From LearnLiberty.org
Why are some countries wealthy while other nations are poor? Prof. James Otteson, using the ideas of Adam Smith, explains how the division of labor is a necessary and crucial element of wealthy nations. Additionally, Otteson explains Smith’s idea of the invisible hand, which explains how human beings acting to satisfy their own self interest often unintentionally benefit others.
In Maclean’s, Stephen Gordon decries the undying myth that if one party to a trade is benefitting then the other must be losing:
In The Myth of the Rational Voter, Bryan Caplan argues that the most important obstacles to implementing sound economic policies are not lobby groups or the ability of other special interests to influence politicians, but certain systemic, irrational beliefs of the electorate. This is hardly an encouraging conclusion, but if we needed any more evidence for at least one aspect of his thesis, the CNOOC-Nexen takeover is providing it.
One of the prejudices identified by Caplan is what he calls anti-foreign bias: “a tendency to underestimate the economic benefits of interaction with foreigners.” According to popular (mis)perception, dealing with foreigners is to be mistrusted: if they want something from us, then they must perceive some benefit from the exchange. And if foreigners are gaining, then Canadians must be losing.
Stephen F. Gordon is waging a lonely campaign to persuade Canadians that free trade is better than the managed, mercantilist “free trade” most of our governments have wanted since the NAFTA negotiations:
Not enough people understand the benefits from the unilateral opeining of borders. (1/2)
— Stephen Gordon (@stephenfgordon) September 29, 2012
The benefits we get from foreign investment are not conditional on how the other govt treats foreign investment.
— Stephen Gordon (@stephenfgordon) September 29, 2012
The gains from the Nexen takeover have *nothing* to do with how China treats foreign investment.
— Stephen Gordon (@stephenfgordon) September 29, 2012
Martin Wolf once called GATT a mutual disarmament treaty for mercantilists. That mindset is still too dominant.
— Stephen Gordon (@stephenfgordon) September 29, 2012
Too many people think that Canadian investors are our hostages and that we should demand some form of compensation for releasing them.
— Stephen Gordon (@stephenfgordon) September 29, 2012
Tim Worstall, after thanking all the folks who got him to the point he can be quoted (and quoted accurately) in the Los Angeles Times, realizes that they’re using his words to present a point he isn’t trying to make:
I wrote here about the coming bacon famine. My point was that we’ve just had a bad crop and this requires a modest change in how we use that crop that we do have. We’d rather like people to stop feeding the now in short supply grains to pigs to make bacon and leave rather more of it to be eaten directly by humans. Further, I gloried in the fact that we have a system which achieves this. We have the futures markets: the future price of corn and soy and wheat has gone up. Farmers are culling their pig herds to avoid the future higher costs of feeding them. This will cause a shortage of bacon in the future and if not an excess then certainly more grain than otherwise that can be eaten by humans. I do regard this as a good result, yes. But what I am pointing to is the way in which in a market, price driven, system the entirely selfish pursuit of gelt and pelf, the desire purely for filthy lucre, brings about such a desirable result. The sole desire of agricultural commodity speculators is to increase the amount of cash in their wallets and reduce the amounts in those of other such speculators. Yet from this system we get a rebalancing of the use of a scarce resource which leads to more humans leading longer and better lives even if we’ve a certain shortage of pigs. At which point Hurrah! for capitalism and aren’t we all such lucky people.
[. . .]
Which is indeed what I said. However, we’re then told this:
Worstall doesn’t go so far as to say we should stop eating meat, but his line of thinking is headed in the right direction. If we didn’t use grain as feed for livestock, we could take significant steps toward ending global hunger while also drastically reducing greenhouse gases. Meantime, we’d spare a whole lot of pigs — and maybe even our health.
All of which makes me sound like some kind of hippie, advocating vegetarianism and the equitable distribution of the world’s resources. When what I’m actually applauding is the way in which financial capitalism red in tooth and claw solves our distribution of scarce resources problems.
The annual Fraser Institute report on world economic freedom may confirm what a lot of Canadians have been noticing: we’re now much more free than our American friends, at least by the measurements tracked in this series of rankings (PDF):
- In the chain-linked index, average economic freedom rose from 5.30 (out of 10) in
1980 to 6.88 in 2007. It then fell for two consecutive years, resulting in a score of
6.79 in 2009 but has risen slightly to 6.83 in 2010, the most recent year available.
