When I was in my late thirties, we used to have a small house in the southeast of France. It was in a village not far from orchards where they were growing apples, pears and peaches. In the village there was a scale for weighing the trucks so as to record the quantity of fruit they were carrying.
I remember my son and I when we were watching the weighing operations. He was fascinated by the magnificent peaches and by the magic of all the mechanical tasks. I was proud of providing him with a great educational moment, a firsthand encounter with human labor, in all its nobleness.
At the end of the operation, we naturally asked where all these peaches were going. I was eagerly waiting for an answer, expecting a dignified conclusion to this wonderful moral experience.
“We burn them”, said the farmer.
My son and I had a glimpse of what pure evil meant.
It turns out that the European Union has a price support scheme. When fruit prices hit the floor, the excess supply is carefully gathered, transported, weighed, inspected, and burned. The farmers are then paid by the government (aka us) for the burnt peaches, at the prevailing rate.
We were told the inspectors were severe. They were only accepting the best looking fruits for incineration. You see, they were wary of fraud. They did not want farmers to game the system by artificially collecting second rate fruits so as to reap more subsidies. Consumers would not have accepted those second rate peaches. Otherwise, they would have had to pay them with their own money. But bureaucrats who incinerate the peaches pay them with other people’s money. They have little incentives to control the quality of the peaches. Those particular inspectors, though, were loyal and conscientious. Only the best peaches were burned.
In the 1970s, French economists working on the theory of fixed price equilibrium were worried about the issue of manipulable rationing schemes. How do you allocate supply to demand when price regulation prevents them from being equal? You need to put in place a rationing scheme which is not manipulable, but you also care about efficiency. There is a trade-off. Random rationing is not manipulable but it is inefficient. Allocating scarcity according to self-reported marginal willingness to pay (MWP) is efficient if such reporting is truthful, but manipulable if consumers can overreport their MWP.
The EC rationing scheme was both inefficient and manipulable, because it forced the taxpayer to purchase the excess of supply over demand while destroying the excess supply – a complete waste of resources – and because supply could be boosted artificially by manipulating quality.
I have another story regarding fruit burning. A big French company had sold trains to Argentina. At that time, Argentina was short of foreign currency. Instead of telling the argentines that it was not France’s problem, the geniuses in the French government accepted an in-kind payment. And that in-kind payment was in apples – presumably the government made a transfer to the train manufacturer and ended up with the apples. Unfortunately, this large supply shock inflicted upon the market for apples drove the price down to the common agricultural policy floor, so that most of the apples obtained in exchange for the trains were incinerated. The French government might have just as well directly purchased the trains and sunk them into the ocean.
But everyone has his Karma, or Nemesis, and the Nemesis of all regulators and politicians is an organized crime institution called the Camorra. Every economist should have read Roberto Saviano’s book. It is a treatise describing one of the most efficient organizations on earth. I also highly recommend the movie, which trumps any of your favorite Halloween horror show, if anything because it’s true.
The Camorra will not leave any gain from trade arising from state regulation untouched. This is their business model: they spot an arbitrage opportunity created by government, and they exploit it. This equally applies, of course, to sound and unsound regulation. The Camorra does not care whether regulation is good or bad. But if it is bad, this makes their job easier. They can expect more cooperation down the line.
And so I must confess that I was quite happy to read on page 306 of the French translation of Gomorra that at least in Campania, the peach burning officials had found their Karma. Apparently the fruits were no longer burned but buried into the ground (perhaps as a tribute to the global warming crowd), and the Camorra had set up a scheme by which garbage was illegally buried instead of the fruits. The criminals were getting the subsidies that should have been reserved for burying the beautiful fruits, and at the same time had established a distribution network so that the fruits would reach the consumer, presumably at a price below the EU floor.
The Camorra had managed to annihilate the EU policy according to which the fruits should be destroyed. Instead, because of the Camorra’s criminal activities, the fruits were eaten. By people.
Along with Uber-style web platforms, the Camorra is an institution that considerably reduces the margin of manoeuver for economic regulation and taxation. Its existence should be acknowledged in any policy evaluation exercise.
For example, there is talk of eliminating cash transactions in the Eurozone. Officially, the goal is to fight money laundering. In fact, the true goal is to eliminate the parallel economy, which is flourishing due to the secular upward trend in taxes and in the amount of regulation. If cash disappears, many transactions will have to be effected legally, and even more would probably no longer take place because they will no longer be profitable. Recorded GDP will go up but actual GDP will fall.
But this policy is likely to simply fail, because the private sector will end up with an alternative means of exchange. While there is much talk about Bitcoin, the Camorra is in an excellent position to become a central bank for the new currency. Should cash be eliminated by the ECB, it has a huge incentive to introduce such a currency, so as to preserve its commercial operations. It is credible enough to impose it as de facto legal tender, because of its ability to use violent means against competing means of exchange. But, since violence is costly, it will probably also make its currency more desirable than competitors by pursuing a price stability objective, keeping its money supply in line with the volume of transactions. An inflationary policy would be hurting itself substantially, since by nature it must have large cash holdings.