Thursday, August 5, 2010

The shape of things to come

From the NYTimes:

MOSCOW — Russia banned all exports of grain on Thursday after millions of acres of wheat withered in a severe drought, a portentous decision at a time when crop failures caused by heat and flooding span the northern hemisphere.

The resilience of civilization is often cited as the answer to the destructive effects of global warming. When these materialize, so the story goes, people will simply deploy the adaptive powers of free-market capitalism and overcome all impediments to the continued growth of prosperity. To that end, we ought to focus not on things like reduced CO2 emissions, but rather focus on getting rich by any means necessary -- something which will position the world's people optimally for adaptation later on.

Russia's reaction to the failure of its wheat crop -- and we're lying to ourselves if we imagine our countries would behave any differently -- illustrates the flaws in that approach. Free markets can be a powerful tool to deal with resource scarcity, including damaged or degraded infrastructure and loss of productive capacity. But markets are only as free as governments make them. As global warming has uneven impacts across the world -- baking crops and destroying coastlines in some regions, mostly sparing or even temporarily increasing productivity in others -- the effects are likely to be magnified by protectionist responses far beyond what an ideal market model might lead us to expect.

Suppose, for example, that a bad growing season in the Northern Hemisphere cuts agricultural productivity by an average of 20%, but in India, for whatever reason, productivity falls by 80%. The "prosperity as adaptation" model would say that India would spend heavily on food imports, driving up food prices around the world, causing citizens of other countries to switch to more vegetable products, less meat and other luxury items, tighten their belts, and, of course, grow more food.

Now let's look at it realistically, given the way real people and real governments actually behave. Look at the protectionist barriers erected in the Great Depression; look at Russia today. And ask yourself, is any country that has lost a fifth of its agricultural crops going to be exporting food? Not likely. Bans like Russia's will be the rule, not the exception. India will have currency, but if enough of the major exporters close their markets, it will do them no good. You can't eat currency.

There are other dysfunctional responses to shortage that may exacerbate the dilemma. Hording, for example. This is a well-known pitfall of imperfect markets. As soon as any agent realizes they may not be able to get something they need in the future, their (rational) reaction is to stockpile it, which greatly exacerbates shortages. In the example above, suppose the following year they have a similar situation, minus 50 million starved Indians. But this year the harvest is better -- it's only down 5%. But this year the US is the "sick man" with harvests down 30%. How easy will it be to import food?

It might seem at first blush countries would be more willing to export food -- the harvest is better, they have more food to spare. But on the other hand, they saw what happened to India -- how they couldn't trade money for food when they needed it. So what is their play? Everybody is going to want to stockpile food. Months of it. Years of it. Even those areas where agricultural productivity is maintained, the temptation to horde and speculate will be great. Huge amounts of a scarce resource end up under lock and key, not in the hands of the people who need them.

A situation like this is hard for people in the developed world to grasp, because we have no experience of a world in which our wealth cannot be readily exchanged for any product or resource we might need. The above examples are greatly oversimplified. But the principle is an important one to grasp: ultimately our needs are for food, shelter and the like. The system that turns money into those things may, and likely will, be compromised by the very scarcity that "prosperity adapters" are counting on to deal with scarcity. With disruption on a large enough scale, scarcity is more likely to overwhelm free markets than the other way around.

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