It appears that responses to the economic crisis have reduced economic freedom
in the short term and perhaps prosperity over the long term, but the upward
movement this year is encouraging.- In this year’s index, Hong Kong retains the highest rating for economic freedom,
8.90 out of 10. The other top 10 nations are: Singapore, 8.69; New Zealand, 8.36;
Switzerland, 8.24; Australia, 7.97; Canada, 7.97; Bahrain, 7.94; Mauritius, 7.90;
Finland, 7.88; and Chile, 7.84.- The rankings (and scores) of other large economies in this year’s index are the United
Kingdom, 12th (7.75); the United States, 18th (7.69); Japan, 20th (7.64); Germany,
31st (7.52); France, 47th (7.32); Italy, 83rd (6.77); Mexico, 91st, (6.66); Russia, 95th
(6.56); Brazil, 105th (6.37); China, 107th (6.35); and India, 111th (6.26).- The scores of the bottom ten nations in this year’s index are: Venezuela, 4.07;
Myanmar, 4.29; Zimbabwe, 4.35; Republic of the Congo, 4.86; Angola, 5.12;
Democratic Republic of the Congo, 5.18; Guinea-Bissau, 5.23; Algeria, 5.34; Chad,
5.41; and, tied for 10th worst, Mozambique and Burundi, 5.45.- The United States, long considered the standard bearer for economic freedom
among large industrial nations, has experienced a substantial decline in economic
freedom during the past decade. From 1980 to 2000, the United States was generally
rated the third freest economy in the world, ranking behind only Hong Kong and
Singapore. After increasing steadily during the period from 1980 to 2000, the chainlinked
EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and
7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously
from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).
The Economist on the least effective ways of dealing with rising food prices:
Although the weather is the proximate cause of the price rises, governments are making matters worse. Look at America’s biofuels policy. By ensuring that a third of the country’s maize is turned into ethanol and fed to cars, it has driven up grain prices and made them more volatile by reducing stocks. At the start of this year America scrapped the subsidy for ethanol, and abolished the tariff on imports of the stuff — steps in the right direction. But a certain amount of ethanol still has to be blended with petrol by law. That keeps prices high.
Bad policies in America are encouraging bad policies elsewhere. Higher prices have spooked importing and exporting countries alike, causing them to turn away from volatile world markets and seek to insulate themselves. Between 2007 and 2011, 33 countries imposed export restrictions on food. Agriculture accounts for less than 10% of world trade, but more than two-thirds of the cost of all border distortions.
[. . .]
Farm protection is like a weed: it grows everywhere and seems impossible to eradicate. This newspaper has been making the case against it since 1843, when we were founded to oppose Britain’s protectionist Corn Laws. Sadly we seem to have made too little progress. At the moment governments are making farming less efficient than it should be. They are increasing poverty. Their policies are otiose, since there are better ways to help the poor, such as direct cash transfers. And they are counterproductive, because they exacerbate the problems they seek to solve.
sp!ked has an article by authors Pierre Desrochers and Hiroko Shimizu, on the disadvantages of the true locavore diet:
Perhaps the most ludicrous claim made by some ‘locavores’ — activists who argue that food produced near final consumers is superior in a myriad of ways to distant imports — is that the globalised food-supply chain is guilty of crimes against seasonality. Limiting our intake of fresh produce to whatever can be obtained locally at certain times of the year (and preserving the surplus for the remainder), we are told, will not only help atone for agri-business’ fossil fuel-driven ways and constrain us to live within regional ecological limits, but it will also make fresh local food more enjoyable when it is available. As one locavore puts it, ‘deprivation leads to greater appreciation’.
The emphasis on local seasonality by food activists, however, is problematic on several counts. For instance, why do militant locavores limit themselves to local seasonality when they could further insist on truly ‘native’ produce and livestock? Seen in this light, North American agriculture should be essentially limited to turkeys, farmed salmon and a few other fish and shellfish, sunflowers, blueberries, cranberries, Jerusalem artichokes and some varieties of squashes. (Though the really hardcore North American locavore could go even further by reverting to problematic native crops such as sumpweed, goosefoot, knotweed, maygrass and little barley that were replaced about one thousand years ago by Mexican imports such as corn and beans.)
