regulated market economy allow for creative uses of unemployed resources, which also pushes society toward the PPF.

The quest for profits within a regulated market economy is beneficial for society. This quest forces firms to be efficient. It also leads creative minds to recognize the potential uses of unemployed resources. Thus, the quest for profit by individual firms pushes society toward the PPF.

But that leaves the other question: where on the PPF does society want to be? Recall Points A and B in Figure 4. Let’s say the individual production decision by the existing firms results in combination B being produced, but society really wants to be at Point A. In other words, the customers of the producers want more art work and fewer cars. Well, since people want more art work than is currently available, they start to fight over it. In a market economy, this “fight” means they start to offer higher prices to the producers due to the shortage. Simultaneously, people aren’t buying all the cars available. In order to sell their cars, the producers start lowering their prices due to the surplus. Initially, the price of art work will increase and the price of cars will decrease until combination B is sold, but what about next year?

The car producers now realize that they can’t get a high price for their product. The competition between car producers will cause some of them to realize that producing cars is not profitable, so some will decide to quit. At the same time, the market for art work is booming. Profits are at an all time high, so the art producers will start to produce more art work – they will employ some of the newly unemployed resources. This simplified example pushes society away from Point B and toward Point A.

If the producers are producing too many cars and too few works of art, then the market forces will force the production system to make the necessary adjustments. This is how a regulated market economy results in a production mix that is beneficial to society.

One important aspect of the discussion above should be pointed out. Other types of economic systems could result in the proper production methods and the proper production mix. A planned economy, where the government makes all production decisions, could result in society realizing Point A. But our simplified model is static- it doesn’t change. In reality, the conceptual PPF is constantly moving and society’s preferred combination is forever changing.

A regulated market economy is self-adjusting. When the PPF moves or society’s preferred combination changes, the market forces producers to move toward the new preferred point. In other words, a regulated market economy allows for mistakes. If a firm is being inefficient or is producing the wrong stuff, they will be forced to either correct their mistake or go out of business. If they go out of business and resources become unemployed, someone will come along and realize a profit potential for those resources. This is a vital aspect for any production system: allow for mistakes.

Consider the example above. At point B, the production system is being efficient, but society wants more resources devoted to the production of art and fewer resources to the production of cars. If the production system did not allow for corrective adjustments, then the movement from Point B to Point A would never happen. Similarly, if inefficient firms were not allowed to go out of business, the movement from Point D toward the PPF would never happen.

During the 20th Century many countries experimented with planned economies, but almost all have faltered. As indicated, a planned economy could result in the proper outcome, but since the implementation of those plans resulted in mistakes, and those mistakes could not be corrected, the economic systems, the Soviet Union in particular, basically collapsed. As Berman concluded, “It has become obvious that, all over the world in our present age, only one kind of economic system is capable of producing significant wealth – the system of regulated markets.” The experimentation with different types of economic systems has proven this.

Not only did the economic systems fail for countries using planned economies, but in many instances, their political systems also failed. Many decisions are made by society through the economic system, but many others are made via the political system. Let’s explore this idea now.

The conceptual PPF can also be used to understand some of the choices society must make as a societal body as opposed to a collection of individual decision makers.

Figure 5

In Figure 5, the two options for production are National Defense and Consumer Goods. National defense includes funding for the various branches of the armed forces such as salaries and equipment. These are expenditures society makes as a whole. Individuals pay taxes and the government uses those funds to pay for national defense expenditures. Society must decide how many resources to devote to national defense. The opportunity cost of increasing national defense is a reduction in consumer goods.

In a liberal democracy, this decision is made by individuals deciding whom to vote for. Again, the model is simplified in the extreme, but the conceptual idea still holds. Imagine that the last election revealed society’s preference to locate at Point A. International events result in society desiring additional national defense, such as Point B. Either the elected representatives increase the tax rate to pay for the additional national defense, or they will be voted out at the next election.

In a representative democracy such as the United States, individuals “spend” their votes in local, state and national elections to purchase a combination of goods just as they spend their money in the market economy. In this case the elected representatives are akin to the firms. Their decisions in the legislative body “produce” social outcomes regarding national defense, education, and myriad other types of social resource allocation. Where the simplified model looses its explanatory use is the fact that instead of making individual purchases of cheese, crackers, cars and art, people have to vote for a representative based upon the complex matrix of political issues. But once again, a liberal democracy allows for mistakes. Since elections occur on a regular basis, the results of one election can be corrected in the next election.

