Thursday, 24 November 2016

C, E, F & P

Rachel Stewart is at it again, criticising the dairy industry. And here I am again, basically agreeing with her despite being a dairy farmer. Dairying is indeed a very powerful industry in NZ, to the point where the 'C' word (cow) just was never mentioned by officials commenting on the water contamination in Havelock North.

The power of the dairy industry & Fonterra in particular is sometimes useful. Fonterra is currently helping to repel the mad scientists who want NZ to embrace GMOs for example. It has also been strong on excluding stock from waterways (sheep & beef farmers are waay behind on this) and is ramping up efforts to limit the use of palm kernel as a feed. These are market-driven positions of course.

But you will never catch Fonterra advocating a massive reduction in dairying in NZ, which is Rachel's position.

My own view is that from long-run perspectives on the environment and the economy, the output of NZ's agriculture is less important than the inputs. As an agricultural exporter, NZ has comparative advantages in our climate, our land/population ratio and our isolation. As a country, we have never really thought strategically about how we should exploit these assets, because that way lies communism, we're told. The markets will guide efficient investments, right?

No. They won't. Markets are socially defined constructs. We make the rules that give the incentives that are acted on in the markets. John Key's first pile of do$h was made by the *government* changing the rules.

This is why, while I applaud Rachel's focus on the 'C' word, I think we also need to address the 'E' word, the 'F' word, and the 'P' word, where

E = externalities;
F = fertilisers; and
P = pesticides.

To understand the point, imagine a world in which NZ dairying was massively reduced as Rachel suggests. The replacement land-uses will still damage our environment unless we force farmers to internalise pollution and rewarded them sequestering carbon (E). Done properly, that can lead to highly efficient changes in the way we use fertilisers (F) and pesticides (P).

Tuesday, 1 November 2016

Minority Rule

Nassim Taleb has a great post on how quite small minorities can win over the majority in social matters:
It suffices for an intransigent minority –a certain type of intransigent minorities – to reach a minutely small level, say three or four percent of the total population, for the entire population to have to submit to their preferences. Further, an optical illusion comes with the dominance of the minority: a naive observer would be under the impression that the choices and preferences are those of the majority. 
Taleb's argument is not that minority rule is generally true (a plethora of oppressed minorities know differently), but rather that it can happen if the minority is intransigent, for example for religious reasons (kosher, halal), and the majority is flexible (i.e. we don't mind if its kosher and halal), and it's not much more costly. In that case, food suppliers might well find it most efficient to cater to the minority. Economic rationality, right there.

This could explain why huge food companies like Nestle and Danone are now very publicly moving away from GMOs. There is a significant minority of people who will go out of their way to avoid eating GMOs, whereas only extreme GMO fanatics could object to eating a non-GMO. So in an industrial food system, non-GMO might be the least cost means of meeting market demand.

These food examples arise in competitive markets: when competition is working well, capitalists often do the most efficient thing, even if it is a major change. These commercial outcomes seem basically efficient on the available evidence.

Taleb doesn't discuss policy issues though. It seems to me that inefficient minority rule often occurs in making social/public policy choices. It's almost inevitable really, despite the best efforts of the decision-makers. A tiny minority of officials (ministers and civil servants), are charged with acting as agents on our behalf. We put these few people up as our agents, and then they are pressured by large commercial stakeholders seeking outcomes favourable to them.

Efficient innovation works fairly well in competitive markets but is notably slower in areas where public policy needs to change, such as on climate change, agriculture and drugs. Minority rule has so-far prevailed in these areas, pushing back hard on changes that would hurt shareholders or reduce investor confidence. The lobbyists involved don't pay much attention to the huge economic and social benefits that reform could deliver.

On these policy issues, our well-meaning agents are facing the minority rule problem very directly. The majority interest is clearly in favour of major policy changes on climate change, drugs and agriculture. But Taleb's intransigence/flexibility framework is still in play, only this time intransigence shows up as the relentless pounding of really detailed/sophisticated arguments in submissions from those opposing change, against a large number of much less complete or sophisticated submissions from a diffuse group of well-intentioned, basically correct, but somewhat unprofessional individuals, each of whom has only a small stake in the outcome.

Not many of us can drop $50k on a major submission to an official inquiry about some important policy/legal/regulatory proposal. Ordinary citizens generally can't match that level of sophistication, but for a firm whose profits are threatened it is fully rational conduct. So our agents, the officials and ministers, need to supply the counterweight on our behalf. Most of our agents are smart and well-meaning and basically understand these points. But we still make no real headway on serious policy problems.*

So my conjectures are:

  1. minority rule is pretty common, and Taleb's intransigence/flexibility framework is a useful way of examining when & why it occurs;
  2. minority rule is generally efficient when it arises from competitive markets, because in those cases it reflects individual preferences; and
  3. minority rule is generally inefficient on matters of public policy (because it doesn't reflect individual preferences) and is indeed a major roadblock to beneficial policy reform.
* Economists will recognise these as "regulatory capture" ideas.