UN chief warns world must urgently increase food production - Yahoo! News

So you don’t say things that make you sound stupid to people who have studied economics, i.e. AP Econ students. Here’s UN chief Ban Ki Moon speaking at a UN conference in Ghana this week:

“One thing is certain, the world has consumed more (food) than it has produced” over the last three years, he said.

Ban blamed a host of causes for the soaring cost of food, including rising oil prices, the fall of the U.S. dollar and natural disasters.

He said he would put together a special task force to help deal with the problem and called on the international community to help…

“We need a real world and not the world of economic theories,” Ban said. “I will work on this right now with a sense of urgency.”

You know who says things like that? People who don’t understand the basic economic theories. Sadly, the theory Mr. Moon is missing here is one of our science’s most basic and simple to understand: that of supply and demand.

First of all, I’d just like to point out the absurdity of his first statement, that “the world has consumed more than it has produced.” Mr. Moon, I’d like to ask you this: If our world has not produced all the food we’ve consumed, then whose world DID produce it? Can’t we just call up the world where all the extra food we’ve consumed was grown and ask them to send us more?

Next, regarding Mr. Moon’s “task force” that he plans to form to deal with the problem, my question is this: What can a handful of bureaucrats accomplish around a table in New York that the market can’t do on its own? Rising food prices send signals to farmers who grow food; a signal that sends a very clear message: “GROW MORE FOOD!”

I’m sorry, but Mr. Moon and his “task force” can spend all the time and money they want brainstorming ways to get farmers to grow more food, but in the mean time the invisible hand of the market, guided by price signals sent from consumers to producers, will work its magic to allocate more resources towards food production and away from alternative uses of grain crops such as ethanol production, eventually shifting the supply curve of food out, stabilizing food prices.

Mr. Moon’s intentions are honorable, but his means of achieving his goal are misguided in an era of the market mechanism, which underpins most of the world’s agricultural economies today.

Jessica Ng asks,

Hi Mr. Welker,
I was just wondering whether the business cycle pertains to ALL economies, including both market and command economies?

Great question, Jessica. I thought I’d put this one out there for everyone to discuss. What do you think, readers? Based on what we’ve learned about the business cycle, would you think that this pattern of economic expansion, contraction, recession and recovery would be likely to happen in a command economy, where all economic decisions are made by a central planning agency? In other words, are business cycles unique to market economies, or can an economy run by the government also experience these patterns of instability? Post your thoughts in a comment below.

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Michael Munger, Bosses Don’t Wear Bunny Slippers, If Markets Are So Great, Why Are There Firms: Library of Economics and Liberty

The other day when we introduced our unit on market failure, we began by revisiting the concept of free markets as mechanisms for allocating scarce resources efficiently. As I was reading blogs tonight, I stumbled upon this blog post by Michael Munger, professor of political economy at Duke University, where he shares an anecdote he uses when introducing the allocating power of markets through the price mechanism:

When I teach political economy, I start with the neoclassical theory of consumption, and then cover production. And I show students how miraculous is it that the actions of millions of people who have never met can be directed by prices. Resources move toward their highest valued use, and consumption goods are delivered to the consumers who want them.

For example, the United States promoted ethanol as an auto fuel. This sharply increased the price of corn worldwide. As Brazilian reporter Kieran Gartlan put it: “Higher prices are leading Brazilian farmers to plant more second crop corn this year, and the country’s modest corn exports are expected to expand [from 42 million tonnes to 48 million tonnes, an increase of 230 million bushels.]” (DTN, March 2, 2007, emphasis mine).

No one directed the Brazilian farmers to shift to corn production. The article puts it perfectly: “Higher prices are leading farmers….” The leadership comes from the prices themselves! The farmers may have had no idea why the price of corn had increased, to $4.00 per bushel. (After all, Brazil uses sugar, not corn, to produce its ethanol.) But Brazilian corn production increased within a year, by nearly 15%. No one made the farmers switch; they made choices. Other corn producers, in Argentina, Mexico, and several African countries, followed suit. No one talked about it, no one gave any orders; prices led them.

The reason I post this excerpt from professor Munger’s blog now is that it serves as a great response to a student who on the first day of our market failure class posited that perhaps the government could do a better job of deciding what goods and services and how much of them should be produced in an economy.

