[tt] Kel Kelly: Are We Running Out of Food?

[Premise Checker]

Kel Kelly: Are We Running Out of Food?
http://mises.org/story/2958
8.5.6

Paul Krugman writes in the New York Times, April 7 that there is a world 
food shortage, accompanied by skyrocketing prices. Because of this, poor 
people in Africa and other places are starving. He suggests that this has 
come about mostly for these reasons:

* new food demand by China
* the high price of oil
* bad weather in important farming areas (particularly Australia)
* the reduction of farmland available to grow foodstuff — in favor of 
growing biofuel crops, for the purposes of alternative, (reputedly) 
environmentally safe energy sources such as ethanol

Krugman's proposed solution to these problems is for us to give more of 
our money to government, so that it can solve the problem the market is 
apparently incapable of solving.

And now, the real story:

Regardless of whether one thinks the above-listed factors play a role in 
world food shortages, there are in fact two issues of primary importance 
related to food shortages and food costs that Krugman does not mention and 
may not know.

First, the underlying cause of any shortage is the lack of a free market, 
since genuine shortages cannot appear in a free market. Instead, while 
prices of goods would likely rise at the onset of reduced supplies, the 
goods in question would always be available at some price — and the higher 
the price, the more the supply would increase to meet demand, which would 
then of course reduce the price. If we had free world markets, food would 
be exported from some countries, such as the United States and Europe, 
where food is plentiful, to countries where it is needed. This is because 
it would be profitable to ship goods to needy areas like Africa, where 
shortages were making prices rise.

The fact that this is not currently happening can be a result only of 
government price controls (which prevent prices from rising in needy 
countries), trade restrictions, or some other government barrier that 
prevents people from getting what they need. The World Bank has cited a 
list of 21 countries that have price controls on basic staples. We all 
remember the stories of people in Ethiopia starving in the 1980s, when 3 
million people went hungry. What was unreported was that there were 60 
million people in Ethiopia at the same time who were unaffected by famine. 
The moving of food from one part of the country, where it was plentiful, 
to the other part, affected by drought, was prevented by fighting between 
the government and rebel groups near the area of the drought. Economic 
incentives were prohibited by the government's forced withholding of food 
shipments (so that rebel soldiers would not have access to supplies), by 
price controls, by the declaring of grain wholesaling illegal in much of 
the country, and by the prohibition of the private selling of farm produce 
or machinery. A similar situation occurred in Zimbabwe in the early 2000s. 
Indian economist Amartya Sen won a Nobel Prize for demonstrating that most 
famines are caused not by lack of food but by governments' ill-advised 
intrusions into the functioning of markets.

The second issue Krugman fails to mention is that high food prices are a 
manifestation of current worldwide price inflation. World governments have 
been printing money at very high rates this decade. While the United 
States has been expanding the money supply by "only" about 10–15 percent 
per year, many countries have printed money at rates exceeding 50 percent 
per year. This money, which had been previously contained mostly in world 
stock markets, has now also spread to commodity markets, from which the 
prices of food are derived. Since money is now being created faster than 
goods are being created, prices are rising.

As another example of this phenomenon of the increase of money exceeding 
the increase in supply of goods, we may cite the rise in oil prices. 
Although this has been attributed in the press and other public forums to 
speculation, greedy oil companies, and increased demands of oil from 
China, the real cause is the increasing disparity between available money 
and available oil. Along this same line, the steep rise in prices — of 
housing, stocks and bonds, oil, gold, commodities, food prices, etc. that 
we have seen this decade — would be mathematically impossible without the 
increased supply of money circulating in the world economy. In fact, if 
the supply of goods were increasing, as it has been, and if at the same 
time the quantity of money remained stable, prices would necessarily fall.

Make no mistake: for various fundamental reasons related to production, 
supply, and demand, there is a lack of supply of some commodities 
available relative to the growing real demand for them. Still, this lack 
of supply is not the root cause either of the occurrence of shortages or 
of the extreme increase in world food prices (by over 80 percent in three 
years). Additionally, though many commodities such as wheat have been 
stagnant or in reduced production over the last several years, other 
commodities have seen continued increases in production; other food groups 
such as cereals, fruits, livestock, and fish and seafood products have 
seen mostly increased supply. Data from The Food and Agriculture 
Organization of the United Nations show that both agriculture production 
and food production per capita has risen since 1990, and stayed steady 
since 2000[1]. In comparison, commodities prices have been rising since 
1999.

Returning now to Krugman's piece, we can see that the reasons he adduces 
for the food shortages and rising prices are illogical. For example, "new 
demand" for food from China would necessarily have resulted not only in 
the Chinese themselves producing more food to meet this demand, but in the 
rest of the world doing so as well. (In fact, China has increased 
agricultural production per capita by 22 percent since 2000.) Can we 
really imagine that world food producers would not have spotted this 
demand and tried to make profits by satisfying it? In fact, they have 
spotted it and have therefore been producing more food. The Chinese 
population is increasing by just over one-half of one percent per year. 
How, then, could the Chinese suddenly have a desire and need for 30 
percent or so more food per year in recent years? Further: how could they 
pay for it, even if they had the want of more food?

As a concept, "demand" is liable to misunderstanding because we use the 
term in several different ways. I might have a demand (desire) for a house 
in the south of France in order to have a place to park the yacht I also 
demand (desire). In this case "demand" is without consequence, because I 
do not have the means with which to pay for these items. Real demand can 
affect prices only if there is real purchasing power, in the form of 
money, to support the demand. Chinese consumers cannot demand, and thus 
pay for, increased consumption of food without more money, which can only 
arrive in their pockets after being printed by their central bank. They 
can have an increased real demand by way of producing more goods with 
which to pay for more food, but this would serve to reduce prices, not 
raise them.

To be clear, it is not the companies that people work for that are 
producing the money, as companies don't produce the money they pay out as 
wages; they produce only goods. For companies to have more money (i.e., 
sell their goods at a higher price than last year) and then pay out more 
money in wages to workers, more money has to be created by their 
government in the form of credit expansion.

With regard to China, then: if there were as much of a new demand for food 
in China as Krugman claims — given a constant amount of money in the 
economy, there would necessarily be a corresponding reduction in the 
demand and prices of other goods. Therefore, the Chinese may well be 
consuming more food, but this increased consumption would not be 
responsible for (absolute) higher prices or shortages.

What, then, about the bad weather? Bad weather could well play a role in 
the short run. But In the longer run, if Australia has bad weather, even 
for five years straight, other countries could and would step up their 
production and increase supply. As an example, more land in the United 
States would be turned to farming. Food shortages in one country would 
cause world prices to rise by some degree temporarily; but the result in a 
situation of free trade would be increased production in and increased 
supply from other countries, a result that would then push the price back 
down. It's possible that the lack of free markets has prevented this from 
happening, but it's certain that free supply and demand would preclude the 
possibility of global emergency.

If there were bad weather in most regions of the world at the very same 
time, the supply of food would in fact decline and prices would rise. But 
in a free market shortages would still not appear. And in a world of an 
unchanging supply of money, this effect would be temporary, as prices 
would fall when supply later increased. Again, as the price of food rose, 
the price of other goods would have to fall. Sustained price rises among 
all goods can result only from new money entering the (world) economy.[2]

As for Krugman's last argument, that farmland usable for food is now being 
used for the growing of biofuel feedstock instead, this is a question 
mark. In a free market, if there were a shortage of food and if the 
necessarily associated high prices of food gave that market signal, land 
used for any other item — biofuel feedstock, car lots, movie theatres, 
houses, or whatever — would be converted to use for farming.

If we had sustained food shortages in the United States, for example, this 
is what would happen. Indeed, agriculture used to represent 50 percent of 
GDP at the beginning of last century, but is now less than one percent. 
Land use has changed to meet changing demands. But if we needed food, we 
could and would build agriculture back up towards that 50 percent level. 
On a worldwide scale, as food prices rose, land would be turned to the 
more profitable growing of food instead of the less profitable growing of 
biofuel feedstock.

Only if government subsidies were high enough to obscure these market 
signals, or if government required energy companies to purchase feedstock 
(which this author is told is the case in the United States), could the 
agriculture production structure be deformed so that this market response 
would not take place. Similarly, if agricultural lands became difficult to 
develop due to government regulations to, e.g., protect current farmers, 
increased production could become difficult.

In sum, the real cause of continually rising food prices is the printing 
of money by world governments. And the real cause of actual food shortages 
is the prevention of profitable global trade in food by the ill-advised 
policies of the governments of the very people who are starving. To the 
extent that any other reasons proposed contribute to a reduced supply more 
than temporarily, it is likely because governments prevent the market from 
working. To ignore these primary drivers of current world food shortages 
is either willfully to dismiss economic logic, or to be unaware of it.

Kel Kelly is a finance consultant who has specialized in globalization 
research and analysis. He lives in Atlanta, where he is taking time off to 
write a book on political economics. See his website: The Proletariat's 
News. Send him mail. Comment on the blog.
Notes

[1] Data goes through 2006.

[2] It could be argued that the observation of food prices rising faster 
than other goods reveals this very occurrence in our world of a changing 
quantity of money, i.e., that this reflects relative price differences. 
This relative-price-difference effect is probably there, but this author 
would argue that it would explain only a small portion of the relative 
price difference. The effect of a credit boom being channeled into the 
commodities markets in general is likely the overwhelming effect of the 
relative price differences. To say that it explains most or all of the 
difference, it would require an explanation as to how stock prices, 
housing prices, and the like can rise disproportionately so much more than 
other normal goods due to a reduced supply, when in fact they have risen 
while their supply has been in abundance. In other words, it happens all 
the time in other areas where supply is not limited.