One of the troubling ideas that seems to have gained traction is that nations should not care overmuch about the needs of their citizens and should accept market outcomes. This position is ultimately contradictory, since its proponents argue for the Reaganite “get government out of the way” position, when commerce depends on rights defined by and enforced by the state (thought experiment: would US companies have built factories in China, a Communist country which could expropriate assets, if the US were not a military superpower?)
This advocacy of “free trade” (when we in fact live in world of managed trade) runs two parallel arguments: the “free trade increases wealth and therefore we should all go along” and and the “more open trade is inevitable, you better be on this bus or you will be under the bus.” Too often, these arguments rest on the assumption that coming close to the economists’ fantasy of frictionless free trade is better. But that was debunked in 1953, in the Lipsey-Lancaster theorem, which demonstrated that trying to move to closer to an unattainable state was not only not assured to produce better outcomes, it could very well produce worse ones. You actually need to do the work of evaluating various “second best” alternatives, rather than assuming more is better.
And there are non-economic tradeoffs to consider as well. We’ve often cited this observation by development economist Dani Rodrik:
I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.
Here is what the theorem looks like in a picture:
To see why this makes sense, note that deep economic integration requires that we eliminate all transaction costs traders and financiers face in their cross-border dealings. Nation-states are a fundamental source of such transaction costs. They generate sovereign risk, create regulatory discontinuities at the border, prevent global regulation and supervision of financial intermediaries, and render a global lender of last resort a hopeless dream….If we want more globalization, we must either give up some democracy or some national sovereignty. Pretending that we can have all three simultaneously leaves us in an unstable no-man’s land.
So what looks like a backlash may simple be these governments recognizing intuitively what Rodrik was able to make explicit: going further on economic integration would lead to tradeoffs they regarded as undesirable. And a big one is basic security needs of its citizens.
On the one hand, we have a new piece at VoxEU arguing that export restrictions have played an unrecognized role in food price increases, which is in line with neoclassical orthodoxy. Note that I find this paper, which has a much more robust model, far more persuasive, and it find the main culprits to be investor speculation and ethanol subsidies. Ethanol took enough corn out of food production to feed 330 million people for a year at average daily calorie levels. Think that wouldn’t have knock-on effects?
These radically contrasting conclusions not only demonstrate that analysts disagree over facts (what caused the price increases?) which makes it much harder to reach sound policy conclusions. The winners of this year’s Leontief Prize, Peter Timmer and Michael Lipton, lectured on the global food crisis and agricultural development (see Timmer’s and Lipton’s texts). To give you a taste of their talks, and the interviews below, here are some extracts from Timmer’s presentation:
Food price stability is a good thing, not a bad thing. The standard model of international trade can show “gains to trade” from highly unstable food prices, but these gains are illusory.
Do not mistake my point. I believe deeply in the role of markets in exchange and price discovery and as the foundation for economic specialization. Markets usually get these right, and governments usually get them wrong. But not always. And the exceptions are important, especially in matters of health, education and food security…
To my consternation (and secret delight), food price volatility is finally back on the intellectual and policy agenda…It is not easy to stabilize food prices, but it is not impossible either. We just need to stop arguing that stable food prices are a bad thing and get on with the tough analytical and empirical work to learn how to do it effectively, efficiently, and honestly.
Day-to-day prices in world commodity markets are a bad guide to long-run decisions on funding agricultural research and investments in rural infrastructure. “Do markets provide the right signals” to getting agriculture moving? Often not.
I hope you enjoy these conversations.
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Each year these issues are going to be more and more with us. Thank you for this very pertinent post.
Good stuff Yves. In my opinion these days you are inspired in the election of subjects and your way to treat them.
Agree. Yves can opine away on just about anything, as far I’m concerned.
In fact, I wouldn’t mind a Song de jour. We shouldn’t forget, music has played a big part in every left-wing revolution since the Gracchi brothers tried to introduce –mild and therefore reasonable– land reform to the old Republic.
Note: Is that true? About the music? Has anyone ever stormed the barricades successfully without it? I have no idea. Still, I think our revolution could a little galvanizing music. And what better place to start, than a NC Song de jour:
(I know, time, time, strapped for time)
If you really wanna storm the barricades, you wrap yourself in the flag and put the finale of Beethoven’s Fifth Symphony behind you. If you dare.
