Tuesday, April 15, 2008

Commodity Prices: Malthus, Policy, or Development?

A front-page article in yesterday's edition of The Wall Street Journal (WSJ) headlined the problem of world food prices (now subscriber content). It was a main topic of discussion at last weekend's meetings of the International Monetary Fund (IMF) and World Bank in Washington, D.C. Rapidly rising food prices are making it hard for the world's poor to feed themselves. And policy-makers are facing tough choices.

So how do you use this in your classroom? It is current. Whether you get your news on-line, through radio or TV, or even via newspapers or news magazines, it's the topic-du-jour. It's personal. I suspect all of your students have heard parents or other care-givers talk about food prices. And teenagers may have noticed rising prices on food they buy. What are some good ways to integrate the topic into your economics or personal finance classes?

There are a number of angles you can use here. And they are based on three of the main arguments that are surfacing again and again in news stories.

One is to use the work of Thomas Malthus to introduce the discussion. I blogged on this back on March 24, and referenced another WSJ article. Malthus talked about population outstripping resources, and this is an idea that students often latch onto, because it is an easy explanation to understand. But while Malthus's observations were valid, given the relatively steady state of the world economy up to the Industrial Revolution; his conclusions failed to take into consideration the effect of changing technology and the ability of new forms of capital to increase productivity and raise real incomes without causing massive starvation. Yet, every time concerns about resources arise, people dredge up the specter of Malthus, and once the concerns dissipate, the specter recedes. If you use this approach, you can help students understand that, while simple, appeals to Malthus really only apply to a steady state that does not adequately reflect economic reality.

A second approach is to examine economic policy. As is pointed out in the article from yesterday's WSJ, a number of nations are blaming the U.S. decision to promote corn ethanol as a bio-fuel source as a reason for rising prices first in the corn and other commodity markets. The thinking goes that by subsidizing corn production and diverting the resulting crop to fuel, there are two effects. First, increased corn production often means reduced production of other crops. Reduced supply of these other crops helps push those prices higher. Diverting a portion of corn crop to fuel production (where the highest price is offered), takes the corn out of the food chain. This again can shift the supply curve left and can result in higher prices. (It is interesting to note in the article that some nations are leveling the charge at the U.S. while pursuing similar prices in their own markets - kind of a "stones in glass houses" thing.) And other nations are implementing policies to impose export taxes on grain in an effort to keep supplies available for domestic use. However, the result is that world prices are driven higher as demand has to be met by other supplies. This approach can provide opportunities to discuss aspects of government policy and responsibility, globalization and interdependence, and market distortions and market forces. Gary Becker and Richard Posner have an excellent discussion along these lines on their blog.

This brings us to the final approach, which is economic development. You can pick up pieces of this approach in virtually all the links I've cited. The argument is that as economic development has taken place in a large number of countries, incomes have risen. With these higher incomes has come increased demand for a variety of products based on basic commodities. People in developing economies have improved their diets, as well as the consumption of other products, including energy in various forms. This is normal and to be expected. (Who among us does not change consumption patterns with improved income?) But this also places increased demand pressures on a wide variety of goods. And as demand shifts to the right, prices rise. And when faced with rising prices across of swath of consumer products, we generally prefer that price be brought into line rather than face choices about what products to cut back on. This is a basic idea, both in economics and personal cinance. And while the choices are unpleasant, they are no less real. This approach to the topic has the advantage of making opportunity cost personal, as the students need to discuss real choices they face.

The truth probably contains a bit of all three (yes, even a little touch of Malthus) and the topic has much more to offer than I've outlined here. But these ideas should offer some starting points. If you see additional possibilities for these articles and the information, please share them here. I'm sure others would appreciate your thoughts, as I do.

1 comment:

Anonymous said...

Excellent summary and nice work not going down the Malthus track (ala Paul Krugman).

As an economist, I sometimes am called upon to teach children about economics on career day at my daughters' school. This may present a good topic for next time.