Basic logic aside, limiting our food intake to local productions is a one-way ticket to chronic famines and malnutrition. Having in most cases no direct experience with massive crop failures, locavores typically ignore the historical and contemporary toll taken by factors ranging from droughts, floods, heavy rains and frost to hail, windstorms, earthquakes and tsunamis, to say nothing of insect pests, rodents, soil erosion and plant and animal diseases. Yet, the historical evidence on the issue is unequivocal. It was only the development of cost-effective long-distance transportation (primarily the railroad and the steamship) that finally eradicated famines through the large-scale movement of foodstuff from regions that had experienced good harvests to those that had struggled with mediocre ones.
Virginia Postrel explains why President Obama’s “you didn’t build that” gaffe has lasted so long when usually politicians’ gaffes barely last a single news cycle, by outlining the arguments of a recent book by Dierdre N. McCloskey:
The president’s sermon struck a nerve in part because it marked a sharp departure from the traditional Democratic criticism of financiers and big corporations, instead hectoring the people who own dry cleaners and nail salons, car repair shops and restaurants — Main Street, not Wall Street. (Obama did work in a swipe at Internet businesses.) The president didn’t simply argue for higher taxes as a measure of fiscal responsibility or egalitarian fairness. He went after bourgeois dignity.
“Bourgeois Dignity” is both the title of a recent book by the economic historian Deirdre N. McCloskey and, she argues, the attitude that accounts for the biggest story in economic history: the explosion of growth that took northern Europeans and eventually the world from living on about $3 a day, give or take a dollar or two (in today’s buying power), to the current global average of $30 — and much higher in developed nations. (McCloskey’s touchstone is Norway’s $137 a day, second only to tiny Luxembourg’s.)
That change, she argues, is way too big to be explained by normal economic behavior, however rational, disciplined or efficient. Hence the book’s subtitle: “Why Economics Can’t Explain the Modern World.”
[. . .]
McCloskey’s explanation is that people changed the way they thought, wrote and spoke about economic activity. “In the eighteenth and nineteenth centuries,” she writes, “a great shift occurred in what Alexis de Tocqueville called ‘habits of the mind’ — or more exactly, habits of the lip. People stopped sneering at market innovativeness and other bourgeois virtues.” As attitudes changed, so did behavior, leading to more than two centuries of constant innovation and rising living standards.
I’ve read McCloskey’s book and plan on reading the next one too. Earlier mentions of Bourgeois Dignity are here and here.
Rob Lyons reviews the new book by Pierre Desrochers and Hiroko Shimizu:
The fundamental question underpinning both those earlier papers and The Locavore’s Dilemma is this: if local food is so great, why did a globalised food system develop at all? The answer, as Desrochers and Shimizu argue, is that the creation of a worldwide trade in food reduced prices, increased variety and improved security of supply. If there is a problem with this world market in food, they argue, it is that it is not open or far-reaching enough.
The online eco-magazine Grist ran an interview with Desrochers earlier this month. In a follow-up piece, readers came up with responses to the interview. One of these responses provides such a neat summary of the arguments in favour of local food that it is worth repeating in full.
‘I am a local-food advocate for many reasons: Taste: An heirloom tomato picked that morning runs circles around a hybridised tomato picked two weeks ago in Florida and gassed so it turns red en route; Quality: the better the soil and the farmer, the better the food; Nutrition: food sheds nutrients after it is picked. The longer it takes to get to market, the less nutritional value it has, comparatively; Transparency: I like knowing how my food is grown and harvested. I visit my meat producer; try that at a CAFO [concentrated animal feeding operation]; Environmental: A minimisation of the use of chemicals that wash into waterways, creating algae blooms, choking out life, or killing beneficial insects, including honey bees; Sane stewardship: I like to support farmers who create more naturally fertile soil, which is better able to resist pests, floods, and droughts; Pleasure: I buy local food at my farmers’ market because it’s more pleasant to do so than going into an air-conditioned grocery store. I see neighbours, chat with farmers, taste before I buy. Economic: I want my food dollars to support my local economy; Humanity: Animals and humans are treated better on the small farms I know than they are on the large ones; I value green open spaces: Supporting local farms with my money encourages those farmers to maintain those green open spaces rather than selling off to developers.’
