From Paper 1:    Food Mountains and Famines (the World View)

• The world does not (at least yet) have a food problem - production capacity is well able to produce enough food for all.  The problems are:
• food distribution and infrastructure
• inadequate incomes for the poor, reflecting inadequate resources (land, labour and (especially) capital - since it is capital which largely distinguishes the rich from the poor)
• inappropriate POLICY:  rich countries subsidising domestic production and protecting their domestic markets from trade;  poor countries taxing food production (or attempting to subsidise food consumption by selling food at less than costs of production) - or, equivalently, leaving most of the population to fend for itself in subsistence agriculture - the trap that no surpluses are produced, trade is not possible (even within a country) and there is neither incentive nor opportunity to exploit the economies of specialisation and trade.
• Development involves fewer people earning a full time living from agriculture than before.  Incomes to farmers will tend to fall in farming to encourage people to leave.  Attempts to prevent these signals (through support of and protection for farming) will simply result in too many people trying to earn a living from farming - increasing asset (especially land) prices, so that farm production costs are increased and farm incomes are not substantially improved.
• Such attempts to isolate domestic (developed country) agriculture sectors from the world market also rebound - world prices are depressed and support costs become ever greater (or production levels have to be restricted with production quotas, set-asides and so forth)
• The Key Problem:  How to resolve the logic of the market system (the best way we have yet found to match productive potential with societies demands) with the necessary co-condition that society sanctions the justice and equity of the market solution - which rewards the rich and penalises the poor, and depends on the rather capricious accidents of birth, opportunity, entrepreneurial risk and good timing.  This problem is even more fundamental and critical than the more obvious criticism of the competitive market - that it does not take adequate account of public goods or externalities - those things and actions which are not properly accounted for in market transactions, being neither contracted for not paid for in the market system.

• Farm support has done nothing to improve farm incomes, all it does is raise the costs of production - both history and logic demonstrate the point.
• Poorer resources will still lead to poorer incomes, other things being equal - improved incomes requires more and/or better resources, or better management to produce more of what is wanted for less.
• But the history of support has created substantial vested interests in its continuance - in the form of increased farm asset prices (pension funds and capital resources for the industry and its dependents) - simple elimination is neither politically acceptable nor (perhaps more arguably) economically sensible.
• Rhetoric of CAP reform (under Agenda 2000 - shortened now to A2K and subsequent reforms) implies reform to:
• Healthy Agricultural Trade (DRH's acronym for:  no more coupled support, limited and finite compensation for asset value depreciation,)
• Re-Creational agriculture - to provide CARE goods and services - implying proper signals of society's willingnesses to pay for CARE etc. and appropriate mechanisms for ensuring delivery of these things from those best able to produce and supply them.
• But systems and mechanisms of support and assistance do not match the rhetoric.  Present systems re-inforce the status quo, and generate increasing uncertainty about the future, while current generation of farmers (the supposed beneficiaries) are increasingly recognising that the present system is of little help to them  -> potential for internal (domestic) fracture of the political concensus on which present policy is based. In particular - current policies do not make any serious attempt to separate the issuse of compensation from the requirements to pay for non-market services of agriculture (landscape, wildlife, environment etc.)
  
• So what might we (society) do instead?
• HAT:  Limited, fully decoupled and finite compensation (lump sum, or as near as politically possible) + security (safety net) to market prices
• CARE and ReCreational Management Payments:
• If we want people to stay, live and work in rural areas when otherwise they would not, it has to be made attractive for them to do so - with captial and income and even sales tax benefits.
• CARE provision requires that we ( as members of society) are willing to pay for these benefits, and that our willingness to pay is appropriately signaled to the suppliers. We need efficient and effective ways of ensuring this - use the existing charitable, NGO and non-profit organisations (CARTS, in short) to do this, with supplementary 'top-loading', free from any additional constriants or accontabilities, from the treasuries.
• What of the future for the Northern Uplands?
• World Competitive agricultural production?  = ranching and low cost production on a large scale?  Often impossible, depending on location, because the land is too valuable for other (CARE) reasons
• CARE (recreational agriculture) alone?  Recreational demands are certainly growing, but probably insufficient willingness to pay to preserve present strcutures and activities (though yet to be tested in genuine market place) except in particular circumstances.
• Originality?  - exploit growing demands for difference and differentiation - 'eat the view', locality and originality - use the market as a living ecology, developing niches and habitats which are self-sustaining and self-promoting.  The key distinction between genuine competitiveness and the conventional economic concept of (perfect) competion.
• None of these, however, are sensibly encouraged or assisted by bureacratic attempts to regulate, proscribe or define what the market wants or is willing to pay for.
• Conclusion - it is not the market which fails - it is our notions of democracy (all power to the majority voter, regardless of who pays) and government.  Yet we have no established and accepted analytical framework or 'science' on which to base sensible discussion of political failures and democratic deficits - other than assinine assertions of some nebulous 'third way'.

