Scarcity

SCARCITY This chapter examines the concept of scarcity. Scarcity is fundamental to understanding large parts of economics. If there was no scarcity, there would be no prices, incentives would have no power, there would be no reason to weigh and choose between alternatives, and the conservative economic principle of “there’s no free lunch” would be meaningless. It is perhaps no exaggeration that without scarcity the whole field of microeconomics would fall apart. However, scarcity does not mean shortages, or absolute scarcity; it can be relative as well. Land and Labor can both be plentiful, but Labor can be relatively scarce. This chapter, after defining the concept of scarcity, will illustrate the concept by looking closely at two cases of scarcity: food scarcity and gender scarcity (the sex ratio). Through these cases, we will look at how individuals make marriage and childbearing decisions. In addition, we will examine the work of economists Thomas Malthus and Amartya Sen and the concepts of opportunity costs, the production possibilities frontier and moral hazard.

1.0 SCARCITY The “economic problem” is that wants are greater than the resources available to satisfy them. Alternatively, demand is always greater than supply. However, supply is the limiting condition because resources are finite and the scarcest resource of all is time. As a result, economics is sometimes called “the dismal science” because its main message is that you cannot do what you wanted.

The concept of scarcity also allows us to parse market prices from intrinsic value. For example, consider the market price and intrinsic value of diamonds and water. Diamonds command a high market price; water is often provided without charge in restaurants and freely available via water fountains and public facilities. However, few would argue that diamonds are intrinsically more valuable than water. So, why is the market price of diamonds so high relative to water? Under the original “adding-up” theories of value proposed by some Classical economists, the value of an item was the sum of its inputs or characteristics, mostly notably, labor time. However, if we were to look at the human body, its component elements would only fetch $4.50: carbon, nitrogen and oxygen are not particularly scarce. However, the estimated value of different organs is fairly high -- Bone Marrow, $23 million; Antibodies, $7.3 million, Kidney, $91,400 -- and the human body as parts could raise almost $47 million (Note: the value of a statistical life: c. $7 million). There is a clear difference between the “use value” and the “exchange value” and scarcity is the key to understanding why.

The puzzle of economic rents sheds light on the importance of scarcity. Rents, by definition, do not entail any labor input, so where does the market value come from? Rents derive from the ownership of scarce resources and the ability to withhold them -- making them artificially scarce -- from production. The extra revenue monopolists receive is not because of the characteristics of what they sell; it is from their ability to make goods and services artificially scarce. Patents, copyrights, and professional licenses also serve to raise the value of services by controlling access to the legal use of products. The broader point is made by the example of diamonds illustrates this point. Diamonds are not naturally scarce; mining companies (DeBeers) hold many diamonds off the market. Scarcity also lies at the root of most global environmental problems and the scarcity of clean air, fresh water, and arable land will no doubt weight heavily in the mid 21st century. The 20th century -- especially if you lived in the USA -- was a century of abundance, the next may be the century of scarcity.

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2.0 MALTHUS & THE DISCOVERY OF SCARCITY Thomas Malthus was an early economist famous for his theories of population, rent, and economic “gluts.” While a contemporary -- and member -- of Classical economists such as Adam Smith, David Ricardo, JeanBaptiste Say and James Mill, he differed from them in significant ways and foreshadowed later developments in modern economics. He is most famous for his thoughts on population growth and sustainability and his writings influenced evolutionary and population biologists including Darwin. In many ways, Malthus is the first environmentalist as the one of the first thinkers to stress the reality and influence of limits to growth and development. To this day, the term “Malthusian” connotes a person with penchant for pessimism, particularly about environmental concerns, and who advocates strong policies to address environmental threats. He was involved in many of the public policy debates of early 19th England and through his teaching position was influential on many of the administrators who would supervise England’s colonization of India.

By the late 18th and early 19th century, the impact of England’s Industrial Revolution was widely evident. In a short period of time, England had come from an afterthought on Europe’s periphery to the wealthiest and most powerful nation of its time. However, Malthus -- among others -- noticed a seeming paradox in England’s economic development. Despite England’s obvious wealth, there was a marked increase in pauperism (poverty) compared to previous experience. How could the nation become richer, while its inhabitants became poorer?

Even if the wealth was unequally distributed, everyone should be better off than when the nation, as a whole, was poorer. A second level of this puzzle was that many of the new poor and hungry were farmers, the individuals who should be the most economically self-sufficient. At the time, the Poor Laws guaranteed the means of subsistence at local parishes for those unable to support themselves. As a clergyman, Malthus had a direct view on the operation of the system and believed it to be a part of the larger problem.

Malthus proposed an explanation based on the “natural” laws of population growth and food supply. Under the contemporary understanding, population and food supply should be in balance. One farmer (+ one acre of land) produced one bushel of food; two farmers (+ two acres of land) produced two bushels of food. In other words, food increased at an arithmetic (linear) rate.

However, population increased at a geometric (exponential) rate. Eventually, population would outstrip food supply with the result of widespread poverty and famine. The food supply acted as a “check,” or limit, to population growth. Food would be too scarce to support the population. As food became more scarce, its price would rise, driving more and more people into poverty.

Returning to the English case, Malthus argued that as England became richer through manufacture, people lived longer and had more children, increasing the total population. In addition, as individuals shifted from agriculture to manufacturing (in part from the population growth in the countryside), fewer individuals stayed on the farms to produce food, yielding less food than before. The key fact for Malthus was that while England’s population grew as result of its wealth, the land to support the growing population did not. As a result, food would be become more scarce relative to population as it grew, driving up its price and consuming greater shares of income.

The problem of high agricultural prices was a problem that engaged all early economists. Most, like David Ricardo, thought it supported the argument for free trade and the repeal of the Corn Laws that prohibited the import of cheaper foreign grain. However, Malthus dissented and argued to keep protectionist barriers for 2

agricultural products. He believed that this would raise agricultural wages and draw more workers into food production.

2.1 WAS MALTHUS WRONG? PART I Over 200 years have passed since Malthus made his original predication of a population-driven famine catastrophe and arguably it has not happened. In fact, as the chart to your right attests, world population has increased seven-fold (at least) since Malthus first issued his dire warnings. Does the absence of worldwide famine disprove Malthus’ theory of population and scarcity? The chart at the far right, showing the relationships between population and wages in England through the 18th century suggest otherwise. There is a clear inverse relationship between wages and population: the larger the population, the lower the wage; the smaller the population, the higher the wage.