As Desrochers and Shimizu explain, these ideas are either not necessarily true, are matters of personal taste or, more often, are completely wrong. Instead, the authors argue, ‘the available evidence convincingly demonstrates that long-distance trade and modern technologies have resulted in much greater food availability, lower prices, improved health and reduced environmental damage than if they had never materialised. Indeed, more trade and ever-improving technologies remain to this day the only proven ways to lift large numbers of people out of rural poverty and malnutrition.’
Let’s take those arguments for local food, one by one, using (though not exclusively) the arguments in The Locavore’s Dilemma.
In most newspapers, you don’t need to wait long to read some journalist beating up on evil speculators for the “damage” they do and the claimed “uselessness” of their activities. Tim Worstall points out that speculators are actually essential to smooth operation of free markets:
What is it that the speculator in food manages to achieve? They move prices through time. At the moment, there’s a drought, and so we think there will be less corn available for consumption next year, so its price goes up.
What would we like to happen? Should prices stay stable? We would all carry on using the amount of corn that we originally thought we’d get. And we’d run out — there may even be a famine. People tend to die in famines.
So what we’d actually like to happen is for people to prepare by consuming a bit less corn this year.
Some of this should come from substitution: farmers will feed wheat to animals not corn. Consumers might move from grits to weetabix for breakfast. Perhaps the fools putting corn into cars will move over to sugar cane to make ethanol from.
We would also like a supply effect: those who are currently growing corn might add a bit more fertiliser, take more care in harvesting, make sure less gets spoiled or lost in transport.
Rising prices causes both of those pretty neatly. Put up the price and people will use less, while suppliers will make more. And what is it that the speculators on the futures markets have done in response to this report of drought? They have raised prices.
Michael Geist on the Canadian concessions to get a seat at the kiddy table for the Trans Pacific Partnership free trade negotiations:
…the benefits for Canada are hard to identify. The price of admission was very steep — Canada appears to have agreed to conditions that grant it second-tier status — and the economic benefits from improved access to TPP economies are likely to be relatively minor since we already have free trade agreements with four of the ten participants.
Given those conditions, why aggressively pursue entry into the negotiations?
[. . .]
Given Canada’s late entry into the TPP process, the U.S. was able to extract two onerous conditions that Prime Minister Stephen Harper downplayed as the “accession process.” First, Canada will not be able to reopen any chapters where agreement has already been reached among the current nine TPP partners. This means Canada has already agreed to be bound by TPP terms without having had any input. Since the TPP remains secret, the government can’t even tell us what has been agreed upon. [Scott Sinclair reports that the commitment is even broader, covering any chapter where provisions have been agreed upon]
Second, Canada has second-tier status in the negotiations as the U.S. has stipulated that Canada will not have “veto authority” over any chapter. This means that should the other nine countries agree on terms, Canada would be required to accept them.
This condition could be used to stop Canada from joining forces with another country on a tough issue during the late stages of the negotiation. For example, Canada and New Zealand both have copyright terms that last for the life of the author plus an additional 50 years. The U.S. has proposed that the TPP mandate a term of life plus 70 years. While Canada and New Zealand might be able to jointly block the extension, the U.S. could pressure New Zealand to cave on the issue and effectively force Canada to accept the change.
Getting rid of our government-mandated monopolies in the agricultural sector (a good thing) is not going to be worth the price of adopting American-style copyright legislation.
Free trade is the way to go, if you want to benefit the consumer. Producers don’t benefit as much: it increases their competition and means that bad producers are more likely to go out of business. Protectionists always rely on the visible “damage” that free trade does to these bad producers and minimize or completely ignore the (larger) benefits to consumers.
Jesse Kline explains why moving toward freer trade will benefit most Canadians, and the drawbacks will be to those who are least able or least willing to face real competition:
Prime Minister Stephen Harper announced this week that Canada will join the Trans-Pacific Partnership (TPP) talks, along with he United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, Mexico and, we hope, Japan. Some say this will be a historic free trade deal that will extend the NAFTA zone into emerging Asian markets; others believe the United States is using the process to impose its own draconian copyright regime on its trading partners, while protecting key industries, such as auto manufacturers. The truth is probably somewhere in the middle.
