Monday, January 31, 2011

Egypt, Food Prices, Markets, and Governments

One of the objections I have often raised against free market systems has been highlight the fiction that it allocates resources towards its more valued use.

Speaking in terms of desire fulfillment, we can direct resources towards uses that fulfill the most and strongest desires by putting them on the market and letting people bid for them. If one person is willing to spend $30 on something that another person is only willing to spend $20 on, then the $30 use will fulfill the more and stronger desires than the $20 use.

That is the theory anyway.

Unfortunately, it only works out that way when the two people are equally wealthy. When some people have a lot more wealth then others, then those with wealth have the ability to bid resources away from those who are poor, even though the poor person has a more highly valued use for those resources.

I first spoke of this problem after hurricane Katrina where people were selling bottled water for particularly high prices. They were accused of "price gouging". Some people defended this practice using the argument above - claiming that the water was going to its more highly valued uses because those people were willing to pay more for it.

I refuted that argument by using an example of two people - one person who only has $20 and who wants a bottle of water to give to her sick (and dehydrated) child. Another person wants that bottle of water to shampoo her pet poodle. In this case, the wealthy person only needs to bid $21 for the bottle of water and it is hers. Yet, it is clearly not the case that this is the use that would fulfill the most and strongest desires.

One example of this is that, as people get wealthier, they tend to eat more meat. The production of meat takes grain. It takes, on average, 7 pounds of grain to produce 1 pound of meat. This is quite comparable to the person above bidding up the price of water so that she can shampoo her dog. They are bidding the grain needed to feed the animals off of the tables of people who need the grain to survive.

Another example of this involves the production of ethanol. Like the production of meat, ethanol purchasers are buying grain - bidding it away from people who otherwise would have used it to eat. Again, rich people bid a resource away from poor people on the open market, even though the poor people would have used it to fulfill more and stronger desires.

In the latter case, we also have examples of government wealth-transfer systems that, for all practical purposes, tax the poor in order to provide benefits to the rich. The production of ethanol is being subsidized. So, we not only have rich people bidding the food away from poor people, but we have rich people using the government to force the transfer of food from those who would use it to eat to those who would use it to fuel their toys.

The current riots in Egypt and elsewhere in the middle east are substantially grounded on rising food prices. Some of these rising prices are caused by droughts and/or floods in various parts of the world where food is grown - Russia, Ukraine, Argentina, and Australia. Yet, another substantial part of the cause is that the rich people are bidding up the price of food so that they can eat more meat and have fuel for their toys.

(See: Rising Food Prices Can Topple Governments, Too)

Even the weather-related causes of the food shortage may be attributable in part to climate change - which results from the burning of fossile fuels - which is something that serves the interests of wealthy people more than poor people (who have a very low carbon footprint). In this case, it is people who have money saying, "We are going to engage in activities that will destroy your fields and lead you to starvation without a thought of compensation for your loss."

The reason we in America and other developed countries are not seeing much of a change in our food prices is because we pay very little for food. Look at your grocery bill next time you go shopping and realize that what you have really bought with that money is a pretty package and advertising, The food is a small fraction of your overall bill.

(People who do not want to spend a substantial portion of their annual income on pretty food containers, advertising can take steps to remove these from their food costs. But, if this is what you like to spend your hard-earned money on, that's up to you.)

To the degree that this fuels the riots (and, certainly, it is not the only objection to the governments of Egypt and Tunisia), I do not know what the protesters are going to gain even if they win. Removing Egyptian "President" Mubarik will not end the droughts. It will not stop the practice whereby those who can afford to eat meat bid grains away from those who cannot. It will not end the free market demand for ethanol, nor will it likely end the forced transfer of wealth by government from those who can barely afford corn as food to those who can afford corn as fuel.

What we need to do is to take steps to make sure that food goes to those who need it to eat first, and to those who want it for something less valuable second, even when the latter can afford to bid the food away from the former on the open market, and even when the latter have the ability to use government to force food transfers from the poor to the rich.

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