This illustrates the “Iron Law of Wages,” the notion that wages will tend toward subsistence level. Imagine a buying a pizza for a party, expecting only four people to show. Each would receive 1/4 of the pizza. Then, four neighbors, smelling the pizza, show up and the individual shares are now 1/8 apiece. Then, more friends, seeing the rocking party, join and the shares shrink even more. Eventually, the shares become so small that people starve and disappear. This was Malthus’ point. The agriculture production is fixed (or limited), and therefore, increasing the population just means smaller shares of the produce for everyone. This is akin to the predator-prey model in ecology.

If we look at this relationships from a longer historical perspective, we see that income levels for most of human history we struck at a low and constant level, known as the “Malthusian Trap.” The chart to your left suggests that the economic welfare of the average human did not increase from the Agricultural revolution to the Industrial Revolution. At the time of Malthus’ writing, most of the evidence clearly supported his interpretation. Clearly, there is the “hockey stick” of income growth during the past 200 years, but Malthus could not have known this (and this is a story for another chapter) writing at the beginning of England’s Industrial Revolution. Still, Malthus may have overestimated the growth of agricultural production by assuming it would growth arithmetically. As his later writings on rent suggest, agriculture probably faces diminishing (less than linear) returns to scale. As food production carrying capacity, its growth may resemble a function approaching its mathematical limit as shown in the chart to your right. This suggests that instead of the slow, grinding immiserization of rising food prices promoting incremental adaptation, the population crisis will occur suddenly with evidence only apparent when the population has already passed an irreversible “point of no return.”

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2.2 THE PRODUCTION POSSIBILITIES FRONTIER The tradeoff between high wages and a large population suggests another basic economic framework: the production possibilities frontier (PPF). The PPF is a chart where two possible uses of the same set of resources are drawn on the horizontal and vertical axes respectively. A curve representing all possible combinations of the two options creates a frontier that maximizes the use of existing resources. Consider the PPF charts below.

This pair of PPFs represent different choices made between two alternatives -- texting and reading a textbook -- facing a student with the same resource: time. The shape of the curve is not symmetrical: the student is much better at texting than reading the textbook and so has to give up much more texting to achieve the same result reading the textbook than she would gain if we gave up reading the textbook to do more texting. The area of the blue box is equivalent to the utility (y units texting, x units textbook reading) derived by a given allocation of resources, in this case time. The white areas under the curve are unutilized potential. The PPF shows the opportunity cost of choices: part of the cost of texting is the foregoing reading the textbook (and whatever benefits reading conveys) and part of the cost of reading the textbook is not using that time to text.

Opportunity costs are often overlooked in making choices, but they are often the largest costs because they involve the trading away of the most scarce resource: time. The most commonly used PPFs are the supply and demand curves which show the transformation ratio between money (price) and real goods and services (quantity). The PPF is also a graphical illustration of the principle of “no free lunch.”

2.2.1 INTENSIVE & EXTENSIVE GROWTH As a production function, the PPF also gives us insight into different strategies to expand an economy’s productive capacity. Essentially, there are two strategies: intensive growth and extensive growth. Intensive growth (“work harder”) means to simply to increase the inputs into a production process to raise the output.

In the example above, it would be as if a person had two hours instead of one to text or read; one would be able to both read and text more. Graphically, this would work by reducing the white unutilized potential areas under the curve. Extensive growth (“work smarter”) means to improve one’s technology so that one can achieve greater output with the same amount of resources. For example, if one became more dextrous, one could accomplish the same amount of texting in less time and either choose to do more texting or have extra time to read their textbook. Graphically, this is equivalent to shifting the PPF outward.

These two approaches can describe the two approaches to industrialization taken by East and South Asian civilizations and Western Europe respectively, explaining the “great divergence” in productivity since 1500.

Broadly speaking, Asian empires (Ming-Qing Chinese Dynasties & Indian Mughal Empire) pursued labor4

intensive strategies. The Asian empires had no frontier to expand food production, so they turned to labor-intensive rice-paddy agriculture. Due to their reliance on rice cultivation, which allowed them to feed a larger population on fewer acres, they had a ample supply of human labor. Finally, the intensive character of Asia’s rice cultivation, including terracing hillsides, cut into their ability to produce energy from biomass. Europe had a different experience. The “discovery” of the Americas following Columbus added many acres for cultivation under the colonial plantation system. In addition, the Bubonic plague caused labor shortages and raised the cost of labor, pushing Europeans to pursue capital and energy-intensive, labor-saving technologies as the charts above show.

In addition, Europe fortuitously found cheap sources of energy underground -- coal -- which allowed them to rely less on surface area for biomass energy (wood) and freed land for food production. The development paths of Europe and Asia show how relative scarcities of key factors of production nudged Europe to adopt technologies that allowed it to close and then surpass the much more advanced Asian civilizations.

2.3 MALTHUS & MORAL HAZARD While Malthus’ description of the population problem are important, equally interesting are the prescriptions he proposed to address the problem. There are two “checks” regulating the population’s size: “positive” checks -- the death rate -- and “preventive” checks -- the birth rate. In particular, Malthus cited two types of positive checks and one preventive check on population growth. Malthus ruled out the preventive check -- “moral restraint” (birth control / contraception) -- and favored the positive checks “vice” (war & crime) and “misery” (poverty & disease) to keep population growth within production limits necessary to support it.

These recommendations made Malthus a curious character in the annals of social reform and welfare. Malthus criticized the Poor Laws that provided free food and shelter to those unable to support themselves and their families. If you fed the poor, it would only “encourage” them to have more children they could not support. This would further exacerbate population pressures, putting downward pressure on wages and upward pressures on food prices, leading to greater and more widespread poverty. The kindest, and most socially responsible, policy would be to let starving people die. The most famous expression of this sentiment is found in the mouth of Ebenezer Scrooge of Charles Dickens’ The Christmas Carol: "Since you ask me what I wish, gentlemen, that is my answer. I don't make merry myself at Christmas and I can't afford to make idle people merry. I help to support the establishments I have mentioned: they cost enough: and those who are badly off must go there.'' "Many can't go there; and many would rather die.'' "If they would rather die,'' said Scrooge, "they had better do it, and decrease the surplus population."

Later, the Ghost of Christmas Present -- a personification of Abundance -confronts Scrooge by showing him “his children”: Ignorance and Want. Most contemporary readers see this as evidence of Scrooge’s miserliness, but for Scrooge and Malthus, this position was considered “progressive.” Therefore, 5

Malthus recommended “starvation wages” -- pay workers enough to live (and work), but not enough to support children -- to employers and advocated the institution of “workhouses” that would require paupers -- including the elderly and children -- to work to receive public assistance. The cartoon (1834) on the right displays a critical view of the workhouses Malthus supported. Poverty should not be ameliorated, but cruel and miserable as possible to serve as an incentive for productive work.

