0:33 Intro. [Recording date: December 10, 2013.] Russ: Before we begin this week's interview I want to thank everyone who submitted an essay for the first EconTalk Essay contest and I want to congratulate the winners, Scott Atherley, Eric Mustin, and Dallas Weaver. You can find their essays at my blog, Cafe Hayek, or using a link from EconTalk. The idea for the contest came from my last-week's guest, Doug Lemov, who talked about the power of writing as a way of learning. To stay about future initiatives like this, follow me on Twitter, @EconTalker, or like EconTalk's Facebook page. I also want to thank all of you who wrote in response to my request during the recent interview with Joel Mokyr to let me know that you listen to EconTalk while you are working. Sorry I couldn't respond to very many of you. I've received about a hundred and fifty emails so far just on this topic. It's nice to know that many of you are working while you are listening. A little frightening for some of you; but I'll keep your secret quiet. I greatly appreciated your feedback and I was delighted to hear what you are doing on the job. It was fascinating.

1:40 Russ: Now for today's guest.... Our topic today is the world of bees--beekeepers and the economics of that world. Along the way we are going to get into some environmental issues such as Colony Collapse Disorder [CCD] and I hope we'll talk about the work of Ronald Coase and what that has to do with the world of bees. Now, reading your work, Wally, I realized how little I know about bees. I know that honey comes from bees. I know bees have something to do with pollination--because I listen to Cole Porter. But that's about it. And one of the things that fascinated me about reading your work is how little I know. Let's start with what bees and beekeepers do. How does the market for pollinization work, and how does it interact with honey production? Guest: It's a fascinating world and there are a lot of facts to sort of get out there. Let me just start with the real basics. Bees are a managed insect. They live in colonies--30,000 bees would comprise a colony. That'll be almost entirely female, perhaps sister worker bees, one queen bee, whose sole job it is to lay eggs, and a few dozen miscellaneous drones, whose sole purpose is to inseminate queens from other colonies. So the biological unit is a colony. Individual bees only live 5 or 6 weeks. A queen is an exception. She lives a year or two, but it's the colony that's the biological unit that perpetuates itself. And it's the colony that's managed by beekeepers. So the outputs, the commercially useful economic outputs of the honeybee colony are two: it's honey, which the bees create by collecting nectar from flowering plants; then the other output that has become more economically important in recent years is pollination. And so what bees do is they, for their own purposes they fly from flower to flower and they collect nectar and pollen. And they bring those things back to the colony. Nectar is an energy source supplying carbohydrates, whereas the pollen is protein. And they feed that to their baby bees and their worker bees. So in the process of doing all this, they, if you manage them correctly, will produce more honey than they actually consume--because they are saving up for the winter--and you can harvest this at opportune times. They produce honey and that's one things that beekeepers do. But then the other thing they do is while they are moving from flower to flower transferring pollen from plant to plant they actually pollinate flowering plants. And this is both useful for home gardening; it's useful for plants in a variety of settings, including agricultural. A lot of agricultural crops require some kind of pollination and honeybees provide a lot of it in modern agricultural. So the two economic outputs are honey and pollination. And beekeepers manage these colonies to provide those outputs.

5:09 Russ: So, I don't know if this is an answerable question--well it's an answerable question even if we don't know the answer--but what proportion of the bees of North America are in beekeeper hives versus just running around loose on their own? Guest: It's a great question and gets at some of the history of beekeeping. The answer is about 100%. Russ: 100% are in beekeeper--you said it's a managed insect. And I know you compare it to livestock. Which is, I think a useful way to think about it. You are saying there aren't--when I see a bee in my backyard, it's come from somewhere? Or am I not seeing a honeybee? Guest: Well, first of all, are you seeing a honeybee, or there are native bees. But honeybees are fairly distinctive. It's not hard to train your eye to see a honeybee instead of a bumblebee, which is much larger. Or wasps and yellow jackets, which are other things entirely. But if you are seeing a honey bee in your garden, the probability that it comes from a managed beehive, that it's cared for either by a hobbyist or a commercial beekeeper, is close to 1. Russ: Wow. Guest: And the reason for that is--I mean, bees are not native to North America. They came along with European settlers, and they were brought over for their honey-producing potential, not their pollinating activities. And they found North America to be such a hospitable environment that they went native. And feral bee colonies essentially populated ecosystems in North America as European settlers moved across the continent. So, when you and I were young, feral bees were everywhere, so not all bees were managed by commercial beekeepers. Some were managed; a lot were just out there in hollow cavities of trees. But in the late 1980s an invasive species called the Varroa mite entered the United States. I think it's native to Thailand. And the Varroa mite is a voracious predator, a parasite on bees, and decimated both commercial and feral bee colonies. To the point where it essentially eliminated all the feral bee colonies by the mid 1990s. Now, beekeepers do things to control Varroa mites, as they do to control a lot of diseases, and manage, as you say, manage livestock, for health concerns. But Varroa are responsible for wiping out feral colonies. And that's the biggest problem beekeepers face now, is the Varroa mite. Although there are other challenges. Russ: Yeah. We'll get into some of those. But I just want to make