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How Not to Fall for the Sunk-Cost Fallacy – Article by T. Norman Van Cott

How Not to Fall for the Sunk-Cost Fallacy – Article by T. Norman Van Cott

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The New Renaissance HatT. Norman Van Cott
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My wife and I frequently vacation near Asheville, North Carolina. Perhaps it’s the economist in me, but an interesting spot that I visit is the Western North Carolina Farmers’ Market. The WNC market is large (36 acres) with vendors selling every seasonal fruit and vegetable item you can imagine. Georgia and South Carolina peaches are always a highlight. Therein lies the basis for a teachable moment in economics.

Chasing Peaches

While returning to Indiana one year, we decided to stop at the market to buy peaches for ourselves and friends. Going west on I-40, we exited for the market. Turning left, we took the bridge over I-40 toward our intended exit. Since the on-ramp for I-40 east and the entrance to the market are not that far apart, we accidentally missed our exit. That was about a 6 mile mistake for me. Unavoidable costs should not figure in the decision about whether to pursue peaches.

By the time we had gotten back to the exit for the WNC market, the question arose whether we should (try again to) buy peaches. I pointed out to my wife that had we known the first time that getting to the peaches was going to entail an additional 6 or so miles of driving, we might not have ever tried to stop.

However, the gasoline, traffic delay and self-incriminating frustration associated with the 6 mile mistake were what economists call “sunk costs.” That is, there was no way to avoid them at that point. Being unavoidable means they should not figure in the decision about whether to pursue peaches. The only costs that matter at that point are the costs of exiting a second time, not both times. So we exited, bought peaches, and continued on our way.   

In retrospect, the net benefits of the peaches were less than what initially motivated us to try to buy them. The net benefits could actually have been negative, but had we not exited the second time, the loss would have been greater!

Sunken Soybeans

Let’s consider another example. Living in rural Indiana, I’ve heard farmers complain at harvest time about how the price of corn and soybeans has fallen so much during the summer. Seeing as they’re going to lose money for the year, “why even harvest” is the lament of some. This is bad thinking. At harvest time many of the costs associated with their crops are “sunk.” That is, the cost of the seed, pesticides, herbicides, fuel, etc. associated with getting to harvest time has already been incurred. Nothing can be done to get that investment back so it should be ignored. The only costs that matter at harvest time are the costs of harvesting itself. The only issue is whether lower prices will cover these costs.

When it comes to tax time those costs, previously labeled sunk at harvest time, suddenly become important in figuring farmers’ taxable income. The accountant is going to want to know them. Moreover, the IRS is going to be interested in their accuracy.

The following spring yields yet another issue. Those seeds, pesticides, herbicides, and fuel costs that didn’t matter last fall now matter, and not just for tax reasons. With planting not yet started, these costs are no longer sunk because they have yet to be incurred. If expectations are that the coming fall is to be a repeat of the previous fall, the farmers will be planting something different than corn and soybeans in the coming spring.

Sunk Costs Might Cost You a Championship

One final example. As a sports fan I have long noted the gargantuan salaries with multi-year, guaranteed contracts for professional baseball and basketball players. What’s interesting is the responses of team owners and general managers when “their” players perform below expectations. More often than not the owner or general managers will say something like “this guy’s contract means we’re paying him umpteen thousands of dollars for this season, so we have to play him to get our investment back.” Another case of bad thinking. Don’t put a bad player in the game just because you paid for them.

The player’s salary for the duration of his contract is a sunk cost. It has to be paid regardless of whether the player plays; it therefore shouldn’t figure in the decision about how much play time needs to be utilized from the player. What matters at this point is whether you can find somebody who can play better. If your favorite team(s) have owners and general managers who think sunk costs matter, I recommend you switch your allegiances.

I’ll admit that ignoring sunk costs is difficult to do. It seems like people have an innate desire to include them in their business and household decisions. But doing so can result in less than optimal decisions, which can include not being able to enjoy those large, juicy Georgia and South Carolina peaches.

T. Norman Van Cott; Economics
T. Norman Van Cott; Economics
T. Norman Van Cott

T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott’s current research is the economics of constitutions.

This article was originally published on FEE.org. Read the original article.

