Friday, December 14, 2007

Free Markets and No Markets

There is a peculiar situation that many rural laborers find themselves in, where the free market gives them no incentive to trade on the world market or the local market. If institutions and infrastructures do not make trade easy, then the laborer simply does not trade, and produces everything for themselves.

Do-It-Yourself production on the one hand is somewhat romantic. But it's causes are usually due to opportunity costs, not the voluntary Thoreau-ian ideals of agoristic artists and communalists. There is nothing wrong with romantic self-sufficiency, but for most rural laborers the higher standard of living through trade compels them out of autarky and into the market.

So trade is compelling, but rural laborers face unfavorable trading conditions, preventing them from trade. One economic explanation can be traced back to the "poor but allocatively efficient" hypothesis of Theodore Schultz in 1964. He said what farmers are really limited by are certain constraints that make it impossible to earn more income by selling labor or goods on the market. Laborers are optimizers like anybody else, and they're efficient at what they do, but they have all kinds of constraints the keep them in the autarkic production scheme. They might like to have mobility, but these constraints prevent them from trading at all (or at least very minimally.)

Neo-liberal economists have been surprised that rural markets often don't exist. The Reagan-Thatcherite Gospel was that markets simply needed to be freed from state control, and this would lead to open markets and prosperity. Everyone loves to point out what was wrong with that idea, often concluding that the idea was wrong about everything. But that idea was just too simplistic. Eliminating state control does not necessarily lead to trade. (Reagan-Thatcherism also was not for eliminating state control either--ahem--like military expenditures.)

The literature from the 60s and 70s was often overlooked during the 80s because of it was seen as too Keynesian. And the Theodore Schultz's hypothesis which came out of that era was one important part in understanding why rural economies aren't too eager to join world markets, and therefore could not be forced into doing so by state-building policies of Reagan and Thatcher.

Articles in the economic literature asked the question "Why are peasants persistent?" The New Institutionalist answer was that there are overwhelming transaction costs and information asymmetries that prevent the peasants from reaping the benefits of trade. They may have to travel for miles to the nearest city or trading center, without using roads, or cars, or donkeys. They may be robbed, or hampered by weather and health conditions. There's information asymmetries: they might not even know what the prices are, and it might not be worth their time to find out. They might not have information-sharing devices (like cell-phone towers in rural India
) to find out who wants to buy their produce or where to meet them.

The abundance of asymmetries and costs in rural markets is therefore crucial. The point at which transaction costs, or the expected transaction costs, is more than the price -- then rural laborers simply stay at home. This creates a system in which free world markets exist, but rural laborers cannot get to them, and would not want to get to them, because making their own products is better for them.

1 comment:

some guy said...

In addition to problems of asymmetric information,
it is often tough for third world farmers to get thier products to the nearest major city, much less the global market. The coffee market exemplifies this trend, as often farmers have to end up paying several middlemen just to get their goods out of town, much less to the international markets.

The dillemma here is not so much with capitalism as it is with human nature. Farmers in the First World, particularly the United States, are well aware of the competition that lies in wait, and so thus they have established a powerful lobby with which to set trade law to limit international competition. Even with the WTO, the trade has certainly been far from fair or free.

My question is: Is subsistence still a viable option?

I heard that in many Third World countries, (such as Mexico) global climate change is making it tougher for indigionous people to run subsistance farms as they used to. Should we let the market step in here?