also, this.

by Josh Nicholas

Be more skeptical about fair trade

I've always been a bit skeptical of "fair trade". Supply chains are long and complicated, there's little oversight on retailer margins and it's unclear how much producers actually benefit.

A recently published paper in World Development appears to back up some of these fears. The authors found that less than a third of the premium paid for fair trade Ethiopian coffee makes its way to producers. Exporters grab a healthy slice, and the cost to comply with certification is great for both farmers and cooperatives.

This is based on interviews with 1600 producers, cooperatives's own records (numbering some 150,000 transactions), and data from the Ethiopian Ministry of Trade.

If an average Ethiopian coffee farmer, who annually sells the equivalent of 400kg of red cherries, were to market all his or her red cherries as VSS certified, with current VSS premium transmission rates, the farmer’s annual income would increase by 6.7 USD compared to the non-certified cooperative farmer (assuming both types of farmers sell all coffee to the cooperative). Even in the case of a perfect transmission, the annual income of the average certified coffee farmer would only increase by 22USD compared to a non-certified cooperative farmer

The paper also notes that certification poses significant barriers to entry. For instance, it requires detailed documentation in areas where many have not gone to school. Environmental and labor standards are admirable, but they also increase the costs for producers.

Producers that are able to comply with all of this are likely those relatively better off in the first place. The paper notes that certified households are more likely to be located close to paved roads and coffee cooperatives, and have heads of households that are older and more likely to have gone to school.

And if that wasn't bad enough, do these standards really achieve anything?

...farmers in these settings often have diverse crop portfolios. They may be able to use sustainable production practices on their coffee plots but not on their other crops. Moreover, resources can be re-allocated within the farm from coffee to other crops, e.g., no child labor on coffee plots might mean more child labor on other plots. While coffee might have been sustainably produced and certified, it is possible that little might have changed in the aggregate at the farm, village, or country level.

Now, this is one study, and it's an analysis of just one country and cash crop. But at the very least it invites more skepticism.

Paying players pays

Is Stephen Curry actually worth more than $30 million a year? How about Lebron James, Russell Westbrook or James Harden?

Five Thirty Eight make a pretty good case that NBA superstars are generally underpaid, relative to what they would earn in an open market.

But that analysis is based on their impact on the court.

This is the top-heavy nature of production in the NBA, and why superstars are so valuable just as a basic bookkeeping cheat code: They create surplus value for their teams (and more generally the league as a whole) that is funneled into less productive players.

What is the business case for paying Stephen Curry >$30 million?

Well, according to a paper by Harrison Li at Berkeley, both superstars and wins add to the bottom line.

..every extra win during the season will bring in .3% more revenue to a team. To put this into context, each individual win for a team like the Los Angeles Lakers, who gained about 214 million dollars in revenues this past year, brought in about 642,000 dollars.

As only five players take the court at a time, one person can have a huge impact on winning. More wins mean more people coming to the games (yay bandwagon fans).

It also means teams can charge more for season tickets and premium seats, and more lucrative local television deals (something a lot of teams depend on). Of course, not all of this is realised immediately. Television deals, for example, are negotiated only every few years.

When the Boston Celtics (my team) added superstars Ray Allen and Kevin Garnett in 2007 the team's salary went up by $25.5 million. But Li estimates revenue increased by over $40 million due to the extra wins and playing more games (thanks to making the playoffs and winning the championship).

So it seems like paying players does pay. Although this paper is a bit old now. It would be interesting to see some fresh analysis, accounting for the new collective bargaining agreement and stratospheric increases in the salary cap.

The flipside of palm oil

An interesting new paper suggests that the Indonesian palm oil industry has made a significant dent in rural poverty.

...my most conservative estimate suggests at least 1.3 million out of the approximately 10 million people lifted from poverty over the 2000s have escaped poverty due to growth in the oil palmsector. Poverty gaps significantly narrow, suggesting not only those near the poverty line are being lifted up.

Of course, as several have pointed out on Twitter, this is not an optimal method of development. Beyond the environmental damage you have negative impacts on health and a lack of incentive to invest in capital and human capital.

However, there are peculiarities of the palm oil industry that break in its favour. Palm oil production has a greater positive impact on poverty than other crops. One of the reasons is that palm oil has to be processed within twenty four hours, leading to decentralised infrastructure.

The observed poverty reduction can be explained by more rapid increases in household expenditures for people in the bottom quintile and agriculture, and through greater provision of public goods most related to agricultural manufacturing, specifically roads and electricity.

