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Comparative advantage and when to blow up your island

Destroying your production capacity is a strategic mistake, and exposes you to blackmail in the future. A smart owner (or a smart centralized government) would not let that happen. If you want to give me free bananas, okay, I will take them; but I will still keep my banana plantation ready. 

 

The article clearly suggests that the inefficient farmer should stop working on coconuts and work full-time (8.5 hours a day) on bananas; so he wouldn't have time to keep the secondary plantation ready.

That's the recipe to become dependent from a stronger partner, something that the article suggests is a good strategy for both parties. But is it?

Let's not assume bad intentions from any side.

Everything goes well for a couple of years... but the efficient farmer realizes he is working only 2 hours a day, and decides to increase his production, working 4 hours per day. (Again -- let's not assume bad intentions; he just wants to expand his production)

Boom! He no longer needs to buy bananas.

What should the inefficient farmer do? Ideally he would reduce the banana production, but he can't produce coconuts overnight. He must sell bananas cheap to buy coconuts.

The bananas:coconut exchange rate jumps from 2:1 to 4:1. That means he must double his production, working 20+ hours per day, while the other farmer comfortably works 4 hours per day.

Of course, he can't do that for long and goes bankrupt before his coconut plantation is ready.

Please note that this doesn't even assume bad intentions from the efficient farmer; it's just a natural result from the free trade between unequal partners.

That's why, in the real world, countries must impose tariffs, quotas and other types of regulation.

 

And the other side of the same coin is that a smart owner -- or centralized government -- will try to expand their future production capacities

I agree with you -- and that's exactly what the efficient farmer did, in the present.

And because the inefficient farmer decided to focus solely on one industry, he couldn't keep the other.

(Something that the article suggests would be beneficial for both parties.)

 

That said, another question is whether subsidies are the best way to keep your production capacity, and what amount of subsidies is optimal. 

It's a sane strategy if you don't want to become dependent.

People can live without iPhones; but they can't live without food.

 

I would even challenge which types of products should we subsidize: if the goal is to prevent starving, we probably do not need to protect our meat production -- if the other countries keep giving us cheap meat, let them; and if they suddenly stop doing that (in the unlikely case that all meat-subsidizing countries would coordinate to do this in the same year), we may have a year or two of mostly vegetarian diet, but no one is going to die.

 

You are underestimating the time and effort to re-create an entire industry, once it is destroyed...

We are talking about decades!

 

In other words, although some protection of production capacity is strategically important, it doesn't necessarily follow that the farming subsidies, as we know them now, are anywhere near the optimal solution.

 

Do you think it would be a smart strategy, for the developed countries, to become dependent?

I don't think so.

Subsidies may not be the "optimal" solution -- but is good enough to protect their interests.

(And, of course, it is not very good for the developing countries.)

Covid 9/17: It’s Worse

Last week we learned there is plausibly a simple, cheap and easy way out of this entire mess. All we have to do is take our Vitamin D.

 

Please read this article: There's Only Weak Evidence For Vitamin-D As a COVID-19 Preventative, But Scientists Are Trying to Learn More

tldr;

Taking vitamin D supplements can help, if you are deficient, but it is not a cure.

There is no "simple, cheap and easy way out of this entire mess".

Excerpt:

To protect himself from COVID-19, Dr. Anthony Fauci has long said he’s skipping hugs and handshakes, wearing a mask, and staying off of planes. Last week, he acknowledged adding another step to protect his health: taking supplements of vitamin-D.

“If you are deficient in Vitamin-D, that does have an impact on your susceptibility to infection,” Fauci, head of the National Institute of Allergy and Infectious Diseases, said in an interview posted on Instagram last week. “So I would not mind recommending—and I do it myself—taking vitamin-D supplements.”

However, while spurious claims that vitamin-D can prevent or treat COVID-19 have proliferated online, including some recommending potentially dangerous doses, it’s important to point out that Fauci wasn’t talking about vitamin-D helping with COVID-19 in particular. Instead, he was speaking more broadly about vitamin-D’s importance in caring for our immune system. (...)

How should people think about their vitamin-D intake during the pandemic? For starters, don’t view it as a silver bullet protecting you from COVID-19—there’s simply not enough scientific evidence for that. But if you’re one of the many Americans with insufficient vitamin-D levels, it may be a good idea to increase your intake—if not to protect yourself from the virus directly, then at least to improve your health more broadly.

Comparative advantage and when to blow up your island

The author discusses impossibly perverse behaviors such as blowing up one's island, but forgets to mention the most common anti-competitive practices such as dumping and product tying.

For example, the other guy would price coconuts and bananas well below the Zone of Possible Agreement (dumping), and you would be so glad to buy everything from them -- destroying your industry and increasing his comparative advantage.

Of course, he is not altruist, so, when you are completely dependent, he will raise his prices above the ZOPA -- and you have no option because it would cost you a lot (time and effort) to rebuild your industry and regain your comparative advantage.

If you try to produce bananas, he drops the price of bananas, making profit from coconuts; if you try to produce coconuts, he drops the price of coconuts, making profit from bananas.

When you start to recover one industry (say, coconuts) he could force you to buy coconuts if you want to buy bananas (tying).

And if you ever managed to rebuild both industries, all he had to do was to bring his prices below ZOPA -- and you would have to decide if you still believe in free and unregulated markets, or avoid the same mistake, imposing tariffs and regulation.

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You can observe this kind of imbalance in the real world: developing countries export iron for $100 per metric ton ($0.05/pound) and buy high value-added products (phones, tablets, computers) for $500/unit.

Developed countries use the profit they make from high value-added products and services to subsidize their farmers, pushing the price down. For instance, wheat costs $188.75/ton ($0.10 per pound).

Without subsidies, the farming industry would be decimated from rich countries, and prices would go up. Of course, there is no such thing as "free market".

Markets need regulation to prevent anticompetitive behavior.