The Price of Rice

This article appeared in the June 2008 issue of Globe Asia.

From the Middle Ages onwards,the fear of deficient harvests inEngland and France immediatelyproduced pamphlets attackinghoarders and speculators fordriving up prices.

In consequence, the statute books were stuffed withlaws prohibiting many of the activities that would normallyaccompany the free trade in grain.

The arguments against government interference and forfreedom in the grain trade were laid out in a comprehensiveway by Condorcet (1743-1794) and Turgot (1727-1781) in Franceand Adam Smith (1723-1790) in England.

The serious student should consult Condorcet's Reflexionssur le commerce des bles (1776), Turgot's Lettres sur le commercedes grains, published posthumously in 1788, and Smith's TheWealth of Nations (1776).

For example, Smith discussed at length both speculation overtime (buying low now in hope of selling high in the future) andarbitraging over space (buying low at one location in hope ofselling for more than the purchase price plus transport costs atanother location).

The first activity was known as forestalling and the latterengrossing. For Smith, forestalling and engrossing were a "mostimportant operation of commerce".

And as he concluded: "The popular fear of engrossing andforestalling may be compared to the popular terrors and suspicionsof witchcraft. The unfortunate wretches accused of this lattercrime were not more innocent of the misfortune imputed tothem, than those who have been accused of the former."

Invisible hand

Smith's prescription (as well as condorcet's and turgot's)was that governments should heed the maxim of laissezfaire.The idea of Smith's invisible hand was clear: "It is the interestof the people that their daily, weekly, and monthly consumptionshould be proportioned as exactly as possible to the supply of theseason. The interest of the inland corn dealers is the same. Bysupplying them as nearly as he can judge, in this proportion, he islikely to sell all his corn for the highest price, and with the greatestprofit; and his knowledge of the state of the crop, and of his daily, weekly, and monthly sales, enable him to judge, with moreor less accuracy, how far they really are supplied in this manner.Without intending the interest of the people, he is necessarily led,by a regard to his own interest, to treat them, even in years ofscarcity, pretty much in the same manner as the prudent masterof a vessel is sometimes obliged to treat his crew."

As I pointed out in my May column "On Rice and CornLaws", public opinion was eventually turned around and theCorn Laws were repealed.

What's behind the high prices

With rice prices soaring, the public's ire about speculatorshas risen – just as it did in the days of old.

No current-day politicians have matched Vladimir IlyichLenin, who told the Petrograd Soviet that "until we apply terrorto speculators – shooting on the spot – we won't get anywhere."

That said, India's government has taken to shuttering commodityfutures exchanges to protect the public from the sky-high prices caused by speculators. Interestingly, many commoditieswhose prices have surged such as tungsten and cobalt are closelyheld and don't trade on futures exchanges. Never mind. As Condorcet,Turgot and Smith might have said, what nonsense.

If it's not the speculators, then what is causing rice prices tosurge? The rice price problem (and that of other commodities) islargely a dollar problem.

Cumulative change in the price of rice

The fall in the dollar relative to gold has forced a massive increasein the world price of rice and other commodities.

David Ranson and I have constructed the accompanyingchart that illustrates the way that the price of rice responds tochanges in the price of gold.

The monthly history of the gold price for the past six decadesis divided into three categories, according to the degree of thegold price change in the initial month. The evolution of the priceof rice over the following year is then plotted.

It's clear that changes in the dollar's price have accounted forthe lion's share of the changes in rice prices historically. Today isno different. It's time to stop blaming the speculators and startpointing a finger at the weak dollar.

Steve H. Hanke

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute.