There are times when drilling into the underlying logic of a proposal illustrates the entire gorgeousness of what is being suggested. For example, the latest in the food and commodity world is that we should add more speculators into the food chain in order to deal with too much speculation in the food chain. This seems confused at best. In more detail, it represents a failure to understand Adam Smith, that death knell for any sensible economics. 

The idea — and it’s from the same lady who insisted all that inflation was just corporate profiteering, nowt to do with money printer go brrr at all — is that food prices are wildly variable. This is bad so therefore there should be buffer stocks:

In the paper, Weber and colleagues call for the creation of buffer stocks of grain that could be released during shortages or emergencies to ease price pressures. 

Well, okay, fine by me in isolation. In the paper itself we get more of the justification: 

Neoliberalism became hegemonic through stabilization policy. Post-neoliberalism will require an alternative stabilization paradigm. …..propose a multi-layered buffer stock system for food staples as a steppingstone in a gradualist transition to post-neoliberalism and a tool for a green transformation of agriculture.

And, ooooookay. As an out and proud neoliberal, I’m not so keen on post-neoliberal but aside from that this clearly isn’t about making markets more effective. It’s about some bright new dawn that will arise just as we’ve got socialism really sorted out. And we mean it this time (this is published by a foundation named after Rosa Luxembourg — one who thought Lenin was too bourgeois and small-time conservative).

But — there’s an old line that all of economics is merely footnotes to Adam Smith. Or wrong. The mistake here is simply to be confused by not understanding Smith.

The idea is that when prices are low, governments — or some public body — buys up cheap grain. Let us call it corn, as Smith does, as in the Corn Laws. When prices rise this bought cheap grain is then released, lowering prices at that more expensive time. A great idea. No, really. 

Sure, there are problems when this is done by politics. The Strategic Petroleum Reserve over in the US is used as an example and recently that’s become a political tool. I recall at least one release before Memorial Day, which is the start of the summer driving season over there. That’s using the “strategic” for short term tactical reasons which is the way politics always does end up working. We’ve examples closer to home as well. The European Union — back into the days of the European Community in fact — used to buy up butter, wine, beef when they were cheap “to sell” when they were expensive and we ended up with butter and beef mountains and wine lakes. 

The archetype of why these plans go wrong is the International Tin Council. Part of the post-war, Bretton Woods-style sorting out of the global economy. This was exactly what is being proposed — a buffer stock. When tin prices are low buy some up and thereby support tin miners. When they’re high, release stock and reduce the price to consumers. Reduce, that is, the price volatility of a commodity. 

This is exactly the same proposal. The ITC went gloriously bust in the 1980s. For the standard reasons of political economy. Those who produce tin are really, really, interested in the price of tin. Those who use tin — or even us out here who had to pay for the ITC — are mildly to really not very much at all interested in the price of tin. So, the producers work very hard to gain power at the buffer stock and amazingly, the price is set nice and high to the producers’ benefit. At which point, unless ever more tax money flows in the buffer stock goes bust — as the ITC did. From memory, the tin price slumped from $25,000 a tonne to $5,000 and South Crofty closed for not the first nor the last time. 

Any such grain buffer stocks are going to run into exactly the same problem. And there’s already talk that this buffer should be only of organic, or agroecological stuff (that’s what the “green transformation of agriculture” means). That is, the stuff that no one at all wants to buy at production cost anyway. 

But let us return to the misunderstanding of Smith. As he took several pages of 18th century prose to point out — all Smith’s points take several pages of 18th century prose to point out — the very thing that a speculator does is exactly this. Someone might buy corn just after harvest when it’s cheap, then hold it into April or May of the next year when the Hungry Time starts and sell. He’s moved consumption of corn from September to May. He’s also, by buying in September, increased the price in that September to the benefit of the producers. By selling in May he’s reduced what the price would be in May without his selling. His speculation has moved prices through time. In exactly — not as in sorta like, but exactly — the manner that this new corn buffer stock would do.

So, speculators do the job of this corn buffer stock. But the initial critique of the current system is that there are too many speculators in that system. Therefore we must add more speculators to do more of what those excessive speculators already do. 

This is confused — and it’s not just because they’re not up to speed with Smith. They’re also missing that political economy point which is that this is not going to reduce prices in general because, of course, the producers will be all out to gain power over the pricing structure. 

Really think about this. All that speculation in commodities markets — the futures and options part of it. By definition that’s a zero sum game for the direct participants. Any one profit is an equal loss to someone else. So, we’ve this vast amount of betting going on — which moves prices through time as these buffer stocks are supposed to do. The futures markets do it at no cost to us, as consumers, at all. Nor as taxpayers. All these suited types get to go into a frothing frenzy over prices and we benefit and it costs us nothing. 

So, the solution to this too much speculation is to add more speculation except this is going to be done by bureaucrats and, more importantly, it’s going to be done on our tab as taxpayers? 

This is worse than confused, isn’t it? Expensive even? Perhaps we should release our buffer stocks of Adam Smith’s 18th century prose.