Yes, markets fail, and for many reasons: a concentration of power among a few large firms, an underallocation of resources towards goods that have spillover benefits, the over-provision of goods that have spillover costs, the failure of the market to provide public goods: these are examples of how market fail.

But when markets work, they really work! The efficiency of resource allocation that results from free, competitive, markets is unrivaled by any central planning agency. Munger’s example above is a simple illustration of this allocative power of markets and prices.

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SAS Sichuan Cycling Adventure - web album

The last two weeks I have been leading student trips outside of Shanghai, first to the Philippines where 16 juniors and seniors built a house for Habitat for Humanity, and just today I returned from Sichuan Province where 24 students road their bikes through the fields of the Chengdu Basin and along the foothills of the Himalaya for three days.

Along the way on our cycling adventure we visited the Panda breeding center, the 2300 year old Qin Dynasty irrigation project at Dujiangyan, and several ancient villages preserved into modern times. On our way to the airport this morning our bus found itself in the middle of a village street market that I swear looked like it could have been 50 years back in time. There was not a private automobile to be seen, only Chinese “Forever” and “Flying Pigeon” bicycles (based on the 1937 American Raleigh design). Half the villagers were wearing the “Mao” costumes of what I thought was a bygone era in China, but it turns out this communist fashion has simply become isolated in the poor countryside, which is where we spent most of this week! Continue Reading »

Capitalism and democracy: friends or foes? | Free exchange | Economist.com

How Capitalism Is Killing Democracy - Foreign Policy (abstract only)

When I last saw my students on Friday, I left them with a question to ponder and discuss on our class Wiki over the weekend (see “Student Thought Forum”): “Why is FREEDOM so important in a market economy? If people in society are not free, can a market economy truly succeed?”.

Friday’s class discussion focused on the different answers to the basic economic questions offered by centrally planned versus market economies. Here’s how my students explained the basic differences between free markets and command economies.

The question I left them to ponder over the weekend had to do with an apparent paradox visible in China today: that of a free market economy seemingly thriving in a society where political and social freedoms are severely limited by the communist dictatorship. It has long been claimed that free markets will be followed closely by political freedom, and vis versa. The two are thought to go hand in hand. According to the Economist.com blog, Free Exchange:

The late Milton Friedman emphasized that economic freedom promotes political freedom and is also
necessary for the sustainability of political freedom over time. His underlying logic is that competitive capitalism separates economic power from political power. One could point to Chile, Taiwan and South Korea as examples where Friedman’s logic seems to hold.

So if, as Friedman said, free markets lend themselves to free societies, then how has China’s thriving market economy not resulted in a freer society, even after 30 years of economic liberalization? Robert Reich of the Foreign Policy Journal examines the issue in some depth:

Conventional wisdom holds that where either capitalism or democracy flourishes, the other must soon follow. Yet today, their fortunes are beginning to diverge. Capitalism, long sold as the yin to democracy’s yang, is thriving, while democracy is struggling to keep up. China, poised to become the world’s third largest capitalist nation this year after the United States and Japan, has embraced market freedom, but not political freedom. Many economically successful nations—from Russia to Mexico—are democracies in name only. They are encumbered by the same problems that have hobbled American democracy in recent years, allowing corporations and elites buoyed by runaway economic success to undermine the government’s capacity to respond to citizens’ concerns.

Of course, democracy means much more than the process of free and fair elections. It is a system for accomplishing what can only be achieved by citizens joining together to further the common good. But though free markets have brought unprecedented prosperity to many, they have been accompanied by widening inequalities of income and wealth, heightened job insecurity, and environmental hazards such as global-warming.

What can explain the recent divergence of capitalism and democracy in countries like China, Russia and Mexico? The Free Exchange blog explains:

The cause of this divergence, Mr Reich contends, is that companies seeking an advantage over global competitors have invested increasing amounts of money in government lobbying, public relations and bribery. This process of corporations’ “writing their own rules” has weakened the ability of average citizens to have their voices heard through the democratic process.

