I am happy to have waited for more than a week before answering the question, because it gave me a lot of interesting responses.
Everyone seemed to know the capitalist “solution” to the problem, which is to simply sell the available food to the highest bidder. The reason why this is good is not that the right people will get the food – I will not presume that people who can pay are in any way better than those who can’t. The reason the solution is good is that the right people get the money. The high prices will give people an incentive to produce more food next year. Because that is the only way you can salvage any good out of the bad situation. Given what I have outlined, people are going to die this year regardless of what you do. But if you follow the right policies, you can prevent the situation from recurring next year. What I have just outlined is the solution to that problem under capitalism. To find whether it is the best solution or not, we need to compare it against the alternatives.
(See? People, it is possible to discuss complicated problems without using complicated phrases like “allocative efficiency” or indeed ontological)
One alternative of course is socialism, and now is perhaps a good time to point out why the example I gave was unfair to socialism. You see, socialism claims that resources are available, but they are unfairly distributed under capitalism. When food is simply not available, there isn’t much anyone can do – and perhaps (so socialists said) capitalism does do a better job. But when food is plentiful, but stocked in godowns or when farms are lying fallow because workers are busy building palaces for the rich, the solution is socialism – so say the socialists.
So the problem with my scenario was not that it was hypothetical or unrealistic (all scenarios are hypothetical and unrealistic) but that it was unrealistic in a way that is specifically unfair to the socialists.
But even then thinking about this unrealistic situation tells us a lot about the problems with socialism, problems that won’t go away even if you make the situation more realistic. The problem you see, is that socialists tend to start their solution with the golden words “The government should”
“The government should” do what? Pradeep and others assumed that socialism says that the government should distribute the food equally among everyone. Not really. Socialism just required that central planners distribute resources optimally (as Pradeep did mention) If distributing the food among the healthiest 20% was the best solution, then “the government should” do that. (If you doubt me, think of George Orwell, a thoughtful and compassionate socialist who supported Britain getting into WWII. If he were convinced that the only way to avoid Britain being run over by the Nazis was by starving 5% of Britain’s population to death, would he have refused to entertain the idea absolutely?) Then of course, “the government should” take steps to ensure that such a thing doesn’t happen again next year.
The problem is not with the ends, but with the means. You see, the price mechanism is replaced with the words “The government should” What is the mechanism to ensure that the government will do what it “should”? Socialists used to think of these things – and I will come to that in a moment – but now they don’t. They just say “The government should”. And right away, there is a serious problem, which is that you will have a shortage of food, regardless of your plan.
That is because the government will have a monopoly over food distribution – and if you have a monopoly over something, you will undersupply it to extract the best price. (By the way, “price” need not be denominated in money. It can be extracted in political patronage. It can be extracted in loyalty – as Kim Il Jong does in North Korea.) You can have beautiful five year plans on paper, but it won’t work. (“What about private monopolies?” I hear you ask. Firstly, it is next to impossible to achieve private monopolies in food without government help. Secondly, the answer to that is to allow free imports – an answer you don’t want to hear. )
Socialists knew this and some of them thought that democracy is the answer. Amartya Sen won a Nobel Prize for proving that a democracy has never experienced a famine. His thesis was that in a democracy, reports of large scale starvation deaths will get into newspapers, and politicians when faced with loss at elections, will act to ensure that famine is averted. All quite true, but as we have seen in India, democracy averts a famine, but doesn’t ensure that everyone will have sufficient food to eat. I am sure a few thousand people still starve to death every year in India. Who cares for a few thousand when we are a billion strong? Democracy just prevents headline-grabbing famines from taking place while Socialism continues to kill the few thousands we don’t care about.
What about “combining the best features of both capitalism and socialism?” Many people like to ask. But unfortunately, problems in the real world cannot be solved using nice sounding phrases. You have to specify which features you’d like to combine and how – and why you think your combination is better.
Now, when I had started this post, it was about price gouging – remember? The example of a closed economy and a severe drought was basically to illustrate the point that if there is a shortage of food, the problem is that food is short, not that prices are high. In our hypothetical example, reducing prices would have made no difference whatsoever. 80% of the people had to die. The only question was which 80. However, keeping prices low artificially would mean that farmers wouldn’t have the incentive of high prices to produce more next year, and there would be greater chance of a “drought” occurring the next year too.
What if I made the economy more realistic? What if I assumed that the drought had caused a local shortage, but food was available elsewhere? In this case, controlling prices would be an even worse idea right? The most important thing to do is to rush food to that place as quickly as possible, right? What would have made food rush to the area? High prices or low prices? Yes of course, poor people who have lost everything cannot afford the high prices – and we should help them – by rushing food there and distributing it. Not by keeping prices low by fiat. Rushing food there will reduce prices of course. So be it.
Beautiful.
When you said, “And why is it that everyone wants to discuss theory and no one wants to think of what will happen in practice except me, the impractical libertarian?”, I thought you will say whichever way you chose to distribute, the result will be somewhat similar. The other 80% will be unhappy and so, will revolt.
And I thought you were unfair to socialists not because socialism claims resources are available, but because its key virtue is supposed to be equitable distribution. Your conditions made that impossible.