Norman Borlaug Saved a Billion Lives – Article by Bradley Doucet

Norman Borlaug Saved a Billion Lives – Article by Bradley Doucet

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The New Renaissance Hat
Bradley Doucet
April 13, 2014
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Wheat
A statue honouring Norman Borlaug was unveiled in DC earlier this week on what would have been the celebrated biologist’s 100th birthday. Borlaug’s work developing and promoting high-yield crop varieties is credited with averting the mass famines that were predicted in the 1960s and saving as many as a billion people in the developing world from starving to death. Yes, that’s “billion” with a “b.” In 1970, he was awarded the Nobel Peace Prize for his history-altering humanitarian efforts.
Born in Iowa in 1914, Borlaug lived through the Dust Bowl, whose effects he noticed were less severe where newer, high-yield farming methods were in use. In the 1940s, he went to work for the Rockefeller Foundation in Mexico, teaching Mexican farmers the latest agricultural techniques and leading a research effort to perfect a high-yield, disease-resistant strain of wheat. In the 1960s, he moved to Pakistan and India, where he also successfully promoted the use of modern farming and high-yield wheat.

Yet this Green Revolution, as it came to be called, met with serious resistance from environmentalists, who to this day bemoan the need for inorganic fertilizers and industrial irrigation. Many greens promote the preservation of, and indeed a return to, traditional subsistence farming, even though it requires more land to grow an equivalent amount of food. Realistically, the choice humanity faces is between a) modern farming, b) razing our forests to make room for traditional farming, or c) mass starvation. And actually, without modern farming methods, razing our forests probably would not be enough to prevent mass starvation.

Thanks in part to the well-meaning but ill-conceived opposition of greens, the Green Revolution has barely begun to reach sub-Saharan Africa, the one part of the world where dire poverty is not hastily retreating. Thanks to too many people romanticizing traditional farming and demonizing modern agriculture, millions continue to suffer and die needlessly. As Borlaug himself once said, “Some of the environmental lobbyists of the Western nations are the salt of the earth, but many of them are elitists. They’ve never experienced the physical sensation of hunger. They do their lobbying from comfortable office suites in Washington or Brussels. If they lived just one month amid the misery of the developing world, as I have for fifty years, they’d be crying out for tractors and fertilizer and irrigation canals and be outraged that fashionable elitists back home were trying to deny them these things.”

Penn and Teller called Norman Borlaug “the greatest human that ever existed.” On his 100th birthday, let’s honour his unparalleled achievement by embracing agricultural technology and moving beyond simplistic and misleading fear-mongering. Let’s try to complete the glorious Green Revolution and spread prosperity across the globe—and save the world’s forests in the bargain.

Bradley Doucet is Le Québécois Libre‘s English Editor and the author of the blog Spark This: Musings on Reason, Liberty, and Joy. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also writes for The New Individualist, an Objectivist magazine published by The Atlas Society, and sings.
What Does Greenpeace Have Against Golden Rice? – Article by Bradley Doucet

What Does Greenpeace Have Against Golden Rice? – Article by Bradley Doucet

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The New Renaissance Hat
Bradley Doucet
November 17, 2013
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Imagine if you stumbled across a naturally-occurring variety of rice that was rich in beta-carotene, a precursor to vitamin A found in carrots, pumpkins, and sweet potatoes. A lack of vitamin A in the body leads to an increased risk of blindness and increased susceptibility to disease, which can in turn lead to premature death in small children. If you could get people in poor rice-based societies to substitute this newfound variety of rice for the kind of rice they normally eat, then you could help them dramatically improve their health.Well, no such naturally-occurring variety of rice exists on Earth. Fortunately, though, some very intelligent human beings have created such a variety through genetic modification or genetic engineering (GE). It is called “Golden Rice” because of its golden colour. But far from celebrating this life-saving invention, groups like Greenpeace are fighting to stop it from being accepted and implemented. My first reaction to this was that the good people at Greenpeace and similar groups are out of their gourds. But skeptical though I was, I wanted to give them a chance to change my mind, to prove me wrong. What I found was not very impressive. Here are some of the reasons the organization gives [1] for claiming that “Golden Rice is environmentally irresponsible, poses risks to human health, and could compromise food, nutrition and financial security.” 1) “The tens of millions of dollars invested in Golden Rice would have been better spent on VAD [vitamin A deficiency] solutions that are already available and working, such as food supplements, food fortification and home gardening.” Well, maybe yes, maybe no. But who is to decide where money is better spent? I personally would rather have lots of people trying lots of different things. The best solutions will win out in the marketplace if people are free to choose. Oh, and Golden Rice is a form of food fortification. It just takes place at the genetic level.

