• Friday, Oct 22, 2021
  • Last Update : 10:51 pm

OP-ED: Prices are information

  • Published at 11:21 pm September 18th, 2021
Pakistan_Basmati_Rice_AFP
Workers dry rice before a refining process at the Al Barkat Rice Mills on the outskirts of Lahore. India and Pakistan are the only global exporters of basmati rice AFP

If prices have gone up then something has changed in either demand or supply or both

On the opening page of every economics textbook is that one basic chart depicting supply, demand and price. 

Sadly, too few grasp the importance of what is being said there. Yes, if demand goes up and supply remains static then prices will rise. 

But we should also be ready to read this the other way around If prices have gone up then something has changed in either demand or supply or both.

This is often derided as “Economics 101,” swiftly followed by an insistence that the world is more complicated than that. Which it is; most of economics is about the complexities. 

For example, there's something called a Giffen Good, where if the price of thing rises then demand also increases. Pretty bizarre, but it does exist. 

Full academic proof of the Giffen Good has been found with rice in southern China and wheat noodles in northern China– the respective basic foods of those two places. 

We might expect this to also apply to coarse rice, the staple consumed by ultra-poor Bangladeshis.

When you're eating right on the edge of your budget, when managing to gain just a full belly makes that a good day, seemingly strange things begin to happen. 

If income goes up a bit, then more will be spent on things to make the rice taste better –salt, butter, a few vegetables, and some fish maybe. 

But if the price of rice increases, those little luxuries fade away because more money has to be spent on that basic necessity – thus leading to a higher demand for rice as the total food budget is now aimed at it.

Fortunately, we don't have to know all those difficult parts of the rest of economics. 

For the lesson of that first Economics 101 chart is enough – prices themselves are the information we need.

Which brings us to the current discussion about the price of rice in Bangladesh

The agriculture ministry says the recent harvest was great, 38 million tons. Enough for everyone. 

The food ministry disagrees and has offered tax breaks and permission to import 1.7 million tons. 

And the planning ministry is insistent that only 30 million tons are needed – so why have imports? 

No doubt the ministry for confusion will be along soon enough to try and make sense of it all.

The thing is, if we understand prices correctly then we don't need to have these sorts of discussions. 

Prices are, themselves alone, the information we need. The rice price is rising strongly. That means demand is rising faster than supply. 

People want more rice than there is currently in the market. That's also all we need to know. 

It doesn't matter whether it's because the crop was bad, or people have more money to spend – or perhaps less. The rising price itself is enough to tell us that we want more rice in the marketplace.

We can also take this one step further. 

Given that that is all the information we need to make a correct decision – we don't even need to make a decision. 

We don't need the whole system of minsters deciding whether to allow imports or tax breaks. 

We can just leave it to that price. 

If the price in Bangladesh rises above the international one then imports will flow in anyway. If the Bangladeshi price is less than the global then exports will flow out. 

Yes, markets need regulation. But often enough to near all the time the regulation they need is provided by the information in prices. 

Nothing else is required.

The reason we don't end up with such a system is because of one of those other odd corners of economics beyond the introductory courses – public choice economics.

The ministers of those departments of agriculture, food, planning and confusion all have a wary eye on their own economic self-interest when making decisions, as do all the bureaucrats in those ministries. 

So they're not going to advocate a system that doesn't need them nor their jobs. Even if such a system is the one we need, and does work better –they're still not, are they?  

 

 

 

Tim Worstall is a senior fellow at the Adam Smith Institute in London 

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