Random Variable

Perhaps the best news today is that Princeton economist and NYT columnist Paul Krugman took the Nobel Prize for Economics this year.

Apart from being generally right on the financial crisis, he’s done some great work on international trade and economic geography – which one day – I’ll read.

John Quiggin points out the one positive element of New Labour being in power. They were once social democrats, and therefore can even contemplate socialist solutions, unlike their American counterparts (Paulson’s still contemplating non-voting equity):

It’s fascinating to wonder how Gordon Brown and Alistair Darling must feel about all this. Having long abandoned their youthful leftism, they have suddenly been forced by circumstances to implement something that looks superficially like socialism, and might even lead to a genuine restructuring of society (utopian I know, but who would have thought a month ago that we would have been wondering what to do with a nationalised finance sector). At the very least, Brown and Darling must have found it easier to adapt to the sudden collapse of the existing order than those who have never imagined anything else.

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down-at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.

I believe that this a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another.

J. M. Keynes, “Economic Possibilities for Our Grandchildren” (1930) in Pecchi and Lorenzo, Revisiting Keynes: Economic Possibilities for Our Grandchildren (The MIT Press, 2008).

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Friend and artist David Henningham suggests in the comments:

I had an idea for a new game; ‘Bank Assassin’. We go queue outside a bank that is in trouble with newspapers/banners two hours before the doors open and try and attract a queue that sparks a run. It’s like Tetris; either we go home when we’re bored, or the bank goes into administration. Job done.

As much as we like a good old-fashioned bank run in the UK, the problem is big capital owners withdrawing their funds from investors, not your high street customer. In fact, the whole crisis is based on the fact that there isn’t any money being held by high street shoppers, and the financial markets are just now catching up with reality.

I have much more to say on the crisis, but I haven’t fully developed my view yet, except to say that Delong and Krugman’s pro-nationalisation approach and Tabbarok and Cowen’s tough love both look reasonable at the moment.

DSquared has a post on JEM launching an attack on Khartoum today. He thinks the various militias will resemble little more than criminal gangs in the near future, with a footnote warning against our own smugness as “the Free Companies went in for this sort of thing in the fourteenth century and made lots of Italy a purely horrible place to live in.” This is basically Tilly’s (now sadly departed) argument in his famous essay. But today could be seen as quite different to the C14 in the following ways:

1. There are ready made states with external legitimacy (in the international system of states), but lack internal legitimacy.
2. Easy access to a plethora of low-to-medium damage weapons. Weapon financing isn’t carried out by wholly separate competing organizations, but organizations fighting over parts of the state.
3. No access to the big weapons that could clearly differentiate the competing groups.
4. No wars of religion to homogenize ethnic identity.
5. The winning organizational forms today (OECD nation states) are too divergent, having followed long path dependencies for easy and stable isomorphism to occur.

In my last post, I said that governments wont open up the free trade of food because domestic prices would increase, leading to discontent. But perhaps, I should make the point a bit stronger. Domestic consumers will starve.

Here’s Bryan Caplan, from his book The Myth of the Rational Voter:

“Maybe the rich are less protectionist because they are more rational; or perhaps income is a proxy for education or intelligence, and these make people more rational.”

Umm…maybe the rich are less protectionist because they’re the least likely to starve.

Final word from Daniel Davies (again), from the comments on Tyler’s response to Dani Rodrik:

[Just what is it that "we know reasonably well" that would indicate that a freer market in rice would raise its real price? Did you not agree in your own posting that freer trade would increase global supplies? How does this lead to a higher real price?]

Barkley, the World Bank estimates that Dani references are the best empirical work we have on this (rather important) question and they look pretty sound.

The global supply of rice is limited in the short term to the crop. Over the course of more than one growing season (a period of time during which it’s entirely possible to starve to death), freer trade in rice would tend to increase the supply. However, it is entirely possible for the following three states of affairs to hold simultaneously:

1) A larger global rice crop
2) A lower global price of rice in PPP terms.
3) In rice-producing countries, a higher relative cost of rice in terms of average wages.