Malthus’ thoughts on this proved influential to the development of Darwin’s concept of “survival of the fittest.” The poor, as evidenced by their poverty, were “unfit” and therefore should not “survive.” Darwin acknowledges his debt to Malthus in his autobiography: In October 1838, that is, fifteen months after I had begun my systematic inquiry, I happened to read for amusement Malthus’ On Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long- continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The results of this would be the formation of a new species. Here, then I had at last got a theory by which to work

Before we dismiss Malthus as a hard-hearted hater of the poor and destitute, we need to understand the economic concept of “moral hazard.” Moral hazard refers to the perverse incentives that arise when choices are separated from consequences or when the benefits of an action are divorced from its costs. In part, this is an extension of the principle that “there is no free lunch” and charity given to the indigent is taken from someone else. However, it is also the aphorism, “if you give a man a fish, you feed him for a day; if you teach a man to fish,you feed him for life.” Charity and welfare provide disincentives to work. If a teacher gives a student a grade higher than they deserve, the student learns not to study. If you give a patient too much care, they may not learn to heal and become self-sufficient. If policies make gasoline (and other pollutants) cheap, there is no incentive to reduce pollution. If everyone receives the benefits of an invention, there is no incentive to innovate.

If criminal penalties are lenient, there is no disincentive to deviant behavior.

2.3.1 MORAL HAZARD & WELFARE On of the most significant application of Malthus’ ideas -- outside of population control -- is the analysis of social welfare programs. First, the association of promiscuity with the poor (and racial minorities more generally) is a stereotype that unfortunately carries down to the present day and reflects Malthus’ linkage of poverty and population growth. The false stereotypes of women as “baby mamas,” “welfare queens,” and “gold diggers” all derive from the premise that women use children as means to extract ill-gotten financial gains.

However, the larger area of application is the concept of moral hazard and the disincentives to work created by public welfare programs.

The first area is unemployment insurance (UI). The graph to your left shows when unemployed workers return to work relative to the timing of their UI. The key is the big spike that occurs about 2/3 along on the horizontal axis, showing a large number of unemployed suddenly finding work the same week that their UI expires. The graph suggests that as long as individuals receive income from UI, which they only receive if they remain unemployed, they have no incentive to find work. This data seems to support Malthus’ idea of moral hazard and work incentives.

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Research by Harvard economist Raj Chetty questions whether UI creates work disincentives. The graphs to your left show his findings. On the left, the chart compares more generous (red) and less generous (blue) UI benefits.

This data seems to support Malthus, where less generous benefits seem to predict a less likelihood of unemployment. However, the key fact is that the left graph is only for individuals who are in debt (no net savings). The graph on the right shows compares the same levels of UI benefits for individuals who have some savings when they became unemployed. It shows that there is no difference in the likelihood of working based on the size of the UI benefit. In fact, contra Malthus and moral hazard, recipients of a more generous UI benefits are more likely to be employed after 35 weeks of unemployment than those receiving a less generous benefit. Similar evidence can be found from Austrian UI where instead of a weekly benefit, employees who have worked for more than 36 months (3 years), receive a lump-sum severance payment. A lump-sum payment should have no effect on the incentive to work because you receive the amount whether you remain unemployed for one day or one year. However, employees receiving the lump-sum payment are likely to remain unemployed longer. This evidence suggests that UI does not provide a disincentive to work, but enables the unemployed to find the best possible job by avoiding taking a lesser job due to income pressures.

Another source of evidence is the relationship between disability insurance (DI) provided Social Security and unemployment. The graph to your left shows how applications for disability (blue) appear to rise and fall with the unemployment rate (red). Since disability is not a result, nor a cause, of business cycles, this relationship would suggest that some individuals apply for disability as an alternative to unemployment and not because of a disabling condition. Also notable is that DI applications increased dramatically following the 2001 recession -- the first recession after welfare reforms passed in 1996 made public assistance more stringent. In short, DI is increasingly used by the unemployed as an alternative to welfare assistance that is no longer available. This interpretation is supported by the composition of disability diagnoses as shown by the graph to your right. The graph shows a distinct rise in the diagnosis of mental (stress & psychological disorders) and musculoskeletal (back pain) as a cause for disability compared to other disabling conditions.

Mental and musculoskeletal problems are notoriously subjective diagnoses. The pattern in the graph suggests that physicians -knowing their patient’s economic hardship -- are colluding to classify them as disabled so that they can receive assistance. The case of DI suggests two about moral hazard and work incentives. First, the leniency of DI does provide a work disincentive. Second, the economizing of ordinary welfare (1996 Welfare Reform) did not eliminate all disincentives for work, but shifted a sizable amount of individuals to a more generous and unnecessary form of assistance.

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The third area is the high marginal tax rates low-income households face because welfare programs are means-tested (the greater your work income, the smaller your benefit). The chart on the right provides a summary of income-support and welfare programs and the size of the benefit at different income levels.

Note: this does not include TANF (Temporary Aid for Needy Families), federal housing assistance (“projects”), or WIC (Women, Infants & Children) that are not universally eligible. They fall into three broad categories: healthcare -Medicaid, CHIP, and “Obamacare” subsidies to buy private insurance, childcare -- dependent tax exemption, Child Tax Credit, etc, and income support -- SNAP (“food stamps”) and the Earned Income Tax Credit (EITC = negative income tax). As the chart shows, every dollar a person earns over $15,000, there is a corresponding decrease in benefits received. As a result, the poor face an effective tax rate of between 54.5% and 81.9% -- steeper if “Obamacare” subsidies are cut. At some levels -- $15,000 to $25,000 -- individuals face a near 100% tax rate, where every additional dollar earned equals one dollar of benefit lost.

This is a powerful disincentive to work.

Another “welfare” program that is provided free of charge is public education. Students (and their parents) are not charged anywhere near the economic cost (2008 = $10,441/pupil) or value (1 year of school = 7-10% increase in average annual earnings) of the education they receive from grades K-12. Despite this generous bequest from society, many students “waste” their free education through absenteeism. Some students, when they begin to pay tuition in college, finally realize the value of their education. As a result, some educational systems charge their students a nominal fee (for textbooks, school uniforms, etc.) to encourage students to take their education more seriously. In the author’s experience, which includes both public and private institutions, daily attendance at tuition schools is between 90%-100%, while the daily attendance at public schools is in the range of 75%-80%. In terms of moral hazard, the difference between “free” and “nominal charge” is significant. So, while Malthus (and neo-Malthusians) may have exaggerated the impact of moral hazard, there is something to be said for imposing a nominal cost for receipt of benefits.