2) “If cross-pollination or seed mix-up causes Golden Rice contamination, it could prove difficult, if not impossible to eradicate.” The use of words like ‘contamination’ and ‘eradicate’ are clearly meant to poison the debate, to get people to equate Golden Rice with dangerous diseases and harmful radiation. Rhetoric aside, is there any reason to expect more cross-pollination or seed mix-ups with Golden Rice than with other varieties? Are we afraid that basmati might cross-pollinate jasmine rice?

3) “If any hazardous, unexpected effects would develop from Golden Rice, the GE contamination would affect countries where rice is an essential staple and put people and food security at risk.” The reason they have to imagine hypothetical hazardous effects is that as far as anyone can tell, Golden Rice has no actual hazardous effects. It’s safe. It’s been tested. In the absence of any indication that it is harmful, we should go ahead and consume it. Or at least let other people consume it if we ourselves are filled with irrational fear.

4) “It is irresponsible to impose Golden Rice on people if it goes against their religious beliefs, cultural heritage and sense of identity, or simply because they do not want it.” Uh, no argument here. It’s not just irresponsible, it’s completely immoral. But who, exactly, is talking about imposing anything on anyone? Groups like Greenpeace are the ones that want to prevent people from being able to choose Golden Rice. I’m unaware of anyone who wants to force people to eat it, or farmers to grow it.

5) “Golden Rice does not address the underlying causes of VAD, which are mainly poverty and lack of access to a healthy and varied diet.” So what? An artificial knee doesn’t address the underlying causes of bone density loss, but it sure makes life better for people whose natural knees are worn out. Getting at underlying causes is great, and I am certainly all for the economic freedom that will help the poor escape poverty. But in the meantime, treating some of the more dire symptoms of poverty also seems like a good idea.

6) “[T]he single-crop approach of Golden Rice could make malnutrition worse because it encourages a diet based solely on rice, rather than increasing access to a diverse diet of fruits and vegetables, considered crucial to combatting VAD and other nutrient deficiencies.” Golden Rice is a food, not an approach. The sooner the people in poor rice-based societies can get access to a diverse diet with lots of fruits and vegetables, the better, but again, in the meantime, Golden Rice can help. To forbid this option while holding out for a better one is perverse.

7) “Despite all the hype surrounding Golden Rice, it still remains unproven whether daily consumption of Golden Rice would actually improve the vitamin A status of people who are deficient.” This is patently false. Scientific studies have shown that the beta-carotene contained in Golden Rice is “highly available and easily taken up into the bloodstream by the human digestive system.” There is no reason to believe that Golden Rice would not improve the vitamin A status of people who are deficient, and every reason to believe that it would.

Since the reasons Greenpeace gives for opposing Golden Rice are so transparently inadequate, I have to wonder what the real, unstated reasons are. I can’t help but think that the people in charge of this campaign are unscientifically opposed to the transformative technology of genetic engineering itself, despite all of its potential to improve human lives. It really seems to me that they are motivated by an ecological religion whose goal is not to make human life better, but to preserve the non-human natural world for its own sake, and to stop us from altering it in any way unless it is to return it to a previous state before humans started altering it, which was somehow a better state despite being less suited to human survival and flourishing.

I’m all for reducing pollution and dealing with other environmental problems to the extent that doing so actually improves the human condition. Prioritizing the environment to the detriment of human well-being, though, I can’t get behind. And preventing the deployment of beneficial technologies that we have no reason to think would have any harmful effects on people or the environment? That is simply indefensible. Greenpeace should cease its harmful campaign against Golden Rice and get behind this life-saving technology.

1. Greenpeace refers to Golden Rice as “GE ‘Golden’ rice,” which I find clunky. For the sake of readability, I have replaced every instance of “GE ‘Golden’ rice” with “Golden Rice” in quotations from the Greenpeace website.

