The uses of price controls

 During the Second World War, the US government tried to use savings to mop up demand and keep consumer prices stable. Price stability through regulation also helped to convince workers to save their income, as they were more confident that the money they saved would keep its value and so they could defer consumption. 

In post-war China, the government used price controls to redistribute resources from Agriculture to Heavy Industry. By suppressing the payments to Agriculture, you also limit the resources which are directed to producing goods for those who work in that sector. 

 

Price wars

Tim Sahay aka 70sBacchan on Twitter, reviews "Price Wars" by Rupert Russell, a book about how financialized commodity markets sow political chaos

Like so many of our troubles today, this chaos was conceived in the triumphant frenzy of deregulation which followed the collapse of the USSR. 

It may seem unbelievable today, but until the Commodity Futures Modernization Act of 2000, retail investors couldn’t bet on the direction of commodity prices. The index funds simply didn’t exist yet. Investment banks and oil companies pushed provisions into the act in the waning hours of the 106th Congress exempting the trading of futures contracts and swaps for energy and metals from regulation. Most commodities derivatives are traded in unregulated over-the-counter markets run by dealer banks in the United States and Britain. 

What sounded like clever market-based thinking proved to be good only for traders. 

They were marketed to investors as helping diversify portfolio risk, but instead, they compounded it. Previously uncorrelated, oil, food, and metals became increasingly linked as a volatile new asset class. As commodity index funds proliferated, local disturbances in crop yields, amplified by leveraged bets of traders, gained the power to rip through global markets, destabilizing prices in far-flung areas with cascading knock-on effects. 

High food prices are blamed/credited for the Arab Spring, which already feels like it was in another century. But the high prices had nothing to do with harvests, and everything to do with money orphaned by the 2007 crash going sniffing for returns. 

There are really only four markets: housing, bonds, equities, and commodities. After the housing crash in 2007, the behavior of investors changed. Institutional money fled housing and equities, and flowed into commodities and bonds. Commodities are a small market in the hundreds of billions, compared to the trillions whooshing down from housing. It was that flow of money, not a supply-and-demand “fundamentals” effect, that caused prices to spike, triggering food riots in 2008.

Book ordered. 

Free trade and hunger part 1

 Sri Lanka is in trouble. 

This seems to have begun when a terrorist attack scared away tourists. The country found itself short of foreign exchange, and the government decided that they would cut fertilizer imports and make up for it by encouraging organic farming. Food supplies collapsed. There is a lot more to the story, but some quick thoughts below.

Imperial CEOs justify their conglomerates by claiming that they can offer their shareholders steadier returns. When some sectors struggle, other companies in their group can compensate. Economists rightly ridicule this because shareholders can much more cheaply achieve the same results by holding a diversified portfolio of shares. The shareholders also agree as is evident from the conglomerate discount. 

Modern states avoid autarky and rely on specialization and trade. There are good theoretical reasons for this, and Economists love to think about the gains from trade. This is very similar to the argument against conglomerates- why produce everything badly when you can produce a few things very well, and then trade for what you don't produce? 

1. The future is very predictable until it is not. When things go really badly wrong, no class will be spared. Sri Lanka, Lebanon, Ukraine, 1930s Spain, 1920s USSR, the list goes on. 

2. Maybe small countries like Singapore have no choice but to rely on trade. Sri Lanka is not a very small country. They apparently can grow their own food, but do import fertilizers, and they really needed the foreign exchange they earned from tourism. 

3. Imports are barely 13% of GDP in the USA. Despite all the "free trade" rhetoric there, they are already naturally insulated. 

4. Maybe larger countries should seek to be more autarkic. Countries like Egypt are facing real hunger because of a war in far-away Ukraine. 

5. Changes in terms of trade are especially dangerous in a world where capital and goods can range freely across the world, while labour is bound to their home country. Citizens are not shareholders who can optimize their portfolio. Poor people in poor countries have no levers except their votes, and they should be able to expect their governments to care for their interests. 

6. More autarky may even be better for peace. 

7. That the Sri Lankan government could so easily decide to try and transform an entire sector is a good example of how important it is to have mechanisms for debate and disagreement. 

8. Is useful debate even possible in the world made by social media? 

Edit: even without a war, some limited Autarky can be helpful for resilience, as when one country suffers a shock of some kind, and can rely on others which produce the same goods. Yet another point to consider is the sheer complexity of planet-spanning supply chains, which are classic spaghetti code. During the COVID pandemic, we learned that house construction in the USA had ground almost to a halt- they had everything else (not quite), but had run out of nails (also).   

Anti-politics 2

 Again from James C Scott's "Two Cheers for Anarchism"

Anti-politics

 James C Scott in his "Two cheers for Anarchism," about the desire to escape from politics into some imaginary world of objectivity. The passage below is about academics and how they try to use citation metrics as a substitute for actually judging the quality of work. 

There is no perfect solution.  

In memory

Tombstone of Vellibia Ertola, who lived ‘most happily for four years and six days.’ She’s shown holding a ball, maybe her favourite toy. 

Controlling the masters of destiny

From Isabella Weber's "How China escaped Shock Therapy", a passage from The Guanzi, which was apparently composed by Chinese planners and advisers in the years around 200 BC, between the Western Zhou and the Quin dynasties. How to use market interventions, instead of command-and-control, to manage the economy. 

Generate revenues without raising taxes, while being seen as a benevolent government.  

If the Government didn't do this, merchants certainly would, so the Government is intervening in a process which would have occurred anyway. 

Free trade and war part 1

 Back in the 1990s, when the Cold War was melting away, we were repeatedly told that the ties of trade will make it impossible for new great wars to break out again. The proposed mechanisms were mainly two: that free trade would have a "softening" effect on manners, making people less warlike (doux commerce), and that powerful business interests would not allow wars to cut them off from important supplies or valuable markets. 

Branko Milanovic reviews a new book by Avner Offer which proposes that the original Great War was caused by free trade, when countries specialized as a result of the larger markets, they felt a need to arm themselves to ensure that essential supplies were not threatened by rivals. This led to an arms race which eventually caused a war. 

Britain was not alone in this. 

The above mechanism explains why countries felt that they needed to arm themselves- as they increasingly specialized in manufacture, they had to build up powerful armed forces to make sure that they could feed their populations. As the COVID pandemic showed us, highly efficient supply chains may be less than resilient. 

Another route to war was when countries realized that their rivals were also vulnerable to starvation, that blockades and U-boat warfare could be used to cut off the supplies which the "enemy" needed. 

This is exactly what the British Navy did to the Germans in World War 1, leading to starvation in Germany, who then struck out towards the East, seeking grain from Ukraine. The Brest-Litovsk treaty gave them what they sought, but too late to save Germany from defeat on the Western Front. 

Today, we are seeing another war in Ukraine, and the USA is practicing a new kind of Trade War against the Russian Federation. We have been expecting a war between China and the USA over Taiwan, but I am sure that the Chinese leadership are watching and learning what the Americans have been able to do to the Russians by attacking the trade ties which bind the Russians to the rest of the World. 

Below is a Twitter thread which an example of what can be done to the Russian airline sector by denying them access to Insurance and spare parts.