2.4 GENERAL GLUTS A second dimension of Malthus’ writings on population and economics is the possibility of a general “glut.”

The Classical economics of Adam Smith, Ricardo, and Say held that general gluts of commodities was impossible. In the aggregate, demand equaled supply; supply equaled demand. Temporary excess inventories of particular goods and services were possible, but always balanced against a shortage somewhere else in the economy. The solution was for the holder of an excess inventory to slash prices until the inventory was sold, freeing capital and purchasing power to address the shortage elsewhere. However, this was only a temporary and transitory phenomenon. A general glut where there were excess inventories everywhere was not possible.

Malthus identified a clear exception: population. The demand for food (population) could be greater than supply (food production) due to the differential growth rates of arithmetic and geometric growth. Malthus would broaden the critique to strictly economic inventories during the recession after the Napoleonic wars [A]According to [Ricardo's]... theory of profits...manufacturers would have been in a state of the most extraordinary prosperity...but, instead of this, we hear of glutted markets, falling prices, and cotton goods selling at Kamchatka lower than the costs of production. It may be said, perhaps, that the cotton trade happens to be glutted; and it is a tenet of the new doctrine on profits and demand, that if one trade be overstocked with capital, it is a certain sign that some other trade is understocked. But where, I would ask, is there any considerable trade that is confessedly

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understocked, and where high profits have been long pleading in vain for additional capital? The [Napoleonic] war has now been at an end above four years; and though the removal of capital generally occasions some partial loss, yet it is seldom long in taking place, if it be tempted to remove by great demand and high profits; but if it be only discouraged from proceeding in its accustomed course by falling profits, while the profits in all other trades, owing to general low prices, are falling at the same time, though not perhaps precisely in the same degree, it is highly probable that its motions will be slow and hesitating...

The missing shortage was money. The existence of credit and money allowed individuals to exceed their budget constraint, just as differential growth rates permits population to exceed its carrying capacity. In terms of business-cycles, the overshoot occurs because optimism about future economic prospects exceeds the delivery of the goods. With respect to population, it comes from miscalculations about the demand and supply of children. Given their historical experience of death rates, couples may plan on having more children than they need or can support. However, they cannot (and probably would not), upon reflection, “un-birth” a child when they discover that fewer children will die in childhood than before.

2.4.1 THE DEMOGRAPHIC TRANSITION The demographic transition is a widely held theory of why we have avoided a Malthusian population disaster so far. It presents a model for how key demographic parameters, such as birth and death rates, will evolve across its social and economic development. The diagram below shows the basic model. In this model, birth and death rates are “flows” in and out of the “stock” of population. The difference between the flows determine the growth rate of the stock and ultimately the population size.

In the pre-modern, “Stage 1” phase, both birth and death rates are high, which keeps population growth rates stable and the total population size small. Life expectancies during this period were low, roughly 30 to 40 years, making a contemporary high school senior or college freshman, “middleaged.” In addition, childhood mortality was high. The chances of surviving to adulthood and bearing children was less than 50-50. In 1832, Nathan Rothschild -- reputedly the richest man in the world -- died of blood poisoning, an ailment that would be simply, and safely, today with a simple course of penicillin. Most fared worse.

As a result, women had to produce children at a prodigious rates to keep pace with mortality. One estimate of birth rates in Colonial America puts the figure at 40-50 births per 1000 (average 10+ children per mother) -compared to 13 births today. This often meant that marriages occurred in the early teens (the age of bar and bat mitzvahs), at least for women, and childbearing commenced in the mid-teens. Childbirth was dangerous: about 1 in 50 births end in the death of the mother and a woman’s chance of dying in childbirth was 1 in 8.

Childhood, as many Colonial Era gravestones attest, was also dangerous. Ordinary illnesses such as influenza and fevers often proved fatal. Hunger and undernourishment were common: until recently, birth month was a predictor of life expectancy because gestation during “lean” months meant your mother was likely undernourished, producing congenital defects in the children. It should be observed that few at the time would have found any of this strange, but simply an unavoidable aspect of the human struggle.

Then, due mostly to improvement in diet, public health, and sanitation, but also better medical care, death 9

rates began to drop. However, since no one knows how long they will live, this development went undetected.

Therefore, they continued to bear children at a rate commensurate with a much higher death rate. In terms of stocks and flows, the faucet was still flowing, but the tub was plugged. Not surprisingly, the tub filled with water. In was probably during this “Stage 2” that Malthus wrote about population growth.

2.4.2 ECONOMIC FAMILY PLANNING Before continuing with the Demographic Transition model, it may be helpful to step back and explore how economists approach the decision to have children, how many children to have, and how to organize the household as an economic unit. From a Malthusian perspective, people are poor because they have too many children. However, some argue that households have large families because they are poor. To understand why, we need to think of the family as an economic unit in agarian and industrial societies. Although some have made an issue about the centrality of the traditional marriage institution as a pillar of social stability, the traditional marriage and the nuclear family is relatively new family form, no more than 400 to 500 years old at most. Historically, extended kinship relationships formed the basis of economic organization, multigenerational households were the norm, and marriages often served as the seal on business alliances between families. The prevalence of arranged marriages and marriage brokers (“matchmakers”) suggest that there has been a distinct economic function of the family household beyond love and procreation.

In an agrarian society, children, particularly boys (girls were seen as liabilities, “mouths to feed”), are seen as productive resources. In agricultural work, even young children could be put to work and contribute to the household’s output. Most premodern agricultural households operated through intensive growth: more labor, and land equals more production. Therefore, the more children one had, the more food the household could produce. The second concern was support in old age. Before Social Security, 401(k)s, and pensions, the main source of retirement support was children. However, this was a risky proposition because high mortality rates made the chances that a child would not live to support their parents was a non-negligible proposition. In addition, girls were worthless for this purpose since they would be married into other households. Hence, the traditional preference for male over female children. This explained some of customary family institutions, such as primogeniture (the eldest male inherited the entire estate), because with inheritance was the obligation to care for elderly parents. In this economic environment, both to increase output and to hedge against mortality risks, it made sense to maximized the number of children.

