Tuesday, May 21, 2024

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Dhaka Tribune

An unlikely hero: The onion market's lesson in economics and government

As consumers, the choice becomes clear: Prioritize efficient market mechanisms over burdensome government interference

Update : 24 Mar 2024, 09:10 AM

Perhaps we should just let the smugglers run the onion market and forget about the government getting involved? But first, a little story about economics itself. 

It's exceedingly difficult to run a real experiment in economics. The thing we always miss is the control group, the people the thing doesn't happen to. For economies are large, complex, things involving many to all people. So, not only does everyone get affected by one or some of the things we want to study, so does the individual reaction to whatever change is happening also affect everyone else. We therefore find ourselves looking for natural experiments. Where some change happened in the one place, to some part of the market, but not to others. The effect of that change then becomes the difference in how those two parts of the market reacted. Probably -- see above about economies being complex places. 

Speculation and volatility

A standard claim about financial and commodity markets is that speculation makes prices and or volumes traded more volatile. Stands to reason -- if people are betting on the price then wild price swings are more likely to happen. The weight of money chasing the market produces those swings. 

Hmm, well, maybe. But we'd like to know whether that is actually true or not? As we discussed a couple of weeks back, Adam Smith thought the other way around. Speculation smoothed out prices in foodstuffs over time. We need an experiment to work out which way around this does work. 

Those criminals, smugglers, driven only by their hunger for profit, were actually delivering onions from India at least a week earlier than the minister

The United States used to have a futures market (this is where you can buy and sell the crop not yet harvested, possibly not even yet planted) in onions. As it has long had in pork bellies (ie, bacon), maize (corn), wheat, beef, orange juice (the plot point of the movie “Trading Places” which is well worth the time, an excellent comedy) and so on.

Then in 1958 the Onion Futures Act banned the futures market in onions (in 1955, two guys had tried to monopolize the market, the ban was the reaction). Since then onion prices have been more volatile than those of other food commodities. Also, more volatile than they were before the futures ban. Now, natural experiments like this are not absolute proofs but they are hugely indicative – futures markets reduce price volatility, not increase it.

The point for us to take from this, for today's argument, is really just: Fun what truths we can learn more generally from onion markets, right? A 70 year old occurrence in the markets for a basic foodstuff tells us a grand truth about the billions and billions traded on global commodity markets every day -- they smooth food prices, not exacerbate them. Cool!

But are there other lessons we can learn from that humble comestible, the onion? I would say yes. I am using only reports in this newspaper here. 

Government intervention vs smuggling

Shutterstock

Back on March 5 the government approved the import of onions from India. Our local production here in Bangladesh seems a little down, that in India a little better, so let us move some over the geographical boundaries -- which are, after all, just lines drawn on the map -- to alleviate prices and shortages here. Yes, why not? I approve, given that varied Ramadan iftars are going to be tastier as a result, presumably most approve. 

On March 15 the minister responsible said that those Indian onions are going to arrive within a week. Well, yes. You know, government timings, a week, maybe 10 days, but anyway, real soon now. Real, real soon now. And isn't it lovely how a wise government takes care of us and deals with potential shortages that might affect the daily break of the fast? 

Except, well, we also have a report that on March 9 the po-lice arrested onion smugglers. Vile speculators, law breakers, who were shipping onions from India into Bangladesh and thereby alleviating the price rise and shortages in our own Dear Country. Horrible criminals. Sure, they were doing what the minister himself had agreed to do four days earlier but as they were not a minister they were not allowed to do this. Terrible, such criminality must be stamped out, obviously. 

But now actually think for a moment. Those criminals, smugglers, driven only by their hunger for profit, were actually delivering onions from India at least a week earlier than the minister -- who has all the powers of government at his command -- and given likely delivery times two to three weeks earlier. Don't forget, the minister is making announcements, the smugglers were caught with real live onions in their hands as they crossed the border. Well, ok, “live” onions isn't quite right but you get the point. 

Who is dealing with onion shortages and price rises better here? The minister with orders allowing onion imports? Or vile criminals motivated only by personal profit? 

So, err, if we wish to deal with onion shortages, onion price rises, who should we leave to deal with the problem? Ministers? Government with all its powers? Or base and venal types who think only of price differences, who speculate in foodstuffs? Which works better -- or perhaps, which works faster? 

MAHMUD HOSSAIN OPU

A call for market solutions

The classical liberal argument -- Adam Smith. Ricardo, Bastiat, Hayek, Friedman and so on -- is an intensely pragmatic one. The world is full of problems so let's use the best method of dealing with each one. Sure, sometimes markets don't work that well, nor capitalism. Equally, government doesn't work that well sometimes. Or, if you're like me, government often doesn't work well. But the trick is to apply the best of those available solutions to each problem. 

The difference in onion prices between Bangladesh and India is going to be determined by how many onions cross the border

We have the results of a natural experiment here, using onions again. Profit driven trade – even if by criminals because we've said profit driven trade is illegal here -- works faster than the government at solving onion prices. So, if we wish to solve the problem of onion prices clearly and obviously we should be using profit driven trade to do so, not government. 

And think on this for a moment. The difference in onion prices between Bangladesh and India is going to be determined by how many onions cross the border. The profits of the traders, illegal or legal, are going to be wholly and absolutely the same whoever organizes it. But if we use the market system then we don't have to pay the salary of the minister -- and his acolytes -- who mismanage the onion market for us. This would no doubt be a tragedy for the minister -- and acolytes -- but there doesn't seem to be any downside for us as consumers or taxpayers. In fact, we get onions, the minister doesn't get us paying his salary, this sounds like an excellent idea. 

Finally, as with onion futures. We gain a grand lesson about the world from a natural experiment in a mere foodstuff. If simple free trade -- without government quotas, licenses, ministers and their teams -- is so obviously beneficial when we talk of onions then how much better off are we going to be if we use simple free trade for everything?

Ministers won't agree, of course, for it will mean they lose their salaries. But how about we restrict our consideration to those we actually care about, us?

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

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