Bradley Doucet is Le Québécois Libre‘s English Editor and the author of the blog Spark This: Musings on Reason, Liberty, and Joy. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also writes for The New Individualist, an Objectivist magazine published by The Atlas Society, and sings.
Against Monsanto, For GMOs – Video by G. Stolyarov II

Against Monsanto, For GMOs – Video by G. Stolyarov II

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The depredations of the multinational agricultural corporation Monsanto are rightly condemned by many. But Mr. Stolyarov points out that arguments against Monsanto’s misbehavior are not valid arguments against genetically modified organisms (GMOs) as a whole.

References

– “Against Monsanto, For GMOs” – Essay by G. Stolyarov II
– “Monsanto – Legal actions and controversies” – Wikipedia
– “Copyright Term Extension Act” – Wikipedia
– “Electronic Arts discontinues Online Pass, a controversial form of video game DRM” – Sean Hollister – The Verge – May 15, 2013
– “Extinction” – Wikipedia

Against Monsanto, For GMOs – Article by G. Stolyarov II

Against Monsanto, For GMOs – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
June 9, 2013
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                The depredations of the multinational agricultural corporation Monsanto are rightly condemned by many. Monsanto is a prominent example of a crony corporation – a company that bolsters its market dominance not through honest competition and innovation, but through the persistent use of the political and legal system to enforce its preferences against its competitors and customers. Most outrageous is Monsanto’s stretching of patents beyond all conceivable limits – attempting to patent genes and life forms and to forcibly destroy the crops of farmers who replant seeds from crops originally obtained from Monsanto.

                Yet because Monsanto is one of the world’s leading producers of genetically modified crops, campaigners who oppose all genetically modified organisms (GMOs) often use Monsanto as the poster child for the problems with GMOs as a whole. The March Against Monsanto, which took place in cities worldwide in late May of 2013, is the most recent prominent example of this conflation. The blanket condemnation of GMOs because of Monsanto’s misbehavior is deeply fallacious. The policy of a particular company does not serve to discredit an entire class of products, just because that company produces those products – even if it could be granted that the company’s actions result in its own products being more harmful than they would otherwise be.

                GMOs, in conventional usage, are any life forms which have been altered through techniques more advanced than the kind of selective breeding which has existed for millennia. In fact, the only material distinction between genetic engineering and selective breeding is in the degree to which the procedure is targeted toward specific features of an organism. Whereas selective breeding is largely based on observation of the organism’s phenotype, genetic engineering relies on more precise manipulation of the organism’s DNA. Because of its ability to more closely focus on specific desirable or undesirable attributes, genetic engineering is less subject to unintended consequences than a solely macroscopic approach. Issues of a particular company’s abuse of the political system and its attempts to render the patent system ever more draconian do not constitute an argument against GMOs or the techniques used to create them.

                Consider that Monsanto’s behavior is not unique; similar depredations are found throughout the status quo of crony corporatism, where many large firms thrive not on the basis of merit, but on the basis of political pull and institutionalized coercion. Walt Disney Corporation has made similar outrageous (and successful) attempts to extend the intellectual-property system solely for its own benefit. The 1998 Copyright Term Extension Act was primarily motivated by Disney’s lobbying to prevent the character of Mickey Mouse from entering the public domain. Yet are all films, and all animated characters, evil or wrong because of Disney’s manipulation of the legal system instead of competing fairly and honestly on the market? Surely, to condemn films on the basis of Disney’s behavior would be absurd.

                Consider, likewise, Apple Corporation, which has attempted to sue its competitors’ products out of existence and to patent the rectangle with rounded corners – a geometric shape which is no less basic an idea in mathematics than a trapezoid or an octagon. Are all smartphones, tablet computers, MP3 players, and online music services – including those of Apple’s competitors – wrong and evil solely because of Apple’s unethical use of the legal system to squelch competition? Surely not! EA Games, until May 2013, embedded crushingly restrictive digital-rights management (DRM) into its products, requiring a continuous Internet connection (and de facto continual monitoring of the user by EA) for some games to be playable at all. Are all computer games and video games evil and wrong because of EA’s intrusive anti-consumer practices? Should they all be banned in favor of only those games that use pre-1950s-era technology – e.g., board games and other table-top games? If the reader does not support the wholesale abolition, or even the limitation, of films, consumer electronics, and games as a result of the misbehavior of prominent makers of these products, then what rationale can there possibly be for viewing GMOs differently?

