This post ties together a number of themes that I have been harping upon
for the past few years. First, from Greg Mankiw’s blog:
wrong with the efficient scale?
Barack Obama vowed on Tuesday to cut billions of dollars from wasteful
government programs….An obvious example, Obama said, were reports of
crop subsidies to farmers who make more than $2.5 million per year.
Like President-elect Obama (but unlike candidate Obama), I am all for
getting rid of farm subsidies. But why would you want to use taxpayer
funds to encourage large, efficient, profitable farms to break up into
smaller, less efficient, less profitable farms? Isn’t that precisely
what you do if you maintain subsidies only for small farmers?
As all ec 10 students know, competitive markets push firms toward the
efficient scale, defined as the level of production that minimizes
average total cost. The low costs are in turn passed on to consumers in
the form of low prices. These conclusions no longer hold true, however,
if government policy tilts the playing field by rewarding small scale.
As quoted on Some
“Ignorance more frequently begets confidence than
Chas. Darwin, The Descent of Man
Then we have this:
erosion threatens land of 100m Chinese, survey finds
Crops and water supplies are suffering
serious damage as earth is washed and blown away
Tania Branigan in Beijing
guardian.co.uk, Friday November 21 2008
discharge into the Bo Hai Bay and western Yellow Sea colouring the
surface waters caramel in this satellite view of China. Light brown
hues show bare land, darker browns areas of vegetation. Photograph:
Almost 100 million people in south-west China will lose the land they
live on within 35 years if soil erosion continues at its current rate,
a nationwide survey has found.
Crops and water
supplies are suffering serious damage as earth is washed and blown away
across a third of the country, according to the largest-scale study for
Harvests in the north-east, known as China’s
breadbasket, will fall 40% within half a century on current trends,
even as the 1.3 billion population continues to grow.
Dr. Mankiw is a smart man, highly respected. I’m sure he’s a
professor of Economics. In light of the China post, it is
see how one would want to do everything possible to promote efficiency
of farming. After all, everyone needs food. And
is always good, right?
The answer, obviously, is: it depends. As
a general rule, whenever someone uses the term “efficiency” in an
argument, it is important to ask what kind of
efficiency is meant.
Efficiency is always a quotient of two numbers: the number of units of
good stuff, divided by the number of units of resource expended to
obtain the good stuff.
It is tempting to just assume that efficiency is always good, and leave
it at that. So if someone concludes an argument by saying
his or her way of doing things is the most efficient, it would seem
that the person has won the argument.
But that little mental shortcut carries a hazard. It is
to challenge the assumption that efficiency is always good.
Business thrives on efficiency. Most businesses seek to
efficiency. Often that is good. But not always.
Indeed, it can be a trap, especially for businesses that need
be sustainable in order to maximize some sort of desirable outcome.
If the business performs some essential function, it can be
catastrophic if, in the name of efficiency, the business burns all of
It is fair to say that farming is essential. It is equally
to say that a failure of the business of farming would be catastrophic.
Thus, the mindless pursuit of efficiency in farming is a
So, what is the kind of efficiency to which Mankiw refers?
Bushels per acre? Bushels per year?
Protein yield per
hour of labor? Calories produced per barrel of oil utilized?
Farming methods that use a lot of oil are particularly at risk for
Plus, with essential activities such as farming, it is necessary to
attend to the risk of game-over events. It may reduce
at least in the short run, to hedge those risks, but it is foolish to
ignore the risks.
For example, let’s say that we are growing wheat, and that the measure
of efficiency is number-of-bushels divided by barrels-of-oil.
Perhaps the best way to maximize efficiency is to plant
of adjacent acres with identical plants. That’s monoculture.
But to farm in that way, you may expose the business to
risks. One such risk would be a disease that targets that
particular variety of wheat. Another risk would be a weather
event that reduces or eliminates the crop.
The risk of disease can be mitigated with pesticides and fertilizer,
but that exposes the farm to greater risk of oil depletion.
Weather events can reduce or eliminate any crop, so there is no way to
eliminate that risk. However, the risk sometimes can be
by planting a variety of crops. Some may be more
drought-tolerant, while others may be more tolerant of wet weather.
Perhaps the most spectacular failure that resulted from the pursuit of
efficiency was the effort to increase arable land in China.
the 1960’s China sought to increase food production with a
massive program of terraforming.
With vast human effort, they terraced land, flattened hills,
down forests. This maximized efficiency, expressed as number
acres being farmed, per acre of total land. The problem is,
to have an erosion problem:
Alas, the actual effect was to create a vicious
according to Vaclav Smil, a University of Manitoba geographer who has
long studied China’s environment. Zuitou’s terrace walls, made of
nothing but packed silt, continually fell apart; hence Zhang’s need to
constantly shore up collapsing terraces. Even when the terraces didn’t
erode, rains sluiced away the nutrients and organic matter in the soil.
After the initial rise, harvests started dropping. To maintain yields,
farmers cleared and terraced new land, which washed away in turn.
The consequences were dire. Declining harvests on worsening soil forced
huge numbers of farmers to become migrants. Partly for this reason,
Zuitou lost half of its population. “It must be one of the greatest
wastes of human labor in history,” Smil says. “Tens of millions of
people forced to work night and day on projects that a child could have
seen were a terrible stupidity. Cutting down trees and planting grain
on steep slopes—how could that be a good idea?”