sure I understand the history. Before the honey bee was introduced into North America, around what time was that? You say with Europeans' arrival? Guest: Yeah. I don't know exactly and I don't know how well documented it is. But certainly 17th century sort of time frame. Russ: So, here's my stupid question: how did flowers take care of themselves, and fruit, in North America before the honey bee got here? Guest: Well, there are--I'm not an entomologist so I don't want to stray far from my knowledge base--but there are hundreds, thousands of insects that pollinate plants. And there are solitary bees that live out in the wild that aren't honey bees. There are flies and moths. There are bats. There are birds. There are all sorts of things that pollinate. And a lot of plants don't rely on insects or animal pollination at all. It's just the wind pollinates them. Our big staple crops--the grains--are wind-pollinated. It's just the unique thing about honey bees is they are so easily managed. Think of it: there aren't so many insects that you could take 30,000 of them in a box and move them into an almond orchard and reap the benefits of their pollination services. There are other managed insects: a small number that are much more difficult to manage on a large-scale basis. But the honey bee is the 'queen bee', so to speak, of pollination because it's easy to manage. You can move them around and they pollinate just about anything. Russ: That raises two questions. So, the first question is--and I may forget the second--what's the advantage, since there are all these natural pollination sources, of bringing in bees to this? Do they improve it? Do they increase it? Why would people find that attractive? Why would farmers find that attractive? Guest: Yeah. They find it attractive because if they want to intensify agriculture and mono-crop--essentially have an acre of nothing but watermelons or almonds or whatever--there just isn't enough ambient pollination to rely upon. Now, I say 'not enough'; that's a pretty vague term; it's actually wrong. Things do grow and there would be pollination without the introduction of honey bees. But what has evolved is a system where farmers rent the services of beekeepers to bring bees into their fields and orchards, and they find that the yield advantage, the increase in almonds per acre or watermelons per acre, from bringing in bees is well worth what they have to pay the beekeeper. So they do it. Russ: And now let me stretch your entomology knowledge a little bit. So, the second question is this: I'm a beekeeper; I put my hive or hives on the back of my truck, and they are in these little boxes which people have probably seen out in the world. They put their boxes up on the back of a flatbed truck and they go to the orchard, say, the almond orchard. How do the bees get home when home has been moved? Right? So, you don't just let them go and say 'Thanks a lot.' They come back. They make their honey, they do all this other stuff. How do they get home when home has moved? It's the back of a truck. Guest: Yeah. Well, bees are pretty fascinating creatures. And I'm not an entomologist but I love reading about the biology of bees. And they recognize their home. They forage up to 3 miles away from that little box looking for pollen and nectar. And they always find their way back home. I say, 'always,' but if they are sick or disease-ridden they might not. But as a rule, 99% of the time they find their way back to that little box. Now, here's a question that you may or may not ask but is often asked: How do you move them, then? How do you keep them in your box when you travel? Russ: Yeah, I didn't think of that. They are not locked in, right? It's not sealed. They have to breathe. Guest: Yeah, that's right. You have to keep it open to the air. Russ: Somewhat. You could put mesh over it, I guess. Guest: And they do. But the big answer to the practical question of how to move bees is: You drive at night. Because only fly during the day. And they come back to their hive in the evening. And there they sit. That's when you move them. So, when they wake up and they are in a new field, they know that home is their hive and they will return to that hive. It is pretty remarkable they don't get lost. Russ: Wally, I have to just add: I think that's not a credible explanation, but since it does happen every time, evidently it must be true. It's a beautiful thing. Guest: They drive at night. But they also adopt your solution; they put mesh over the bees in case they are-- Russ: Antsy. Guest: Wayward bees want to sneak out of the bedroom window in the middle of the night. Russ: Go partying. Is it darkness that makes them less active? Or do they have an internal clock of some kind? Guest: Okay; you've now tipped beyond my entomological knowledge. Why exactly they--well, let's see. It's understandable why they've evolved in this way. That their useful activities out of the hive are out of the day, because that's when they can find the blooms. What mechanism is it that tells them to stay inside--I mean, darkness sounds like a--I don't know. Russ: I'm just wondering if we can fool them; I'm wondering what happens when you across time zones. We did do a podcast on ants long ago. They obviously have a lot in common because ants and bees, as you said, their real unit is the colony, which is an incredible example of emergent order. There is no--the queen, at least in the ant world, and I assume in the bee world also, the queen is not in charge. It looks that way maybe because the queen is bigger. But there is this set of forces that bring these creatures together in ways that are not controlled. Guest: Yes. Here's something for your reading list. There's a Cornell biologist named Tom Seely who has written several books, one of which is called Honeybee Democracy, that's on these issues about how the internal organization of bee colonies; and it's very much an economic kind of explanation. You really feel an intellectual kinship between economics and evolutionary ecology when you read his stuff. And he gave a talk one time at North Carolina State, and I went up afterwards and said, 'Gee, that was great; it really piqued my interest. I'm an economist.' He says, 'Are you interested in Hayek?' And I said, 'Well, yeah, as a matter of fact.' He says, 'He's my favorite economist.'

