Wednesday, May 18, 2011

Amartya Sen and all that

Amartya Sen did a lot of research on the causes of famine and the gist of the conclusions was that lack of food was not a factor at all, and that various market failures were evident (including hoarding, purchases by the British military, price gouging etc.) which explains most of it. This perhaps contradicts Adam Smiths conclusion about bakers, bread and "the hidden hand" that means we can all get fed without benevolent bakers.

I don't disagree with the gist of that, and my belief is that Destitution, not Dearth is what causes famines (there is an Economist article of a few years ago that I could look up but I don't need it to make my point)

India became democratic after about that point, and the Government of India has, ever since, had a program of purchasing and distributing food for the poor, including subsidising food in good times and in bad. I like to call this system a "brute force" way of solving the problem. The "hidden hand" of commerce gets replaced by a very visible hand of the Government. However, is this brute force method foolproof? How expensive is it? Why does Australia not embrace or need something similar?

My assertion is that the policy of the Government of India has got the credit for avoiding famines when in reality, a policy concentrating on social welfare rather than food purchases would have both avoided famine more cheaply, and would have resulted in far higher economic growth meaning it would have been considered "first world" well before the turn of the century.

I completely disagree with the policy conclusion that Governments becoming buyers and sellers in the market is a good way to avoid the market failures that cause famines. Certainly there must be enough storage capacity for store levels to increase when prices are low, and drawn upon when prices are high, if only to buy enough time for suppliers to ramp up/down production/imports (panic buyers are profitable, if supply can be ramped up) . Social welfare to avoid destitution should be done with money or food vouchers rather than the food itself, so that market signals still function at the farm level (small farms will not ramp up production if the Government doesn't offer a higher purchase price). Governments are just as capable as individuals of hoarding, price gouging etc. when it comes to/from other countries, so what may be of benefit for a country in isolation may still be a complete disaster to an inoccent other country which has become destitute.

This is to say there is still a dearth of situations where Governments should involve themselves in consumables. Nor any situations where private interests should own infrastructure. That is not necessarily about whether an outcome is an aim of a policy, but whether the policy is equipped to give the desired result.

9 comments:

Chris Fellows said...

Jeez, that invisible hand of Adam Smith's gets around, doesn't it? Almost as bad as Diego Maradona's.

Money and food vouchers are fungible, so they can be used to buy grog or swapped to speculators for money to buy grog. An Indian policy concentrating on social welfare would have had this soft underbelly, just like it does in our country. Such a policy would also would have needed an army of bureaucrats to administer - a millstone around the neck of the market a country like India cannot afford as readily as us- and be susceptible to rorting on a grand scale.

Under famine conditions, you do not want the market to work. The market means high prices the unemployed cannot afford. Small farms are subsistence farms and are not able to ramp up production on the timescale needed anyway. The market-distorting mechanisms that are keeping them down are the subsidies allowing European and North American farmers to swamp the market with cheap food, year in and year out.

Marco said...

Australia has no soft underbelly ... or is that what you call a beer gut?

Starvation certainly isn't a problem even in the poorest, most isolated aboriginal tribes, even in times of natural disaster.

There were several episodes of panic buying during this last La Nina. Also, a huge potential for people to be stuck without the means to restock their pantry. The ability of the Government to be part of the solution without purchasing or selling a single crumb of bread of itself is nothing short of breathtaking. True story.

Since you opened the door with your mention of European and US subsidies - What are these subsidies if not an attempt to ensure their own citizens have food in spite of world conditions. Also to ensure their own farm labourers continue to have stable employment regardless?

Although not directly buying the food necessarily, it amounts to that as he who pays the piper calls the tune. Governments implicitly or explicitly decide which markets the food goes to.

Chris Fellows said...

So you agree with me that governments distort the market for most everything, whatever they do, and therefore it is kind of silly to get all Apocalyptic about feed-in tarrifs that are a *part* of the renewable energy mandates that comprise in total *1/3* of the projected rise in electricity prices in NSW this year? ;)

Chris Fellows said...

Q. "What would Wikipedia say?"

A. In 2008, a detailed analysis by the European Commission concluded that "well-adapted feed-in tariff regimes are generally the most efficient and effective support schemes for promoting renewable electricity".[9] This conclusion has been supported by a number of recent analyses, including by the International Energy Agency,[10][11] the European Federation for Renewable Energy,[12] as well as by Deutsche Bank.[13]

9.^ a b c European Commission (COM), 2008. Commission Staff Working Document, Brussels, 57, 23 January 2008. Accessed 17 November 2008 at: http://ec.europa.eu/energy/climate_actions/doc/2008_res_working_document_en.pdf

10.^ International Energy Agency (IEA) (2008). Deploying Renewables: Principles for Effective Policies, ISBN 978-92-64-04220-9.

