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At least the Japanese can video conference when their bullet trains break

In my last post I discussed the short and medium run effects of increased trade and specialization on a society’s robustness. What is the effect over decades?

Complexity through new technology and specialisation, enabled by interpersonal and international trade, increases the productivity and productivity growth in an economy. Changes in productivity accumulate exponentially over time so in the long run they dominate any other impact. There are two ways this greater productivity can be used: in a purely Malthusian economy (which would include all of the world pre-1800 and the poorest parts of Africa today) all of the extra efficiency goes towards increasing population density while incomes remain roughly constant; in a modern post-Malthusian economy it mostly goes towards making each person richer.

When complexity results in greater population density and unchanged near-subsistence incomes, a society may be more or less vulnerable to collapse than it was before. A disturbance of similar magnitude is just as harmful for each person. The greater number of inputs makes disturbances more frequent, but the larger size of the economy allows greater diversification which is a buffer against some kinds of industry specific shocks. A larger economy can come up with more innovations as there are more people to do experiments and solve new problems. In the views of some historians complexity in subsistence income societies has resulted in the collapse of many large and sophisticated empires through history, so this is some evidence that the net effect is towards greater fragility. If our concern is not the harm a disaster inflicts on each person or the probability of a society collapsing, but rather population falling below an absolute number, which is the case when we worry about human extinction, a higher population is surely better. A disaster has to be much more severe to take the world’s population from 7 billion to zero than from 100 million to zero.

When a society uses complexity to make each person richer it is also unclear clear if it is more vulnerable than before. Though reliance on many inputs would suggest any single good or service is more likely to be disrupted, each person has a bigger ‘buffer zone’ before their income falls low enough to threaten their survival. If every person in Australia found their income halved tomorrow, we could continue surviving comfortably; when the same happened to countries in 1750 were halved, famine, riots and a cascading collapse of law and order were frequent outcomes. A rich society has other advantages that make it more robust. It can afford to stockpile more goods for security or add redundancy to any supply chain to make disruptions less frequent. It will also have more capital, idle labour and land which it can potentially reallocate to make more of anything it is struggling to obtain. A rich society, like a high density society, will have a greater capacity for innovation and problem solving and will foster some people who specialise in that task specifically. As in the Malthusian case, a richer society produces more kinds of goods across more places and sometimes in more varied ways, and this diversification makes it more resistant to shocks to any specific process. As modern industrial society is the first post-Malthusian civilization, the fate of historical empires may not have so much to teach us about the impact of complexity on robustness today.

The picture isn’t all rosy. Though more resources are available to cover for any problems, it is possible that the more complex production techniques familiar to rich countries are hard to scale up (or down) in the short term, and the specialised skills and machines found in complex economies may not be as easily reallocated to different tasks as more basic ones. The time necessary to create the physical and human capital necessary to open a nuclear power plant is probably greater than that for a traditional coal plant; a shovel can be applied to a greater range of tasks than a dental drill. The skills and technologies found in rich societies may also be less adapted to disaster scenarios than those found poorer ones. For example, nobody I know would be able to grow all their own food.

Though there are things about modern societies which make them more robust and others which make them less robust, I think the overall movement is clearly towards robustness. At a guess, rich societies today even with their 20 varieties of mobile phone charger and ‘just in time’ supply chains, are more resilient in the fact of disasters than any others in history and they will become more so the more complex and rich they get. Complexity in the financial system probably contributed to the 2008 financial crisis but after decades of productivity gains a recession is much less painful now than in the 1930s. Then many people went without food, today people tough it out without Wiis. At the other end of the spectrum, any very crowded and poor country which relies on complex technology to get its necessities is probably the most vulnerable to disaster in history.

Related thought from George Monbiot. He is more pessimistic than me.

In general as a production process gets more complex and requires many specialised and non-substitutable inputs, it is more vulnerable to disruption. This is proposed as a cause of collapse for many sophisticated empires throughout history. The economic fallout from the Iceland volcano fiasco got me wondering: does trade follow the rule that complexity leads to fragility, and if so how can we reduce that?

Short run effects

There is a compensating benefit to trade which increases stability which complicates the situation: unexpectedly low production in one place can be made up by unexpectedly high production in another. To give us some context I’ll consider robustness of food supply, one of the most important production and distribution processes for a society’s stability. For simplicity I’ll imagine three kinds of disruption: local crop failure (a local 30% output shortfall), global crop failure (a randomly distributed 30% output shortfall globally) and a halving of trade (from war, protectionism or natural disaster for example).

Self-sufficiency but no trade: Imagine a world where there is no trade in food between regions. Each region has to aim to produce enough food to feed itself. Each region has to worry about a bad season and regional output can be very variable and if they don’t produce enough food, they will starve. Given this they will aim to produce more food than they need and stockpile lots of grain in order to make a famine very unlikely. They are nonetheless more vulnerable to local shocks than if they could buy food from elsewhere in these emergency scenarios. A global shock has the same impact. However such a situation is not at all vulnerable to trade disruption as nobody relies on trade.