So it appears that as capitalism and free markets have flourished, freedom of the individual has been trumped by freedom of the corporation to lobby and thus influence government into creating favorable environments for investment and growth, often times at the expense of society’s health and the best interests of the public as a whole. We will learn a term for this kind of activity in AP Economics: rent-seeking behavior. As firms grown larger and industrial and commercial power becomes concentrated in powerful multi-national corporations, the priorities of governments seem to be shifting away from individual freedoms and civil rights and towards the interests of the corporate world, whose money and influence run deep through the veins of the world’s governments.

So perhaps I was wrong. Maybe Milton Friedman was wrong too. Perhaps the 21st Century has bred a new relationship where free market capitalism is wed not to democracy, but to a new kind of corporatocracy, a term used by Noam Chomsky, in which governments bow not to the will of the people they govern, rather to the pressures from corporate entities. Freedom and justice for all (firms, that is). Gives you something to think about, huh? Any comments?

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Command vs. Market economics in Zimbabwe:
Mugabe’s decree on prices puts Zimbabwe economy in a tailspin - International Herald Tribune

And a blog post commenting on the news:
Managing Globalization » Economics 101 in Zimbabwe

Our first unit in AP Economics (and Friday’s lecture) examined the differences between command economies and market economies. One of the main points of yesterday’s lecture was that markets work because they result in an efficient allocation of resources towards the right products, using least-cost production methods, and putting those products in the hands of the people whose resources command the highest value in the resource market. If too much of one good is being produced and not enough of another, the “invisible hand” of the market will reallocate resources from the over-produced product to the under-produced product.

One of the reasons command economies fail is that central planners who attempt to control output and price, even when their intentions are to help consumers by assuring enough stuff is produced and available at an affordable price, are in essence acting against a basic economic law: that of supply and demand. In Zimbabwe, where inflation has reached nearly 10,000 percent (that means a candy bar that costs $1 today will cost $100 in a year!!) the president recently attempted to place price controls on all products by forcing merchants to slash their prices in half. The result? Food has vanished from the shelves of markets in Zimbabwe:

Essentials like bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs of bargain-hunters who denuded stores like locusts in wheat fields. Meat is nonexistent. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.

Manufacturing has slowed to a crawl, because few businesses can produce goods for less than their government-imposed sale prices. Raw materials are drying up because suppliers are being forced to sell to factories at a loss. Businesses are laying off workers or reducing their hours.

As our first AP unit “Basic Economic Concepts” winds down, this article and blog post seem timely to remind us of one of the core principles of Economics: the importance of prices and markets in allocating resources (land, labor, capital and entrepreneurship) towards producing the goods and services society most wants. Later in the year we’ll examine what happens when markets fail, which they often do; but at this point in the course it is important to understand that despite their failures and shortcomings, free markets rarely experience the chaos associated with command economies of the past, and even the present as the Zimbabwe example shows. In the words of Daniel Altman, the blogger linked above:

The Soviets, Chinese and some of their allies kept their tightly controlled economies going for quite a few decades, though not perhaps with unalloyed success (former backyard smelters in China will get the pun). Mugabe’s version hasn’t even lasted through a change of seasons. Now, there are still a few lingering arguments in academia and policy circles about the merits of command economies. But a poorly planned command economy - no one seems to want that. Can anything short of total collapse follow?

Any thoughts? Why did Mugabe’s attempt to help consumers by keeping prices low only make the problem worse? What does this say about markets versus planned economies? Discuss!

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Managing Globalization: To reduce poverty, money isn’t everything - International Herald Tribune

Another great article on Economic Development; this one compares development in Venezuela and Brazil over the last decade:

Overall income is moving upward in both countries, if for different reasons. Venezuela is riding the black tide of high-priced oil, while Brazil’s relatively firm economic policies have built confidence in its business prospects among both locals and foreigners.

In Venezuela, president Chavez’s socialist inspired, oil financed command policies have provided access to benefits to citizens in exchange for political loyalty. This has skewed the motives of service providers and recipients, who often realize that improving peoples’ lives is secondary in importance to making the government think that peoples’ lives are improving:

One example of this problem was a program intended to improve literacy. “The government had no system of accountability to monitor performance other than the reports of its own administrators,” Rodríguez said. “When program administrators learned that it was more important to show loyalty to the regime than to effectively run the program, any incentives that they had to administer resources efficiently, from a social point of view, disappeared.”

