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 a world of managed trade) runs two parallel arguments: the “free trade increases wealth and therefore we should all go along” 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 simply 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 finds the main culprits to be investor speculation and ethanol subsidies. Ethanol took enough corn out of food productionto 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.
This post originally appeared at naked capitalism and is posted with permission.