Resources Research

Culture and systems of knowledge, cultivation and food, population and consumption

Posts Tagged ‘2008

Economics is not physics

leave a comment »

From ‘India and the Global Financial Crisis What Have We Learnt?’, by Dr Duvvuri Subbarao, Governor, Reserve Bank of India, as the K R Narayanan Oration, at the South Asia Research Centre of the Australian National University, Canberra on June 23, 2011.

A few months into the crisis [the 2008-09 financial crisis], the Queen happened to be at the London School of Economics and asked a perfectly sensible question: ‘how come none of the economists saw the crisis coming’. The Queen’s question resonated with people around the world who felt that they had been let down by economics and economists. As economists saw their profession discredited and their reputations dented, the economic crisis soon turned into a crisis in economics.

What went wrong with economics? It now seems that by far the most egregious fault of economics, one that led it astray, has been to project it like an exact science. The charge is that economists suffered from ‘physics envy’ which led them to formulate elegant theories and models – using sophisticated mathematics with impressive quantitative finesse –  deluding themselves and the world at large that their models have more exactitude than they actually did.

Admittedly, in a limited sense there may be some parallels between economics and physics. But similarity in a few laws does not mean similarity in the basic nature of the academic discipline. The fundamental difference between physics and economics is that physics deals with the physical universe which is governed by immutable laws, beyond the pale of human behaviour. Economics, in contrast, is a social science whose laws are influenced by human behaviour. Simply put, I cannot change the mass of an electron no matter how I behave but I can change the price of a derivative by my behaviour.

The laws of physics are universal in space and time. The laws of economics are very much a function of the context. Going back to the earlier example, the mass of an electron does not change whether we are in the world of Newton or of Einstein. But in the world of economics, how firms, households and governments behave is altered by the reigning economic ideology of the time. To give another example, there is nothing absolute, for example, about savings being equal to investment or supply equalling demand as maintained by classical economics but there is something absolute about energy lost being equal to energy gained as enunciated by classical physics.

In natural sciences, progress is a two way street. It can run from empirical findings to theory or the other way round. The famous Michelson-Morley experiment that found that the velocity of light is constant led to the theory of relativity – an example of progression from practice to theory. In the reverse direction, the ferocious search now under way for the Higgs Boson – the God particle – which has been predicted by quantum theory is an example of traversing from theory to practice. In economics, on the other hand, where the human dimension is paramount, the progression has necessarily to be one way, from empirical finding to theory. There is a joke that if something works in practice, economists run to see if it works in theory. Actually, I don’t see the joke; that is indeed the way it should be.

Karl Popper, by far the most influential philosopher of science of the twentieth century, propounded that a good theory is one that gives rise to falsifiable hypotheses. By this measure, Einstein’s General Theory was a good theory as it led to the hypothesis about the curvature of space under the force of gravity which indeed was verified by scientists from observations made during a solar eclipse from the West African islands of Sao Tome and Principe. Economics on the other hand cannot stand the scrutiny of the falsifiable hypothesis test since empirical results in economics are a function of the context.

The short point is that economics cannot lay claim to the immutability, universality, precision and exactitude of physics. Take the recent financial crisis. It is not as if no one saw the pressures building up. There were a respectable number of economists who warned of the perilous consequences of the build-up of global imbalances, said that this was simply unsustainable and predicted a currency collapse. In the event, we did have the system imploding but not as a currency collapse but as a melt down of the financial system.

We will be better able to safeguard financial stability both at global and national levels if we remember that economics is a social science and real world outcomes are influenced at a fundamental level by human behaviour.

[The entire oration is here.]


Global governance, food security? What do these mean?

leave a comment »

Vendors in Mapusa, Goa

Vendors in Mapusa, Goa. The middle basket contains 'nachne', local millet

Are the current arrangements fit for the job? This is the question posed in a current discussion on FAO’s The Global Forum on Food Security and Nutrition (FSN Forum). The Forum is set up and managed by by FAO’s Agricultural Development Economics Division and, in their words, “is a community of practitioners currently reaching more than 2800 members” around the world.

The short intro to this discussion is: one of the consequences of the 2007-08 food price crisis was the emergence of a number of new institutions and initiatives that were intended to strengthen global capacities to respond to such situations. “You are invited to share views on how an effective global food governance system should work and on what major issues are to be addressed in order to ensure an adequate and safe food supply for all humans at all times.”

