"The Perils of Efficiency"

James Surowiecki:

The Perils of Efficiency, by James Surowiecki: This spring, disaster loomed in the global food market. Precipitous increases in the prices of staples like rice ... and maize provoked food riots, toppled governments, and threatened the lives of tens of millions. But ... food prices, while still high, have come well off the astronomical levels they hit in April. ... But the recent price drop doesn’t provide any long-term respite from the threat of food shortages... Nor has it reassured anyone about the health of the global agricultural system, which the crisis revealed as dangerously unstable. ...

It wasn’t supposed to be this way. Over the past two decades, countries ... have moved away from their focus on “food security” and handed market forces a greater role in shaping agricultural policy. Before the nineteen-eighties, developing countries had so-called “agricultural marketing boards,” which would buy commodities from farmers at fixed prices (prices high enough to keep farmers farming), and then store them in strategic reserves that could be used in the event of bad harvests or soaring import prices. But in the eighties and nineties, often as part of structural-adjustment programs imposed by the I.M.F. or the World Bank, many marketing boards were eliminated or cut back, and grain reserves, deemed inefficient and unnecessary, were sold off. In the same way, structural-adjustment programs often did away with government investment in and subsidies to agriculture...

The logic behind these reforms was simple: the market would allocate resources more efficiently than government, leading to greater productivity. ... It was also assumed that, once governments stepped out of the way, private investment would flood into agriculture, boosting performance. ...

This “marketization” of agriculture has not, to be sure, been fully carried through. Subsidies are still endemic in rich countries and poor, while developing countries often place tariffs on imported food... And in extreme circumstances countries restrict exports, hoarding food for their own citizens. Nonetheless, we clearly have a leaner, more market-friendly agricultural system than before. ... Governments ... spending on agriculture has been cut sharply.

The problem is that, while this system is undeniably more efficient, it’s also much more fragile. Bad weather in just a few countries can wreak havoc across the entire system. When prices spike as they did this spring..., the result is food shortages and malnutrition in poorer countries, since they are far more dependent on imports... And, while higher prices and market reforms were supposed to bring a boom in agricultural productivity, global crop yields actually rose less between 1990 and 2007 than they did in the previous twenty years, in part because in many developing countries private-sector agricultural investment never materialized, while the cutbacks in government spending left them with feeble infrastructures. ...

The old emphasis on food security was undoubtedly costly, and often wasteful. But the redundancies it created also had tremendous value when things went wrong. And one sure thing about a system as complex as agriculture is that things will go wrong... If the just-in-time system for producing cars runs into a hitch and the supply of cars shrinks for a while, people can easily adapt. When the same happens with food, people go hungry or even starve. That doesn’t mean that we need to embrace price controls or collective farms, and there are sensible market reforms, like doing away with import tariffs, that would make developing-country consumers better off. But... Instead of a more efficient system, we should be trying to build a more reliable one.

Essentially, as in financial markets, we need to do a better job than we have in the past of measuring and insuring against infrequent, large shocks that hit all markets simultaneously. When production is widespread and shocks are small and idiosyncratic, then there is insurance in large, integrated markets since the idiosyncratic risk can be averaged out. But when production is concentrated, or when there are large shocks that hit many producers simultaneously, then the shocks no longer cancel each other out and the system becomes vulnerable to shortages (and excesses) if there is insufficient storage, or the inability to quickly redistribute existing supplies to where they are needed most. It is this latter type of risk that we need to handle better.

Comments

[Hussey]

Surely we can call this scarcity as the peril on efficiency. It puts a question mark on many things and can really be disastrous for few.

[a]

Gosh, sounds to be like a strong argument against free trade.

[jcb]

Gosh, sound like people might like to take a look at the real Malthus -- both the Essay on Population and Principles of Political Economy (esp. Part 7) are on Google Scholar -- not the crude caricature of him in current circulation. Also Keynes' appreciative essay: "The First Cambridge Economist."

[TNLNYC]

Ahem, it's not just in the financial space: Ruthless Efficiency is a couple of year old but along the same lines.

[jcb]

. . . . And also, for good measure, the work of Ester Boserup (which is compatible with TM).

[Joen]

Has anybody seen the hunger map?

here it is

http://www.fao.org/es/ess/faostat/foodsecurity/FSMap/flash_map.htm

It should also be noted that world population went up from 3.7 billion in 1970 to 6.7 billion in 2008.

[Alex Tolley]

Economists are quite familiar with game theory, mini-max strategies etc. in business, so why the apparent blindness in macro economics concerning outcomes of dynamic, perturbable systems, especially those that deal in relatively unsubstitutable ones like food and water?

Has the "market as efficiency maximizer" become such a religious icon that economists need to be iconoclasts to question its supremacy as a strategy?