In industrial societies, the calculus changes. Instead of productive members of the household unit, children become strictly liabilities. They cannot be put to work easily to earn income and higher skill requirements of imply an additional investment in their education. In addition, the pressures to earn income to support the family meant increasingly that mothers would be forced to leave the household and earn wage income. Parents opted for fewer “higher-quality” children instead of simply maximizing the quantity. Supporting these choices was the creation of public retirement programs, elderly care facilities, and pensions that removed the need for multigenerational households. Family size has decreased significantly over the past century. Parents no longer expect their children to be economic contributors to the household, but treat them as consumption goods (or alternatively investments) that produce affection. This change can be seen in the economic value of children in law. A century ago, compensation for children’s wrongful death was their economic wages; the wrongful death of a newborn was zero. Today, compensation can run into the millions. The change in the economic significance of children may also explain changes in parenting. As a valuable (and scarce) investment, parents need to protect their investment leading to “tiger-mothers,” “helicopter parents,” and “kyoiku mama” (Japan) parent types and parent-advice industry that ranges from baby-naming (and the choice of distinctive and unique name spellings) to how to raise a “perfect” child. Perhaps the most poignant measure of children’s worth is the reaction to war casualties. The monthly casualties in America’s War on Terror are equivalent to the casualties of a third-tier Civil War battle. While all lives are valuable, the crushing reaction to war deaths today reflects the greater investment in individual children by contemporary parents.

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2.4.3 DEMOGRAPHIC TRANSITION CONTINUED In the later stages of the Demographic Transition, people realize that death rates have declined and begin to reduce births. A large part of the change was due to the improving status, education, and employment of women. The graph on your right shows the time paths of total fertility and adult female literacy in several key developing nations. As is clear, as adult female literacy improved, fertility declined, slowing population growth. However, where traditional female roles continued to prevail, fertility remained high. For example, the backward curve in Iran’s (green) time-path reflects, no doubt, the influence of its Islamic Revolution in the early 1980s.

Higher female education levels typically resulted in greater knowledge and willingness to use contraceptive methods.

Increased female labor force participation caused women to delay marriage and the age of first childbirth, reducing the window to bear children. Higher social status mean that women enjoyed more options beyond the traditional roles of wife and mother which had implications for population growth rates.

By the final stages of the Demographic Transition, both birth and death rates reach a low level: life expectancies have doubled and birth rates are now below replacement levels (2.3 children/woman) in most of the developed world. In fact, this has become an issue of concern in Northern Europe, Scandinavia, and Japan. In Japan, low birth rates mean that the Japanese population will shrink by a third over the next half century as birth will not replace deaths. As the chart to the left shows, while many countries still have high birth rates driving population growth, in most developed countries, populations are shrinking due to the low birth rates.

A key element of this is female participation in the labor force. As a result, many countries have initiated pronatalist social policies to encourage women to have more children including long (and paid) maternity leaves, free childcare, and even bonuses for newborn children. However, they have only been modestly successful in raising birth rates.

2.4.4 FEMALE LABOR FORCE PARTICIPATION One of the key social developments of the past century is the rise in female labor force participation (FLFP).

Obviously, women have always worked, but historically, this was largely concentrated in the private sphere (home and society) and not compensated in wages. For a variety of reasons -- some economic, some social -the traditional gendered division of labor has broken down, and women now compete with men in the wageearning labor force. In fact, while FLFP has risen, it has declined for men in the USA. The value of “women’s work” has become apparent, not only in the raising and care of children, but in the decline of key social functions such as charitable organizations, religious groups, volunteer organizations, mutual-aid societies 11

and neighborhood associations have all declined in membership, subtracting from society’s stock of social capital. In addition, many social functions traditionally performed by women: caring for elderly and sick relatives (and neighbors), norm regulation and maintaining social networks, are going undone or are now paid work. In short, the value of women’s un(wage)compensated work has become manifest as the areas of childcare, elderly care, food preparation, and domestic service have become increasingly monetized activities. However, more importantly the social value of women’s activities was unnoticed as an externality of social activities whose value is seen in the rise of social problems these externalities addressed. While male “fraternal” organizations were mostly directed at private gains and business networking, female organizations focused on improving quality of life and social reform. Although the gains of FLFP (and education) are considerable, the social costs are as well.

Two economic aspects of changes in FLFP participation is the quality of traditionally female-dominated occupations such as nursing and education and the rise of the “two-income trap.”

Previously, when women’s occupational choices were limited, these professions attracted the most-talented women. As occupational choices, especially for professional women, has proliferated, these occupations no longer draw the same share of the best talent and a major cause of the reputed decline in teaching quality and shortage of nurses may be due simply to occupational choice. Secondly, in the past, women served as an “insurance policy” against lost income due to male unemployment. “Unemployed” mothers could enter the workforce to defray lost wages. However, as the norm of a “two-income” household became commonplace, households expanded their budgets as added female wages made up for stagnant male wages in the 1970s and 1980s, but lost their flexibility, making bankruptcy much more common than previously.

The “shape” of FLFP shows the tradeoff between work and childbearing. If FLFP rates are plotted over the lifespan, they have a distinctive “M-Curve” shape with a kink during the prime childbearing years. In other words, women enter the workforce prior to marriage/childbearing, take a hiatus from careers to raise children, before returning to the labor force.

The diagram above shows the development of the M-Curve in the US over time. As is clear, the kink in the M has gradually disappeared over time along with higher levels of FLFP suggesting that women are no longer leaving the workforce to raise children (contributing to the decline in births). A comparative view, shown in the diagram to your left, suggests a similar dynamic and the gendered division of labor in different societies. In Japan (red) the M-Curve is much more pronounced than the US (blue). However, northern European nations, such as Germany and Denmark show much higher FLFP and less dip during childbearing years, while more traditional countries like Singapore and Malaysia show no return to the labor force after marriage/childbearing. A similar structure can be found if Japan’s FLFP composition is shown. In terms of full-time employment, Japan’s M-Curve looks similar to Singapore and Malaysia with part-time employment consisting of the largest share of post-childbearing employment. A final note is that countries with lower FLFP tend to have longer labor force participation and delayed retirement, while high FLFP nations tend to have earlier effective and statutory retirement than their counterparts.

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3.0 SEX RATIO The sex ratio is the of men to women in a society. A sex ratio greater than one shows that there are more men than women (women are relatively scarce) and a ratio less than one shows that there are fewer men than women (men are relatively scarce). Biologically, there should be more women than men because of longer life expectancies due to lower infant morality, fewer congenital diseases, and lower mortality at every age over the lifespan. Sex ratios below one should be the norm. However, in developing countries sex ratio are consistently over one, while in developed countries are under one. The map below shows the global distribution of sex ratios where blue shades show sex ratios below one and red shades show nations with sex ratios above one.

