“Stablizing” Commodities   1 comment

The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.

This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.

 

Attempts to lift the prices of particular commodities permanently above their natural market levels have failed disastrously so often and with such media attention that sophisticated pressure groups, and the bureaucrats upon whom they apply the pressure, seldom openly admit that is their aim. At least initially, the propose something more modest.

They have no wish … to raise the price of commodity X permanently above its natural level. That … would be unfair to consumers. But it is now obviously selling far below its natural level. The producers cannot make a living. Unless we act promptly, they will be thrown out of business. Then there will be a real scarcity, and consumers will have to pay exorbitant prices for the commodity. The apparent bargains that the consumers are now getting will cost them dear in the end. For the present “temporary” low price cannot last. But we cannot afford to wait for so-called natural market forces, or for the “blind” law of supply and demand, to correct the situation. For by that time the producers will be ruined and a great scarcity will be upon us. The government must act. All that we really want to do is to correct these violent, senseless fluctuations in price. We are not trying to boost the price; we are only trying to stabilize it.

Reading that reminded me of the lamas in SimCity, by the way

There are several methods for “stablizing” commodities, but in America, we favor government loans to farmers to enable them to hold their crops off the market. Most people find the arguments for these loans to be pretty plausible. Farmers dump all their crops on the market at harvest time, which drives the prices to their lowest level. Speculators take advantage of this to buy the crops themselves and hold them for higher prices when food gets scarcer again. It is said the farmers suffer because of this because they speculators get the advantage of the higher average price.

Image result for image of commodity stabilizationHazlitt didn’t find support for this argument either in theory or experience. He saw the speculators as the best friend of farmers. Farm prices fluctuate and the risks of that instability must be born by someone. In the 1940s, it was the commodities speculators who bore the risks. The more competently they were at speculating, the more help they were to the farmer. Speculators serve their own interest precisely in proportion to their ability to foresee future prices. The more accurately they foresaw future prices, the less violent or extreme were the fluctuations in prices.

Speculators buy crops when farmers sell crops and they keep on buying them until there is no future opportunity for profit. They sell when they think the price is right. This results in stabilizing the price of farm commodities year round. Because speculators take the risk, farmers don’t have to. Investigations had shown that the speculators had actually subsidized the farmers by storing the crops at their own expense.

What happens when the State steps in and either buys the farmers’ crops itself or lends them the money to hold the crops off the market, creating an “ever-normal granary”? The privately organized free market is performing this function well without government interference, but now the farmer is encouraged, with taxpayers’ money, to withhold his
crops excessively. Politicians want the farmers’ vote, so they place the “fair” price for farm products above the price that supply and demand condition justify. Buying is reduced and this begins to distort the market.

Excessive stocks are held off the market, temporarily securing higher prices than would otherwise exist, but later creating much lower prices than would otherwise have existed. The artificial shortage built up this year by withholding part of a crop from the market means an artificial surplus next year.

Image result for image of commodity stabilizationSomething like this happened with American cotton. They piled up  an entire year’s crop in storage and destroyed the foreign market for US cotton, thus overstimulating the growth of cotton in other countries. The bureaucrats were warned it would happen before they undertook the program, but when the inevitable problems emerged, they insisted they would have happened anyway.

The loan policy is usually accompanied by or leads
to a policy of restricting production, thereby creating an artificial scarcity. In nearly every effort to “stabilize” the price of a commodity, the interests of the producers have been put first. The real object is an immediate boost of prices. To make this possible, a proportional restriction of output is usually placed on each producer subject to the control.

Assuming that the control can be imposed on an international scale, it means that total world production is cut. The world’s consumers are able to enjoy less of that product than they would have enjoyed without restriction. The world is just that much poorer. Because consumers are forced to pay higher prices than otherwise for that product, they have just that much less to spend on other products.

The restrictionists usually reply that this drop in output is what happens anyway under a market economy, ignoring a fundamental difference that Hazlitt had already discussed in earlier chapters. In a competitive market economy, it is the high-cost and inefficient producers are driven out by a fall in price. In the case of an agricultural commodity it is the least competent farmers, or those with the poorest equipment, or those working the poorest land, that are driven out, while the most capable farmers on the best land do not have to restrict their production. On the contrary, if the fall in price has been symptomatic
of a lower average cost of production, reflected through an increased supply, then the driving out of the marginal farmers on the marginal land enables the good farmers on the good land to expand their production.

In the long run, there is no reduction in the output of that commodity and the product is then produced and sold at a permanently lower price. If that is the outcome, then the consumers of that commodity will be as well supplied with it as they were before. As a result of the lower price, they will have new money left over to spend on other things. The consumers, therefore, will obviously be better off. Their increased spending in other directions will give increased employment in other lines, which will then absorb the
former marginal farmers in occupations in which their efforts will be more lucrative and more efficient.

When government interfers, however, the efficient low-cost producers are not permitted to turn out all the output they can at a low price. The inefficient high-cost
producers are artificially kept in business. This increases the average cost of producing the product. It is being produced less efficiently than otherwise. The inefficient marginal producer are artificially kept in that line of production, continuing to tie up land, labor, and capital that could much more profitably and efficiently be devoted to other uses.

Yes, as a result of the restriction scheme the price of farm products has been raised and “the farmers have more purchasing power.” They have got it only by taking just that much purchasing power away from the city buyer. We’ve looked at this senario before. To give farmers money for restricting production, or to give them the same amount of money for an artificially restricted production, is no different from forcing consumers or taxpayers to pay people for doing nothing at all. In each case the beneficiaries of such policies get “purchasing power.” But in each case someone else loses an exactly equivalent amount. The net loss to the community is the loss of production, because people are supported for not producing. Because there is less for everybody, real wages and real incomes must decline either through a fall in their monetary amount or through higher living costs.

If an attempt is made to keep up the price of an agricultural commodity and no artificial restriction of output is imposed, unsold surpluses of the overpriced commodity continue to pile up until the market for that product finally collapses to a far greater extent than if the control program had never been put into effect. Or producers outside the restriction program, stimulated by the artificial rise in price, expand their own production enormously. This is what happened to the British rubber restriction and the American cotton restriction programs. In either case the collapse of prices finally goes to catastrophic lengths that would never have been reached without the restriction scheme. The plan that started out so bravely to “stabilize” prices and conditions brings incomparably greater instability than the free forces of the market could possibly have brought.

Just what the government planners mean by free trade in this connection I am not sure, but we can be sure of some of the things they do not mean. They do not mean the freedom of ordinary people to buy and sell, lend and borrow, at whatever prices or rates they like and wherever they find it most profitable to do so. They do not mean the freedom of the plain citizen to raise as much of a given crop as he wishes, to come and go at will, to settle where he pleases, to take his capital and other belongings with him. They mean, I suspect, the freedom of bureaucrats to settle these matters for him. And they tell him that if he docilely obeys the bureaucrats he will be rewarded by a rise in his living standards. But if the planners succeed in tying up the idea of international cooperation with the idea of increased State domination and control over economic life, the international controls of the future seem only too likely to follow the pattern of the past, in which case the plain man’s living standards will decline with his liberties.

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Posted January 31, 2017 by aurorawatcherak in economics

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  1. Pingback: Introduction to “Economics in One Lesson” | aurorawatcherak

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