YS: “Ethanol took enough corn out of food production to feed 330 million people for a year at average daily calorie levels.”
That’s peak oil. Shaky food supply. Fracked poisons. 1,000 military bases. 100 dollar fees for carry on luggage. Etc. It hits you everywhere.
The peak oilers have been saying for years: people will have to localize, if they want survive what’s coming. So I say, what better place to start, than at the nation-state level?
Note: Yup, I’m all for localization (especially in the application of our currency), and that makes this New Deal liberal a true conservative, I believe.
My food supply is getting very localized this time of year: lettuce, radishes, arugula, spinach and a bunch of herbs from the backyard; snow and snap peas, onions and carrots not far behind; tomatoes, broccoli, pole beans and zucchini on the way.
For what I don’t have, I visit the local farmers’ market where I also get eggs and cheese. Through that market, I met a farmer and his two sons from whom I’ll get a half beef and half hog for the freezer when butchering season arrives. (I know, but we’re meat eaters.) These animals are raised without being stuffed full of antibiotics.
I’m growing some of my produce in the front yard where all the neighbors and passers-by can see it mature. I’ll drop off some excess at the close-by neighbors and “plant the seed” of us all starting a community garden in one of the vacant lots nearby.
Produce as much of what you need as possible. Do for yourself as much as possible. And for the rest, cooperate with other humans whom you know face-to-face. Those principles will do a lot to protect you from this collapsing system while creating a new counter-society with humane values.
Sadly, vacant lots are often sprayed with weed killer because that is the cheapest route to making it look palatable for the neighborhood.
Also, create a community distillation plant to get pure water, for that will be a major concern going forward.
Just wanted to say to Goin’ South that my wife and I agree 100%
To talk of ‘free trade’ when labor is bound by national borders and capital is not is a non sequitur.
There’s a direct correlation between the relaxing of hedging standards that allowed speculators to hold more futures contacts than traditional hedgers. Until the changes in 2000’s speculators accounted for 30% of open market contracts, acting in their capacity as the grease for the wheels of commerce; today speculators represent close to 80% of open market positions.
Assuming a conservative 40%-1 leverage for hedge funds, when they take a position in leveraged futures contracts their total leverage can become an effective 100+ to 1; giving them the ability to move markets way beyond market fundamentals. This happened several years ago when speculators ran the price of grain to historical highs. The hedge funds knew that most farmers and grain elevators had to remain 100% hedged either by state law and/or their bank requirements. The hedge funds ran the prices up past any realistic fundamentals to where the cost of margin calls outweighed the cost of the raw commodity, effectively pushing the real users out of the markets.
The world is awash in crude oil and food, it just misallocated.
I thought Lipton was more interesting. He said small holders in Africa are more efficient because in Africa labor is still the only capital. And as such it is the surest form of security for the people. Then later he said that in the industrialized countries capital-intensive farming is more efficient. But he didn’t address all the tax breaks and other subsidies provided by those governments. Nor soil and water depletion. Had he addressed the entire human-social input to industrialized agriculture he would surely have said that it is a very expensive enterprise.
In terms of globalization v national self sufficiency Timmer seemed to address the issue more clearly. It isn’t either-or. It is a correct balance. I was confused tho’ because I couldn’t tell if he advocated 80% national self-sufficiency (which burdens the poor) and 20% surplus for trade, or the other way around. Timmer saw agricultural R&D and long term planning as a primary source of food security and a national responsibility. This effort is not currently funded by any global consortium; nor is any other R&D.
So this is a good question. Why is capital allowed to roam the world when it is currently not committed to anything but an imbalance of money and markets?