The opportunity to correct mistakes is a vital aspect of both the economic and political systems, but as Berman points out, there is also a need for stability. Within the economic system, firms must be able to survive temporary periods of loss. This is accomplished through the credit markets where firms can borrow against future earnings, if they can convince the lenders that those earning will be forthcoming. Within the political system, stability can be achieved via the constitutional structure of the legislative bodies.

In the United States, stability is achieved by having differing lengths of terms for the legislation bodies, Senate and House of Representatives, and the executive branches of government. This stability is further secured by having staggered terms within the Senate and having life-long appointments to the Supreme Court.

Stability is very important within society. There is a huge difference between society making a mistake that requires adjustment and a temporary disruption. If the political system does not allow for correction, such as in a dictatorship, then society will eventually find itself at a point on the PPF other than the desired point, or more likely, inside the PPF. On the other hand, if the system is unstable, then it is impossible to make any plans for the future.

Consider the case of Russia during the Yeltson presidency. During a period of 18 months, President Yeltson fired his cabinet and Prime Minister repeatedly. This instability caused constant confusion within parliament. Instead of concentrating on the important issues of rebuilding – some would argue building for the first time – their society, the politicians focused their efforts on the inner workings of the personnel structure. Additionally, since investors in the economic system were uncertain about the political structure, investments were not being made. Thus, the instability within the Russian political system resulted in a stagnation within their society.

As with the economic system, other political structures could lead society to the desirable result. But when adjustments are called for, dictatorships do not allow for correction and unstable systems result in too much upheaval. A stable liberal democracy allows society to make reasonable decisions.

As Berman points out, the various experiments with economic and political systems resulted in the conclusion that the combination of a regulated market economy and a liberal democracy is the only workable structure that allows societies to make meaningful and rewarding decisions. The simplification of the PPF allows us to understand why this is so.

But the PPF as presented above leaves some important questions unanswered. Again, these can be discussed by changing the focus of the decision matrix. A free market economic system is one where no regulations exist. If society were to have a free market system, various problems would quickly become apparent. When these problems crop up, the political system is called into action to design regulations that alleviate the problems.

In response to a homework question concerning how societies correct for mistakes in this framework a thoughtful student wrote what was at first a puzzling sentence, but one that carries great wisdom. “We have a government of ‘can’ts’ and not a government of ‘cans.’ Honestly, it took me several readings to figure out what Paul meant. In our regulated market system, we have a list of regulations, as discussed above, that list off things that people ‘can’t’ do. If an entrepreneurial soul has an idea and that is not listed, then we say – as a society – go ahead and try it out. If it works and people like the new idea, then the entrepreneur will make money and stay in business. If the idea basically sucks, the business will disappear and the resources will be freed up for other ideas.

The beauty of Paul’s comment is the counter example he offered. If our society was one of ‘cans,’ then there would simply be a list of things that are allowed. New ideas would not be allowed to be explored and new production technologies or new products would not bear any fruit. As will be discussed in detail in later chapters, the very creativity of the human spirit – within the context of regulations – will be the driving force of finding a way out of the quandary of climate weirding. Imagine having to pick from a list of allowable activities!

Our area of major concern is the interaction of human activity with the environment.

Figure 6

In Figure 6, the PPF has been redesigned to show the choices between a clean environment and consumer goods. One of the realities of the drastic increase in production during the last 200 years is the fact that much of this production results in pollution of one sort or another. It would be a simple matter of closing all factories and outlawing internal combustion engines if society desired a perfectly clean environment. But the opportunity cost of doing so would be the consumer goods we now produce – including food.

Because the idea that human action has negative effects on the environment is relatively new to our human experience, it could be convincingly argued that industrial society is currently at a point inside the PPF such as the previous point D. This new realization has led to a variety of new regulations like the Clean Air and Clean Water Acts. Since these laws were passed less than 40 years ago, great strides have been made in terms of efficiency – pushing out toward the PPF. The amount of pollution per unit of output has drastically decreased as firms have found new and better ways of producing their stuff. A following chapter will explore the specifics of policy design, as for now, the presentation remains very simplified.