15:04 Russ: So, getting back to the logistics. What crops are important demanders of honey bee services? Guest: The first one that people mention are almonds, because almonds are the most valuable agricultural product of the state of California. I think that even includes dairy. Russ: Really? Guest: Yeah. It's huge. Russ: It's mind-boggling. Guest: Well, I should--it may not--it may be only the most economically important crop as opposed to animal agricultural. But I think it even does outstrip dairy. And almonds have been developed, and the kind of breeds that have been developed over the last several decades are ones that are highly dependent on honey bee pollination services. And it wasn't so much the case decades ago, but now, as it stands, the varieties of almonds that are planted and the way they are planted it is almost true that if you don't put supplementary bee pollination in there you don't get almonds. It's not literally true but it's highly dependent. So that's the first crop that you had mentioned. And acreage has grown over the years, and they've become--they are important for another reason actually and that is that they bloom very early in the year--late February or early March, so that's when honey bees are demanded, at a time when most other crops are not flowering. So that's one particular crop that's important, but then there are a lot of vegetable and fruits--blueberries, apples, cranberries, watermelons, squash--as kind of a rule of thumb it's again not the staples of your diet. It's not the wheats or rice, soybeans and corn that are pollinated by bees. It's fruits and vegetables, the colorful things. Russ: And how much money are we talking about here, for a particular orchard? Obviously it depends on the size of the orchard and how many bees are involved. But what's the typical kind of number for how much money might change hands to show up with your bees? Guest: If you take bees into an almond orchard, you might rent them for a 10-day service while the trees are blooming, for $150, $175, maybe $200 per colony. You might put two colonies per acre. So $300, $350 an acre is how much the almond grower would pay the beekeeper. A little perspective on that is that's going to work out to be not huge in the spreadsheet of an almond-grower, maybe a 5-7% cost share. So among all the seed and land--well, per anything. Of all his costs--labor, chemicals, fertilizer, land, etc.--renting pollination services is going to be 5, 10, 7% of his costs. Russ: What's a big almond orchard? How many acres maybe? Guest: I don't know. There are about 800,000 acres in California; an individual one I'm sure is several thousand. But I'm not sure how large they get. But they are not small operations. Russ: But that's a lot of almonds obviously. Guest: Yeah. It's the only place almonds are grown in the United States; we're the biggest producer of almonds in the world. So it's a big industry. Russ: And how fragmented or concentrated is the bee colony business? Is it 250 or 500 or 7, say, beekeepers showing up in California for those almonds or is it just a few? Guest: No, it's very unconcentrated. These are primarily what you think of agricultural enterprises--family businesses. My co-author, Randy Rucker at Montana State U. and I have done a lot of work on bees over the years. The question you just ask is not easy to answer, but ballpark, 1500 commercial beekeepers in the United States. And they have from several hundred to several thousand colonies that they manage. And so they are large if you think in terms of how many bee colonies a handful, a small number of people, can manage. But they are not big businesses. Russ: So the top 5 don't have half the market, you are saying. Guest: No, nowhere near. There are no corporate beekeepers. Corporate farming itself is rare. That's maybe another conversation. And I think it's really due to the principal-agent kind of problems; there's so much micromanagement and information flow that has to happen in real time that it's these small operations that end up being the economically dominant form. Russ: And do any almond growers or watermelon growers have their own bees? Any vertical integration there? Horizontal integration, sorry. Guest: Very little to none. One reason for that is what I just said: information monitoring demands are high, and so it pays to specialize and transact across markets. But the other reason is that it makes a lot of economic sense for beekeepers to be migratory, because you think of when crops bloom that require pollinating services--it might be almonds in late February or early March. That's only 10 days. And so the next thing happening is maybe up in the Central Valley a little farther, California, some vegetable seed crop requires pollinating. So, as the season progresses going north, what migratory pollinators, beekeepers, do, is they move their bees on trucks and pollinate a handful--3 or 4 sets maybe of different crops. Finally they are up in Washington and Oregon pollinating blueberries or raspberries or cherries. And then their spring activity is over; the pollen, the bloom is perceived as north as it's going to. And then they truck them out to the sunflower fields of North Dakota for the summer where they graze them. And then this joint output process turns from 100% pollination in generating pollination income to making honey, which is what they do during the summer. Not receiving pollination payments but rather making honey that they extract and sell. So, that was a long-winded answer, but that's why you don't see, I think, the kind of integration that might sound natural--that these guys are moving all over the country. Here's a factoid that I kind of like: You asked about the concentration of beekeeping. Well, in terms of geographical concentration, 2/3rds of America bees are in the almond orchards in late February, early March. Two thirds of it. Every bee insect in the country. And they come from as far away as North Carolina, where I live. So at the margin it's profitable for a North Carolina beekeeper to put his bees on a truck, send them across the continent, to get that $150, $200-a-colony almond pollination fee.