Yves,
How would you propose to regulate food prices? Farmers will not like being told they cannot profit as much as possible from their hard earned crops. The more regulations, the more people will do things illegally. We have largely moved to a system where there are only two kinds of rich people, those who break the law, and those who are the law. For example, US beef is banned in China due to BSA ( even though Canadadian beef is not). Yet, US beef is all over China. Some of the large beef processors won’t touch this market, but their smaller competitors, which are still comapnies that sell in the $100MM range, will. Many other products are smuggled across borders by bribing customs agents, to avoid taxes and tarrifs. If this illegal business were stopped,very many billions of dollars worth of US agricultural exports would dry up. This raises the question, why does the US government not work more to legalize what is already a big trade? Agriculture is all we have to sell anymore, now that manufacturing has been decimated. Maybe they don’t want the Chinese to buy our products, so that the Chinese have only one thing left to buy with their Wall Mart dollars: Treasuries. This is good for our politics, because the US government-Wall Stret can better control this flow of cash to play favorites with its cronies
I would posit that it is Big Ag that will not like to be told that it cannot squeeze as much profit as possible off the land. The small farmer isn’t out to get rich – if he can make a decent living for himself and his family, which too often now he cannot, i suspect he will be quite satisfied (as we would all pretty much be) The small farmer is being squeezed out, to all our detriment. Big Ag is not only destroying the small farmer but the land itself ….
Personally, I would regulate less and progressively tax more. Only crooks — not innovators — do something “only for the money”. If we make it difficult for people to amass more than 100x the median savings, then solely-money-motivated people will stop working so hard without regard to the people they crush underfoot.
If there’s any CEO in America who wouldn’t continue working despite a 90% tax after the first $2m/year, then I suspect the world would be better off with that person quitting, staying at home, watching Oprah, or maybe finding something they would truly enjoy doing even in the absence of diverting national profits to their private account.
http://www.youtube.com/watch?feature=player_embedded&v=q9BW9E6omFQ#t=0s
http://www.youtube.com/watch?feature=player_embedded&v=w75QqbktAmk#t=2s
This is important, and could be the beginning of real change.
After watching a TED Talk with the speaker in these videos, Marcin Jakubowski, I’ve been following their progress. Their operation is located near Kansas City.
http://opensourceecology.org/wiki/Main_Page
One of the troubling ideas that seems to have gained traction is that nations should not care overmuch about the needs of their citizens and should accept market outcomes.
Okay. The car is full of drunks each trying to grab the wheel, each claiming he can drive faster than the others. Mom and the kids are bound and gagged in the back seat, helpless.
Food riots are the final arbiter and only those who are beyond drunk even think of going there.
Policies leveraging the benefits of “comparative trade” make nations dependent on one another. Interdependency perhaps reduces the likelihood of war between them. But, being dependent on others also means you’re less free to disagree with them and make your own choices. It’s a loss of flexibility and partial loss of effective sovereignty. After you’ve closed down your factories, lost the know-how to make things for yourself, opted for oil contracts over clean energy research, etc., who knows how far you’ll compromise your morals to keep from experiencing a temporary reduction in standard of living?
Yes, this is why I’m a gardener; it’s my personal hedging strategy.
* * *
On the general topic of how to get out from under this system before/while/during it all collapses, the interesting John Robb has a new blog on resilience. This post on the failure of central planning should interest people across the “political spectrum” which is really not a two-dimensional line, but a dynamic and convoluted space…
yves, i just think wwii was a significant event in the goings on of the rest of the 20 century and as well as 21. i wonder if it was decided at that time by elites that ‘hitler was elected by the ppl so the ppl do not know what’s right and therefore their democracy needs taking away’.
Locality and small scale farming are what will deliver food security.
What is viciously fighting against this solution? Corporate food farms that help write ever more burdensome inspection and food regulation. These regs are supposedly there to police factory farms, but are instead applied to local farming efforts.
Why? Because they are the easiest targets. They lack the legal and political resources to fight. Regulation is the most effective competitive tool for large agribusiness. This is especially true when inspectors know they can work as consultants for large agribusiness after they retire, ensuring that they deliver a slap on the wrist for corporate violations, and come down on small producers like a ton of bricks for propaganda purposes.
Farmers like Joel Salatin have long championed local, non-industrialized, non-petroleum based farming. Their methods work, and they are opposed by large agribusiness because their methods can’t be scaled up to extract regular profits.
Want food security? Want to remove these issues of import/export consequence and reaction? Locality and small scale farming, done on a nationwide basis, can feed our people. You don’t have to import millions of tons of beef from argentina, or fruits and vegetables regularly from south america. Why is it done?
Because government is the eminent tool of competitive advantage, and the use of regulations to smother competition grants large importing/exporting agribusiness effective monopolies over food commodities.
Want to break the monopoly? Establish a threshold and vigorously regulate the farms above that threshold amount (numbers of cattle, chicken, monoculture acres, etc.) Small farm food production is best policed locally, though evaluation and review sharing (thanks internet!), and causing death or sickness through foodbourne pathogens is (or should be) criminally actionable. Almost all small farmers know this, as their farm lives or dies based on the quality of what they produce.