(3) is clearly the problem, because it will lead to states of affairs where workers can’t afford to buy enough rice to eat. Which is what we call a “food crisis”, which was the whole motivating point.

Dani’s point is very clear here and quite obviously correct. An increase in the supply of rice doesn’t guarantee an increase in the ability of poor people to buy it. If rice is more expensive on the world market than it is in India, then if India opens up trade in rice, then the price of rice in India is going to go up. If Indonesia bans trade in rice, then the local price of rice is lower than it would be if Indonesian rice-growers were able to sell to Japanese rice-eaters instead of local peasants.

We might all, as Dani says, “want there to be free trade in rice”, but you pick your year for this sort of liberalisation, and you don’t pick a year in which the “adjustment issues” could involve hundreds of thousands of deaths from starvation.

Tyler Cowen writes in his latest column:

Lately, it’s become fashionable to assert that, in this time of financial market turmoil, the market-oriented teachings of Milton Friedman belong more to the past than to the future. The sadder truth is that when it comes to food production — arguably the most important of all human activities — Mr. Friedman’s free-trade ideas still haven’t seen the light of day.

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The more telling figure is that over the next year, international trade in rice is expected to decline more than 3 percent, when it should be expanding. The decline is attributable mainly to recent restrictions on rice exports in rice-producing countries like India, Indonesia, Vietnam, China, Cambodia and Egypt.

However, even if we were to free up trade, this would likely irritate urban domestic consumers. Governments that want to stay in power are not likely to annoy this demographic. This is the opposite problem to Europe, where democratic governments have had to rely on the rural vote to stay in power throughout the 20th Century, although we only refer to the former as populism, despite the justifiability of domestic consumers’ grievances. As Dani Rodrik points out:

Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers.  Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality.

These dynamics played themselves out in the Pakistani elections. Shaukat Aziz paid off the trade deficits with agricultural primary commodity exports, the result of which was huge hikes in the price of rice (can’t find a reference for the moment).

Daniel Davies, forcefully makes the argument against Tyler’s:

As Raj Patel correctly notes on the Guardian blog, we are shaping up for a fairly substantial risk of a free market democide. . There was certainly no shortage of people pointing out at the time that removing fertiliser subsidies and dismantling strategic grain reserves was a hell of a risky thing to do, but the neoliberals pushed it anyway, under the assumption that deregulated food markets would encourage investment and improve productivity. Which, given a very long run of good weather indeed, might have worked, but that was hardly the way to bet, and it really does not appear to be the case that anyone did a huge amount of detailed research into how this green revolution might have been carried out and financed. Beware, always beware, of long term solutions to short term problems.

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It really is hard to see what qualitative difference one might draw between the way in which the World Bank and IMF have fucked around with the food security systems of third world countries in the name of “free markets”, and the way in which Stalin and Mao did more or less the same thing in the name of “collectivisation”. Peter Griffiths’ article and book refer. The great thing about the market mechanism, of course, is that when it kills a million people, it doesn’t leave fingerprints.

It’s time we went back to studying political economy, and ask more questions rather than proposing ideological solutions. Here’s your starter for ten: As far as agriculture goes, democracy and free trade is not an easy fit. Does anyone have reasonable solutions to this, which aren’t of the “let’s remove economics from democratic participation” variety?

PS: I mentioned in the comments an article, which suggested that the end of EU subsidies on dairy exports played a role in Japan’s butter crisis. Aaron Schiff points out however that there’s a 802% import tariff on butter imports. However, I don’t think this completely undermines the major point, but adds yet another complexity.

My theory is that hybrids will be pretty much a fad thing. For the long term, look to bicycle technology for the state-of-the-art in carbon footprint reduction.

We all need relatively speedy transport these days. I believe we will see average bikes whose average speed for the average cyclist will be in excess of 40mph, and within the decade.

That were my thoughts the other day as I perused the racks outside work and noticed that all the cycles parked there were made of aluminium as opposed to my steel alloy rust bucket.