If the distribution of sex ratios is not biologically determined, social factors -- such as the status of women -- explain the pattern of variation. Sex ratios are also an indicator of relative scarcity of men and women in the “marriage/relationship” market. In societies where the sex ratio is over one, women are relatively scarce, while in those that it is below one, women are relatively plentiful. What are the social implications of “cheap” or “expensive” partners in the relationship market? In traditional societies, women tend to be scarce, raising their value.

Women become prized possessions and customs such as veiling of married women in some Islamic societies or foot-binding in traditional China have a social function of marking wives as “exclusive” property. Having a wife was a sign of wealth and social status and the inability to pay the “bride price” (now institutionalized in the purchase of an engagement ring) meant that one could not marry. It implies that longer-term, monogamous relationships would be the norm. Virginity and chastity would be prized in women and chivalric conduct expected from men. The notion of treating women as property was widespread before modern times and the description of an unchaste woman as “damaged goods,” and that this precious item was “earned” through chivalric action fits this misogynistic perspective. In addition, the distinction between “legitimate” and “illegitimate” children was key. Legitimate children could only be created as the product of a sanctioned marriage (or through adoption). Legitimate children had legal and economic claims on the household; illegitimate ones did not. Legitimacy, therefore, was also a scarce resource.

In the a low sex ratio society, the terms of exchange are reversed. A comparison of 19th century American regions is instructive as the graph to the left suggests. Sex ratios stayed much higher in the South relative to North and this may explain differences in cultural values about families, parenting, and the status of women. Recently, some authors have noted differences in family law across US states that reflect this regional variations. In low sex ratio societies, women have become “cheap” due to their “oversupply.” Some authors argue that this is consistent with higher levels of infidelity, divorce rates, and promiscuity because there is a lower penalty. In addition, one might expect a coarsening of social manners, especially toward women, and more 13

non-traditional households. One would also expect a rise in illegitimacy, but less social stigma attached to it.

Also, practices that “objectify” women -- by both women and men -- are more likely to be common and accepted. On the other hand, there is likely to be more freedom for women to take on non-traditional roles and occupations. The best examples of this are post-WWII Germany, which suffered a huge decline in the male population due to war deaths, and WWII America because of war mobilization. Another historical example is Ancient Rome, a relatively progressive society that allowed women to own property. Rome imposed “bachelor taxes” to encourage men to enter conventional marriages and produce legitimate children.

3.1 HEALTH & SEX RATIO One of clearest signs of the impact of the sex ratio is in legal treatment and social outcomes. A good comparison is the United States and Latin America, which have both different sex ratios and cultural attitudes toward women. Some statistics: about half of Latin American women report being victims of domestic violence (compared to about 1 in 3 American women); Latin American women are twice as likely to be sterilized compared to other developing areas and four times more likely than the developed world, making sterilization one of the most common form of contraception in the region. Rape statutes are far less stringent than their American counterparts. In some nations, laws are not enforced, but in others, legal language only makes “good women” eligible to be considered rape victims. In others, women are not provided recourse, but their husband, father, or brothers area, deriving from legal doctrines that treated women as property.

However, health outcomes provide a clearer test. Some diseases affect both men and women, while others, like cervical cancer, only affect women. The difference in incidence and survival rates across countries is a good indicator of the status of women in that society.

The map to your left shows the incidence of cervical cancer worldwide. Unlike other cancers, cervical cancer is largely preventable through the HPV vaccine and so incidence levels reflect the priority given to women’s health, particularly OB-GYN care. The mortality rate for cervical cancer in Latin America is four to five times higher than the US and about 50% higher than other developing areas, while the survival rates for other cancers is nearly equal across regions. Further evidence of the disparity can be seen in the graphs below that show the levels across time in Latin America compared to the US and the age specific mortality from cervical cancer across regions. Still, while the US does better comparatively, differences can seen between regions.The first map shows the levels of HPV vaccination and the existence of abstinence education programs across states. As can be seen, states in the South are more likely to have lower vaccination rates and are more likely to have abstinence-only education programs.

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How does this affect the incidence and survival of cervical cancer? The two maps to the below left show the incidence (left) and mortality (right) from cervical cancer. As is clear, a group of Southern states have both a higher incidence and a lower rate of survival from cervical cancer. This is consistent with the theory that women’s health receives lower priority in certain regions. On the right, incidence and mortality levels for breast cancer are shown. There is no regional clustering for incidence, but there is a somewhat regional grouping for mortality. In addition, while not shown, there is no regional clustering for incidence and mortality from skin cancer, a disease afflicting both men and women equally.

Incidence -- Cervical Cancer -- Mortality

Incidence -- Breast Cancer -- Mortality

3.2 CHANGING SEX RATIOS The level of gender development and gender equality are significant predictors of social and economic development.

Therefore changes in the sex ratio over time are good indicators of development trends. The chart to the right shows the changes in USA since the Civil War. We see the initial dip due to male Civil War casualties, followed by a rise in the sex ratio in concert with the Gilded Age policies that lead to malnourishment, prompting a decline in average height over time. From the 1930s, we see a long secular decline in the sex ratio that paralleled the robust economic growth following the Great Depression and social programs and progressive taxation that spread wealth broadly.

This development also saw a long secular improvement in the status of women, including a rise in FLFP. However, beginning in the 1970s, we start to see the sex ratio tick up again. Once again, this tracked stagnation in wages and a reverse tide (or a slowing in progress) for American women.

The main driver in the improvement of the sex ratio was probably the passage of Social Security that provided women with an independent income in their old-age. This separated their welfare from the income of their spouse and women could take full advantage of longer life expectancy. The chart to your right shows age-specific sex ratios for children (< 5 years) and the elderly (> 65 years). The sex ratio at birth, captured by the <5 sex ratio, did not change significantly. If anything, the number of boys increased. The dramatic change is in the sex ratio among the elderly. The elderly female population jumps after the 1940s relative to men as women realize their life expectancy advantage.

Social Security, by providing secure income to the elderly, removed the social and economic barriers to longer lifespans.

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3.3 SEX RATIO & SAVINGS: CHINA Just as Social Security drove a major change in American sex ratios, China’s sex ratio is driving retirement considerations. In the 1970s, to reduce population growth, China embarked on a “One-Child Policy” that limited most families to one child per couple. The unintended consequence of this policy was that many parents used sex-selection abortions to choose a male child. As a result, the generation of the One-Child Policy will have approximately 40 million more men than women. In addition, the adoption of capitalist market reforms after 1978 dismantled several pillars of China’s social safety net including elderly support and healthcare.