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• What, exactly, does distortion mean?
• Provisional answer - interference with market determined prices (other than to correct for public goods and externalities), since there is no such thing as a unique set of prices which can simultaneously satisfy social wishes for justice (relating to endowments of resources (land, labour, capital and management skills)) while also satisfying market balance (equilibrium) and efficient allocation (corrected for public goods and externalities).

Without trade (under conditions of autarchy), this society will choose some particular mix of M and G (say at point A, producing and, necessarily, consuming amounts Am and Ag respectively).  Notice that this choice, whatever it is, necessarily requires that the rate at which these two goods can be exchanged (both on the supply (ppf) side and the demand side of the local domestic market) will be equal to the Autarchy Price Ratio.  Supply price (the slope of the ppf) is equal to the demand price (given by the choice exercised by the society as to which mix of goods to consume).  The market is in balance, and, providing that the ppf and the choices exercised by society include all public goods and externalities), the efficient price.  Supply curves - the price at which succesive amounts of any one good can be produced - necessarily slope upwards for this reason.  (Question -  do demand curves necessarily slope downwards, and does it matter if they don't?).

Trade will only occur if this society meets and negotiates with some different society (with different ppf, and/or different social valuations on the possible products).  If all societies are exactly the same, then trade will neither happen nor be sensible.  Trade relies on differences - so the "level playing field" notion is very misleading.

When trade happens, a new and different price ratio will be established - the Trade Price Ratio.  This society can now choose a new combination of goods to consume, not totally restricted by its own ppf - it can specialise in the production of the good which is more valuable in trade (good M in this case), and export some of this good (amount Pm(t) less Am) in return for imports of G (amount Cg(t) less Pg(t)).  Amount Ex of M buys amount Im of G on the 'world' market.  So now our society is consuming at point Tc (chosen arbitrarily here to be the same amount of M as before, but more G - unambigously better off.  By how much?

By the value of the additional G consumed, valued at the pre-trade price ratio given by the autarchic price ratio.  Or, by the increased income generated by trade - the value of the exports valued at the trade price ratio.  The two values are not identical - they are measured at different price relatives (real prices).  Which is the most relevant depends on the reasons we need the measurement - but the difference does not invalidate the general principle - people are better off if they specialise and trade.  Otherwise, we wouldn't do it.  And we do, all the time.  Very very few of us, if any, really choose to be totally self-sufficient - life is too short and too miserable if we do.

Restriction of trade or distortion of trading price ratios necessarily makes our society worse off than it otherwise could be.  Q.E.D.

An Illustration:  The gains to be made from elimination of EU Dairy Quotas and associated price support
Intervention buying, export refunds and import levies on dairy products (Skim Milk Powder (SMP) and Butter) support domestic EU prices at Pm, with production restricted by quota at Q*.  Elimination of quota alone, without also eliminating supported prices, makes no sense (make sure you understand why not).

However, if both are eliminated, producers lose less than consumers and taxpayers gain.  The combined producers loss and consumers gain results in a net loss in surplus shown in the diagram, which is necessarily less than the taxpayers gain.

See the summary of the recent study of the consequences of quota elimination for the current estimates of the gains versus the losses (from the DEFRA web site containing the whole report) in preparation for next weeks class - and come prepared to answer the question as to why quotas were introduced in the first place, if they are now such a "bad" thing!