Published: July 14, 2008 06:41 pm         

STUMPTALK: The cause of the food shortage and rising prices

The media is seriously exercised about the worldwide food shortage, which is real enough, but the reasons given are illogical. Economist Paul Krugman of the New York Times weighs in with his expert reasons: new food demand by China; the high price of oil; bad weather in farming areas (particularly Australia) and reduction of farmland available to grow foodstuff – in favor of biofuel crops. Then out pops Krugman’s leftist solution: we should give more of our money to government, so it can solve the problem the market is apparently incapable of solving.

Hogwash! Instead of sound economic theory, Dr. Krugman offers up political gobbledygook. Actually, the underlying cause of any shortages is the absence of a free market, since genuine shortages cannot happen in a truly free market. Instead, while the prices of goods would likely rise at the first sign of a shortage, those same goods would always be available at some price – and the higher the price, the more incentive for producers to increase supply to meet demand. If we had free world markets, food would be exported from some region, such as the United States and Europe, where food is plentiful, to regions where it is needed. This is because it would be profitable to ship goods to needy areas like Africa, where shortages are driving up prices. The fact that this in not happening can only be a result of government price controls, trade restrictions or other barriers that prevents people from getting what they want.

We were aghast by the media stories of 3 million people starving in Ethiopia in the 1980s. But what we didn’t hear is that 60 million Ethiopians at the same time were unaffected by the famine. Moving food from one region, where it was plentiful, to another region affected by the drought, was prevented by fighting between the government and rebels. A similar situation occurred in Zimbabwe in the early 2000s. Famines are not caused by lack of food but by governments’ ill-advised intrusions into functioning markets.

If there were as much new demand for food in China as Krugman claims, the Chinese themselves would necessarily produce more food to meet demand (in fact, China has increased agricultural production by 22 percent since 2000). Can we really imagine that the world food producers would not spot the demand and tried to make a profit by satisfying the demand? Since the Chinese population is increasing by 0.5 percent per year, how, then, could the Chinese suddenly need 30 percent more food per year?

Bad weather, as Krugman cites, can indeed cause temporary shortages. But if Australia had bad weather even for an extended period, other countries would step up production and increase supplies. In the early 1900s, agriculture in the United States represented 50 percent of GDP, but is now less than 1 percent. Land use has changed to meet changing demands. But if we needed food, we could build land use back up to the 50 percent level. On a worldwide scale, land would be turned to the more profitable growing of food instead of less profitable biofuel feedstock.

Krugman fails to mention or doesn’t know that high food prices (up 83 percent in the last three years) are a manifestation of current worldwide price inflation. Since world governments have been printing money faster than goods are being created, prices are rising. For example, Chinese consumers cannot demand more food without the money to pay for it. China could produce more goods with which to pay for more food, but that would reduce prices, not raise them. Instead the Chinese, like most world governments, have the inflationary habit of “creating” more money. The steep rise in prices of oil, food and other commodity markets would be mathematically impossible without the increased supply of money flooding the world economy. Otherwise, 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.