23:06 Russ: Did you say there are about 30,000 bees in a colony? Guest: Yeah, at full strength. Russ: And some of these guys have many, many colonies, too, right? Guest: Oh, yeah. Russ: So it's a big truck. Or more than one truck. Guest: Picture a semi-trailer, one you'd see on the freeway, an 18-wheeler, stacked with honeybees, with boxes, hives of honey bees. It'll have about 400 colonies like that. Russ: Whoa. On one truck? Guest: Yes. Russ: Wow. So, when they--we're going to get into some more policy issues in a minute. But this is so interesting. The image of the bees after their hard work--which of course they kind of--I was going to say they kind of enjoy, but I don't know what 'enjoy' means for a bee. But it's kind of what they are made to do, is to go from flower to flower. Guest: Yeah. You'd need to interview bees on your next podcast episode to find out how they feel about this. Russ: Yeah. But they do it naturally, is a better way to say it. So, they go from California and then they go up to Oregon and Washington State and then they go to--which Dakota is it? Guest: North Dakota. Russ: So they are grazing there on sunflowers, just hanging out. A huge portion of the bees must be there. Guest: Well, don't--I am giving you some highlights of what is a very complex pattern of migration. There are bees that--the typical pattern is their home base will be in some southern state and then they will travel north for pollinating, stay up north when all the weather is nice and there's nectar to be gathered up there, and then they go back to home base. It happens along the East Coast, Florida up to Maine and back. Some of it happens laterally, West to East. So it's not true that every beekeeper is following the same pattern. Russ: No, but there are a lot of bees in North Dakota in that period. There's something beautiful about that imagery of them just kind of hanging out there. And I wonder if there is some--there must be a lot of beekeepers that hang out there, and there must be some culture of interaction between them that is undocumented perhaps. Guest: Yeah. Well, actually there's a really good book, another one that's one my reading list--I've read it--Hannah Nordhaus, The Beekeeper's Lament. It's about the culture of beekeeping. And her story is an interesting one. She started out--let's say she's an environment journalist, very interested in environment implications of agriculture. And I talked to her, and she started to write what she thought was an exposé of, you know, the bees are all dying; it's the problems with modern chemical agriculture. Russ: We're going to turn to that topic next. Guest: But she ended up--and I don't want to characterize her views on that topic--she ended up writing a book about, the subject you just asked about: the life of beekeepers up in North Dakota in the summer and tending their bees. Now, in fact they are driving all over the place, so they don't just park with their bees. But it's a very interesting book about the evolution of the system and the culture of driving all night with your bees and waking up in the morning. It's kind of a cowboy thing. Russ: The whole idea of having hundreds of thousands of bees on your truck, as they are sleeping--there is something poetic about it.

