Talk to almost any academic, and you’ll hear nothing but negative opinions about neoliberalism. Meanwhile, out in the real world this ideology continues to improve the lives of billions of people, at a faster rate than at any other time in human history.
Do you recall how the Soviet Union used to continually suffer from poor harvests due to “bad weather?” During the 1970s, US farmers made lots of money exporting wheat to feed hungry Russians. Guess which country is now the world’s largest wheat exporter:
So how did this miracle occur?
This roaring output is the result of a confluence of short- and long-term factors. Since the Soviet Union’s collapse, farming has undergone a gradual transformation from “a fantastically ineffective collective model to effective capitalism”, says Andrei Sizov, head of SovEcon, an agricultural consultancy in Moscow. Although the state’s overall role in Russia’s economy has grown, agriculture has largely remained in private hands, fuelling competition.
And Russia is one of the few countries that will actually benefit from global warming:
The future also looks bright owing to global trends. As populations grow, so too should food consumption, especially in some of Russia’s largest export markets, such as Turkey. Rising temperatures and improving technologies mean longer growing seasons, higher crop yields and wider swathes of arable land in much of Russia. “Everyone is moving north,” says Yuri. His son has started farming in the Belgorod region, closer to Moscow.
So why don’t most intellectuals understand the beauty of neoliberalism? Because they don’t understand economics. It’s that simple.
PS. There is no shame in not understanding economics. The list of fields I do not understand is probably ten times longer than the list of fields I do understand. Opera, quantum mechanics, French poetry, organic chemistry, etc. Heck, I couldn’t even explain to my daughter how a TV set works.
Merry Xmas and Happy New Year.
READER COMMENTS
Benjamin Cole
Dec 25 2018 at 10:26pm
Perhaps the United States should take note of this Russian success story, and also migrate our agriculture sector to free markets.
I wonder if Russian wheat yields per acre (hectare) match those of the US?
In truth, I genuflect to the free markets totem in the Hall of Macroeconomics.
But unsought, stray thoughts intrude during meditation.
Why are the sectors in which the US has a dirigiste-style economy—finance, defense/aerospace, agriculture, even arguably tech—also the sectors in which the US remains globally competitive?
The US is probably competitive in entertainment too, and this is not a dirigiste sector, so perhaps there is an exception
(I include tech in the dirigiste-economy due to the Department of Defense’s $100 billion R&D budget (endless spin-offs), NASA (fading but some), and the many state-funded universities that are so intertwined with tech. The Department of Agriculture has a lot of biotech-research going on too. I concede “tech as dirigiste” is arguable.)
PS For fun, I checked out international wheat yields per hectare. (Of course, there are variations in soil and climate, but for fun.)
US yields are comparable to Russia, and lag the Ukraine’s.
There is a clear winner, however, where wheat yields are double (!) that of the US/Russia. Can you guess where?
Germany!
So the old lesson: You can have free markets, or you can have dirigiste-economies, but the best results are when you have a lot of Germans.
Interestingly, despite spending the most per hectare on inputs, the Germans produce the lowest-cost wheat, due to superlative yields.
I will put a truncated link here as spam filters prevent that.
farmdocdaily.illinois.edu/2018/07/international-benchmarks-for-wheat-production.html
Then put h-t-t-p-s:// in front.
Mark Bahner
Dec 27 2018 at 9:40am
Without more study, I can’t provide more than a speculative comment, which is this: land for growing wheat is probably much cheaper in the U.S. than in Germany. So it makes sense the Germans would try to have a much higher yield than the U.S. per unit of land area. That does not necessarily mean that Germany produces wheat less expensively than the U.S. They may use more labor, more machinery, more fertilizer and pesticides, etc.
Matthew Waters
Dec 28 2018 at 5:05am
Ben,
If you look further down in the Illinois study, the cost of inputs to the German farm were also twice the other countries. In Figure 5, it shows a profit margin for all other countries while Germany’s revenues barely exceed profits.
The EU is notorious for very bad government policy with respect to agriculture, such as butter mountains. That’s my guess for the abnormal yield for the German farm in this study.
