The economist David Ricardo was an interesting guy. He’s one of the half-dozen or so most famous of all economists and most economics students know his name because of his theory of international trade. He explained the idea of comparative advantage.
David Ricardo didn’t start out in life as a moral philosopher, logician, or mathematician. By age fourteen he was working at the London Stock Exchange, buying, selling, speculating with his own money, and learning about people and things. When he was a relatively young man of 27 he read Adam Smith’s Wealth of Nations and was so intrigued that he decided that he wanted to be an economist, too. So he amassed a substantial fortune, retired from the Stock Exchange at age 42, and became one, devoting the rest of his rather short life to writing treatises on economics. His work is one of the cornerstones of systematic economics.
His experience points out one of the gripes I have about modern economists. Economics is a science of human behavior but, unfortunately, most of today’s economists don’t have the insights into human beings and their economic behavior that a David Ricardo would have accumulated from working with men who were buying and selling since he was a lad. Nowadays when an economist says he started he career working for a financial firm he generally means as an economist.
Some of that stands to reason because of something that Adam Smith wrote about—specialization. But some of it, I think, is just unfortunate.
When an economist tells me that the world price of rice has doubled because the cost of corn has increased 20% as a consequence of being diverted into ethanol production, I know enough about human behavior to doubt him. Rice and corn are not perfect substitutes. Heck, yellow corn, the kind used in ethanol production, isn’t even a perfect substitute for white corn. We use most yellow corn as animal feed and much of what we export is used for that purpose White corn is the stuff that’s used for making tortillas, corn flakes, and grits.
White corn is too expensive to use for ethanol production and we devote nearly twice the acreage to it that we did 20 years ago. Our production of white corn has started to fall off somewhat in recent years but it’s not because of ethanol production:
The United States exports from 25 to 30 percent of its white corn, roughly about 25 million bushels. Exports grew rapidly during the 1990s from 20 million to over 62 million bushels in 2000 but have subsequently declined to 35 million bushels.
Mexico grows more white corn than yellow corn, focusing on the production of food-grade white corn products rather than on the production of yellow corn for animal rations. Because their production usually does not meet their consumption demand, Mexico was historically the largest importer of U.S. white corn, buying over 80 percent of U.S. exports. Since 2000, however, white corn exports to Mexico have fallen sharply because the Mexican government has provided incentives for domestic farmers to increase production. In 2006 Mexico imported only 10 million bushels of white corn.
To the best of my knowledge nobody imports corn as a substitute for rice. For most people that employ rice as a staple in their diets there is no substitute. The Bangladeshi government can’t even persuade poor Bangladeshi people to substitute potatoes for rice when the cost of potatoes per kilo is less than the price of rice per kilo.
Don’t get me wrong. I disapprove of subsidies, particularly permanent subsidies, generally. I have less problem with short-term temporary subsidies to alleviate hardship but long-term permanent subsidies distort the market and, consequently, influence behavior in ways that become increasingly difficult to disaggregate. I don’t think we should subsidize ethanol production at all but I think that subsidizing food crops for ethanol production is perverse.
However, I think we need to look in other directions than biofuels for an explanation of why the price of rice is rising. I think it’s rising due to the rising cost of oil, demand, and government policies as the most important drivers but I’m open to the idea the that U. S. corn subsidies for ethanol production are causing the price of rice to rise. The burden of proof is on the affirmative.
Well, I think the data supports you. America is producing and consuming the same amount of rice. The likely suspect of price increases would be increased labor costs or transportation costs, or the attractiveness of exports. Globally, rice production, consumption and stockpiling are increasing, but trade appears to be decreasing. This is “due primarily to the impact of higher global prices and export bans and restrictive policies among many of the leading exporters including Egypt, India, and Vietnam.” Rice hoarding and government trade policies.
Data:
http://usda.mannlib.cornell.edu/usda/current/wasde/wasde-04-09-2008.txt