                Indeed, the loathing of all GMOs stems from a more fundamental fallacy, for which any criticism of Monsanto only provides convenient cover. That fallacy is the assumption that “the natural” – i.e., anything not affected by human technology, or, more realistically, human technology of sufficiently recent origin – is somehow optimal for human purposes or simply for its own sake. While it is logically conceivable that some genetic modifications to organisms could render them more harmful than they would otherwise be (though there has never been any evidence of such harms arising despite the trillions of servings of genetically modified foods consumed to date), the condemnation of all genetic modifications using techniques from the last 60 years is far more sweeping than this. Such condemnation is not and cannot be scientific; rather, it is an outgrowth of the indiscriminate anti-technology agenda of the anti-GMO campaigners. A scientific approach, based on experimentation, empirical observation, and the immense knowledge thus far amassed regarding chemistry and biology, might conceivably give rise to a sophisticated classification of GMOs based on gradations of safety, safe uses, unsafe uses, and possible yet-unknown risks. The anti-GMO campaigners’ approach, on the other hand, can simply be summarized as “Nature good – human technology bad” – not scientific or discerning at all.

                The reverence for purportedly unaltered “nature” completely ignores the vicious, cruel, appallingly wasteful (not even to mention suboptimal) conditions of any environment untouched by human influence. After all, 99.9% of all species that ever existed are extinct – the vast majority from causes that arose long before human beings evolved. The plants and animals that primitive hunter-gatherers consumed did not evolve with the intention of providing optimal nutrition for man; they simply happened to be around, attainable for humans, and nutritious enough that humans did not die right away after consuming them – and some humans (the ones that were not poisoned, or killed hunting, or murdered by their fellow men) managed to survive to reproductive age by eating these “natural” foods. Just because the primitive “paleo” diet of our ancestors enabled them to survive long enough to trigger the chain of events that led to us, does not render their lives, or their diets, ideal for emulation in every aspect. We can do better. We must do better – if protection of large numbers of human beings from famine, drought, pests, and prohibitive costs of food is to be considered a moral priority in the least. By depriving human beings of the increased abundance, resilience, and nutritional content that only the genetic modification of foods can provide, anti-GMO campaigners would sentence millions – perhaps billions – of humans to the miserable subsistence conditions and tragically early deaths of their primeval forebears, of whom the Earth could support only a few million without human agricultural interventions.

                We do not need to like Monsanto in order to embrace the life-saving, life-enhancing potential of GMOs. We need to consider the technology involved in GMOs on its own terms, imagining how we would view it if it could be delivered by economic arrangements we would prefer. As a libertarian individualist, I advocate for a world in which GMOs could be produced by thousands of competing firms, each fairly trying to win the business of consumers through the creation of superior products which add value to people’s lives. If you are justifiably concerned about the practices of Monsanto, consider working toward a world like that, instead of a world where the promise of GMOs is denied to the billions who currently owe their very existences to human technology and ingenuity.

Illiberal Belief #9: It’s a Small World – Article by Bradley Doucet

Illiberal Belief #9: It’s a Small World – Article by Bradley Doucet

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The New Renaissance Hat
Bradley Doucet
January 11, 2013
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We have only one planet, it’s true, and there are ever more of us crowding onto its surface. With six billion humans and counting, surely we must be running out of land—if not on which to live, then on which to grow the enormous amounts of food required to feed us all. As evidence, we are reminded of the large swaths of the planet mired in poverty, a tragedy that is used to justify any number of illiberal policies, from Maoist one-child population control laws to Stalinist food rationing meant to stretch out our meagre and dwindling resources.

Thankfully, these fears are unjustified. The advent and improvement of air travel and modern communications technologies have certainly made the planet seem smaller—we can zip to the Far East in a matter of hours, or send electronic documents anywhere in the world in a matter of seconds—but it’s still the same gigantic ball of rock it has always been. The Earth is really staggeringly large; too large, in fact, to grasp intuitively. Of course, six billion is also too large a number to grasp intuitively. Only mathematics can help us understand if we are truly running out of space.