26:49 Russ: But let's move back to the economics. There has been a lot of concern in the last few years about what's come to be called Colony Collapse Disorder (CCD). Explain what that is. First we'll talk about what might be causing it, and then we'll talk about how the market has responded to it. So first, let's talk about it: What is it? What do we know about it and what is the magnitude and scope of it? Guest: Colony Collapse Disorder is a term that first gained currency in about 2007. Beekeepers have always faced diseases of various sorts. It's usually known what those diseases are. American Foulbrood is one; Nosema; Varroa mites that I mentioned. But in 2007, a mysterious thing happened. A beekeeper by the name of David Hackenberg, Pennsylvania beekeeper, takes his bees down to Florida for the winter, in this migratory pattern I was talking about. He leaves them for a couple of months, he comes back, and he finds the bees have essentially vanished. So, there was no smoking gun. There weren't dead bees lying at the bottom of the hive, as would be true if there were other kinds of known diseases. And beekeepers across the country started reporting instances of this same phenomenon, same syndrome. A colony 'collapses'--meaning it's no longer viable. And most of the adult bees have left, leaving a few of the brood--the baby bees as well as probably a queen. And that's Colony Collapse Disorder. And it--I think--gained notoriety, well, for two reasons. One, it's a real thing. Over-winter mortality is normal in beekeeping. If you put 100 colonies out for the winter when you come back in the spring to spruce them up to take them out pollinating, you might have lost 15%. And that would be a pretty standard 20-30 years ago kind of over-winter mortality rate. We could talk about how beekeepers adjust to that. But let's just say it used to be 15%, and since 2007, with this Colony Collapse Disorder and other problems, overwinter mortality is more like 30%. So it's a real phenomenon. It's a real thing. And it means more die over winter. They are less healthy for some reason going into the winter dormancy period and then they come out and the marginal colonies have died. Russ: But is it that they've died? Or disappeared? The first example you gave is as if they just wandered off, lost their mojo. Right? Guest: Yeah. Well, it's--I think as Colony Collapse Disorder is currently understood--I should have said 'disappeared,' not died. Because that is what the term describes. Now, leaving the colony is not entirely unheard of. Bees will swarm. If they don't like environmental conditions or if a hive of bees gets too crowded--and this is actually what that book Honeybee Democracy is all about--they divide and they create one new queen who flies off with half the bees and the other half stays in the old hive with the other queen. So, en masse movements of bees in the air is something that happens. And so, from that perspective, disappearing bees isn't entirely novel. But nobody really knows where they go. Presumably they are not setting up shop somewhere else and being healthy. So I think that CCD gained notoriety both because it's another challenge the beekeepers face. And also because it's got this mysterious-- Russ: It's scary-- Guest: Yeah. People don't know. And there are all sorts of early theories. Cell phone transmissions. It's aliens. It's all sorts of things. I would say the research community, which I follow pretty closely, still is at a loss. There are a lot of culprits. Probably the best explanation is a combination of factors--viruses, maybe weakening by insecticides that are applied to crops or applied directly to the colony by beekeepers to control the mentioned-previously Varroa mites. So a lot of things are coming together here, perhaps. No single explanation as of yet. Russ: Global warming? Guest: Uh, that's certainly been mentioned. Russ: I'm sure. Guest: Yeah. Russ: Any evidence for it? Guest: Not on that. I think the evidence is so weak on any one explanatory factor: There are people who would say that insecticides have now been fingered. I don't see the evidence for that. But you get into the policy realm--and that's what you hear most about nowadays if you just casually are following news sources: the EEU (European Economic Union) has banned a class of pesticides, insecticides called 'neonicotinoids' and there are various groups that want that done in the United States. And they motivate that policy proposal over concern for honey bee health.

32:28 Russ: So, whatever the reason, it's a dramatic increase in mortality over the winter, doubling roughly compared to historical standards. And normally that would cause some concern. Forgetting the--I think the worry, there was an ecological worry that something sinister was going on and maybe it's the insecticides, maybe it's global warming, maybe it's something else. But a lot of people thought--and I think what's interesting about these kinds of examples is: It's like the frogs. These are small creatures; it's sort of the canary in the coal mine. Something is going wrong here. It could lead to this sort of cascading destructive effect on the ecosystem and next thing you know we are not going to have any fruit in America. I think there's a lot of anxiety about those kind of seemingly small changes. But assuming that it's not that catastrophic canary-in-the-coal-mine kind of phenomenon, it's just something that is transient--maybe it's insecticides--but it hasn't worsened. It's a bad thing--30% dying over the winter instead of 15%. But what's interesting and what you've written about is how markets responded to this effect. Which by itself should have had some dramatic effects on a whole bunch of things just on the pure economics of it. How have the honeybee folks, how have the beekeepers responded to this phenomenon even though they don't fully understand the cause? Guest: Yeah. That's been the focus of some recent work that Randy Rucker and I again have done. We have been following honey bees for a while. And my initial interest in honeybees came through the honey subsidy program--that beekeepers had support prices and supplements like for many crops. So I started interest in that angle, became more interested in pollination, and then while I was thinking about economics of bees, Colony Collapse Disorder arose. And Randy and I are talking, 'So, gee, if it's that bad, shouldn't we see, oh, fewer bees? Higher prices for pollination rentals?' Russ: Higher prices of honey? Higher prices of almonds. Fewer almonds, maybe. Guest: Yeah. I mean, there should be, just purely from an economic perspective you should see evidence of this. So we started looking. And surprisingly enough, as I speak here today, in 2013, we have more bees in America than we did in 2007, before Colony Collapse Disorder was observed and named. There