"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Wednesday, December 19, 2007

Capitalism Being Creative

My objection to economics should not be taken as an objection to capitalism. I think capitalism is necessary, if not entirely sufficient. We just have to build in a few gentle incentives and stand back.

Here's a nice example of creative capitalism promoting efficiency: auto insurance based on miles travelled.

This is a very helpful idea for those of us who have to drive sometimes but don't like to or want to.


James Annan said...

That's great - I've long been an advocate of use-based charges. Last time I owned a car, I looked into per-mile or low-use insurance, but there wasn't anything worthwhile around (I already had very cheap insurance as a middle-aged claim-free driver in a cheap low-powered car). Putting the annual registration tax onto the price of petrol would be good too. It's even been mooted that a universal insurance (3rd partly only) could be funded by tax on petrol, but that subsidises the worst drivers.

John Mashey said...

It will be interesting to see how this works.

"Winning the Oil Endgame", 2005, by Lovins & co, pp 218-219 analyzes various options, with their favorite being PATP: Pay At The Pump:

"basic third-party property-damage and bodily-injury insurance be bought at the fuel pump and repaid to each state's insurers in proportion to their current-year market share. Other insurance and extra coverage would be paid to one's chosen company. This is simply a smarter way to pay about one-third of your insurance bill, and reduces everyone's bills because there are no longer any uninsured motorists (you can drive without insurance, but not without fuel.)"

Interesting, although unclear how electric vehicles fit :-)
Apparently CA Energy Commission has looked at this one favorably.

David B. Benson said...

Don't buy a car.

Use a bicycle, bus, tram, subway or taxi for short trips. Use a bus or train for longer trips.

If you must, rent a car.

Michael Tobis said...

Too late, David. I bought a car weeks ago. I can't singlehandedly fix Texas. More on this to come.

John Mashey said...

David: give Micheal a break, he's in Texas :-), and even elsewhere there are places where with the best will in the world, it's really pretty hard to avoid having a car, just as there are other places where one has to be nuts to own one. one can argue that we shouldn't have built where we did.

Of course, it will help to eliminate some of the crazed subsidies for cars, i.e., see Don Shoup's "The High Cost of Free Parking." (see reviews in Amazon).

Also, you might look at Streetline Networks, which does interesting wireless sensor networks that help address the problems Shoup describes.

There are energy problems whose practical improvements involve:
- public policy (& hence politics)
- cheap technology that helps encourage better behavior, in this case, encouraging people to use cars less.

[Disclosure: I'm an advisor for Streetline.]

Amongst the myriad of conservation and efficiency actions that need to be taken, at least some tradeoff Moore's Law and smart software to eventually yield better energy efficiency. In this case, the critical improvement was the hardware+software that let an epoxied-to-the-street "bump" go 5-10 years on 2 AA batteries, and that makes this application practical.

Dano said...

Speaking of Capitalism being Creative, James hinted at it: premium also based on horsepower. When I lived in West Germany that's part of how my insurance was based.

Price signals such as these also allow us to test whether The Market is a decent mechanism for x. Bring it on, I say!



chris.gay said...


Thanks for post on MileMeter! We developed our particular approach after 3 years of research and development. It took some time to create a solution that was convenient, profitable, and did not use tracking devices.

We'll try to keep folks updated on our progress via our blog. We plan on starting sales in mid-08, and intend to move into other states quickly.

To address some of the other comments on your blog:

John -- Pay at the Pump would eliminate uninsured motorists, but create other problems. It is also a political impossibility (Tx Governor Ann Richards tried...). Keep in mind that according to the Center for Public Integrity, the insurance lobby is the #1 political lobby in every state. And the insurance industry does not like change :) With distance-based insurance, though, we can increase the affordability of insurance so that people who are choosing between legal compliance and groceries due to affordability issues are no longer forced to do so. Pricing by the mile can make insurance more affordable and beneficially impact the uninsured motorist (UM) issue. Enforcement is capricious unless people have an affordable way of complying with the law. For more on the affordability and equity impacts of per-mile insurance pricing, see Patrick Butler's papers on CentsPerMileNow.

Dano -- I grew up in Germany and had the privilege of driving there. The Germans have many transportation policies that I personally find intuitive and beneficial. In our case, while we do not alter the price for higher horsepower vehicles directly, we do so indirectly. Heavier vehicles are more expensive to insure, since they are more likely to injure the other party in a collision. Similarly, more valuable vehicles (market price) are more expensive to insure for some insurance coverages -- so this indirectly increases the cost for luxury vehicles (sports cars, large trucks, etc).

Chris (the guy in the MileMeter video)