Scott Sumner
Dec 25 2018 at 11:32pm
Ben, Sorry, I can’t follow that at all. How does a “dirigiste” policy make us globally competitive? And what makes a sector dirigiste?
Benjamin Cole
Dec 26 2018 at 5:06am
Scott Sumner:
I cannot answer you, except with sociological banalities, in a comment section.
I am merely noting that the US is highly regarded and globally competitive in finance, agriculture, defense/aerospace and many regions of tech.
All of these sectors are heavily mixed with, or even defined by, government.
A dirigiste economy is one in which there is a heavy measure of government influence, intervention and support, but also much private ownership, in key industries—see China, Singapore, possibly still Japan.
Anyway, set that aside.
What is really interesting is that Germany produces double—double!—the amount of wheat per hectare than the US and Russia, and at a lower cost per unit.
So, I am not German (well, my mother’s maiden name is Miller, which comes from Mueller, but that is going back).
But the real answer to economic progress is to be German. Free markets or dirigiste, it may not matter.
MikeP
Dec 26 2018 at 9:40am
The Germany result is not particularly surprising. Germany is more densely populated than the other countries, so the land chosen to grow wheat is the very most productive wheat- growing land in Germany.
The other countries go for quantity rather than efficiency because that’s how they make the most wealth.
David Henderson
Dec 26 2018 at 3:33pm
Wow, MikeP! Good answer! I hadn’t thought of that, and I love it when applying good old-fashioned opportunity cost gives a great insight.
Benjamin Cole
Dec 26 2018 at 10:08pm
Mike P-
Well…maybe.
There are 180 people per square kilometer in Ukraine, and 230 in Germany. So, yes, Germany is more heavily populated than the Ukraine, but not what I expected. But German gets double the wheat yield per hectare of liberalized Ukraine.
And course, even the figures above do no mean much. If German cities are more dense than Ukraine’s, then more open land would be left. German countryside could be less populated than the Ukraine countryside.
But the German miracle seems to be heavy inputs. They use a lot of fertilizer and possibly pesticides to gain high crop yields. So they actually get a lower per unit cost. German farms are growing, but smaller than US farms.
Whether the German farm sector is free-market or not….well, hard to tell. From Nation’s Encyclopedia—
“Important areas of German agricultural policy have transferred to the European Union, particularly in market and price policy, foreign trade policy, and structural policy. EU agricultural reforms in 1992 cut market price supports, replacing artificial prices with government subsidies, and put stricter controls on output volume. Through the reduction of price supports and through additional measures, the reforms promoted more effective farming methods and more ecologically safe agricultural production. The federal and state governments, in their turn, provided financial assistance for agricultural development, land consolidation, village renewal, and construction of country roads. Special funds were available for disadvantaged areas where agriculture was an important economic and social factor. The government’s requirements of good agricultural practice required that fertilization and plant protection did not exceed an established maximum, and farmers who used environmentally friendly farming methods received financial compensation in recognition of their environmental policy.”
Germans are good at business and organization…and government.
I think culture often trumps economic theologies….
ChrisA
Dec 27 2018 at 2:32am
Ben
Give me large amounts of money and I am sure I can also double wheat production per hectare in Ukraine. The point of free markets is to find the best combination of land, inputs and other costs (like labor) to come up with the optimum answer. If the German answer is distorted by subsidies it won’t be the right answer even if their productivity per hectare is the best. Also – let’s just say that you are correct in this one instance – government investment finds the right answer when free markets could not. But you have to set against this one success all the cases where it turned out to be the wrong answer. I am sure you can describe some of these. The whole EU approach to agriculture for instance where people are paid to keep their land fallow is a good example. This is designed to keep productive land out of use to raise prices for consumers. How can this be a sensible policy except if you are a rich landowner? Furthermore this assumes that we stop at simple stupidity like subsidies. Very often when the results are not in line with the statists wishes they double down. We have a great example at the moment in Venezuela. How is the state control of industry and agriculture working out there? Seems like a very risky policy just to be able to boast about the best yields per hectare to me.
MikeP
Dec 29 2018 at 12:02pm
There are 180 people per square kilometer in Ukraine, and 230 in Germany. So, yes, Germany is more heavily populated than the Ukraine, but not what I expected.