This created a dilemma for Chinese adults. In Asia, daughters (and daughters-in-law), not sons, are considered to be the better caretakers of their parents, but they have produced too few girls to take care of the aging elderly population. As a result, a need to build up savings to provide income in their retirement years became imperative. The chart above shows the high correlation of China’s sex ratio with the savings rate (YC/Y = (Income - Consumption)/Income = Savings Rate). As the sex ratio (blue) rose in the 1980s due to the One-Child Policy, so did the savings rate (red) in lockstep. They need to save more because they do not trust their male children to take care of them in their old age. The economic result is that China has the highest savings rate in the world, several magnitudes higher than the US at its postwar height. This creates problems with the functioning of the current economy. The money that could be used to purchase China’s production for consumption is instead being funneled into investment through savings, leading to overcapacity and chasing up asset values of real estate -- a key source of China’s economic problems. It also forces China to find an outlet for its production via export, mostly to the US. The lesson of China’s adoption of a Malthusian policy of curbing the birth rate is that instead of making the economic system more viable and sustainable, it has created significant problems that threaten China’s long-term economic welfare.

3.4 MISSING WOMEN The Nobel Prize-winning economist Amartya Sen has called attention to the “missing women” problem.

Biology predicts that boys and girls should be born in roughly equal proportions. However, if this is true, there are 100 million “missing” women -- mostly concentrated in Central, South, and East Asia -- from the world’s population. A large part of this story is the practice of sex-selective abortions, where cultural preferences for male children in concert with ultrasound technology to determine the gender of the fetus with unregulated access to abortions allowed Asian parents to tilt the scales toward male over female children. However, this is only part of the story. The low-status of women means that many Asian women are more likely to be mal- and undernourished and are less likely to receive necessary medical care. In developed countries, women have lower age-specific mortality at every point in the lifespan, however, as the chart to the left shows, Asian women have higher mortality at every point in the lifespan compared to their male counterparts. In particular, Chinese girls in their late teens have a mortality rate over twice that of boys their age. And in other developing countries of Asia, middleaged women (30-60) have a 50% higher mortality.

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4.0 AGING SOCIETIES Population structures are not uniform. Some societies are older than average, while others are weighted toward younger people. Unlike other products, humans cannot be produced on the spot or at convenience. One cannot dispose of excess population like one could dispose of excess inventory, machines, or raw materials. Individuals are most productive in certain age-spans and therefore a society with a larger share of its population in these age cohorts will be more productive than an equally sized population with more young or elderly. Some like to observe that â&#x20AC;&#x153;demography is destinyâ&#x20AC;? and one challenge that faces the US in the near future are the problems of an aging society. In Malthusian accounting, one person = one person, regardless of other characteristics, but a young population, who has not entered their peak childbearing years, is much more likely to grow simply from momentum even if the birth rates are low, while an older population might continue to decline even with higher birth rates. The diagram below shows the population pyramids for three different settlements.

Population pyramids should the percentage of the total population, usually in 5 or 10-year increments, from birth until old age. It is split by gender with the female population on the right and the male population on the left. As is clear, these three settlements have significantly different age structures. Sandy, Utah -- a wealthy suburb of Salt Lake City -- has a classic hourglass shaped population structure. Why? The two bulges represent school-age children and their middle-aged parents. The 20-somethings are absent, either at college or priced out of a community with little rental stock and full of single-family homes. In addition, there are few individuals of retirement age. The second community is Washington, DC, a major metropolitan area. Here the bulge is in the 20s-30s. Noticeable is the small schoolage child cohort. The younger adults are not parents, but likely singles flocking to large cities in search of future spouses. Finally, on the right is Miami Beach, a Florida retirement community. It shows large elderly cohorts, with distinctly more women than men at the upper age cohorts. Although different places (suburbs, cities, and retirement communities) have different age structures, in total it show the changing age structure over time. To the left is Japanâ&#x20AC;&#x2122;s evolving population pyramid for 1950, 2003 and a projection of 2050. In many ways, this parallels the US sans 17

immigration. In 1950, we see a broad-based population pyramid, typical of most developing countries today.

The key fact is the shares of the population in the labor force (black) compared to the youth and elderly (blue and gray respectively). Although the size of the labor force was relatively small -- just under 60% -- most of the dependent population was young, which bodes well for the future because they will enter the labor force.

It also means that the population will likely grow simply from momentum as the larger younger generation have more children even at lower birth rates. The 2003 pyramid, typical of most developed nations today, shows a mature “barrel-shaped” structure. Most (2/3rds) of the population is in the labor force as the young generation of 1950 has grown up. However, youth cohort has shrunk considerably -- more than halved as a share of population, while the elderly dependent population has increased fourfold. While this is sustainable in the short-term, the lack of a young population entering the workforce makes this long-term unsustainable.

If current trends continue, the projected population for 2050 -- an inverted pyramid -- presents a challenge to Japan (one also faced by other developed nations). The workforce will be significantly smaller, with a large group of elderly dependents and little prospect of growing because of the small youth cohort slated to enter the workforce. This will put stress on the finances of income support and medical care programs for seniors such as Social Security and Medicare. One of three things will happen: a) taxes will be raised on future workers to make up for the gap in revenues, b) benefits will be reduced for future retirees or c) the statutory age of retirement will be pushed back forcing workers to work longer to qualify for benefits. If you are a high school student graduating in the early/mid 2010s, this means that this will hit just before the time you plan to retire.

The demographic squeeze is not simply a problem for taxpayers or Social Security recipients. Even if retirements are privately funded, they depend for their returns ultimately on the productivity of the workforce, which depend in turn (in part) on the size of the workforce. In addition, as the Chinese example in the previous section suggests, the lack of secure retirement leads to excess savings in the present, which cuts into incomes.

Moreover, the gap created by lack of public support will be made up by the adult children of retirees to provide the support. Although the Social Security “crisis” has often been exaggerated and dissembled (see chapter on taxes), the generational balance created by too many dependents and too workers is a policy problem. The chart above shows the generational balance for China in the early 1980s. It charts age-specific “production” and consumption” across the lifespan. When individuals produce more than they consume, they generate savings, but when they consume more than they produce, they must “borrow” from those producing savings.

In other words, over time, the area of “borrowings” (blue) must equal the area of savings (red) in the diagram, regardless of actual borrowing and savings of individuals.