[Bruce Wilder]

religious icon? Maybe

But, maybe it is just the lazy "first best" habit of thinking every market and industry has the same structure as a competitive widget market

[Patricia Shannon]

http://www.msnbc.msn.com/id/27771447/

USDA: Number jumped 50 percent in 2007, which is almost 700,000 children
Associated Press updated 54 minutes ago

WASHINGTON - New government figures show that almost 700,000 children went hungry in America at some point in 2007.

That number was up more than 50 percent from the year before and reached its highest point since 1998.

The Agriculture Department’s annual survey of food security, released Monday, also shows that more than 36 million adults and children struggled against hunger last year. That’s up by 700,000 since 2006. These are people who either didn’t have enough money for food or access to enough food aid to maintain active healthy lives.

Almost a third of these people, or nearly 12 million, had what the government calls “very low food security.” That means they had a substantial disruption in the amount of food they typically eat.

[ccm]

"The problem is that, while this system is undeniably more efficient"

WTF!? In the original this quote was preceded by: "three countries provide ninety per cent of corn exports, and five countries provide eighty per cent of rice exports". From the FAO Imports and Exports of Selected Agricultural Commodities Group, I (2004) Table C.16: In 2004 the US (first place) accounted for 52% of all corn exports and the EU (second place) accounted for 17% of all corn exports. In 2004 the US (third place) accounted for 13% of all rice exports and the EU (fourth place) accounted for 11% -- and let's not forget that rice is a TROPICAL grain. [Please note that you have to add up the EU data yourself.]

Economists and responsible reporters should stop repeating outrageous lies about the global agricultural system. It is designed solely in the interests of enriching farmers in the US and the EU. Efficiency has nothing whatsoever to do with it.

"many developing countries private-sector agricultural investment never materialized" Well, no $#!%. Given the subsidies in the US and the EU, no honest person in their right mind would have expected it to.

[Patricia Shannon]

Anybody want to take bets on how long it will take BJ to say hungry people in the U.S. is no problem?

[OhNoNotAgain]

"Anybody want to take bets on how long it will take BJ to say hungry people in the U.S. is no problem?"

Well, given that he seemed to wave away the issue with switching off of oil "when it got expensive enough", I would expect a similar response here. Why not ? In fantasy land, when food becomes scarce, the price will go up and people will then switch from producing other "stuff" to becoming farmers, and everything will be fine ? Right ? Can someone draw me a chart ?

[Joen]

Notice the phrase used "That means they had a substantial disruption in the amount of food they typically eat." That means that term also applies to a 400 pound kid who actually goes into a diet or actually misses his 10am snack of a bag of Doritos. Please! How can we worry about obesity one day and lack of food the next one. In any case if you are worried about the world food supply don't wait for the government to use tax money to attempt to solve the problem for you. There is a lot of food which you can buy with your money and store for years, and if people didn't complain about preservatives in food I bet you could store them for decades in you pantry without going bad.

[jonfernquest]

"...while developing countries often place tariffs on imported food... And in extreme circumstances countries restrict exports, hoarding food for their own citizens. Nonetheless, we clearly have a leaner, more market-friendly agricultural system than before. ... Governments ... spending on agriculture has been cut sharply...."

Farmers seemed to be favored over rice consumers in the agricultural policies of net rice exporting states because farmer votes matter for elections.

A two-tiered system of domestic and international prices, as in number one rice exporter Thailand right now seems to restrict export supply when international prices fall below the domestic price as they are now. But the details of the system of price supports and subsidies is very complicated and it is hard to say what is going on while it is going on. One thing is for sure, votes have given farmers new political power and this works against market mechanisms.

http://www.readbangkokpost.com/business/agriculture/will_thailand_continue_to_be_w.php

http://www.readbangkokpost.com/easybusinessnews/agriculture/what_is_really_happening_in_th.php

Market friendly agricultural system? Politics and votes is what drives it.

[Patricia Shannon]

Has Icarus changed his alias to Joen?
Whoever it is has never been really poor for an extended period, or they would know how silly their post is.

[calmo]

Mark distracts me (and I need it bad, you?) with this odd variety of risk: ...since the idiosyncratic risk can be averaged out. And surely if none of us ever had idiosyncracies or ever spotted them among others, this would be some dull world. [as in "That was some walkin on the water, Jesus!" and not as in "some argue that GWB has been unfairly assessed by the press".]
[So don't mind Iccy's residues Patricia. You don't need any more of these idiosyncracy thingies. And I for one cannot be expected to average them out. No.]
Let's hunt this one down with Alex:Has the "market as efficiency maximizer" become such a religious icon that economists need to be iconoclasts to question its supremacy as a strategy? Yes Could B, could be...Alex, could you trim some of the idiosyncratic hair of this beast before we pin it down?

