Friday, February 4, 2011

Economics in Literature: Princess Academy and Traders

The Lovely and Gracious enjoys reading young adult and childrens books and she got me to read The Princess Academy by Shannon Hale, targeted at grades 5-9. A short read, it tells the story of group of girls from a poor village, one of whom will be selected to marry the prince. It also includes a small piece of economics that was running through my head today as I pondered people's reactions during the food price crisis to speculators, traders, middlemen, and other pariahs.

In the story, the villagers live on a mountain and most of them are involved in quarrying rock. Their only contact with the outside world is a group of traders who arrive, bargain for the lowest price they can get for the stone, and leave. During the course of the girls' education to make them worthy of marrying the prince, however, the lead character discovers that their village is the only one that produces this special kind of rock that is highly valued because it is rare. She returns home and convinces her village to threaten to not sell to the traders and take up trading themselves if they don't get a better price. The traders cave and everyone gets to eat that winter ... and live happily ever after.

It seems that I've heard this story repeated often in discussing agricultural development. Allow me to mix smallholder farmers and stone quarriers for a moment:

Scenario 1 (from the book): Producers' cooperatives give producers (more) market power compared to traders, so we want to encourage them. Fight monopoly power with another monopoly. Or at the least with a public education system that teaches kids how to form their own monopoly/cartel.

Scenario 2: What economists have tried to convince people of -- and we can see how little success we've had thanks to the pitchforks that came out at the mention of speculators rigging food markets -- is that traders are good for reducing price volatility and provide essential market services. Yes, it looks like they buy low and sell high, but if they didn't the low would be lower and the high would be higher. In this view, the problem really is too little competition in the trading sector. If the traders really are a monopoly, break them up; if not, encourage the growth of middlemen to reduce their market power (e.g. subsidies, infrastructure to lower costs, spread of market information, the usual). Mr. Government, tear down this monopoly.

Scenario 3 (the 1980s parastatal boards?): If the profits from selling rocks/grain are high enough compared to transaction costs, the only way a monopoly can exist for extended periods of time is with government collusion preventing the growth of the trading industry. What's important could be the political economy of the trading industry. This is a marginalized town with no representation in government, whose citizens are in fact despised by most of the nobility. Since in the story the stone is primarily valuable to the crown and the nobility, it would not be hard to imagine that the traders are in fact or implicitly bankrolled and supported by the government. It is conceivable that in the next book we discover the traders coming into town with a little military might to encourage a more favorable pricing. Let's hope the prince can come to the rescue then because in the last 30 years of governance research we haven't quite figured out how to solve this problem ideally...

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