In Brazil, where monetary benefits for families are linked not to political affiliation but to “actions like attendance in school, prenatal care and childhood vaccinations”, development policies have proved more effective:

Figures compiled last year by Rômulo Paes de Sousa of the Ministry of Social Development and Fight Against Hunger, covering the period from 1999 through 2004, painted a rosy picture: School attendance was up, while illiteracy was down. Life expectancy was up, but hospital visits were down. Employment was up, and child labor was down.

The lesson here? When politics and economics are wed, it appears that development policies may take a back seat to political allegiance and thus prove less effective. Evidently, the top-down command system in Venezuela, where access to benefits requires utter loyalty to the all-powerful Chavez, has proven to achieve less than noteworthy improvements in the main indicators of human development (such as infant mortality, literacy and life expectancy). On the other hand, Brazil’s market-based system, where monetary incentives lead results in citizens gaining access more a wider variety of efficiently run development programs, have proven relatively successful in actually alleviating poverty.

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One week ago I left Shanghai behind and my wife and I began our annual migration back to our summer stomping grounds, the Pacific Northwest. After 10 months living and working in a city of 18 million people with an industrial sector that ensures 365 days a year of a thick haze blank over the Shanghai, nothing is more refreshing than returning to the nearly empty mountains of North Idaho (“It’s a state of mind” is what they say around here).

Some of the highlights of life in Northern Idaho include the excessively blue skies, the sparkling Lake Pend O’reille, the ever green slopes of the Selkirk mountains, the bears, moose and deer with whom we share our beautiful trails, and finally the intimate sense of community that infuses the local economy of Sandpoint, our home town of 8,000 (you’d need 2,250 Sandpoints to make one Shanghai!).

In Shanghai, foreigners mostly shop at one or two boutique foreign grocery stores, packed full of processed foods imported from Europe, North America, Japan, Australia and other far corners of the earth. About the only things you’ll find that are “local” in these markets is the produce, which itself is of suspect quality given the large quantities of chemicals banned in most western countries used by Chinese farmers (not to mention the continued use of human feces as a fertilizer).

To eat like a foreigner in Shanghai is to be an active participant in the global, industrial food chain. The manufacture of the processed foods imported from the West involved industrial processes far beyond the comprehension of most consumers. The use of petro-chemicals infuses every step of this process, from the chemical fertilizers, herbicides, fungicides, pesticides and insecticides to the chemical preservatives to the petroleum burned getting the food from field to factory to warehouse to container ship to grocery store thousands of miles away. To eat like a foreigner in Shanghai is to contribute to the degradation of our environment, the warming of our atmosphere, and the destruction of a traditional way of life for local family farmers all over the West, as factory farms proliferate across the West’s fertile lands. Despite all this, my wife and I still eat like foreigners in Shanghai, and attempt to suspend our conscience while we participate in the industrial food chain we so despise.

For my wife, Liz, and I, returning to Sandpoint, Idaho is an act not only of spiritual and physical rejuvenation, but also of economic emancipation. We are freed from the destructive global industrial food chain on which we depend as foreigners living in China. To eat in Sandpoint is to participate in a sustainable, local, environmentally friendly food chain where organic, locally grown foods are available in every grocery store.

Our first stop when returning to Sandpoint is always Winter Ridge Organics, followed by a trip to Woods Ranch Meat Processing Plant (for me, as my wife is a vegetarian). Woods Ranch presents an interesting study in local foods. All of the meat processed at this small plant nestled in between Idaho’s Selkirk Mountains and the Cabinet Mountains of Western Montana is raised in the rich grasslands of the Pack and Kootenai river valleys. In addition to grass fed beef, this plant processes and sells direct to the consumer pork, buffalo, and game meat such as elk and venison. During the hunting seasons it is not unusual to find bear and moose in their freezers, as the region’s mountains present local hunters with a plethora of wild game.

When I compare the intricate and energy intensive food chain of the foreign eater in Shanghai with the short, direct food chain of the local eater in Sandpoint (along the dirt road to Woods Ranch you pass the very cattle that are processed therein), I begin to wonder how our economy has woven such a tangled web of international trade and commerce. I am also thankful that I am in a position where I get to observe and participate in both extremes of the modern economy, both the local and the global. As a teacher of economics, this perspective may prove valuable as my students and I strive to put the complex web of today’s economy into focus.

