French President Nicolas Sarkozy has called for the G20 nations to put in place tighter regulation of food commodity prices. France is leading the call for tougher limits on speculation in food commodities.
“A market that is not regulated is not a market but a lottery,” said Mr Sarkozy.
Such ignorance of economics in a world leader ought to be shocking, but unfortunately isn’t.
My first response is that:
“A market that is regulated is not a market, but a state run distribution system!”
The purpose of a free market is to establish the price of a product or service based on the voluntary exchanges of individuals.
Take a relatively simple product like a pencil, the production of such a simple thing requires the complex coordination of resources from around the globe as masterfully explained in Leonard E Read’s Essay: “I Pencil”
Whilst socialists have always tried to co-ordinate economic activity by central planning they have consistently failed. Ludvig Von Mises showed conclusively that such failure is not the result of ineffective planning techniques that may one day be improved. It is inherently impossible to coordinate economic resources effectively without the use of market pricing.
Economic Calculation in the Socialist Commonwealth and later analysis.
If price caps worked, as Mr Sarkozy seems to think, then the logical question is why not simply cap the price of everything and why not as low as possible, say at 1 pence. That way, everyone in the world could afford everything and everyone would be happy.
Everyone would surely vote for a politician who delivered such a world. Everyone would instantly be “rich” they could buy several houses, luxury cars, diamonds, etc, etc.
The problem is that once the existing stock of items had been purchased, who would produce any more?
Why would anyone produce goods that cost more to produce than they can be sold for?
Even Sarkozy’s state run monopolies cannot create wealth out of thin air. (They can of course print money but that does not make everyone rich either, just ask any holder of a billion Old Zimbabwean Dollars how rich they are)
Mr Sarkozy’s “1 Pence Utopia” would of course rapidly collapse into communal destitution and starvation.
The historical result in any every system of state imposed price controls is a shortage of the price controlled good. The market price is the method by which consumers and producers coordinate the balance between demand for a product and production/supply of a product.
If you artificially reduce the price you get under-production such as the shortages of rent controlled properties in New York.
If you artificially increase the price you get over production such as the beef mountains and milk lakes under the EU’s Common Agricultural Policy.
If food prices are currently “high”, it is because we are demanding more food than the current production system can supply at the prices we want to pay. The high prices encourage more land to be switched away from less profitable activities to food production, more capital to be invested in farming, more intellectual energy to be spent on improving the efficiency of food production.
In short the high price signals the market to increase supply. If left to its own devices the supply will be increased and prices will fall.
If prices are instead reduced by legislation then the opposite will happen. Land will be switched away from farming food crops to alternative, more profitable, uses. Farmers will go bust and no new investors will want to put money into agriculture. The net result is that supply will fall further. Without the self correcting mechanism of the market the result will be food shortages and starvation.
Every single form of intervention in free markets by the state has negative consequences. Murray Rothbard’s excellent book Power and Market ruthlessly exposes and destroys the fallacies concerning the alleged benefits of each and every type of state intervention.
But what of the evil speculator, who supposedly produces nothing and simply profits by driving prices higher than they “should be”?
Walter Block in “Defending The Undefendable” explains with razor sharp logic why the speculator is a force for regulating prices and preventing shortages and should be applauded rather than vilified.
If you prefer empirical evidence to logical argument then a recent article from the Adam Smith Institute compared the historical volatility of the crude oil market (Where speculators are often blamed for volatility)and that of the onion market (Where speculation in the USA has been banned for 50 years by the Onion Futures Act).
The market with speculation is considerably less volatile, exactly as would be expected following Walter Block’s reasoning.
It should come as no surprise that Nicolas Sarkozy is economically ignorant, the key factor for success in politics is not economic competence, intellectual rigour or integrity of character. The successful politician is simply the master of charismatic sophistry who can convince the unthinking masses that he will give them more of “something for nothing” than the other guy. (And when he fails can find a suitable scapegoat to vilify)
In this case the “something for nothing” is cheap food for all, at a time when demand outstrips supply.
If successful his actions will inevitably deliver food shortages, for which he will undoubtedly blame someone else.