There are 80 people per square kilometer in Ukraine.
So presumably more along the lines that you expected.
Mark
Jan 5 2019 at 6:13am
Well, I am German 🙂 and we are really useful as a controlled experiment in “market-oriented or dirigiste/state-planned – does it matter and how ?”
We had a West and an East-Germany for several decades. Turned out the east failed to deliver the goods. Harvest/car-building/tv/housing – only pollution was great.
Alan Goldhammer
Dec 26 2018 at 7:24am
Scot doesn’t understand “…Opera, quantum mechanics, French poetry, organic chemistry, etc. …” These I do understand; I don’t understand economics!!
Mark Barbieri
Dec 26 2018 at 9:08am
I get that people don’t understand economics. I have a very meager layman’s understanding of it. What frustrates me is that so many very smart people don’t see the very strong correlation between economic freedom and prosperity. How someone can ignore the success of economically free countries and the terrible failures of economically un-free countries mystifies me.
Thaomas
Dec 26 2018 at 9:31am
I guess you mean non-economists when you say “academics,” and of course we are still, notwithstanding much successful imperialism, 🙂 only a minority in academia. And there is also a strand that confuses “neo-liberalism” with “free market fundamentalism.”
John Donnelly
Dec 26 2018 at 1:52pm
Dr. Sumner,
I’m in need of a good text on Neoliberalism. Can you recommend one please?
Pierre Lemieux
Dec 26 2018 at 3:59pm
Very interesting, Scott. But what do you call “neoliberalism”? It seems that the term has been used (if not invented) as a pejorative term to criticized classical or free-market liberalism or any related component (or trace) in American “liberalism.” I have myself used “néoliberalisme” (including in the subtitle of one of my books published in Paris) with a positive connotation, but I may have been one of the few classical liberals to do so. (PS: I can help you with French poetry.)
Scott Sumner
Dec 27 2018 at 12:26am
Ben, Not sure the point you are making about Germany. The country is poorer than the US, Australia and Canada.
John, I’d encourage you to read Milton Friedman, who does a good job discussing the advantages of free markets.
Pierre, It’s hard to define neoliberalism precisely. I think of it as a policy mix of property rights, free markets, free trade, privatization, deregulation, no price controls, and pro-growth tax reforms. It’s often combined with some redistribution and regulation in areas such as the environment.
Thaomas
Dec 27 2018 at 4:26am
Scott,
Do you consider increasing deficits in order to reduce the taxation on high income people to be “pro growth?” What about a revenue neutral tax on net CO2 emissions + reduction in the wage tax?
Scott Sumner
Dec 27 2018 at 6:43am
The most pro growth policy would be a carbon tax used to reduce taxation on capital income. Deficits tend to reduce long term growth.
Thaomas
Dec 28 2018 at 4:33am
If by “capital income” you mean the tax on business income, I fully agree. But to move resources to investment we should focus on moving from a progressive personal income tax to a progressive personal consumption tax. Higher personal tax rates with more generous partial tax credits for 401K type asset accumulation would be a good start. As would a shift from the capped wage tax to a VAT for financing social transfers.
Benjamin Cole
Dec 27 2018 at 10:58am
Ben, Not sure the point you are making about Germany. The country is poorer than the US, Australia and Canada.–Scott Sumner
You are one-third right!
On a per capita GDP PP basis, Germany is richer than Australia and Canada, but lags the US.
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita
Of course, Germans work a lot less than Americans.
“At the same time, German workers enjoy unparalleled worker protections and shorter working hours than most of their global counterparts. How can a country that works an average of 35 hours per week (with an average 24 paid vacation days to boot) maintain such a high level of productivity?”
24 paid vacation days a year?
Also, see this
Which nationalities work the longest hours?