Here is my contribution to the discussion on ‘Global Governance for Food Security: are the current arrangements fit for the Job?’.

‘Global governance’ and ‘food security’ are not compatible ideas in present circumstances. If we look at the idea of ‘food security’, which development agencies and social scientists tend to agree is achieved by every family/household having enough to eat – and able to find and purchase that food easily – then this is only part of a way of living. That way of living, where the production and consumption of food is concerned, has for some years now been more aptly called ‘food sovereignty’. The difference between ‘security’ and ‘sovereignty’ is a major one, and governance – as it is commonly understood by UN agencies and development professionals – may apply to ‘security’ but hardly can to ‘sovereignty’.

So there is a difficulty with how this has been framed. Global governance is I’m sorry to say neither feasible under current economic conditions nor desirable from a cultural diversity point of view. It may have been a guiding principle in the mid-1930s when the League of Nations was created, and has been re-articulated in many forms – sometimes grandly, at other times in attempts to find peace and end conflict. The idea lies at the heart of many of the multidisciplinary efforts led by UN agencies, especially concerning human development, environment, healthcare, the right to education. It is at the core of the Millennium Development Goals programme. It remains, as it was more than 70 years ago, a fuzzy notion that does more to distract than to build. FAO needs to have nothing to do with such an idea.

Rice is still planted and harvested in the coastal talukas, but fields such as these are threatened by urbanisation

Rice is still planted and harvested in the coastal talukas, but fields such as these are threatened by urbanisation

The food crisis of 2007-08 is a point of extreme stress in the steady progress of the consolidation of the factors of food production and the organisation of the consumers of food products. In many ways, the ‘crisis’ began when the first fields were harvested with Green Revolution hybrids, and that was a long time ago. It is the growing concentration of capital in the post-harvest sequence – rather than in the people and households and villages who cultivate – that has led to the extreme food impoverishment which we first recognised in 2007-08 and promptly called a ‘crisis’.

This systemic difficulty continues simply because the same forces that, in public fora, in UN agencies, in corporate-industrial circles and within national policy, call for governance are also the forces that create legislation, treaties, trade agreements and multilateral institutions designed to sabotage all expressions of food sovereignty.

I have no doubt that within the ‘number of new institutions and initiatives’ there are also a number of people with the will and intention to help solve a problem that is found in many countries, many provinces and states. However, that does not make it a ‘global problem’. Some of the forces at work are international in scope and scale, such as the reach of the giant fertilisers corporations, the impact of the world’s major agricultural commodities exchanges, the dense links between grain trading cartels and the financial markets. These operate internationally, and the effects of deprivation and food price inflation are also seen in many countries. There are common elements, no doubt, but it is useful to distinguish elements that are common from the idea of ‘global’, for there will not be an inter-agency solution.

Identification of these problems, the reform of economic systems which permit such deprivation, and the creation and maintenance of social institutions (council of village elders for example) can only form locally and work locally. At best, there may be an exchange for methods and practice, available to all to participate in. That I think is what FAO should aim for on this subject.

The climb to food price peak in two charts

leave a comment »

These charts describe the 12-month rise in two indices: FAO’s Food Price Index, whose all-time high is the cause for so much alarm, and the IMF’s commodity index for food, which is less often referred to for food price burden impacts, but is no less important.

The FAO Food Price Index, comparative rise over 12 months for 2010 Feb to 2011 Jan and for 2007 Jul to 2008 Jun.

The FAO Food Price Index, comparative rise over 12 months for 2010 Feb to 2011 Jan and for 2007 Jul to 2008 Jun.

We see the index movements until the 2008 peak and the current peak of the FAO index and of the IMF food index (below). Over a year’s rise they are similar, but the worrying factor is the base for the 2010-11 rise, which is higher in both.

The IMF Commodity (Food) Price Index, comparative rise over 12 months for 2010 Feb to 2011 Jan and for 2007 Jul to 2008 Jun.

The IMF Commodity (Food) Price Index, comparative rise over 12 months for 2010 Feb to 2011 Jan and for 2007 Jul to 2008 Jun.

Written by makanaka

February 4, 2011 at 15:00

FAO food price index tops the 2008 peak

with one comment

The UN Food and Agriculture Organization’s food price index has risen to 214.7 for December 2010, which is above its peak of 213.5 in June 2008.