is virtually no effect--there has probably been some effect on the price of pollination services, but it's not dramatic. And it's probably only for almonds, the only early-season crop that is pollinated. Not for the other crops pollinated the rest of the year. And this is surprising, given all the discussions of CCD and honeybee health. And as it has come to be, well, beekeepers manage these colonies and you can take a healthy colony and you can split it. You can buy, purchase, a queen, from specialized beekeepers who do nothing but produce queen bees. You buy a queen, you split your bees. You put the new queen plus half of your old bees into a new, empty box--maybe it's the same box that was vacated by a colony that died. And once the queen and the new bees get used to one another, in about, oh, 6 weeks, you have a pretty-much full-strength colony that you can take out for pollinating and making honey for the season. So it's--it's standard practice for beekeepers to do this. It's called 'making increase' or 'making splits.' And that's how they've responded. That's why--you know, you can do the arithmetic. It's not that difficult to think about how many more splits you'd need to make to compensate for a 30% loss when you are used to a 15% loss. It seems like that is exactly what beekeepers have done. And so that's maybe not too surprising. I guess what we were a little more surprised at is, well, wouldn't this put some pressure on the queen part of the industry and increase the price of queens? We've found there's been no effect of Colony Collapse Disorder on the prices of queens. So apparently that's a constant-cost industry. Russ: Explain that--a constant-cost industry. Meaning? Guest: Meaning, in industry, that it can produce its product at some constant average and marginal cost. And if demand were to double for that product, there might be a temporary increase in the price of it, but eventually the industry could replicate itself and produce twice as much at the same cost--hence, price--as it was producing before. Russ: So, that can either happen by expansion or by--it happens by expansion, but it could happen by just new entrants. It could be just that it's relatively easy to start a queen-making business: the technology is understood and people know how to breed them, etc. Right? Guest: Yeah. That's a good point. I don't know which of those has happened. We've collected data from the American Bee Journal over the last 40 or 50 years on the prices of bees. And you tend to see the same companies. And so I don't see a lot of turnover in the numbers reflecting new entrants. But--so it's probably expansion by existing companies. But that's a falsifiable claim.

38:20 Russ: So, the Disorder, which is again, we don't fully understand it, but the immediate economic impact has been close to zero? Is that an accurate statement? Except for maybe almonds? And if so, why is that? What's going on in almonds, if you know. It's an amazing thing; it's a beautiful thing. So we've got a lot of people say we've got to do something about it. But of course, beekeepers did something about it. Guest: Yeah. That summarizes it for me. Now, is it a canary in a coal mine? That's a little harder to disprove. And it's worrisome that honeybee mortality has risen in this unexplained way. But if you just focus on pocketbook issues of the food supply, consumers shouldn't worry about this at all. It's utterly negligible in the price of food that they purchase and the availability of food and the variety of food that exists. Now, it's not negligible from the perspective of beekeepers. It's the same way that cattle ranchers have to deal with diseases that afflict cattle. And it affects their bottom line. So beekeepers have to adjust. And so, the American Bee Journal is filled with discussions of Colony Collapse Disorder and how it affects the bottom line of beekeepers. Now, in that, you asked: Why would it affect the price of pollination services for almonds and not others? I think the explanation there is that it's very difficult to get a full strength colony very early in the year. Which is what almonds require. You put your bees down south; they normally start coming out of their winter torpor when it gets warm. Well, it's not very warm when the almond trees are blooming and so they kind of have to force them out of their winter state to be full strength. And that puts a real biological stress on colonies that are already weak. And it doesn't give beekeepers much time to engage in that splitting of colonies that I talked about. So you can kind of see that there's some resistance to expanding the availability of pollinators that early in the season. But once they are back up to full strength the costs of providing pollination services to later crops--apples--hasn't really been affected. And so you wouldn't see a pollination fee increase there. Russ: So, the price of almonds has risen quite dramatically in the last few years. Is any of that, some of that, a little bit due to this effect? I know there's an increase in the demand for almonds. I've read--I think it's true--that there is an increase in demand for almond milk and other things. Guest: Yeap. And I think that's not due to an increase in pollination fees. I think, again, a generous assessment of the importance of pollination to almond growers would be no more than a 10% cost share, and I think somewhere like 5 or 7% is a good number. So if you have a 30% increase in what is a 5 or 7% cost share, well that's going to make--you know, that could make a little bit of a difference in the value of almonds at the farm gate. Now, what is the fraction of the value of a can of Blue Diamond Smokehouse Almonds at the store represented by the actual almonds? You know-- Russ: Less. Guest: Right. Not very much. The old saying in agricultural economic circles is: There isn't much wheat in a box of Wheaties. It's mainly packaging and shipping and processing and all that stuff. And so the cost of wheat is very small-- Russ: Marketing. Guest: Yeah. And so even something like almonds, where you think you are buying just almonds. I should know this figure, but I don't. But I would guess that the cost of almonds in a can of consumer almond purchases at stores is 50%, say. So, now you've got 50% of what consumers buy is the actual almonds; and 5% of almonds is pollination; and pollination fees for almonds go up by 20-30%. There's not much action there. Russ: Yeah. Now that's a beautiful back-of-the-envelope calculation that summarizes what the probable impact is. But it--obviously, if the beekeepers didn't respond, it would be bigger. But they've mitigated that response throughout all these products, crops, by their natural incentive to try to get access to those pollination demands. Guest: That's a great summary of it. I have nothing to add to that.