Self-sufficiency and trade: Imagine that in this world trade was suddenly opened up so that all regions could trade with one another. Initially production patterns do not change, so each region is still dedicating the same resources to food production and has the same distribution of expected outputs. In the case of a global supply shock, trade will help a little if a region can get by for a while on a low food supply; those regions with an especially bad crop failure can buy from those regions with a more mild failure. But local crop failure can now be covered with imports from other regions which had bumper crops that year. Vulnerability to trade disruption is no greater now because no region relies on trade except when there is a local crop failure and previously they would have been ruined in that situation anyway. This situation is much more robust than the previous one

No self-sufficiency but trade: Now over time people adapt to this new trade and some regions start producing a lot of food and others start producing less food. In a market system this concentration and specialisation will be based on comparative advantage. Local crop failure is only an issue when trade also fails. Assessing vulnerability to global failure is hard. The total global expected output and stockpiles of food would probably go down a bit over this time. The ‘law of large numbers’ means less excess capacity or stockpiled food is necessary to keep the same risk of famine as existing in scenario 1 because total global food production is less variable than local food production. However, specialization between regions makes food cheaper making stockpiling cheaper and allows us to produce most food in the regions with the least variable output. Compared to self sufficiency and trade we are more vulnerable to trade disruption.

Local crop failure

Global crop failure

Trade disruption

Self-sufficiency but no trade

Vulnerable

Vulnerable

Not vulnerable

Self-sufficiency and trade

Not vulnerable

Vulnerable (but less?)

Not vulnerable

No self-sufficiency but trade

Not vulnerable

Vulnerable (?)

Vulnerable

As we can see, self sufficiency and trade is unambiguously the most robust of the three options, but it is ambiguous which of ‘self-sufficiency but no trade’ and ‘no self-sufficiency but trade’ is the worst. That will depend on how frequently local crop failures, global crop failures and trade disruptions occur and how harmful each is.

What can we do?

If we can have both lots of trade and some back-up systems appropriate for a non-trade world we will be especially robust.

A subsidy for local production to make you less reliant on trade, but open trade when local output falls short is a possibility, though it would be costly and useless against global failures as other countries will proportionally reduce their production. Robin Hanson proposes among other things that previously agreed prices be allowed to rise in emergencies, which gives private parties a reason to maintain excess and robust local production capacity if a supply shock seems likely. The more lucrative opportunities to price gouge during disasters a society commits to having, the more robust it will be.  The subsidy of stockpiles which are only released in a disaster would increase robustness to all kinds of failure, even those where law and order break down. To avoid crowding out other stockpiles or more robust production methods, government stockpiles should commit to sell at high prices rather than give the stockpile away.

In my next post I’ll consider long run effects of trade and complexity on robustness and explain why restrictions on trade or any other policy which reduces productivity growth would be counterproductive.

Greg Clark in A Farewell to Alms:

“The focus on material conditions in this history will strike some as too narrow, too incidental to vast social changes over the millennia. Surely our material riches reflect but a tiny fraction of what makes industrialized societies modern? On the contrary, there is ample evidence that wealth—and wealth alone—is the crucial determinant of lifestyles, both within and between societies.

Income growth changes consumption and lifestyles in highly predictable ways. The recent demise first of the American farmer and then of the manufacturing worker were already preordained when income began its upward march during the Industrial Revolution. Had we been more clear-sighted, we could have foreseen in 1800 our world of walk-in closets, his-and-her bathrooms, caramel macchiatos, balsamic reductions, boutique wines, liberal arts colleges, personal trainers, and $50 entrees.”

Lant Pritchett in Let Their People Come: Breaking the Gridlock on Global Labor Mobility:

Hamilton and Whalley (1984) calculate that free migration could as much as double world income—which makes it very hard to stay motivated about the fractions of 1 percent that further trade liberalization can generate. These empirical results make intuitive sense. Goods markets are in fact quite deeply integrated, and though there are still gaps across countries in prices and evidence that the “border” effects inhibiting trade are still quite large, the price differences in goods across countries induced by restrictions on trade are very small relative to the observed wage gaps of as much as 10 to 1. Because, in the standard economic “triangle” calculations, the efficiency losses rise with the square of the distortion, further liberalization of trade (where distortions have been reduced) just cannot.”

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Robert WiblinHi! I am a young Australian man ostensibly interested in the truth and maximising the total number of preferences that are ever satisfied, weighted by their intensity. I also enjoy reading and writing about the topics listed above. If you share my interests, friend me on , , or or subscribe to my RSS feed .

All opinions expressed here are at most mine alone, and have nothing to do with any past, present, future or far future employers.

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