Our planet has a surface area of approximately 510 million square kilometres, of which just under 30% (149 million sq. km) is land area. How many people can the Earth support? According to Scientific American, “With current farming techniques, a little less than half an acre can grow enough food to feed one person.” One square kilometre contains roughly 247 acres, and so can feed approximately 500 people. If all of the land on Earth were suitable for food production, our planet could therefore support a population of some 73.5 billion people (149 million times 500). Of course, not all land is suitable for agriculture, but thankfully we don’t need it to be. Our current population of six billion could be fed on just 12 million square kilometres of agricultural land, an area slightly larger than the United States. Even at nine billion people (the downwardly-revised population peak we are set to hit by 2050)(1), we would only need 18 million square kilometres, representing just 12% of the land on Earth, or an area about the size of Russia. Furthermore, this figure assumes unrealistically that no further improvements in farming techniques will be invented over the next five decades.

1. Although it is true that there are more of us than ever, the 2004 UN projections show that population growth is slowing and total population is on course to top out at around nine billion by mid-century, far fewer than previously thought.
Bradley Doucet is Le Quebecois Libré‘s English Editor. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also writes for The New Individualist, an Objectivist magazine published by The Atlas Society, and sings.
Organic Shmorganic – Article by Charles N. Steele

Organic Shmorganic – Article by Charles N. Steele

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The New Renaissance Hat
Charles N. Steele
October 6, 2012
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A study by researchers from Stanford University of “organic” food was unable to find any health benefits, prompting a rant from NYT’s Roger Cohen against organic food.  Finally, finally, finally!  Cohen on track, rather than off the rails!Many years ago I heard Bruce Ames, a cancer researcher and head of College of Public Health at Stanford give a lecture in which he discredited the health claims of the “organic” movement and warned that it would raise costs without returning corresponding benefits.  His main fear was that this would lead people to eat fewer vegetables rather than more.  The second most important thing people can do to avoid cancer is eat more vegetables, he explained (stopping smoking is  number 1).  He based this in part on his own research with with carcinogenic properties of manmade pesticides and naturally occurring ones; the naturally occurring ones were every bit as bad and as prevalent in vegetables, and neither posed a meaningful risk in his research.  (Obviously misuse of pesticides could be a different matter.)  The new Stanford study was unable to find the superior health benefits attributed to “organic” foods, corroborating Ames’ argument.

I’ve also heard agriculture experts discuss the alleged environmental harmfulness of “non-organic” agriculture, something not covered in the Stanford study.  Again, the alleged environmental benefits of “organic” are mostly hype, and in some cases it can be worse.  Chemical fertilizers in particular deserve none of the slander that’s directed at them.  (Again, use them incorrectly and you can poison things… but that’s also true with “organic”.)

I’ve been putting “organic” in quotation marks, because the word itself always meant something different: it refers to carbon-based compounds.  That is, that’s what it meant until the word was grabbed by – let’s be honest – hippie food faddists.  “Organic” was changed to mean “simple, healthful, close to ‘nature,'” (another doubtful word), all utterly unsubstantiated claims.  Next yuppies and similar types jumped on the bandwagon, because it made them feel good about themselves “saving the planet and eating healthier and sidestepping ‘corporate agriculture,’ etc.”

This is a great example of the fundamental role of subjective utility in economic value.  Belief in “organic” is essentially religious faith, unfounded in evidence.  What makes “organic” more valuable is consumer demand, based on perceived, imagined characteristics, not some physical measurable properties.  That’s why big food corporations got into the act. They were slow to enter, and when they did, they were entirely responding to demand.  They would prefer not to produce this way, because it is costlier, but so long as consumers demand it, you give them what they want, or you lose market share.  There’s quite an irony here. Anti-capitalists frequently accuse “big business” of manufacturing consumer preferences in order to manipulate people and reap profits, yet the whole “organic” movement was manufactured by a motley collection of  anticapitalist  mystics from both left and right.

I heard NPR cover this story, and the  reporter concluded that the whole “organic” thing must have been a conspiracy by “big agriculture” (another dubious concept) to hoodwink us and get our money… a completely backwards argument, as most farmers, big or little, would prefer less costly, easier, more productive modern agricultural methods.  It’s quite common to be producing “organic” crops, meat, etc. and have some small step go wrong and have the “organic” label be lost – and even though the stuff is perfectly good, it now can’t be sold for enough to cover costs.  I’ve had farmers tell me about this, and have read of many more examples.

“Organic shmorganic” indeed!