11.^ de Jager, D., Rathmann, M. (2008). Policy Instrument Design to Reduce Financing Costs in Renewable Energy Technology Projects. Work performed by ECOFYS, Ultrecht, The Netherlands. Paris, France: International Energy Agency – Renewable Energy Technology Deployment, Accessed 9 March 2009 at: http://www.iea-retd.org/files/RETD_PID0810_Main.pdf.

12.^ European Renewable Energy Federation (EREF 2007). Prices for Renewable Energies in Europe for 2006⁄2007: Feed in tariffs versus Quota Systems – a comparison. Doerte Fouquet, editor, Brussels, Belgium, available at http://www.eref-europe.org/dls/pdf/2007/eref_price_report_06_07.pdf.

13.^ http://www.dbcca.com/dbcca/EN/_media/Global_Climate_Change_Policy_Tracker_Exec_Summary.pdf

Chris Fellows said...

Australia has no soft underbelly ... or is that what you call a beer gut?

Starvation certainly isn't a problem even in the poorest, most isolated aboriginal tribes, even in times of natural disaster.


That's right, pretend not to get my point. It is the underbelly of the *policy* where you try to provide an acceptable standard of living through welfare payments... it doesn't work in Aboriginal Australia, it doesn't work in Aboriginal Canada, it won't work under famine conditions because (1) if people *aren't* actually starving *at that moment*, men will use the money to buy cigarettes and grog, and (2) if people *are* actually starving at that moment, they will pay grossly inflated speculative famine prices instead of the price the government could have bought the food for in better times.

Marco said...

Apocalyptic about feed-in tarrifs that are a *part* of the renewable energy mandates that comprise in total *1/3* of the projected rise in electricity prices in NSW this year? ;)

What has become evident to me is that the status of the policy at the moment is that practically everybody has a plausible argument to cry poor and require compensation.

I still feel the need to be apocalyptic about it because the Governmental culture in Australia against subsidies is in danger of becoming Europeanised in a domino of policies, if we don't reverse this policy.

Marco said...

Q. "What would Wikipedia say?"

I did read what wikipedia said before I started my rant. I have also followed through on some of the analysis. Suffice to say that I don't disagree with any of the "data" or "facts" but I vehemently disagree with their policy conclusions.

Two points I might make: Carbon tax or emissions trading has not occured in countries that haven't also had heavy subsidies and/or significantly high feed-in tariffs as well, so that comparing the actual success of one strategy over the other is impossible for the moment (for either the grid parity or carbon reduction goals).

The extreme volatility of the market for renewables is directly attributable to the way these subsidies and tariffs pick and choose "winners".

Germany has been touted as a "success" story due to their large penetration of rooftop solar. However, how nonsensical is it for a country with a dearth of sun to be the country hogging the lions share of PV systems for so long, while they were (and still are, because they are still running) less efficient than the ones being manufactured now.

Dr Clam said...

I should concede the point that the rate of return on feed-in systems in NSW seems to be (have been) ludicrously high by world standards... methinks our lawmakers should do a bit more research on Wikipedia first before rolling these sort of things out.

I have always seen the AGW kerfuffle as an obvious stalking horse for protectionism so I am really onside there as well. I don't think it's worth throwing away the rule of law over, though.

Marco said...

I should concede the point that the rate of return on feed-in systems in NSW seems to be (have been) ludicrously high by world standards...

The problem is that it is extremely hard to get that balance right. What happens is that if you set it too low, there is too litle takeup and the Government looks stupid. Too much and it becomes too expensive and disruptive to the status quo. The positive feedback inherent in the system means that you won't know and won't be able to let it find its own equilibrium by itself. The policy has to change again and again.

The issue is not really that. It is the architecture of the payment for power generation system it creates. Imagine if you will that the Government wants to set up distributed generation system. In terms of the power generation it is a loss making enterprise, but theoretically at the end of it there will be an infrastructure that can be called on for power needs. The Government doe not want this to show on the books as either an expense or an infrastructure expenditure (who would?) because compared to other investments it would be demonstrably poor value for money. Instead it essentially *regulates* that individuals are guaranteed a certain rate of return, and the cost of the loss making enterprise is passed on to someone else. Just who and how much is where the crux of the issue is. By promising a rate of return from one side of the ledger, the risk that has to be borne on the other is going to be passed around like a hot potato. No matter what settings are made on the pricing etc., this central issue is enough for the policy to self destruct. This is unless retail prices are so high already that the utility could be happy to take it all on.