And here comes the news that mathematicians have finally worked out a model that explains ride stability at speed. That it’s 2007, and we only now know something that seems quite trivial should be some indicator of the growing market for cycles.

MarginalRevolution is hosting a book forum on Gregory Clark’s “A Farewell to Alms”. Clark attempts to explain how up until recent history, economies existed in a state of Malthusian equilibrium. High downward mobility made rich children poor. The values of the rich filtered into the poor, kick starting massive economic growth and an escape from the Malthusian trap.

We are concentrating on the first few chapters.

Clark explains how Malthusian economies meant that the quality of life in Japan and China was much lower than England’s than the 1800s. Most of human history can be understood in terms of a Malthusian trap, until England escaped it.

I have never been sold on Malthus, especially the way it is instrumentalised by those who I deem the “fatalist left,” a significant and growing group of people who believe we’re all doomed by looming ecological disaster, and anything to reduce the population of the planet, short of outright genocide is a good thing.

Clark first points out how hunter-gather societies were egalitarian. This is generally the case in subsistence economies. Inequality seems to appear whenever there is significant division of labour, as was certainly the case by 1800. Clark also points out how countries, who we can refer to as the bottom billion, have levels of consumption below preindustrial levels. I expect that this is to be explained in terms of cultural values later:

“Countries such as Malawi or Tanzania would be better off in material terms had they never had contact with the industrialized world and instead continued in their preindustrial state. Modern medicine, airplanes, gasoline, computers – the whole technological cornucopia of the past two hundred year – have succeeded in producing among the lowest material living standards ever experienced. These African societies have remained trapped in the Malthusian era, where technological advances merely produce more people and living standards are driven down to subsistence.”

What is missing from the list of what the West has given Malawi or Tanzania, is poor colonial governance, weapons, dire land management. If anything, the modern Malthusian era is a production of Western interference.

Farewell to Alms will explain how the Industrial Revolution became possible. Clark suggests early is that the answer as to why growth exploded in the Industrial era is to do with the Malthusian processes he describes. He suggests this is the only explanation which makes the revolution inevitable. However, I am not sure that it is inevitable. I’m guessing that the institutional progenitors that influenced the Industrial Revolution were in competition with other institutions that could have fundamentally shaped progress.

“China and Japan did not move as rapidly along the path as England simply because the members of their upper social strata were only modestly more fecund than the mass of the population. Thus there was not the same cascade of children from the educated classes down the social scale.”

Manuel Castells (2000) pinpoints the Industrial Revolution on structures of states between different countries. China for example, didn’t have an Industrial Revolution (though it was capable of doing so in 1400), because it practiced isolationism and was extremely bureaucratic, with a culture disinterested in technological innovation. This would suggest that downward mobility of the upper classes would not have had much effect anyway. It can also be argued that Japan escaped the Malthusian trap after the 1868 Ishin Meiji (Meiji Restoration). The lower starting point of postcolonial independence countries should also be a strong force in the great divergence.

Clark’s Malthusian model contains a component called the technology schedule. The schedule is designed to show how affordances in technological advance only increase population, but do not raise the standard of living. There may be truth to that (p=0.5), but one of the advances of the Industrial Revolution was food production over and above the ability for reproduction to catch up (p=0.8).

Finally, as Malthusian economy requires population pressure to be reduced, Clark looks at fertility and mortality rates. This seems robust, though to think that infanticide was so widely practiced in forager societies seems extreme to us. I defer to Clark and the anthropologists on the matter.

So far, Clark has offered a significant amount of evidence to back up his Malthusian model of preindustrial England. However, Malthusian theory appears to be essentially untestable. This was one of Nathan Sayre’s (2006) major complaints about people who keep reverting to statements about the carrying capacity of the Earth in the modern age. Power relations and state structures seem more compelling factors for the Great Divergence so far.

Bibliography

Sayre, N. F. (2006). [Lecture] Geo 130 – Natural Resources and Population. Berkeley, California, US.

Castells, M. (2000). The Information Age: Economy, Society and culture – Volume I: The Rise of the Network Society (Second Edition). Oxford: Blackwell Publishers.