Dr. Charles N. Steele is the Herman and Suzanne Dettwiler Chair in Economics and Associate Professor at Hillsdale College in Hillsdale, Michigan. His research interests include economics of transition and institutional change, economics of uncertainty, and health economics.  He received his Ph.D. from New York University in 1997, and has subsequently taught economics at the graduate and undergraduate levels in China, the Russian Federation, Ukraine, and the United States.  He has also worked as a private consultant in insurance design and review.

Dr. Steele also maintains a blog, Unforeseen Contingencies.

Droughts, Famines, and Markets – Article by Steven Horwitz

Droughts, Famines, and Markets – Article by Steven Horwitz

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The New Renaissance Hat
Steven Horwitz
August 28, 2012
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As I write, many high school students all over the United States, my daughter included, are reading John Steinbeck’s The Grapes of Wrath, with its portrayal of the 1930s Dust Bowl, in preparation for literature courses in the fall.  Steinbeck’s fictional account vividly captures the suffering endured by many Americans due to the severe drought, poor farming techniques, and ensuing dust storms in Texas, Oklahoma, and other states.

With the U.S. Midwest stricken by drought this summer, it’s worth considering why the crop failures there have not led to food shortages and other serious problems.

It’s also worth considering why famines, which occurred with regularity for most of human history, have all but disappeared in the last 100 years or so.

The answer is: the market and globalization.  This combination, for reasons I explore below, enables humanity to be far less at the mercy of the weather and provides us with ways to ensure that food gets to where it needs to go.

Markets help us avoid famines in two ways.  First, the innovation made possible by the search for profit and the relative freedom of markets in the western world have increased agricultural productivity by an order of magnitude.  We feed a planet of almost 7 billion reasonably well–although not as well as we might like–and we do it with a decreasing number of people and acres of land.  The United States can feed its own population and still export grain to the rest of the world–even as farmers are forced to divert corn to boondoggles like ethanol.  We are at less risk for famines simply because we can produce more food with fewer resources, and even if one large crop fails, we have more large crops elsewhere to make up the loss.

Signals

The second way markets help is that price and profit signals inform producers where foodstuffs are in short supply and simultaneously provide incentives to get the food there.  Prices are an incentive wrapped in knowledge, enabling them to serve as traffic signals to ensure that no one goes without. True, food may be more expensive during a drought, but that is far better than no food at all, as was often the case in human history.

We see these processes at work right now.  The drought in the middle of America destroyed a good deal of the corn crop in Indiana and Iowa.  Meanwhile, farmers in places like Washington state and Virginia have largely escaped unscathed.  The short supply in the Midwest drives up prices and signals to producers elsewhere that profit opportunities exist in those places; the incentive associated with that signal leads farmers to get their crops to where the demand is.  Yes, the higher prices mean that folks will be a little worse off, but corn is in fact more scarce, so those higher prices are not the result of farmers exploiting the drought, but rather a reflection of genuinely shorter supply.

The price signals might also cause corn producers to divert some corn from other uses to food for humans. Such substitution is only possible because market prices provide the needed knowledge and incentives. In a world without markets, producers could not get information so easily and effectively; nor would they have the incentive to respond appropriately. More famines would result.

Globalization

Finally, globalization has nearly eradicated famines.  All the market processes I have identified are even more effective when the area of trade expands.  When commodity markets are global, countries facing droughts and bad harvests have a whole world from which they can attract new supplies.  The United States is not limited to tapping farmers in Washington and Virginia. It can attract corn from around the world.  In fact, Canadian farmers have had a much better year and are already seeing higher prices for their exports to the United States.  Canadians will pay a bit more for their grains as a result, but prices in the United States will be significantly lower than they would be without the Canadian imports.

As Pierre Desrochers and Hiroko Shimizu point out in their wonderful new book, The Locavore’s Dilemma, the belief that making food production and distribution more local and less global will increase “food security” has it exactly backward.  The most important thing we can do to ensure a secure food supply in the face of droughts and other threats to the harvest is to allow markets to work freely and extend that freedom globally.

We cannot control the weather, so the threat of drought is always present. But we can unleash the market and further globalize food production to avoid the human disaster of famines when harvests go bad.  The conquering of famine is one of the great human accomplishments of the last century.  That no one is starving because of the drought this summer is evidence of that victory.  Let’s not let the forces of locavorism reverse those gains.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.