Steve Reads

(Attention conservation notice: 1300 words starting with historical shocks in the price of coffee, and veering over into some thoughts on protecting ourselves from uncontrollable risk.)

There’s an interesting little article in the New Statesman, critically reviewing a book entitled Starbucked. Starbucked seems mostly unconcerned about poor coffee farmers, says the review, even though they’ve historically suffered through price collapses that left them desolate. The U.S. government instituted coffee price supports during the Cold War to keep the poor folks on our side, but the end of the Soviet Union said goodbye to all that.

One might reasonably ask how price booms and busts of this sort can happen in a free market, but it occurs to me that maybe it’s built into the process. Suppose coffee prices rise to some tantalizingly high level — because bad weather killed a lot of coffee trees, say. I, as a coffee farmer, expand my plantation: I plant more trees, maybe buy more land, hire more help, and so forth. Workers take time to train and trees take time to grow. By the time they’ve borne fruit, J. Random Webpage suggests that six years will have passed.

Unfortunately, over those intervening six years, lots of other coffee farms have planted more trees. There is now a glut. Prices plummet. Farms go out of business. Other farmers decide to plant their crop of choice (coca, maybe) on the new land that they’ve acquired. So now a lot of coffee trees have disappeared. Hence supply goes down. Demand is as high as it’s even been, so we’re back out of equilibrium. Prices rise, and we’re back to where we started.

This is all nicely self-correcting, but in the meantime a lot of people have lost their shirts and a lot of families have gone without food. A basic respect for one’s fellow-man would make one howl in outrage. No one has misbehaved here: the market is not punishing those who’ve taken unnecessary risks. Rather, the market has punished people for doing what the market tells them they ought to do — namely plant when prices are high and pick another line of work when prices are low. Microeconomic actors have been subjected to macroeconomic forces over which they have no control. I think Michael Pollan says somewhere in The Omnivore's Dilemma that all agricultural products are inherently ripe for price supports, and that pure free-market allocation for agricultural products just doesn’t work; this may be why.

In the longer term, you’d hope for people to realize the pattern they’re in: don’t invest too much capital ahead of time, knowing as they do that it’ll take six years to reap the reward. Larger institutions surely get the message here: banks are probably all too aware of the risks in coffee planting; they may well deny startup capital to small farmers. Conglomerates that can pool their risk — by planting coffee when it’s dear and other crops when it’s cheap — will probably pull ahead here.

The booms and busts of coffee prices, though (right, courtesy of the International Coffee Association), suggest that a great quantity of the world’s coffee may well be produced by smallholders. If it were an oligopoly, I’d expect less variability.

With that much risk involved in planting coffee, I suspect that a lot of people who would be great coffee farmers forego it and do something else altogether. When you have to keep your family in food, you’ll avoid high-risk, high-reward options in favor of low-risk, moderate-reward ones. If the poor were more risk-tolerant, they might be able to bootstrap themselves out of poverty. If they were protected from certain kinds of unavoidable risk — crop failure, macroeconomic collapse — people might stay in the jobs for which they’re best suited, rather than having to take second-best jobs that are safe bets.

This is essentially the guiding insight behind Samuel Bowles’s and Herbert Gintis’s essay “Efficient Redistribution: New Rules for Markets, States and Communities,” in Recasting Egalitarianism. Poor workers are risk-averse for the reasons mentioned, whereas wealthier people are assumed to be more risk-tolerant. With some economic protection beneath them against uncontrollable risks, poor workers may take the first step up out of poverty.

Bowles and Gintis’s novel contribution is to suggest that this risk-protection happen via asset redistribution rather than income redistribution — giving them houses and machinery rather than a guaranteed income, for instance. The great virtue of private property is that it connects costs and benefits with actions: if I own a house, it’s now in my financial interest to help keep my community safe; that same feeling of responsibility does not attach to renters. Likewise: workers in employee-owned firms may have more of an incentive to work hard and catch their coworkers slacking than do workers in traditional hierarchies. (Neither Bowles and Gintis, nor any of their 15 respondents, checked whether firms granting stock options performed better than those that didn’t. Not sure why, other than that poor people tend not to get stock options.) Asset redistribution, in a word, is more economically efficient than income redistribution. Hence it’s more likely to be politically palatable than is income redistribution via taxation. (A whole host of questions will naturally arise for you here, among them: isn’t there a cost associated with taking assets from one group and giving them to another? I’m skipping over these in the interest of brevity, but you can be sure that Recasting Egalitarianism addresses them.)

After Bowles and Gintis’s leadoff essay, we find any number of responses from any number of angles — though, sadly, nearly all of those angles are from the left. One would have enjoyed seeing someone like Greg Mankiw throwing in a more conservative position. As it stands, the essay collection sometimes sounds like 5-year-olds arguing over whether they’d rather have a pony ridden by a magical fairy princess, or a unicorn with a chocolate fountain spilling forth from her horn. Only with more jargon. And with endless academic tones. In all honesty I couldn’t stand most of the book.

I did love the two Bowles and Gintis essays, however: the opening one, and the wrapping-up response to their critics. The latter is in many ways just a restatement (or possibly prestatement — I’ve not checked the dates) of their essay “Is Equality Passé? Homo Reciprocans and the Future of Egalitarian Politics.” Humans, says Bowles and Gintis, may well be wired to give certain kinds of help to their fellow-men and not give other kinds. We want to insulate people from uncontrollable risks, but we don’t want to insure their bad behavior. We want to punish people if they abuse our generosity. And we want to forgive them fairly quickly if they correct their errors. This is the recipe for a just society. More to the point, it may be the only recipe that’s consistent with some innate ethical norms that we all carry.

The message from Recasting Egalitarianism is that asset equality makes good economic sense. The message from The Conscience of a Liberal is that economic equality reduces political extremism. And the message from The Great Risk Shift is that without a radically amplified “insurance society,” we’re going to return to the bad old days before the New Deal. Equality, for lack of a better word, is good. Equality is right; equality works.

Hopefully liberals are back in the business of taming the market’s outrages.

(New Statesman article on coffee via Crooked Timber. Pointer to Recasting Egalitarianism via Cosma Shalizi’s del.icio.us feed.)