The changeover to locally produced food will massacre large agribusiness, and will be vigorously opposed. You have to make an active choice to support your local farmers, and it will be inconvenient. You will need to know how to store food, and make longer range plans than just one week or the next trip to the grocery store. It requires thought and effort, and unfortunately many Americans will not be able to cope.
This is all nonsense. Here is why.
1. We know that food can be produced very cheaply and in plentiful quantity. Simply observe the progress of American or any modern agriculture. Ethanol placed an enormous new demand on the system that was almost entirely met.
2. Wise governments subsidize and encourage international trade, free or nearly free, with the incredible technology infrastructure that permits cheap worlwide transport of any goods, so that cheap food can be sent anywhere.
3. Truly wise governments know that price supports for basic foods can keep food prices amazingly stable, and allow for stocks of several years to be on hand in case of emergency.
4. Wise governments know that the true cause of poverty is the way that multinational corporations get out of paying 90% of their taxes in third world countries by using tax shelters. All it would take for a massive increase in those poor countries standard of living is for the rest of us to punish companies who cheat on taxes. (GE???)
5. Wise governments can subsidize currency conversion so that there is almost no friction with overseas trade.
6. The only reason there are any poor folks around the world is our inability to elect truly wise and sensible governments, and the inability to remove really bad governments. Most people around the world can now get TV, they see what they are missing, and they are all ready to vote. People will risk their lives to vote. The most popular TV show in all the world…House. You don’t thin all those poor people would love to have medical and food services like that?
1. We know that food can be produced very cheaply and in plentiful quantity.
– Only because of massive expenditures of cheap energy and petroleum products, patented gmo seeds, and government financial assistance.
2. Wise governments subsidize and encourage international trade, free or nearly free
-Financed completely by large investment banks and the source of most derivative based wealth transactions.
3. Truly wise governments know that price supports for basic foods can keep food prices amazingly stable
– Stable does not equal cheap. 3% inflation is considered stable, yet it guarantees that prices double in 24 years.
Also it sets a floor on corporate profits. Isn’t that nice?
4. Wise governments know that the true cause of poverty is the way that multinational corporations get out of paying 90% of their taxes in third world countries by using tax shelters.
– And those tax breaks are written by wise governments, because that’s how wise governments get elected. Otherwise you are a country like cuba, venezuela, or the former CCCP, and your people are impoverished anyway.
5. Wise governments can subsidize currency conversion so that there is almost no friction with overseas trade.
– And they grant currency monopolies to private financial giants, and the elite make trillions on derivative, commodity, and currency speculation, which create massive bubbles that pop and impoverish their nations peoples.
6. The only reason there are any poor folks around the world is our inability to elect truly wise and sensible governments, and the inability to remove really bad governments.
– Bad governments? Like the CCCP, or argentina, or Venezuela, or Nigeria, or China? Oh, you mean governments such as the united states, or the eurozone. Indeed, those are bad governments, which have been totally captured by the elite. So what’s an example of a wise government? China? The CCCP? The Russian Federation?
The big mistake is choosing worse governments just because you’re fed up with bad ones. Any government that can be used as a tool of competitive advantage is bad. Any government that can dispose of people and their property by bureaucratic fiat or on the whim of a leader is worse.
cf the irish potato famine – same story.
I am surprised nobody has mentioned that role of the US Dollar for international trade (i.e. reserve currency) and how that is directly related to the export controls mentioned in the VoxEU paper. (Yves?) The reason there are export controls is because the dollar-denominated, “international” price is higher than the domestic-denominated price. Thus, producers export instead of selling locally, which in turn creates scarcity, shortages domestically. Thus, the export controls mentioned in the VoxEU paper.
Of course if the dollar wasn’t a reserve currency and the massive amount of excess dollars weren’t able to be used for the financialization of food, we wouldn’t be in this mess.
Thus, we are exporting inflation and externalizing the cost of our banking crisis. And we can do this because we have a monopoly on the OS for global trade–If that makes any sense–
With the likes of Monsanto and Dow Chemical dominating agriculture with their unholy frankenfood, the only food security is to grow your own, or intimately know those that grow it for you.