This proves that efficiency is not alway good. It is
necessary to consider also the issue of sustainability.
In The New Yorker magazine, James Surowiecki has
published an article: The
Perils of Efficiency.
For Americans, the drop in commodity prices has put a
more bucks in people’s pockets; in much of the developing
it may have saved many from actually starving. So did the global
financial crisis solve the global food crisis?
Temporarily, perhaps. But the recent price drop doesn’t
any long-term respite from the threat of food shortages or future price
spikes. Nor has it reassured anyone about the health of the global
agricultural system, which the crisis revealed as dangerously
…in the eighties and nineties, often as part of structural-adjustment
programs imposed by the I.M.F. or the World Bank, many marketing boards
were eliminated or cut back, and grain reserves, deemed inefficient and
unnecessary, were sold off. In the same way, structural-adjustment
programs often did away with government investment in and subsidies to
agriculture—most notably, subsidies for things like
and high-yield seeds.
The logic behind these reforms was simple: the market would allocate
resources more efficiently than government, leading to greater
…The problem is that, while this system is undeniably more
efficient, it’s also much more fragile.
You really have to read the entire Surowiecki article to get the full
impact. (It’s short.) But for those that do not
links, here’s the bottom line: Yes, agriculture is now more
efficient; but when things go wrong, more people go hungry.
More examples can be found in the transcript of the PBS interview
Moyers and Michael Pollan:
I mean, the supply chains of food are just absurd.
know, we’re catching so-called sustainable salmon in Alaska. We ship it
to China to get filleted and then we bring it back here.
I know we can count on American business to always find the most
efficient way to do things. But what kind of efficiency are
seeking? The only rationale for shipping salmon across the
both ways (and probably uphill both ways) is that
cheaper. To specify: this is efficiency as measured in
dollars-spent-in-production divided by number-of-marketable-fillets.
It is not grams-of-high-quality-protein divided
We can count on businesses to seek efficiency, but it generally is only
one kind of efficiency. That particular kind of efficiency
not always be in our best interest.
Another example from Moyers and Pollan:
BILL MOYERS: What’s insecure about our food process?
MICHAEL POLLAN: Well, having a highly centralized food system such as
we have where one hamburger plant might be grinding 40 or 50 million
burgers in a week, where one pre-bagged salad plant is washing 26
million servings of salad in a week, that’s very efficient, but it’s
also very brittle or very precarious. Because if a microbe is
introduced into that one plant, by a terrorist or by accidental
contamination, millions of people will get sick. You don’t want to put
all your eggs in one basket when it comes to your food safety. You want
to decentralize. And Tommy Thompson, when he was departing as Secretary
of Health and Human Services said, you know, one of the big surprises
of his time in Washington was that no one had attacked, no terrorist
had attacked the food supply because, and this is a quote, ‘it would be
so easy to do.’
(Thompson understands nothing. The reason the WTC was
that it provided dramatic images on the TV. If the goal had
to kill a large number of people, they would have done something else.
The MSM will never show the same footage of contaminated
over and over and over again.)
Robert Paterson provides an explanation and an example of the
perils of efficiency:
When the centralized distribution systems fail, all
nodes get cut off and isolated. Food, energy, money and security all
collapse back to the local. If you cannot feed yourself, heat your
homes, exchange goods and look after your security you are in deep
trouble. In highly centralized states, the nodes are helpless. They
cannot deliver the basics for life. Imagine New York with no oil and no
food with intermittent electricity. Imagine this happening for only a 2
week period. Then imagine being cut off semi permanently. You think I
exaggerate? This happened in 1989 – 95 in cities like Moscow
What this means, is that the kind of central planning employed in the
Soviet Union, or that tends to be employed by monopolistic businesses,
is inherently fragile. It is also, by the way, the reason
Desert Storm, and Shock and Awe, were successful: knock out the central
nodes, and the whole thing falls apart. It’s also why the
insurgency is so dratted difficult to deal with: there are no central
Efficiency is important, but it works best if it is balanced by some
degree of redundancy. Central planning can be extremely
but it is important to have distributed units that have the capacity
for autonomy and self-reorganization.
Walmart sometimes is lauded as a beacon-on-the-hill paragon of
efficiency. But it is a business that is absolutely dependent
upon a steady stream of large diesel-powered trucks, for input, and a
steady stream of automobiles, for output. Will that kind of
business have a role in a few decades?
Sure there will. But only with changes. Currently,
shelves stocked with a few day’s worth of a zillion food items, most
being available all year. Eventually, they will have shelves
stocked with far fewer items, but in much greater quantity, with many
items being present for only part of the year.
I suppose that could be considered efficiency, also, but with a
different numerator and a different denominator.
As a general rule, whenever someone makes an argument using the term efficiency,
it is important to clarify what the numerator and denominator are, and
ask if that provides a measure of what is really important.
It all depends upon what it is, that you are trying to
Even now, as the NBER
has finally called this a
recession, the White House rejects
the term. They call it a
“business cycle.” I was not sure what that meant, so I
went to the NBER site.
At first the page would not load; presumably, this is because
many people are trying to access it at once. After a few
attempts, I got to the home page. I clicked on a link
something like “NBER Announces December 2007 Peak in Economic Activity
.” (Even they are avoiding the word recession,
preferring to invoke the somewhat rosier term, peak.)
But when I clicked on the link, it would not load.
searched for a video that depicts the business cycle, so I would
understand what it is all about: