The BBC reports this evening a warning from the World Bank “that rising food prices, driven partly by rising fuel costs, are pushing millions of people into extreme poverty”.
On 15th April 2008, three years ago almost to the day, I wrote here:
“You cannot buck the market, the laws of supply and demand will always rule. Even in Communist states, the market, often the black one, was still dominant. Yet politicians continue to act as though the market implications of their policies can be avoided; the most simple, the most basic laws of economics are disregarded. Secondary school classes will be taught easy things such as if those demanding a product offer a sufficiently high price, there will be supply, and that if demand for a limited supply increases, then the price of a product will rise. The only way to keep prices low, or even to eliminate a supply altogether, is to look at the demand side of the market.
The United States seek to stop heroin by spraying fields of poppies in Afghanistan. Few would disagree with the aspiration, but what’s the consequence of what they are doing? If the supply goes down, the price goes up. Addicts find heroin harder to get, they must pay more; to be able to pay more, they must have more cash; to have more cash will often mean they will have to steal more. Back in Afghanistan, the elimination of much of the crop means those who are able to continue growing can charge more; those who are prevented from growing poppies find alternative crops not nearly so profitable, they become sympathetic to those who oppose the United States.
The market cannot be bucked. Demand for heroin is inelastic, it does not respond to price in the way that demand for most products does – if someone is addicted, they will pay almost any price. The way to get rid of the drugs problem is not to drive the prices higher, but to eliminate the demand – but that would mean looking at how the demand arises and taking steps to change things, an altogether more complex and costlier process than crop spraying in a far off country.
Market forces apply to every decision. The United Kingdom’s requirement that fuel at the forecourt pumps include 2.5% biofuels is presented as a positive measure. The BBC report that “The idea behind the Renewable Transport Fuels Obligation (RTFO) is to reduce climate change emissions from transport – which produced more than a quarter of overall greenhouse gases in the UK – by using renewable fuels instead of fossil fuels”.
The environmental impact of the biofuels is questioned; the market impact is that there has been a sharp increase in the price of the grain and oil used for production, leaving many people in poorer countries struggling with the rising cost of their staple goods. While politicians may have aspired to seeing the production of biofuels by domestic producers, the reality in a globalized market is that companies will buy where supplies are available and at the lowest possible price; in this case in a market where poor people must try to compete.
If the market cannot be bucked and if the poor are not to be priced out of the market, then there need to be measures to reduce fuel demand, something much more complex and costly than mixing some plant oil with the petrol”.
If it was obvious to me, it was obvious to the great and the powerful where we were heading.