Joel Salatin delivering a talk at Google
http://www.youtube.com/watch?v=jBZgANtcXm8
Try this old standby for the home remedy.
From Google search
“How to grow food”
http://www.verdant.net/food.htm
I like it. No ads. More good material than you could ever use in one lifetime
Actually, those wind up being the same thing. We have too many people on this planet, because our economic system doesn’t need them all. Remember: no money, no life. It’s not like most people can hunt, gather, or garden to create the necessities of life. Even if we have enough resources to theoretically feed, clothe, and house everyone (Malthus will win in the end — he only has to be right once), nothing in our economic system ensures that this will actually happen. You already see the reality — some people living a luxurious life of excess while millions struggle to survive. Darwin will win in the end too — those less successful are falling off the edge of life all the time.
Darwin or Malthus. Take your pick.
I think we could all use an elucidation of the term “democracy.” It is bandied about as if it were something self-evident on the one hand, and an unqualified good on the other, with the underlying assumption being that it–ill-defined as it is–is something that actually exists. These aspects cause the term to function somewhat like an electrical switch which turns off the critical faculty, while one pays a subconscious homage and ready assent to the term. Everyone uses the term at every possible opportunity, with the result that it really seems to be mean almost anything you please, and more particularly it is the magic ingredient in whatever scheme you are trying to foist on others.
To be sure, we all know the dictionary definition of the term. But is it a reality. Does it make sense, not in terms of a village government, or a small terrritory, largely agrarian, but in terms of immense agglomerations of human being in urban contexts of incredible complexity and in the overall context of the modern world created by technology and industry, administered by vast bureaucracies, and so forth? What on earth does the term actually mean in such a world? Anything? Nothing? Empty ideology and grist for demagoguery?
Restricted U.S. Army Internment and Resettlement Operations Manual;
Federal Communications Commission Report on Google WiFi Spying;
https://publicintelligence.net/
Thank you, Yves, for highlighting this!
And thank you Michael Lipton! The focus on the small farmer is key, but i would suggest that that is true not only in Africa, but all over, for a number of reasons, e.g. Mexican farmers priced out of their livelihood by US subsidized ag products become the “illegals” we decry – poetic justice, i would say …
The big point he makes is that small farmers are actually more productive and resource efficient than Big Ag which is destroying not only the soil but biodiversity to boot, as well as depleting water supplies.
Vandana Shiva (Navdanya) and Wangari Mathai (sp?) (Green Belt movement) have done amazing and voluminous work in this area, and IMO should have been prominently mentioned by Lipton – except perhaps that he seems to be enamored of the “Green Revolution” which Shiva is decidedly not .. I encourage anyone who gives a damn about these issues to explore their work.
Timmer seems to disparage, somewhat, the idea of self sufficiency, but IMO, the concept is key for a number of reasons, not the least of which one tends to take care of that which one relies upon – when one feels one needn’t rely on the local source, but can get something from “elsewhere”, the local is sacrificed. When that occurs not only is a resource wasted but control over our lives is transferred elsewhere …
Food production is at ground zero of so many strands discussed here – healthcare v sickcare, corporate control v local control, financialization v production. One can argue that those who control the money supply run the show, but on a much more fundamental level, those who control the food and water supply control the fundamentals.
The most important greenbacks are those you can eat … People riot for food, migrate for food, steal for food. Perhaps the ultimate perversity of OUR society is that we are “producing” food that is making us fat and ill – how “sick” is that …
Derivatives may be the “weapons of mass destruction” of our money supply – perverting the entire concept: how much more are GMOs “the weapons of mass destruction” of our food supply perverting the very idea of food ….
If we are food and water secure in the places we live, we will have a solid platform to stand on to battle TPTB. The small farmer is key to turning this around ….
Aquifer, GMO seeds may be a weapon of mass destruction against people in general, but the single biggest weapon used against small farmers is subsidized insurance. No farmer would or could pay the true cost of revenue insurance. Regular weather or crop disease events would limit the size of operations very handily if subsidized insurance were not the law of the land. Your USDA farm program has discriminated against small farmers by its program policy for decades. I could go into it in detail, but there’s no changing it till it fails on its own.
Is The Food We Eat Killing Us?
http://theeconomiccollapseblog.com/archives/is-the-food-we-eat-killing-us