The problem is that the agreement is being negotiated under a veil of heavy secrecy. And if rumours that the negotiated sections of the agreement already contain over 1,000 pages prove to be correct, it is certain that the TPP will not give us anything resembling real free trade. Indeed, the Canadian public has little idea about what we are getting ourselves into, or how much the government knew about what it was agreeing to. Based on a leaked chapter of the agreement, it looks as though we just signed up for an entirely new copyright regime, a mere hours after the government passed its own made-in-Canada solution.
To the government’s credit, it is simultaneously pursuing trade deals with the European Union and China. But in these times of global economic uncertainty, we need to see the benefits of trade sooner, rather than later. Free trade leads to higher standards of living, and benefits society through lower prices and increased variety of consumer goods; it forces domestic industries to be more efficient. Fortunately, there is another way to achieve these benefits: The Canadian government could open our borders to the world by unilaterally removing all our trade barriers.
It’s a very sad commentary that the only way the current “pro-business” federal government can even consider scrapping our supply management monopolies is because “our trading partners forced us to”:
If the government were of a mind to get rid of supply management — it swears it is not — that is perhaps the only basis on which it could: our trading partners made us do it. Certainly it would not dream of doing so otherwise. Such is the power of the supply management lobby, especially dairy, that a suffocating consensus has settled over the issue, of a kind rarely seen in a democracy. Consensus is not even the word. Every party strives to outdo the others in the fulsomeness of its support. And not just every party: every member of every party, in every province and at every level of government. It’s quite creepy.
Yet virtually every economist or policy analyst of note agrees that supply management is a disgrace. The primary effect of the quotas — the intended effect — is to drive up the price of these foods, staples of most Canadians’ diets, to two and three times the market price. The burden of these extraordinary price differentials, of course, fall most heavily on the poor, a fact that ought to trouble self-styled “progressives” but evidently doesn’t.
But it isn’t only consumers who pay. Since the quotas are tradeable, the premium over market prices gets capitalized into the value of the quota. The right to a cow’s worth of milk production, for example, runs to about $28,000, meaning a farmer looking to get into the industry faces an initial outlay, for the typical 60-cow farm, in excess of $1.5-million — just for the quota, never mind the cows, the barn and the rest.
The EU is not taking Prime Minister Stephen Harper’s advice gracefully. In fact, they’re not taking it at all:
Maybe it was the 35 C heat here on Mexico’s Baja Peninsula. Maybe it was the pressure of the crisis he faces back home.
Whatever it was, when I asked European Commission president Jose Manuel Barroso here Monday why Canada should risk its financial good name to bail out European banks, Barroso blew a diplomatic gasket.
“We are extremely open and we are engaging our partners but we are certainly not coming here to receive lessons from nobody,” he harrumphed.
That “nobody” is apparently our PM. How dare a mere Canadian politician offer criticism of the European Union, the greatest political achievement of mankind?
In Barroso’s eyes, the fiscal crisis in Europe is not even Europe’s fault. It is the victim in all of this. For that reason, the rest of the world ought bail it out, even though, as Prime Minister Stephen Harper has noted, the so-called euro area of 27 countries is the single largest and wealthiest economic unit in the entire world.
Harper has told Barroso just that, saying that if Canada — or anyone else — is going to kick in to a US$430 billion pool administered by the International Monetary Fund, then Europe is going to have to release the chokehold it has had on the IMF.
And of course, no negotiation with the EU is complete without some hard-to-misunderstand threats from the Eurocrats:
But Barroso wasn’t finished. In the middle of his tirade, he trotted out a thinly veiled threat that a Canada-EU free-trade deal was at risk unless Harper comes to his senses and sends Canadian cash to the continent.
“We are trying to conclude an important agreement on trade with Canada. Why? Because all the other parts of the world look at Europe as a source of possible growth for them. And, in fact, they also have an interest. The sooner the situation is stabilized in Europe, the better for them,” he said.
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