43:34 Russ: So, let's talk about Ronald Coase and James Meade and Steven Cheung. We actually did a podcast episode touching on these issues back in 2008 with Mike Munger, a near-neighbor of yours at Duke University I might add, in the Triangle area of North Carolina. He was talking about the Florida market. But let's step back and talk about the fundamental economics here. I want to start with James Meade. James Meade was a Nobel Prize winner who speculated that there would be some problems in the pollination market because of what he called, or what I think has come to be called, 'reciprocal externalities.' And that is that the bees benefit the apple orchard or the almond orchard; the apple or almond orchard benefits the bees. So it's not obvious to some economists that this market would work very well. And so that was his original thought. And what happened after that? And did I get that correct? Did I summarize him correctly? Guest: Yeah, I think that's right. Francis Bator I think popularized his work. But it originated with Meade. The story is just what you say, that a nice example--it's easy to come up with negative externalities. Positive externalities are a little more difficult, and here's a nice story: You've got apple growers next to bee keepers. And the bees themselves fly over and they collect nectar from the apples. And so that's helpful for the bee keeper because he produces honey. And while the bees are doing this, they help pollinate apples; and so that produces more apples. And so that the fact that the apple growers are there enhances the profitability of the beekeepers, and vice versa. Russ: And I should just add, just to make it clear: The worry is that they are going to free ride. That somehow, because the bees are flying around, the apple guys can take advantage of the bees and not have to pay for them. Because after all, bees are just--who could control them? Guest: That's right. Free riding, or even a more benign interpretation is, these guys might not know of each other. I think that's the story that I get out of Meade and Bator, is that, sort of unbeknownst to each other, these reciprocal external benefits are happening. And so then, from a social welfare perspective, you say, Well, gee, we should have more apples being grown, because not only are apple growers producing apples, they are producing nectar for the bees. And we should also have more bees, because not only are they producing honey but they are enhancing the production of apples. Therefore we should be subsidizing both of these industries to get a better mix of the agricultural products. Russ: And that's the flip side of the Pigou interpretation of externalities: that when there's too much of something because people's actions have effects on others than just themselves, we need to tax it; in case of positive externalities you just need to subsidize it; otherwise we don't get the right amount. Guest: That's right. It's exactly the same argument turned on its head due to the positive nature of the externalities. So, that was--I don't know if you ever learned that story, but Bator's The Simple Analytics of Welfare Maximization--I remember it in Master's level economic theory classes, I learned that. It's a nice example of how the market works or doesn't work. Steven Cheung comes along. He was a student of Ronald Coase's. And I talked to Coase once about this; and Coase encouraged Cheung to take on this story and see if there was any truth to it. Cheung was, at the time, a professor of economics at the U. of Washington; and he did research that ultimately was published as "The Fable of the Bees" in 1973. And what he discovered--I'm not sure if Coase's suggestion came first or if just living in Washington State where they grow a lot of apples brought this to Cheung's attention--but he found that if you went into a small agricultural cultural town in Washington State and opened the Yellow Pages, there was a section for pollinating. Pollination. And funny thing--there were companies there advertising their services as pollination specialists; and they would bring their bees to your apple orchard and charge you for the privilege and enhance your apple yield. So, to me, that was the most telling piece of empirical evidence in that paper. What's the externality here? Not only are they aware of each other. They are contracting with each other. That's prima facie evidence that there's no externality in my book. And then he went on with other--he collected some data from a small number of bee keepers, what they charged for their pollination services. And found that, he thought markets worked pretty well. Basically, the law of one price held: that pollination services sort of achieved some equilibrium price. So that was Cheung's refutation of the Fable of the Bees in 1973. I think he was probably listened to more by economists than others because what transpired at about the same time is we instituted a honey subsidy program, that one of the main at-least public arguments for was it would induce more beekeeping and increase pollination services which we need more of. So apparently they weren't reading Cheung. Russ: Yeah.

