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28.01.2011 General posts
 
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  • A comment on the ‘Guide to the CAP reform politics’ by Jean-Marc Boussard

A comment on the ‘Guide to the CAP reform politics’ by Jean-Marc Boussard

Jean-Marc Boussard is a former director of the French agricultural research institute INRA and highly experienced in models of agriculture that incorporate uncertainty. Reacting to the recent ‘Guide to the CAP reform politics’, he raises important questions about what economists really know about agriculture and what kind of recommendations they can give with sufficient certainty. Readers are welcome to contribute short comments or longer responses (1-3 pages) in this debate that will be posted on this blog.

"This paper is an excellent synthesis of the current agricultural economists’ common wisdom regarding the CAP. At the same time, my personal feeling is that there are deep theoretical economic reasons not to agree with this apparently logical reasoning.

The central idea is not new. Since 1992, the target is clear: let markets manage supply and demand of agricultural commodity. Since (unfortunately) there is no market for agriculturally produced public goods, build some sort of artificial market for the latter, in order to let farmers free to decide which of them to produce, and in which quantity, while democratically elected people representatives will decide upon demand through (limited) budgetary expenses.... All successive reforms of the CAP since 1992 aim at this target of “liberalizing agriculture”.

It is a seducing picture. It is inspired by a long standing movement of economists (or pseudo economists) which can be traced back up to the French “physiocrats” ("those who desired the government of Nature") of the 18th century. They thought that the royal bureaucracy was quite inefficient in its efforts to secure food for all in the Kingdom of France, so that leaving merchants free to transport grains from one province to another was the most effective way of achieving the target. But this policy led to various tragedies and hunger riots until the French Revolution came back to much stronger agricultural policies.

Since then, the validity of the liberal approach of agricultural problems has never been confirmed by experience. Quite the contrary, during the 19th and 20th century, many attempt to implement it here and there were followed, under the pressure of circumstances, by motions back to some form of “dirigisme” – thus demonstrating the failure of the concept....
The economic science has never been blind in front of these experimental observations, and provides explanations. They deserve to be recalled.

The “general equilibrium theory – the branch of economic science devoted to these questions – convincingly demonstrates that a pure market economy is “efficient”: it guarantees the best possible use of resources given a specific income distribution, provided some conditions are met. Some of these conditions are rather formal, such as the “concavity and independence of utility function” (and it also implies some other assumptions, such as that envy does not plays any role in human decisions, which remains to be demonstrated). But other conditions are extremely questionable, especially the requirement that the mean value of prices is the only vehicle of information between producers and consumers. Now, this is not true. Even an author as difficult to be suspected of socialism as Ronald Coase observes that, if markets were really functioning as assumed in the general equilibrium theory, there would not be any necessity for firms (which are bureaucratic structures, where information goes through other channels than prices) to exist. Indeed, the lessons to be derived from the modern general equilibrium theory is not that it is a model to be imitated (as the Marxists of the 70’s were persuaded it was) but, on the contrary that it is not feasible in the real world (a conclusion which should have delighted the Marxists, if they had been less dogmatic and more open minded!).

In the case of the agricultural sector, a major obstacle for the application of the liberal ideas is the volatility of price. Because prices are volatile, producers are obliged to take their decision not only on the basis of the mean price, but also of its variability, meaning that the latter also stands as an information conveyor. Of course, the general equilibrium theory investigated this point too. But, up till now, maintaining the optimality in such a risky context is possible only with an “exogenous” risk (a risk the occurrence of which is independent of the behavior of agents, such as a drought or an epizooty) and under the condition of a “complete set of contingency markets” (roughly, it is possible to get insured for any harmful event). Now, contingency markets are far from being complete, and, even more importantly, price risk are rarely exogenous, because they are caused by speculation and expectations, which are not “exogenous”. Because of this situation, price fluctuations in agriculture not only can be very harmful to the final consumer, but also, can create large inefficiencies, with prices never equating marginal costs – as should be the case with an “optimal” liberal equilibrium.

Another agricultural shortcoming of general equilibrium theory as applied to agriculture is the fact that, in case of shortage, the most natural way of matching supply and demand is to let the poor dying. That was the position of such a prominent economist as Robert Thomas Malthus, who saw it, again, as the “law of nature”. Malthus was right: animal populations are regulated that way. But is it not the specificity of homo sapiens to tame Nature instead of being tamed by it?

Now, if markets are not functioning as pictured in elementary textbooks, or if we are not completely satisfied with the consequences of the “law of Nature”, then one must derive conclusions from this fact. That was the rationale behind the US policy set up by President Roosevelt in the mid thirties: disconnect the agriculture from market. Eventually, after the Second World War, the same kind of policy was adopted by all non-communist nations, with outstanding success: remember most experts, in the fifties, were expecting a world famine in the 90’s. The fact that it did not occur is largely a consequence of such policies. Conversely, their abandonment could very well be the cause of a worse famine in the 2020’s, despite all the reasons for that it should not occur...

Another consequence of the studies regarding the general equilibrium theory is more specific to the contemplated “new PAC” aspects regarding the role of markets (or “pseudo-markets”) to manage the environment. Among the conditions necessary for the optimality of market equilibrium to hold is the independency of production processes: one technique should produce one output, and no more. Now, it turns out that in agriculture, marketable commodities and non marketable public goods are “joint products”: you cannot produce wheat without at the same time producing some sort of “wheat landscape”, as well as, probably, some pollution tied with pesticides or fertilizer leakages. But joint products are a notorious difficulty in production economics, because the marginal costs are not uniquely defined anymore, hence the possibility of multiple and inefficient equilibriums.

Finally, a last difficulty arises with the definition of the environmental requirements which are whished by society. We have seen above that it should be defined by “democratically elected people representatives”. Now, it is extremely difficult for an assembly to properly define a consistent preference ordering. A preference ordering is necessary to define a policy: do you prefer starving or eating GMOs? According to the answer, your decisions will not be the same. Of course, the ordering should apply to all feasible combinations of events (for instance, “starving”, “eating GMOs, “applying pesticides”, etc... ). Since different citizens may have different ordering preferences, the necessity of a deliberative body to decide is evident. But will the decisions of the deliberative body be consistent?

The problem was raised by Condorcet in the late 18th century. K.J. Arrow, in 1963, provided an in depth study (social choices and individual values) showing that consistency can never be guaranteed, but that some institutional arrangements make it more likely. Recently, Elinor Ostrom got a Nobel Prize for studying the problem at the scale of small communities. Obviously, it leads to great difficulties, which, combined with the “joint product” problem will end with frustrations, inefficiency, squandering resources, and endless disputes. Ironically, it will be accompanied by the development of a huge bureaucracy, while one of the major advantages of liberalism is to get rid of bureaucracy...

In view of these (and a few other) difficulties, I do not think the liberal proposal should be described as “economically rational” or “recommended by Science” – as it implicitly is. Agricultural economists should be much more modest – and at the same time, more ambitious. They should modestly admit that the theorems on general equilibrium are so demanding that they are in fact inapplicable to the real world. They should also be more ambitious because the real world is so rich that many unknown laws are to be discovered in order to improve the rationality of governments ... My concern is that, by invoking a pseudo science as a truth to support a very discussible political construction, which will predictably lead to failure, agricultural economists discredit themselves, at the point of being illegitimate when they will have something really relevant to say..."