Indonesia’s over 1600 palm oil mills each buy fresh fruit bunches fromdozens of villages, often through a complex network of traders providing important aggregation and logistical functions for independent smallholders and farmer groups needing to get their fruit to the mill within 24 hours of harvesting. Urgent processing requirements mean the area feedingeach mill is roughly a 50 kilometer radius.

All that being said (and I recommend reading the paper in full), there is one big takeaway. Roughly 90% of recent increases in production have come from expansion in land use, and the large number of small holders are significantly less efficient than the larger operators.

Part of this is due to economies of scale that the smallholders can’t achieve. But with so many of our products containing palm oil, one way to tackle the environmental problem may be to invest in Indonesian smallholders to raise productivity.

Yield maximizing practices relate to pest management, fertilizer application, pruning, and harvesting at the optimal time... The key on-farm technology is seed quality, determined at the planting stage... Roughly two laborers are needed for every five hectares of Indonesia’s current 7 million hectares of industrial plantations.

Journalism has a presentation problem

One of the biggest issues with modern journalism is that framing is overvalued and understanding is undervalued. This is true not just in practice, but also in the way it is taught.

Look at any journalism course in Australia and you’ll find that subject knowledge is discounted in favour of presentation skills. Internships and practical media projects are favoured over electives in other academic disciplines - statistics, economics, medicine etc.

This came to mind as I read the last of Nate Silver’s essays on the 2016 election.

In recent elections, the media has often overestimated the precision of polling, cherry-picked data and portrayed elections as sure things when that conclusion very much wasn’t supported by polls or other empirical evidence.

By teaching journalists that their job is packaging the ideas and actions of others, the medium inevitably becomes constrained. What is good presentation exactly? Among other things it’s putting things as simply as possible.

On the one hand this is a good thing - it makes the news widely accessible. On other other, simplification can itself be misleading. Condensing dozens of pages of a working paper, or decades of iterative academic theory, by necessity requires the subtraction of nuance. This is what Nate Silver identifies in his latest piece.

Experts provided myriad caveats to their forecasts in the 2016 election. But constrained by their job as packagers, journalists provided only certainty. By banishing the details as boring or irrelevant, trying to get a clear angle, we were systematically misled.

”While many things about the 2016 election were surprising, the fact that Trump narrowly won1 when polls had him narrowly trailing was an utterly routine and unremarkable occurrence. The outcome was well within the “cone of uncertainty,” so to speak.”

But a narrowing of the role is only part of the problem. One of my friends is currently studying journalism and recently completed a course on data journalism. While this taught her a great deal on telling stories with data, she has little idea of what data to use or when, There were no economics, demographic, health etc. components of her course to provide her with the context surrounding the data.

This narrowing of expertise by definition curtails what stories are told. A bunch of technical skills are being dumped on the market with little subject knowledge to act as guidance to what exactly is a story. It also means these journalists are at the mercy of the very experts they end up packaging.

Now, of course, this whole argument is a great generalisation and misses many wonderful journalists. Especially older journalists who have spent time in the field and built up subject knowledge. But having spent much of the past decade around young and upcoming journalists, Silver’s analysis reads incredibly true. And it’s very worrying.

The economy is everything

With Australia currently engaged in an abysmal debate over same sex marriage, it‘s refreshing to be reminded that morality often has a utilitarian history.

For example, this recent paper suggests that norms around illegitimate children are based in economics.

Based on data from the Austro-Hungarian Empire and modern Austria,
we show that regions that focused on animal husbandry (as compared to crop farming) had significantly higher illegitimacy ratios in the past, and female descendants of these societies are still more likely to approve illegitimacy and give birth outside of marriage today.

The key point is actually buried a fair bit down in the paper. The reason there is this split in social norms between crop and animal farming communities is apparently due to differing labor structures.

18th and 19th century workers on crop farms were on short term contracts, often working as day labourers.

In crop farming, the work load and the resulting demand for additional
labor, is determined by the rhythm of the seasons... additional manpower is needed in the harvest season.

Workers on animal farms, meanwhile, had long term contracts. This was less precarious, but they also tended to live on the farms and so had little opportunity to create their own households. Their illegitimate children were tolerated by the communities.

In contrast, in animal husbandry the workload is distributed relatively evenly throughout the year... Animal husbandry requires a sound knowledge of the peculiarities of each animal (analogous to firm-specific human capital), while harvesting is less specific.