Ultimately, I can say I wish I could have the best of both worlds. I wish I could take my wonderful job and school and classroom and students of my life in Shanghai and “import” them all to Sandpoint, Idaho. I wish we could all enjoy a more l

ocal existence; but the prospects of this way of life surviving seem weaker every year I return. A couple of summers ago the town just north of Sandpoint opened the first Wal-Mart in Northern Idaho. Reality check: globalization is everywhere! China haunts my idyllic summer paradise; I cannot escape it! At least the haze of Shanghai has not stretched its ugly reach to the Selkirk mountains, not yet, at least…

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One of the joys of summer for teachers is that we get to forget about stacks of student work and read whatever we want. One of the books I read during my Bali trip was one about food called The Omnivore’s Dilemma, by Michael Pollan (the other was the classic and utterly cheesy mystery in which a Harvard professor uses economic theory to solve crimes, Murder at the Margins).

While The Omnivore’s Dilemma warrants several blog posts itself, one section stood out to me as relevant to what I was seeing in Bali firsthand. In discussing the different food chains humans participate in, Pollan discusses a concept called “artisinal economics”, which he describes as a system in which “the competitive strategy is based on selling something special rather than being the least-cost producer of a commodity.” Pollan goes on to point out that “this artisinal model works only so long as it doesn’t attempt to imitate the industrial model in any respect. It must not try to replace
skilled labor with capital; it shouldn’t invest capital to reach national markets but rather should focus on local markets, relying on reputation and word of mouth rather than on advertising…”

Touring around Bali, one cannot help but be awed by the seemingly endless selection of arts and crafts available not only to tourists but to Balinese for their houses, businesses and temples. Around the town of Ubud (famous as a center of artisanship),wood and stone carving workshops and painters studios stretch for kilometers in which truly talented artists can be observed creating unique (and some not so unique) pieces of traditional art (and some not so traditional, such as the Thai Buddhist monk paintings I’ve seen on sale in places like Bangkok and Phuket). It would seem that a large percentage of the island’s population is involved in the art business, and although I did see some African patterns such as giraffes and of course the Thai monk paintings, the majority of the art appeared to be in traditional Balinese styles and for the local market.

The market for art and crafts seems to fit Pollan’s description of an “artisanal economy” where quality and individuality are the goal of the economy’s output, as opposed to maximizing output and minimizing costs. To see young men and women working with their own hands and tools that haven’t changed in centuries was refreshing, representing a hope that I and I would guess many of you share regarding the desire to hold on to something from our society’s past even as the modern economy pushes us ever forward into a world of homogenization, increased output, increased mechanization and inevitably less and less beauty and quality defining and differentiating unique cultures from one another.

Discussion Questions:

1. Why do firms in developed and developing countries tend to replace workers with machines as their economies grow?
2. If the craftsmanship and artisanship of Bali belongs to an “artisanal economy”, what kind of economy do the factories, superhighways and giant container ships of the rich world belong to?
3. Do you think the artistic, labor intensive industries that employ so many Balinese will survive in the modern economy, or can artists be replaced by machines as easily as seamstresses and auto workers were in
   the 20th century?
4. Based on Pollan’s description of “artisinal economics” quoted above, what chances do you think exist that such an economy will reemerge and thrive sometime in the 21st century? What would it take for such an economy to thrive today?

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IF you’ve visited this blog in the last two weeks, you’ve probably seen the picture below of a beautiful sunset, a distant island and a wispy palm. Turns out I stayed two nights on the beach that picture was taken from, Ahmed in Bali’s remote northwest corner! What a beautiful island Bali is! Unlike many touristy places in Southeast Asia such as Phuket and Samui in Thailand, Bali is an island paradise that has managed to develop a thriving tourist industry while simultaneously maintaining its distinct Hindu culture and traditions that awe visitors and help them understand why it’s called the “island of the gods”. Not only do most Balinese outside the one or two major cities still live in the traditional style houses, but they actively practice their unique form of Hinduism (imported from India via Java in the 11th century), maintain the traditional forms of dance and religious ritual, and sustain themselves by practicing any number of artistic trades rooted in the island’s rich and colorful history. Indeed, in most villages we passed through, it was hard to tell which buildings were temples and which were houses. As much of Indonesia