Now, I am curious what your answer would be if the case is different in two ways. Suppose the island is not facing food starvation, but a viral attack. You will be cured, if you take a pill; but you will die in a day, if you dont. The problem is there is stock only for 20% of the population. Will your solution be any different now? And what if the island’s population is 10? 1000? Million? Billion?
Ramnath, I do agree that in this situation the other 80% might riot or revolt. But this possibility is exactly the same regardless of which solution you propose. For more realistic systems, I believe that the possibility of a riot or revolt occurring is the least in a capitalist system. I will explain why if you want.
I am saying the same thing about equitable distribution as you are. Socialists used to say that “The problem of production is solved. The problem of distribution remains.” In the situation I set up, it is impossible to make that claim, which is why it is unfair to Socialists.
I don’t understand your scenario and why it is different from the one I outlined. Can you explain?
I think your answer to the capitalist v socialist socialist question is excellent but I think your reasoning appears to be slightly flawed. I think the question of judgement is key i.e. who judges who should have and not have and how much. The impartiality of the price mechanism is key in understanding optimality of the solution. All other systems require some sort human input in terms of moral judgement. however socialists like me will argue of the unfairness of a system that is blind to moral judgements or perhaps that is a good thing.
RR,
“The reason the solution is good is that the right people get the money. The high prices will give people an incentive to produce more food next year”
Your assumptions:
1. The people who produce food will get the money.
2. The people who produce food will stay alive to produce food next year.
Just the money reaching the producers will not solve the problem. The producers need to eat and stay alive in order for this model to work.
So, more important than capital in this case is the selection of the producers to be the primary recipients of the food.
The only way this will work is for all the producers to hoard all the existing food supplies.
Now let us say 5% of the population produces all the food on the island. Do you think the 5% holding all the food will part with whatever it takes to feed an extra 15% of the population when they are not sure if they will be able to produce more next year?
If you define success as the survival of the race on the island, able bodied youth and providers of basic necessities(food, shelter, and clothing) of child-bearing age are the only people who should get their normal share of food.
Infants, young children, the diseased, and the elderly will be the first to go (Just like in any natural disaster).
I don’t know of any popular model that will ensure this cold pragmatism.
Ganti’s BIL, perhaps I was unclear, but I meant that the producers should be free to sell the produce, not that they should be forced to sell at the highest prices they can get. Presumably, they will keep enough food to feed themselves and their families if human nature is any guide. And I was looking for a workable solution not a theoretically optimum solution which does not have a workable mechanism to put in place.
Ram, can you explain that in English?
In English – who has rights within a society. Only price is right.
People, it is possible to discuss complicated problems without using complicated phrases like “allocative efficiency” or indeed ontological
I’d blame socialism for this really. If only my keyboard was more capitalist, and gave me an electric jolt every time I type a word with more than four syllables…
What I suggested as a solution was definitely a theoretical optimum. I have said myself that no popular model will ensure cold pragmatism.
Call me a cynic, but if human nature is any guide, the producers will keep (hoard) more than just enough food to feed themselves and their families, and become ‘Kalidas’, and chop the very branch they sit on.
History is replete with such stories.
There is obviously a need for a regulating authority. We are only debating who/what is in the best position to act as the regulating authority.
Ganti’s BIL, usually the criticism of capitalism is that people are too selfish. Are you saying now that the problem with capitalism is that people aren’t selfish enough to make money? In any case, no I don’t think that there is “obviously” a need for a regulatory authority. No one has yet managed to prove that for this case.
Ram, I’ve explained how my method ensures that more food gets produced than any alternative method. Unless you are able to give me a better method, I’ll have to ask you if you are willing to have people starve in order to satisfy your notion of fairness.
Here is
why this theory is absurd,
The previous comment was incomplete so here is the remaining part –
The solution has too many assumptions. The most important being that the market will survive such a situation, another the state currency, rather any currency will survive, for any auction to be carried out. I have analysed the situation in much more detail in my new economy and investing blog, and I have pleasure of inviting all bloggers to rebutt my arguments
The comment above by Corrector of Maladies is interesting, but it doesn’t agree with you in a basic assumption.
However, I think even going by your assumption there are some flaws in your theory.
First, in any sufficiently large population it is naive to assume that food can be auctioned off to end consumers. Middlemen like merchants will be involved and will take their profits. Consider this situation. A group wealthy merchants who control a majority of wholesale purchase (not necessarily a monopoly) can keep the prices artificially down for the producers. In this case, the bulk of the profit goes to the merchants and not the producers. Also, even if they give a fair price to the producers, they can hoard the produce and sell it later at a higher price. This inflates the price artificially.
Second, let us assume that the above scenario doesn’t happen and producers get their fair share of profits. What then? Since their lands / irrigation is already good (otherwise they wouldn’t have produced this much) they can’t improve their own business much. Agreed that they may want to invest in other’s farms – but even merchants can do this (so why do you stress on producers getting the money?). But the fact is that they need not do so. They may just save all the money apprehending a worser drought next year.
Forgot to add that my first situation is where a governing agency is required. Is it not?
Now that’s a Surprise! Kim Jong Il actually apologized for North Korea for conducting nuclear testing?!! He said he didn’t have plans to test anymore. Something just doesn’t sound right about that one.