Recall the conceptual idea behind the PPF. Now that gains in efficiency are becoming harder to achieve, society is now faced with the question of where on the PPF to locate. This involves serious choices at both the economic and political levels.

Within the realm of a regulated market economy, the interaction of consumers and producers has resulted in more and more products being produced with environmentally safe methods. Many firms have gone beyond the strict requirements of various environmental laws and use this fact in their advertising campaigns. As the environmental consequences of our modern production techniques have moved from the back pages of scientific journals to the front pages of newspapers, consumers have also begun to change their behaviors. Consumers are demanding products that are produced in environmentally friendly ways and new kinds of products that have low impacts on the environment. These so-called “green production” changes in the market place have resulted in a movement along the PPF.

But the market place can only do so much on its own. This is why we have regulations. The political system has a role to play as well.

Let’s explore the problems with global warming and the choices that global society has to contemplate. In order to understand some of the issues revolving around global warming, we need to introduce another investigative methodology: hypothesis testing.

A hypothesis is an assertion subject to verification. Therefore, hypothesis testing is the process of evaluating assertions that may or may not be true. However, analysis of this type is not simple. The question concerning global warming, for example, is a very complex one. Does the human production of carbon dioxide and other gases actually cause a warming of the atmosphere? If so, how can this be proven? Unfortunately, in most cases of complex inquiry definitive proof cannot be developed – and global warming is a strong example of this. So instead of collecting definitive evidence, the problem becomes one of collecting convincing evidence.

Hypothesis testing is a methodology used in a variety of disciplines based on statistical analysis. The first step in conducting a test is to determine what is called the null hypothesis. The null hypothesis is a statement indicating what will be evaluated. If the question is a mathematical one, there are specific rules regarding the formulation of the null hypothesis, but for our current purposes we’ll simply focus on the concept. The alternative hypothesis is simply what ever disagrees with the null hypothesis. For our example, the null hypothesis is that human production of carbon dioxide results in global warming. Therefore, the alternative hypothesis is the statement that global warming is not due to human activity. Of course the IPCC and many other have pretty definitively answered this question by now.

Recall, a hypothesis is simply an assertion. As such four possible results can occur from the test. Based upon the available evidence, we either reject the null hypothesis or fail to reject the null hypothesis. If we reject, then we conclude that the statement is probably wrong. Since we can never know for certain, we can never say the null hypothesis is true; rather we can say that we fail to reject the null hypothesis. In essence, we are saying that the null hypothesis is probably correct. If we could collect enough information to make a definitive conclusion, we could discern whether the null hypothesis is true of false. The following table shows the possible outcomes.

		Actual Reality
		Null is True	Null is False
Conclusion from Statistical test	Fail to reject Null Hypothesis	Correct conclusion	Type II error
	Reject Null Hypothesis	Type I error	Correct conclusion

If the null hypothesis is actually true and the statistical analysis shows that we should fail to reject, then we’ve made a correct conclusion. Similarly, if we reject the null hypothesis when it is in fact false, then we’ve made a correct conclusion.

But it could also be the case that the evidence is misleading and we make an incorrect conclusion. If the evidence shows that we should reject the null hypothesis when it is actually true, then we are making what is called a Type I error. A Type II error is when we fail to reject when in fact the null hypothesis is false.

Using our example of global warming, the four possible outcomes of our test are easily explained. If the human production of carbon dioxide causes a warming of the atmosphere and we collect evidence that convinces us that this is the case, then we’ve reached a correct conclusion. Conversely, if global warming is not human caused and we are convinced of this, then we are also correct.

The potential problems occur when an error is made. If the statistical evidence leads us to reject the null hypothesis when in fact human production of carbon dioxide is causing global warming, then a Type I error has been made. On the other hand, a Type II error results when we conclude to fail to reject when global warming is not happening.

These mechanical steps of our hypothesis test have serious implications for the types of decisions society makes.

If the evidence convinces us to fail to reject, then we are essentially saying that the human production of carbon dioxide and other gases is indeed causing global warming. This result might well cause society, through the political system, to impose regulations and restrictions on the production processes. These enforced reductions in the human production of carbon dioxide and other gases will change the combination of consumer goods available to consumers. Since the burning of fossil fuels, oil, coal and natural gas, are the primary sources of carbon dioxide, a plethora of changes will have to be made within society’s actions.