This new peak, at a time when the price of crude oil is above USD 90 a barrel, is the strongest signal yet that global foodgrain supply has entered a critical phase. The FAO index has been rising steadily through the second half of 2010 – we discussed it here.

The cereal price index stands at 237.6 which is almost 40 points below the peak of 274.3 (in April 2008). The oils price index stands at 263 which is just under 20 points less than the peak of 282.6 (in June 2008). The dairy price index stands at 208.4 which is 60 points under the peak of 268.6 (in November 2007).

But the sugar and meat price indices are at all-time highs. The meat price index is now at 142.2 (in September 2008 it was 137.4 and its previous all-time high was 139.3 in September 1990). The sugar price index is now at 398.4 which is an extraordinary 180 points above its all-time high of 218 (in March 1990 – it was 207 at the maximum during 2008). The sugar price index crossed 300 in August 2008 and remained above 300 until March 2010, and again crossed 300 in September 2010.

Comparing three-month averages for the FAO food index and its main index components helps us understand how the 2010-11 food price crisis compares with its predecessor in 2007-08:

Food     Meat       Dairy     Cereals    Oils       Sugar
3-month avg
at 2008 Jun    210.4    129.5    240.8    271.7    273.9    173.9
3-month avg
at 2010 Dec    206.4    141.2    206.3    227.0    242.1    373.7

A Bloomberg report quotes FAO senior economist Abdolreza Abbassian: “One might expect prices to come down in spring, and this may be in fact the worst. But given how unexpected the weather events have been, I for one would not want to bet on anything along those lines.” The report said that concern about drought doing harm to Argentine harvests helped corn jump 52% in Chicago last year and soybeans to rise 34%. Prices also gained as China, the world’s largest soybean buyer, became a net corn importer. Wheat added 47% in 2010 as Russia, hit by its worst drought in a half-century, banned all cereal exports.

“Eyes will be on the Argentina corn crop,” Abbassian said. “There is still, unfortunately, a potential for grain prices to strengthen on the back of a lot of uncertainty. If anything goes wrong with the South American crop, there is plenty of room for them to increase further.” Potential damage to South American soybean and corn crops is of greater concern for world grain prices than harm to wheat in Australia caused by floods, according to the economist. Argentina and Brazil are the world’s second- and third-biggest corn and soybean exporters after the US. “The watch is definitely on South America for the next two weeks,” Abbassian said. “Given the very tight corn market, and demand from China for soybeans and the tight soybean market, if those commodities start to rise more, that will also lift wheat.”

Agrimoney has a report polling commodities fund managers in several financial centres worldwide for their views. What they say about the impact major forecasts, such as the World Agricultural Supply and Demand Estimates, have is worth paying close attention to. The WASDE report provides the US Department of Agriculture’s comprehensive forecasts of supply and demand for major US and global crops.

Reuters has reported that India’s food inflation rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a January interest rate hike. “But the spurt in prices of many basic foodstuffs has also raised questions over the government’s ability to control price rises through monetary policy, with poor infrastructure, hoarding and supply bottlenecks contributing to stubbornly-high food inflation.”

Unseasonal rains are officially blamed for pushing up prices of vegetables such as onions and tomatoes, but some commentators point instead to poor agricultural productivity and transport after years of few reforms and weak government investment. Onion prices, a key food staple for Indian families, rose over 23% percent over the week to December 25. The food price index rose 18.3% in the year to December 25 and the fuel price index climbed 11.6%. This compared with 14.4% and 11.6% annual rises the previous week.

The Wall Street Journal has said that food prices in India are continuing their sharp rise, increasing concerns among economists about a prolonged spell of high prices and adding pressure to the central bank to raise interest rates later this month. “The Reserve Bank of India next meets on Jan. 25 to consider an interest rate rise after pushing up rates six times in 2010 – one of the most aggressive tightenings of any central bank. But calls for a further move keep coming, most recently with the International Monetary Fund saying in a report released Thursday that rates need to be higher to curb inflation.

“The central bank will need to walk a fine line, however, since liquidity within the bank system is tight and further rate hikes could exacerbate that problem, economists said. Data from the Ministry of Commerce and Industry Thursday showed that the wholesale price index for food articles rose 2.5% in the week ended December 25 from the previous week. The year-on-year inflation rate for food surged to 18.32% from 14.44% the week before. It was the fifth straight week of rising food prices, which have been hovering at elevated levels in recent months.”