The problem of businessmen hoarding essentials was solved 248 years ago by Adam Smith in his book Wealth of Nations. It's possible that near a quarter of a millennium is long enough for the lesson to sink in but, given the modern world, perhaps not.
With the concerns over prices during Ramadan, something that happens each year with depressing regularity -- the concerns, not Ramadan -- it's worth running through his argument again.
A speculator in wheat -- someone who buys, then stores -- buys at what they think is a low price for storing in order to sell at a higher price. They are speculating so they are a speculator -- but they're also a hoarder.
In the climate of Britain there's only one wheat harvest a year. So, in September, just after it, there's a pretty good supply of wheat around. Equally, come June and July that last year's harvest is running out, awaiting the refilling of the barns in another six week's time. That period, just before the harvest, was known as the Hungry Time.
When wheat was plentiful just after that harvest, folk would fill their bellies. The civilization as a whole didn't have a particular surplus of food over the year, meaning that gorging at one time of the year would, inevitably, lead to hunger at another time. This is just how things were in 1776.
A speculator who bought wheat in September, at that time of plenty, could probably buy it fairly cheap. Then store it until June and, quite possibly, sell at a higher price.
What is the effect of this speculation?
Well, if you buy wheat when wheat is cheap then obviously, the price of wheat is a little higher than it would have been if you didn't buy that wheat. So, speculators buying their stock in September makes bread and frumenty more expensive in September and so people gorge on it less. This preserves some of the annual crop to be eaten later in the year. It also gives the actual farmers a higher price.
The reverse is also true when you sell your speculative wheat. That wheat price is high in June because it's running out. But you now sell your stock and this makes the June wheat price cheaper than it would have been without your speculation. People can now eat more bread (and frumenty) in June that they could have done without your speculation.
That is, there is less hunger in June because of the wheat speculator. And obviously, he's not going to hold on forever, because wheat becomes cheap again at the end of August with the harvest.
Prices are moved through time because the supplies are moved through time. Prices at times of glut are higher than they would have been without the speculation. Prices at times of dearth are lower than they would have been without the speculation. The food speculator smooths out prices over time.
Back to modernity and our current world. Every year there are the concerns coming up to Ramadan that traders are stockpiling essentials. While we do eat less often during the month we do tend to eat better during it. So, there is an increase in demand for those essential foodstuffs during Ramadan.
What is the effect of our traders becoming speculators in that run up to Ramadan? They move those supplies, and so those prices, through time. Prices just before Ramadan are higher than they would have been without the speculation. But prices during Ramadan are lower than they would have been without the speculation. Traders who get this wrong only lose money.
Do other traders make money doing this? Well, yes, if they get it right. But note that they only make money if they do what we actually want to happen -- prices to rise during the glut and to fall during Ramadan itself. We want the result that comes from the hoarding and the speculation. So, we should probably leave the traders alone to do their speculation.
No one is saying that the hoarding traders should be given a medal for trying to make money. But stopping them from doing what we want to happen does seem a little odd.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