49:15 Russ: Well, we've come back to the discussions we've had of Ronald Coase in a number of previous episodes. The idea here is that when there are transactions costs, sometimes these external effects can be quite troublesome. Coase argued that therefore, in those situations where there are transactions costs that are sufficiently high, we should be worried about the outcome; and we might want to make sure we assign property rights carefully and see how the incentives play out in that case. But if transactions costs are low enough, usually the parties themselves can solve the problem. The fact that Cheung found these guys, these people selling their services suggested that the transaction costs were not as high as Meade and others had worried about. It wasn't the case where bees were wandering around and the apple people were free-riding on the bees. The actual facts were quite different. It's a beautiful example; it's very similar to the lighthouse story we talked about in the recent podcast episode with Don Boudreaux about Coase's work, saying: Well, let's see how lighthouses actually work. People say that they can't be provided privately, but they sort of were--not 100%; it's a little bit complicated. But let's see what the actual facts are. And here's another beautiful example where this naive--I'll call it naive--blackboard economics where someone postulated a market failure, when you looked at the market somebody figured out how to make it work. Guest: Yes. It is a great example of that. I think Coase inspired a lot of empiricism, looking at the real facts of the situation and how did market participants on the ground devise ways to create economic value, capture rents, contract with one another. Russ: That honey subsidy thing strikes me as--I doubt that a bunch of politicians read James Meade and said, Hey, we've got to help these people. There must have been some interesting public choice/political incentive issues there. Guest: Yeah. I think you're right. I don't think they did do a lot of reading of Meade and Bator. But it is true that in Congressional debates over the honey subsidy the externality argument was trotted out. In fact, I clipped a quote from an American bee-keeping group, who is exhorting his members. He says, 'I've found about this thing called a positive externality. And if we could make all our elected representatives aware of this, I think we've got them in the palms of our hands.' Something to that effect. So they were reading it. And I don't really think that--well, it depends on what your view is of the political economy of these subsidies. I think honey subsidies are pretty well explained by the concentration of benefits and the small number of producers, and the diffuse nature of costs. Stop a person on the street and say, 'Would you contribute a nickel for the welfare of beekeepers and bees,' and an awful lot of people would say yes. And if you aggregate all those nickels that turns into $20,000 per beekeeper. Russ: Is that a rough measure of what the size of the subsidy was? Guest: I'd have to go back and look at what we'd written, because it's been actually a number of years since I looked at that. Russ: We'll put a link up to that and people can go find it for themselves if they are really curious. Guest: There's a Law and Economics paper on the honey subsidy program that Rucker and Mary Muth and another author, Ted Chuang. Russ: Are those subsidies still in place? Guest: They were killed and now the agricultural subsidy has shifted to crop insurance subsidies. And honey production is covered by subsidized insurance to cover losses. So there still is a honey subsidy. It's not large in absolute or even relative terms. Russ: I breathe a sigh of relief. Thank goodness.

53:47 Russ: Do you want to say anything else about the Meade-Bator-Cheung stuff? Is there anything else interesting Coase that we didn't talk about? Guest: Well, you know, I think we covered sort of the main points. In my view the thing that Rucker and I, I would say if we extended Cheung's work, it's looking at how sort of modern agricultural markets have evolved and the whole migratory beekeeping thing. It's a wonderful "I, Pencil" story. I'm sure you are familiar with Leonard Read's monograph on the coordination of unrelated individuals by markets. Russ: Sure. Guest: This is it. You've got people focusing on producing almonds who don't really know about what it takes to be a beekeeper, and vice versa; and then you've got honey consumers; you've got almond purchasers in the rest of the world. All these people are coordinated by markets in efficient ways, and that's sort of the marvel of it, this vision of a frictionless equilibrium. But then the nitty gritty of how it actually happens is all dictated by the transactions costs of contracting. Here's one interesting thing just to add to the property rights-transactions costs theme: Beekeepers are producing two products, pollination services and honey. So they are two-output firms. And the way they do their business is they keep the honey and they market that themselves. They don't keep the fruit produced by their pollination; they actually work as contract laborers in renting out the services of their bees. And so here's a contracting solution to a problem where you want the ownership of the output to lie in the hands of the person who can most readily control the value of the output. And that's honey in the case of the beekeeper and it's fruit in the case of the farmer. So, the contracting mechanism is a particular Coasean solution of this property rights problem. And it's just fascinating. It's what makes the whole "I, Pencil" story work.