On the other hand, if the evidence convinces us to reject the null hypothesis, then the political result will likely be a decision to make no additional regulations. It is important to recognize that a decision to do nothing is a decision.

The political process is complex with regard to the possible outcomes. The possibility that global warming is happening may lead to further regulations and restrictions. This may be reasonable if the event is actually occurring, but a great deal of concern and dogma revolves around the possibility of a Type II error.

What if these restrictions are uncalled for because global warming is quite simply not occurring? The political rhetoric revolving around this possibility is quite strong as will be discussed in the “Bob Williams Chapter.” Obviously, the restrictions will limit the human caused production of carbon dioxide and other so-called greenhouse gases. This has led to an uproar among those industries that are major culprits in the effluent of carbon dioxide. These companies are very concerned, for obvious reasons, about their future profits if the restrictions are enacted.

Although further efficiency gains can be realized, there is little doubt that the restrictions will cause some industries difficulty. In order to reduce the human production of carbon dioxide and other greenhouse gases, Schelling made an early estimate of a reduction of 2% of Gross Domestic Production in the United States.

A 2% reduction in GDP would be roughly equivalent to less than one year’s growth. Although it varies year to year, GDP typically grows by 3-4% annually. So reducing the effluent of greenhouse gases will not require a drastic change in the overall production system. However, the required changes will not hit all industries equally.

The industries that are most likely to face substantial restriction, and therefore reduced profits, are vigorously using the political system to avoid the implementation of such regulations. Using various lobbying techniques representatives of these industries are using a Type II error argument: there is no convincing evidence that global warming is a problem. Furthermore, they argue that even if global warming exists the effects won’t occur for many years.

But what about a Type I error? If the evidence is such that global warming does not appear to be happening, when in fact it is happening, then no restrictions will be enacted. Alternatively, if the political process results in a lack of regulation when in fact global warming is occurring, then what are the consequences?

One day I had just finished teaching this hypothesis testing material to a class and was driving home listening to Science Friday. This must have been the spring semester in 2000, but I may be wrong. The topic that day was exactly the one under discussion herein: climate change. Those were the very skeptical days of the discussion, and obviously much of the conversation before I turned on the radio had dealt with what we are calling a Type II error – the consequences of creating regulations when no regulations are in fact needed. The next caller into the show asked “What if we make a Type I error?” I almost put the car in the ditch in utter surprise. I swear that is true even if I don’t remember the precise show. The caller went on to discuss what might happen if we fail to create new regulations and ideas and climate change arrives.

Of course, the Stern Report, the IEA and the IPCC have thoroughly investigated and statistically quantified the consequences of a Type I error, and these estimates will be discussed below. But for the current chapter, let’s continue with the example.

It is clear that weather patterns will change. In many locations, these changes will be detrimental, but in other locations, the changes will be beneficial. The warmer weather and changes in precipitation patterns will actually improve agricultural output in some locations such as central Canada.

Obviously some countries, particularly island nations, are very concerned about the possibility of rising sea levels. There appears to be increasing evidence that the fluctuations in weather patterns are increasing in terms of drought, flood, and the severity of storms. Additionally, the very uncertainty concerning the possible effects causes some people to argue that this might be the worst aspect of the situation. Borrowing from Richard Norgaard’s work, global warming is a “large experiment” with unknown results, and therefore should be avoided .

Let’s introduce a couple of new measures. One measure that is commonly used is the average. In statistical analysis, this measure is called the mean. Another useful measure is called the standard deviation. This is a measure of dispersion, which shows how the data values are scattered. The larger the standard deviation, the more scattered the values are, and the smaller the standard deviation, the more clustered the data.

Let’s compare the weather patterns when global warming occurs. Imagine a location where the average temperature is 70 degrees with a standard deviation of 10 degrees. Now let’s increase the average temperature by 2 degrees due to global warming. We can look at a graph of these two situations.

Figure 7

The dashed curve shows the higher temperature scenario. Since the average has increased by two degrees, the curve has simply shifted to the right and the result is more days with high temperatures and fewer days with low temperatures. This is the reason why locations in the extreme northern and southern latitudes may actually benefit from global warming: improved weather patterns.

But the evidence points toward increased variability in weather patterns as well. This increased variability results in an increased standard deviation. Let’s compare the original scenario of an average of 70 degrees with a standard deviation of 10 degrees with a situation where both the average and the standard deviation increase by 2 degrees. The following graph shows the result.