[Jay]

How can you spend $126 million, receive $1.6 million in revenues and turn a $1.6 million profit???

http://community.seattletimes.nwsource.com/favorfactory/favorfactory_2008/lawmaker.php?id=H6PA12030

[Patricia Shannon]

Jay,
Interest?

[Jay]

"Interest?"

You obviously don't know GAAP that well. That doesn't surprise me though, since you don't need to know GAAP if you are cooking the government books. One place you can find the answer to how GAAP treats interest here...

http://www.sec.gov/Archives/edgar/data/831001/000104746908011506/a2188770z10-q.htm

[OhNoNotAgain]

"How can you spend $126 million, receive $1.6 million in revenues and turn a $1.6 million profit???"

What in God's name does that link have to do with the topic at hand ? Or are you just blatantly trolling and hijacking the topic ?

[Not Grow Equals Less]

Maybe if we stopped paying people to not grow food there would be enough. Emergency stores of long lasting food should be kept on hand. The Mormons keep 1 year supply of food on hand for emergencies. A good idea for everyone.

[Patricia Shannon]

Aside from the cost, to keep a one-year's supply of food on hand takes a certain amount of room. I have friends whose living accommodations are a rented bedroom in someone else's house. In some cases, a couple shares a single rented bedroom in someone else's house.

[Patricia Shannon]

Jay, my comment about "interest" was a joke. When I looked at your link, I couldn't figure out what you were talking about.

[don]

The problem with agricultural markets is that short run supplies and demands are both highly inelastic. The U.S. Department of Agriculture oversees programs to combat the natural tendency to wide swings in supply. A global coordination seems also appropriate. Basically, competitive markets, where suppliers don't know what each other is up to, can be a disaster for agriculture.

[reason]

don,
I think most people here know that (assuming hedge funds don't break them) futures markets are a better answer here. But this still doesn't change the fact that we someone financed specifically to build strategic food reserves as it is a cost that nobody will actually want to bear in a competitive market. The problem is (as is often the case in insurance as Patricia has pointed out) that those that would really benefit from such insurance, can't afford it. Demand should regularly exceed end consumption in good years (building up stocks) to allow necessary consumption to be supported in lean years.

We covered this topic earlier and I said the same thing. I think this is something that usefully could be done by a UN agency to prevent political exploitation by people who don't really need it (i.e. countries that can afford to pay higher prices should).

[reason]

Patricia,
I think events have sent Jay off the deep end. He gives every indication of being someone struggling with denial. I won't waste time on him anymore.

[reason]

One parallel to consider is electricity supply.

[Jay]

"I think events have sent Jay off the deep end."

That is funny that you say that, because a long time ago I realized that you are so far off in la la land that the odds of you coming back to reality are equivalent to a tornado assembling a Boeing 747.

[Not Grow Equals Less]

"Aside from the cost, to keep a one-year's supply of food on hand takes a certain amount of room."

Yes, that's true. Not everyone can keep emergency supplies on hand under current circumstances. This could be alleviated somewhat by allowing smaller/cheaper homes to be built for the bottom half, and eliminating the regressive property tax. More people would be able to afford their own home this way, and store supplies as needed.

[reason]

I hate to have to point out once again that this statement about property taxes is not correct. The incidence of property taxes in the long run falls mostly on the price of land. And what is regressive is not the taxes themselves (which are proportional to wealth) but the way in which in the US police and education are local responsibilities (in most countries they are the responsibility of the equivalent of states).

[reason]

With regard to the incidence of taxes, I forgot to further extend the logic and point out that as the incidence of the taxes is on the price of land, reducing these taxes does nothing to make homes more affordable (at least as long as the price of building land is sufficient above 0).

[Not Grow Equals Less]

"...reducing these taxes does nothing to make homes more affordable..."

It reduces the total monthly cost of ownership (interest, property taxes, utilities, maintenance, etc...) I do agree that primary education should be federal responsibility, and thus paid for with progressive income taxes.

[reason]

Not Grow Equals Less

it reduces the total monthly cost of ownership

...
True only in the short term and for existing owners, and ignoring opportunity cost. Long term the price of land will adjust (assuming buyers are well informed and rational) so that for new buyers to total cost will stay the same as their interest costs (or opportunity cost of alternative investments for existing owners). Partial analysis is often misleading.

[reason]

oops
should read
... so that for new buyers total cost will stay the same as their interst costs fall. For existing buyers the opportunity cost of alternative investments rises as the price falls so they lose twice (higher costs and lower land price). That is why it is so hard to move towards land taxes which are in many ways the least distortionary taxes.
http://en.wikipedia.org/wiki/Land_value_tax