Fantastic review in the Wall Street Journal of ‘Extreme Economies’ by Richard Davies

Apr 1, 2020

‘Extreme Economies’ Review: Let’s Make a Deal

In refugee camps, prisons and other unlikely places, markets arise to meet critical needs and, at times, circumvent faulty official policies.

What Adam Smith called the “propensity to truck, barter, and exchange one thing for another” is as widespread today as it was in the 18th century. In Richard Davies’s “Extreme Economies,” it emerges in places as diverse as a Middle Eastern refugee camp and a U.S. penitentiary. Markets, Mr. Davies engagingly shows, can make an extreme situation less extreme. Sometimes, it is true, they can make things worse, and there is a role for government intervention. But Mr. Davies also shows how government responses can be ineffective or do harm in their own way.

Mr. Davies, a fellow at the London School of Economics, first describes how markets flourish in Zaatari, a Syrian refugee camp in Jordan that in 2013 was home to 200,000 people. Informal businesses range from pet-bird shops to wedding-dress rentals. By 2015 private business sales reached almost $14 million a month—no thanks to the United Nations High Commissioner for Refugees, the agency that runs the camp.

The agency’s staff members, Mr. Davies tells us, have their own ideas about what refugees need, and so they issue e-cards that can be used only at U.N.-sponsored supermarkets to buy necessities. The aid workers’ idea of necessities includes things that the refugees don’t want—like low-quality powdered milk from New Zealand. The refugee response is to buy the powdered milk anyway, then resell it at a loss to a smuggler for cash. The smuggler off-loads the milk to Jordanians driving past the camp. The refugees can then use the cash to buy things they do want from private businesses—like homemade yogurt, a Syrian staple. Not to mention pet birds.

The U.N. agency is not a fan of refugee markets, and so in 2014 it built another camp, named Azraq, to correct the “mistakes” in Zaatari. It spent $63.5 million on a planned community a long way from Jordanian towns. Azraq’s dispersed grid of homes and 100 official businesses contrast with Zaatari’s enthusiastically congested central core. Tight security in Azraq and its remote location prevent smuggling—the refugees are stuck with e-cards for things they don’t want. The buildings for official businesses are mostly empty. The greatest risk for Zaatari refugees breaking the rules is that the U.N. could send them to Azraq, which the refugees view as an open-air prison camp. A better idea would have been to allow free enterprise in both camps.

Mr. Davies’s most striking case of flourishing markets is the one inside the Louisiana State Penitentiary. Entrepreneurial prisoners produce pecan candies, fried chicken, and services like haircuts and shirt-ironing for sale to other prisoners, while they persuade guards to look away. Guards also smuggle in synthetic cannabis for sale to prison drug lords, who sell it to other prisoners. The most remarkable aspect of this market is that inmates aren’t allowed to hold cash, so they have had to invent their own money. They use a system of pre-paid cards in which a relative or friend on the outside can make an anonymous transfer to a guard or to the relative or friend of another prisoner. Informal markets make prison a little less awful.

Markets can result in less favorable results, as we see in the jungles of Panama. Loggers there build tracks for their heavy trucks deep into the jungle to harvest the most valuable trees. Smaller operators follow the tracks in pickup trucks to grab less valuable wood. Campesinos come next to graze their cattle on the cleared land. Overgrazing induces the campesinos to move to new pastures. All that is left after all this, Mr. Davies notes, is a wasteland that supports nobody. This is a classic “tragedy of the commons,” in which each individual has an incentive to extract as much as possible from common lands even though everyone will eventually be worse off. One answer to this problem, proposed by economists, is optimal state control of extraction rates, keeping them low enough to allow the commons to grow back.

Unfortunately, an optimal government hasn’t been functioning in Panama. Weight limits on logging have had the perverse effect of goading loggers to chop down the straightest trunks and discard the rest of the tree. The system, as Mr. Davies writes, “is designed to protect the forest but does the opposite.” The government also offers subsidies for reforestation, but 80% of it investors have grabbed for teak plantations. Alas, teak trees shut out light from the understory and shed acidic leaves. Mr. Davies observes that the ground underneath the teak trees “looks as if it has been doused with petrol and left to burn.” In this case, both markets and government have failed.

Mr. Davies’s next stop is Glasgow, where one of the world’s largest shipbuilding industries existed from the 1800s through the 1950s. In the good times, firms benefited from one another because of “agglomeration externalities”—they shared a pool of specialized labor and suppliers. Shipbuilders located in Glasgow because other shipbuilders were there. Unfortunately, the process also works in reverse. Global demand shifted away from Glasgow’s coal-fired steamships to diesel-powered tankers. Japanese firms used new dry-dock technologies to out-compete Glasgow for the world market. Every time a Glasgow shipbuilder went out of business, the pool of labor and suppliers shrank—making it even harder for remaining firms to survive.

The British government responded with that always popular answer—a government commission. It forced a merger of many Glasgow shipbuilders, aiming for large-scale efficiencies. But it didn’t work. In 1977 the government nationalized the industry. The state-run firm also failed. Glasgow’s shipbuilding agglomeration was gone. The market answer to such a spiral is for individuals and firms to move somewhere else, where a newly flourishing agglomeration can be found. This solution, admittedly, is not that helpful to someone who can’t move or doesn’t want to.

From such varied experiences, Mr. Davies draws a compelling portrait of markets functioning—and sometimes malfunctioning—in all sorts of conditions and cultures. It is clear from “Extreme Economies” that the world deserves both more market solutions and more competent governments.

Mr. Easterly, a professor at New York University, is the author of “The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor.”