Global Warming:

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Figure 8

In this scenario, not only does the number of warm days increase, but the number of cold days also increases! The increase in the standard deviation – the variability of the data – has severe effects on the weather patterns. If it were simply the case of an increased average, then it might simply require a change to more heat resistant crops as the temperatures increase. But the increased variability will require crops that are both heat and cold resistant. This type of possible result adds to the uncertainty factor regarding global warming.

This brief overview of hypothesis testing and statistical analysis allows an understanding of the controversies revolving around global warming. But another aspect of the situation further complicated the decision process: the influences are global in nature.

Pollution can have local, regional or global effects on society. For example, air pollution caused by automobiles in Phoenix Arizona degrades the air quality in the local Phoenix area. This pollution is augmented by sources such as Los Angeles and the Mohave Generating Station as a factor in the haze problems at the Grand Canyon. The greenhouse gases produced in Phoenix also contribute to global warming.

Since pollution has local, regional and global effects, decisions have to be made at a variety of levels. As the scope of the causes increase – local to regional to global – the political process becomes more complex. Global warming is especially problematic since the scope potentially involves literally every national and international political body in the world.

The Kyoto Treaty negotiations involved over 150 national governments trying to agree on limitations for the human production of greenhouse gases . The upcoming Copenhagen negotiations, 2009, may result in an updated agreement. Then the United States will have to decide to ratify the new agreement – we never ratified Kyoto. When ratification does occur, then the production system will have to make changes based upon the form of regulations enacted. The interaction between the economic and political systems will result in a combination of goods somewhat different than those being produced today. The political structure of a liberal democracy leading a regulated market economy will allow the decisions to lead to an efficient and desirable solution. Since more and more countries are adopting this combination of decision systems, the global solution regarding the human caused production of greenhouse gases will move toward the socially preferred result.

So if dogs run free, then why not we? Well, in most industrial societies with high population densities, dogs don’t run free. Socially determined regulations concerning leashes and fences limit the freedom of dogs. In the same manner, regulations and restrictions limit human behavior. But as long as the dogs stay within their fenced areas, they can chase butterflies as the wind blows. The same is true for humans living with the combination of a liberal democracy and a regulated market economy: creativity and entrepreneurial activity stimulates efficiency and socially desirable results. We can do it both better and smarter. We must do so.

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� Most of this chapter was originally a paper of the same title written on July 4, 1999 as a teaching device for a freshman level course being taught on air pollution with my grand colleagues Bruce Fox, Janet McShane and Marin Robinson. Since then the original paper has been very helpful in introducing economic analysis to numerous classes. I have updated it for current purposes. The opening paragraphs refer to my thinking about the terror of the Bosnian “troubles.” Keep in mind that Economics has been known as the Dismal Science since the Malthusian quandary. Keep in mind the paragraphs on Bosnia when we get to the chapter on migration.

� The title of this article comes from “If Dogs Run Free” and the quote is taken from “Three Angels”, both by Bob Dylan. See Lyrics, 1962-1985, Bob Dylan, New York: Knopf, 1985, pages 290 and 296 respectively.

� Berman, Paul, “Reimagining Destiny,” The Wilson Quarterly, Summer 1999, Vol XXIII, Number 3, pages 45-55. See specifically pages 45-46.

� A vital consideration at this point is that the firm in question is producing the same quality of product as the other firms. If a firm was producing lesser quality cars, then a third axis would be necessary in the graph since a third good would be available.

� Oh my, how much has changed since I first wrote this paragraph! Recall the original audience was freshman in 1999. With newer information, this example could be updated, but I will do so in the text.

� Schelling, Thomas C., “Some Economics of Global Warming,” The American Economic Review, Vol. 82, No. 1, March 1992, 1-14.

� Norgaard, Richard B., Development Betrayed: the End of Progress and a Coevolutionary Revisioning of the Future, New York: Routledge, 1994.

� I am still puzzled how I foresaw this as a possible outcome when the data were still uncertain.

� See Cooper, Richard N., “Toward a Real Global Warming Treaty,” Foreign Affairs, Volume 77, No. 2, March/April 1998, 66-79. This very readable article explains many of the issues surrounding the Treaty negotiations.