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.
In this example it is assumed that the entire island is literally owned by one person. So, if you wish, this person may be a metaphor for a strong centralized government.
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. That way, I get free bananas today and keep my ability to produce bananas tomorrow.
(And the other side of the same coin is that a smart owner—or centralized government—will try to expand their future production capacities. For example, if today it is for me more profitable to grow bananas than to write computer software, I might strategically decide to write software anyway, at least part-time, because two or three years later my software-writing skills are likely to increase dramatically, while my banana-growing skills would probably remain the same. So the comparative advantage of tomorrow may reward me for writing software, but in order to get there, I need to accept some disadvantage today.)
That said, another question is whether subsidies are the best way to keep your production capacity, and what amount of subsidies is optimal. (Of course, the farmers will always say “more is better” for obvious reasons.) If we discuss real-life agriculture, 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.
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. (Specifically, I think that subsidies of meat production are completely unnecessary—it is unlikely that all other countries would stop subsidizing meat at the same year, and in the unlikely case that would happen, we would survive anyway.)
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.)
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.
---
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.
In this example it is assumed that the entire island is literally owned by one person. So, if you wish, this person may be a metaphor for a strong centralized government.
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. That way, I get free bananas today and keep my ability to produce bananas tomorrow.
(And the other side of the same coin is that a smart owner—or centralized government—will try to expand their future production capacities. For example, if today it is for me more profitable to grow bananas than to write computer software, I might strategically decide to write software anyway, at least part-time, because two or three years later my software-writing skills are likely to increase dramatically, while my banana-growing skills would probably remain the same. So the comparative advantage of tomorrow may reward me for writing software, but in order to get there, I need to accept some disadvantage today.)
That said, another question is whether subsidies are the best way to keep your production capacity, and what amount of subsidies is optimal. (Of course, the farmers will always say “more is better” for obvious reasons.) If we discuss real-life agriculture, 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.
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. (Specifically, I think that subsidies of meat production are completely unnecessary—it is unlikely that all other countries would stop subsidizing meat at the same year, and in the unlikely case that would happen, we would survive anyway.)
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.
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.)
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.
You are underestimating the time and effort to re-create an entire industry, once it is destroyed...
We are talking about decades!
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.)