Here are two additional sectionettes from my ”Notices of the AMS” book review entitled ”Economic and Common Sense” on Steven Landsburg’s book “More Sex is Safe Sex – the unconventional wisdom of economics”. Both sectionettes deal with Government intervention in economics. The first is about fertilizer subsidies in Malawi. This was a move made by Malawi’s government against the advice of the world bank and against standard market economic teachings. Judging from the outcomes of the last couple of years it was a successful move. The second is an anecdote about administrative measures the US government took against inflation in the early 1970s, as told by Bob Aumann. I do not know if these measures were successful.
Current events, the financial crisis and the attempted bailout make the topics of these little sectionettes of some relevance. (And so is the issue of “what do firms want” and the larger issue of “economics and common sense”.) I do not think that the dramatic and sad current financial crisis by itself is definite evidence to support more liberal forms of market economy (which I tend to favour) rather than more conservative versions. (Or the other way around.) In other words, I tend to think that a crisis of this nature can occur (and perhaps cannot even be avoided) under both economic systems. The issue of governmental intervention is also far from being clear. The case for subsidies for fertilizers in a hunger-stricken country seems much clearer than (humongous) subsidies for financial institutions; both in terms of effectiveness and in terms of basic values of fairness and human dignity.
The case of Malawi
… economists do make definite and far-reaching suggestions on how to run things. A December 2007 article in the NYT authored by Celia W. Dugger entitled “Ending famine, simply by ignoring experts,” describes the story of Malawi which, against the economic advice of the World Bank, gave subsidies to fertilizers and brought long famine in the country to an end. The logic of the World Bank behind two decades of advice against fertilizer subsidies (and against using aid money for fertilizer subsidies) is somewhat related to the separation between business and charity which we discussed before.
Here are some quotations from the NYT article: “Over the past 20 years, the World Bank and some rich nations Malawi depends on for aid have periodically pressed this small, landlocked country to adhere to free market policies and cut back or eliminate fertilizer subsidies, even as the United States and Europe extensively subsidized their own farmers. But after the 2005 harvest, the worst in a decade, Bingu wa Mutharika, Malawi’s newly elected president, decided to follow what the West practiced, not what it preached. Stung by the humiliation of pleading for charity, he led the way to reinstating and deepening fertilizer subsidies despite a skeptical reception from the United States and Britain. … This year, a nation that has perennially extended a begging bowl to the world is instead feeding its hungry neighbors. It is selling more corn to the World Food Program of the United Nations than any other country in southern Africa and is exporting hundreds of thousands of tons of corn to Zimbabwe.”
So does this story mean that economists’ advice is worthless? Not quite. In many cases, following economists’ advice was for the better, and there are probably even more cases where defying economists’ advice had devastating outcomes. Economic theory profoundly contributes to our ability to discuss and understand our economic reality, and has led to useful insights and sound advice. The role of mathematics and statistics in modern economic theory can make us mathematicians proud. (But not blind to the shortcomings of economists and economic theory.) We should take economists’ advice seriously but be aware of errors and even certain systematic biases.
A more recent article on Malawi
Before moving on to the 1970 US inflation, let me mention a more recent article in The Economist entitled “Malawi – can it feed itself?” The author acknowledges the success of subsidies for fertilizers for the harvest in the last three years, but points out some drawbacks: Farmers who could afford to pay full prizes to fertilizers also got the reduced prize; in some cases fertilizers were smuggled from Malawi to neighboring countries; and some fertilizer companies in Malawi suffered from the move. For these reasons, and an additional reason quoted below, the author advises caution:
“… Which is why experts promoting Malawi as an advertisement for a renewed effort to bring about an African green revolution should do so with care. To be sure, the subsidies have been a massive improvement on the panicky food buying of 2002 and 2005; they have enabled poor farmers to plant their crops more cheaply; they have given them more to eat; and they have avoided the perverse outcome, in some other African countries, where farmers are reducing the amount of land they are planting at a time of high food prices because they cannot afford fertilisers.
Yet more efficient, longer-term investments have worked elsewhere. Kenya stopped fertiliser donations in the early 1990s and binned its import licence and ceiling price on the commodity, yet private depots of it have grown and farmers have bought more fertiliser as transport has got cheaper. A season or two of bad weather could recast Malawi’s policy as a heavy fiscal burden which the country has to carry because its farmers, who make up most of the country’s voters, now view big subsidies as a right rather than a last resort.”
(In my opinion, the analysis, views and tone of this article are very disappointing.)
And here is the (somewhat expanded) sectionette about Bob Aumann and the Treasury Secretary John Connelly.
Fighting US inflation in the 1970s.
In the early 70s Robert J. Aumann , a Hebrew University of Jerusalem mathematician, a recent Nobel laureate in economics, and, at the time, a visiting professor at UC Berkeley, was rushed to Washington D.C. to a meeting convened by John Connelly, the US Treasury Secretary. Aumann received a call from Washingtone at 5 AM and when he heard it was from the Treasury Ministry in Washington he did not believe it and immediately hung up. But then the phone rang again and the voice on the other end insisted that Aumann cancell his classes and come to Washington “the first-class plane ticket will be waiting at the airport,” the voice promised.
The meeting began and it dealt with the high US inflation at that time. Several prominent economists that Aumann knew by name participated. At some point duringthe meeting the secretary’s assistant asked Aumann: “Who are you?” Aumann suggested that they will discuss it outside, and when he told the assistant who he was, the assistant’s reaction was: “Ohh, this is why Ulman is not here.” As it turned out it was a mistake. The intention was to invite economist Lloyd Ulman. Aumann told the assistant that since he had come all the way from Berkeley and the meeting was of some interest to him he would be interested in staying. “What is your field?” asked the assistant and Aumann replied “general equilibrium theory”. The assistant entered the room, came back after a short while and said: ”The secretary would like you very much to attend, he assured me that general equilibrium is precisely what the country needs.”
The meeting took several hours and to Aumann’s surprise, all the other participants in the meeting recommended strong administrative measures to fight inflation. When Aumann noted that these “common-sense” recommendations run against “economic logic,” as explained in textbooks written by the other prominent economists in the discussion, his view was dismissed. These recommendations were adopted and later implemented.