Mexico – 2255 hours per year
Costa Rica – 2212
South Korea – 2069
Greece – 2035
Chile – 1974
Russia – 1974
Poland – 1928
Latvia – 1910
Israel – 1889
Lithuania – 1885
Iceland – 1879
Estonia – 1855
Portugal – 1842
Turkey – 1832
Ireland – 1820
US – 1783
Czech Republic – 1770
Hungary – 1761
New Zealand – 1757
Slovakia – 1740
Italy – 1730
Japan – 1713
Canada – 1703
Spain – 1695
Slovenia – 1682
UK – 1676
Australia – 1669
Finland – 1653
Sweden – 1621
Austria – 1601
Switzerland – 1590
Belgium – 1551
Luxembourg – 1512
France – 1472
Netherlands – 1430
Norway – 1421
Denmark – 1410
Germany – 1363
Those Germans! They get wheat yields double US levels, and they work about 400 hours a year less than Americans and live nearly about the same. And better than Aussies or Canadians.
Really, why not study Germany for clues to running an economy?
Does a detective start with a theory first, and then assemble all facts to support his theory—that’s called “framing the suspect”—or does one look at the facts, and then devise a pragmatic explanation of what is observed?
Plato’s Revenge
Dec 27 2018 at 5:08pm
German writing here:
Germany is a good place to live, but it’s not as exceptional as you make it sound. It’s a highly educated, capital rich, relatively homogeneous, high trust society — like other European countries. Austria, Netherlands, Denmark, Sweden and, above all, Switzerland, score not too differently on your metrics.
(Keep in mind that these measures are noisy, and that averages are subject to selection effects.)
Benjamin Cole
Dec 27 2018 at 8:11pm
Plato’s Revenge:
I am not German, so I guess I can extol the virtues of the Teutonics freely without being accused of bias.
The Germans seem to operate government in coordination with markets to obtain excellent results.
Singapore does this too—it is a dirigiste economy with per capita GDP PPP 50% higher than that of the US. A fable has evolved that Singapore is some sort of free-market mecca, but in fact the opposite is true.
This does not mean I think the US should go the dirigiste route, although the US does so in agriculture, healthcare, aerospace/defense. finance and much of the tech sector—-the same industries in which the US remains competitive.
I think in the US there might be a chance a dirigiste economy would lead to too much crony capitalism and then slower growth.
But the strength of dirigiste economies remains a fascinating topic.
In China in particular, if infrastructure need to be built, then it is built.
The US is so bad at building infrastructure, and property rights so extreme (in terms of ownership, not development rights) that Scott Sumner says the US should not even try to build infrastructure.
It is hard to square hardcore libertarianism with modern-era macroeconomic development.
Plato's Revenge
Dec 28 2018 at 8:03am
Hm, not sure why you keep insisting that the German *government* does something right here. It just doesn’t do anything particularly economical, and we’d be better off if it did less. And, again, there is nothing special to Germany (today) compared to its neighbors, except size (and that’s a dubious blessing)
Plato's Revenge
Dec 27 2018 at 5:54pm
also, I wouldn’t use PPP instead of exchange rates for GDP, unless the exchange rates are manipulated/distorted/not market rates
PPP is a calculated exchange rate on the basis of a basket of *retail* prices/rents. Why should only retail prices matter? And the reasons they are higher in rich countries properly belong into GDP. The mark up is erned (and spent) by someone, and the economy suports this
If you want to compare wages or living standards, it’s different, but for the economic power and wealth of an economy, you want its ‘liquidation value’ in the world market
Nick
Dec 28 2018 at 1:31am
Hi Ben,
You write:
I have a few questions. I think you seem to imply that (at least hardcore) libertarianism isn’t suggestible.
Assuming that somehow government caused this to happen, how do you propose you bring the same to the rest of the world?
Do you think, if so why, that nation states are equivalent in all aspects and results obtained in one place can be replicated elsewhere if we “just tried hard enough”?
If, let’s say, we discovered that few countries belonging to a particular culture regularly produced people who performed extraordinarily well in certain arbitrary activities (perhaps at the mentally challenging game of Go), is that an indictment of the failure of another country that has relatively more free markets? Why so? Why not also call it a failure of government in other countries?
Uday Manchanda
Jan 10 2019 at 7:46pm
Maybe this will serve as a wake up call to end farm subsidies! Of course, nothing will change and the status quo of corporate welfare to wealthy farmers and agribusiness, as well as protectionist controls, in order to prop up domestic prices, will continue unabated.
Comments are closed.