5.0 FAMINES One of Malthus’ direct influence was on the British colonial administration of India and his influence can be seen in colonial policies. In addition, the case of India seems tailor-made to confirm Malthus’ theories of population and scarcity. Neo-Malthusians, such as Stanford biologist Paul Ehrlich argued in 1968 that “India couldn't possibly feed two hundred million more people by 1980.” Since independence, India’s population has grown from 400 million to over 1 billion. India occupies 2.5% of the Earth’s arable land, but supports 15% of the world’s population, a population density that is six times the world’s average. In addition, 35% of its population is under the age of 15, nearly 70% is rural, and about a third is illiterate. None of these statistics suggest India is in the latter stages of the Demographic Transition to slow population growth. In addition, India has suffered several major droughts that seriously impaired its food production. During the first 18

hundred years of British rule, India seemed to confirm Malthus’ predictions with famines claiming over 50 million lives. In addition, shortly before independence, the Great Bengal Famine claimed over 2 million lives.

Since independence, India has had three major droughts that resulted in millions of tons of grain production lost -- larger than the food supply loss in previous periods, but famine deaths have not mounted to more than a thousand. Meanwhile, in neighboring China, a country with many of the same objective challenges, but with greater wealth, food production, literacy, and age structure than India, the worst 20th century famine -- killing at least 20 million, but more likely 45 million -- following the Great Leap Forward from 1958 to 1962. How was India able to defuse the population bomb while China -- following all the Malthusian prescriptions -suffered the nightmare scenario?

5.1 DEMOCRACY Nobel Prize-winning economist Amartya Sen has argued that the key ingredient in India’s success was democracy. Despite widespread and persistent poverty, especially in rural areas, India has been able to maintain democratic institutions and processes for most of the period following its independence. Above and beyond the protection of political freedoms, democracy acts as a social information processing mechanism and a guarantee of social equity. By providing a channel for the disadvantaged and suffering to pressure public officials to be responsive to their needs. In India, despite the patron-client structure of the ruling Congress Party, they could not ignore the widespread suffering and moved quickly to redistribute grain to the droughtstricken provinces even before the bad harvest lead to food deprivation at no cost to individuals. In contrast, local officials in China during the Great Famine repeatedly underreported or failed to report famine conditions even after hundreds of thousands of individuals had died because they were afraid they would be punished for reporting bad news. The second role of democratic institutions was the norm of equity and sharing the burden.

India opted for widespread hunger and malnourishment -- everyone received less than a full calorie allowance -- but no starvation. In contrast, party officials and urban workers received full rations while rural farmers were left to starve. To illustrate, imagine there is one full meal available and two persons to feed. In India, the individuals agreed to split the meal and both go hungry, while in China, the more powerful person took all the food and left the other to starve. The following report was typical during China’s great famine: In the second half of 1959, I took a long-distance bus from Xinyang to Luoshan and Gushi. Out of the window, I saw one corpse after another in the ditches. On the bus, no one dared to mention the dead. In one county, Guangshan, one-third of the people had died. Although there were dead people everywhere, the local leaders enjoyed good meals and fine liquor...I had seen people who had told the truth being destroyed. Did I dare to write it?

Instead of following the Malthusian and Darwinian principle of survival of the fittest, India followed a policy of support for the weakest and most vulnerable and did much better in combatting the crises of food supply shortages.

5.2 TECHNOLOGY & TRADE A second factor Malthus underestimated was the role technology to lift the carrying capacity limit. Malthus, and most Classical economists, believed resources to be finite in an absolute sense. At best, food production could only increase as a linear (arithmetic) function of population: one person = one bushel; two people = two bushels, etc.

However, subsequent research by agricultural economist Ester Boserup argued that food supply is not a linear function of population. Her argument was twofold First, as food became more scarce, higher food prices would provide an incentive to use more efficient techniques and spur innovation. Second, the supply of “geniuses” grows with population. As population grew, the chances of a breakthrough rose.

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Therefore, food supply would behave like a step function that stayed ahead of population and not a logarithmic function approaching a carrying capacity limit. In India, the Green Revolution introduced new seeds and agricultural techniques that greatly expanded food supply despite a growing population. In addition, the response to famines was not decrease in food supply, but a increase in the following year from previous good harvests. Food shortages, conveyed through the price system, sent signals that reorganized food production to increase both inputs and improve techniques to raise output. The graph below shows food supply in post-independence India. The dips in 1966, 1975 and 1980 correspond to the major droughts where India’s indigenous food supply dropped. A Malthusian would predict that food supply would only return to pre-drought levels in the following year, but as the graph shows, after each drought -- and only after drought years -- grain production reached a new high. In addition, if the grain production was simply a one-time application of “Green Revolution” techniques, the rise in grain production would have a slightly different trend pattern: a one-time gain followed by a plateau instead of multiple stepped rises and plateaus.

Another mistake of Malthus’ can be seen in the graph: underestimating the beneficial influence of trade. Malthus opposed the importation of foreign agricultural products, thinking it would undermine the wages in the agricultural sector. However, as the trend of Indian grain imports shows, imports rose during times of droughts and poor harvests, supplemented the domestic grain supply. Trade allows individuals to diversify natural risks: there may be a major drought in one place, but it is unlikely to happen everywhere at the same time. Some areas will be in surplus while others are in shortage. High prices will attract surplus resources from other areas and provide the quantity of food demanded.

Although climate change may result in more correlated weather events, undermining the logic of risk diversification through trade, it has proved beneficial in the past.

5.3 WHO STARVES? There are two major misconceptions about famines about who is most likely to starve and when famines occur.

The first misconception stems from the belief that everyone is equally liable to the threat of famine, i.e., if there are 100 people, each person has 1/100 chance of starvation. The most likely group to starve during a famine are primary food producers, who common sense would say should be the least at risk. The second misconception is that famines occur when there is a food deficit, but in fact they often occur when there is a food surplus. The reason behind misconceptions can be answered from the same dynamic. First, the expectation of a poor harvest usually occur long before the harvest due to telltale signs such as heat, floods, and other weather events. This drives up food prices before harvest as households stockpile in anticipation.

When this occurs, owners of food stocks sell into the high prices, reaping windfall profits. Farmers, who must wait for harvest, are frozen out of the market. In addition, they cannot buy food on the market because of the debt incurred to plant the harvest. When farmers are able to sell their harvest, prices plunge as all try to sell into markets with fewer buyers, further depressing prices. Farmers are “selling calories” at a lower price then they can buy them, further depleting their own household calorie stock. Many end in bankruptcy and starve.

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