The Production of Scarcity and Famine
The world of the stockmarket has resulted in a situation where remotely we can extract profits via the production of scarcity and famine. We can all trade in the stocks, futures and derivatives markets these days by investing using the internet and stock trading software. I can go to my computer and use a browser to find any number of investment options. I can buy software which automatically buys and sells stocks for me, not knowing anything more about what I am investing in bar the fact that it has gone up in price or declined in price.
This kind of separation between the owner and the enterprise is known to bring about problems in the form of the Principal-Agent dilemma. The principal–agent problem comes about when one person, or entity, (the “agent”) is able to make decisions that impact another person or entity (the “principal”). It is thought of as a problem because sometimes the agent is motivated to act in their own best interests rather than those of the principal.
Typical examples of this relationship which are cited include corporate management (agent) and shareholders (principal), or of politicians (agent) and voters (principal). The Principal-Agent problem has the potential to arise in nearly any context where one party is being paid by another to do something. We can also conceive of this arrangement in series or as chains whereby the principal is ever acted upon by the agent who brings about the actions.
In this way we might extend our understanding of the Principal to that of environment and diffuse social effects – such as a factory (agent) polluting a river (principal) or indeed an investment bank (agent) impoverishing a country’s economy (principal) by currency trading or controlling the price of grain. By thinking about the distance between the owner and the enterprise in terms of the Principal-Agent problem, we can build an understanding of how negative externalities might come about.
An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Donald Rutherford explains that “all transactions between buyers and sellers, between producers and consumers, and between employers and workers can affect wider society. An externality can also be described as a spill-over or neighbourhood effect. The early modern analysts of externalities were the Cambridge economist Pigou, with his contrast between private and social dimensions to economic variables, and the Chicago economist Coase, who continued with the analysis of pollution”
[page 89, Economics: The Key Concepts, Donald Rutherford, Routledge Key Guides, ISBN: 978-0-415-40057-2]
The greater the distance between the principal and agent, the more room for uncontrolled and negative things to happen as the agents are removed from the grounding realities of their actions. In a situation of housing, absentee landlords often make for slum buildings where the care and maintenance required to upkeep a structure to a suitable level for human habitation falls by the wayside due to lack of proximity and awareness; and ultimately care (moral investment).
The driving force of stock markets are to create profits to pay dividends for the shareholders of companies. The Chief Executive Officers of the companies are hired to make sure that dividends are paid to the shareholders. This is known as the Fiduciary responsibility. A fiduciary duty is a legal duty to act solely in another party’s interests. The shareholder primacy which dominantly drives the motives of owning shares is that of profit – people invest money in the enterprise, taking on the risk in exchange for a share of the profits.
The problem which emerges in increasingly acute ways in a technological world is a of lack of proximity and moral investment in the way that profit is generated. In short, people who own shares or have money invested in the stockmarket all too often do not have any understanding of how the profit has been generated, the effects of the behaviour of the company or the externalities which have been created in the process.
The result is that people with money invested abstractly, through pension funds, hedge funds, and other financial instruments, are not aware that they may have gained their profits through collectivising their finances in industries which may have negative external effects such as arms trading, environmentally devastating practices such as tar sands mining and fracking, or in strategies which impoverish nations by inflating the price of staple foods.
Here we are interested in the idea of scarcity and the effect which scarcity has on the price of commodities such as wheat and rice. Investment banks and fund managers are in abundance. The employees of banks are generally more bound from sharing any opinion other than their corporate statement, however fund managers are under less pressure to stick to a policy line. Here are excerpts from an article by John Kay in the Financial Times:
“There is not much connection between the food profligacy of the rich and the shortages endemic among the poor….Last week’s food summit in Rome should have been a forum for sophisticated analysis. But, even leaving aside the offensive presence of Robert Mugabe, president of Zimbabwe, the discussion seems to have been as muddled, and the conclusions as banal, as those dinner table exchanges of long ago. Delegates talked about speculative activity in commodity markets, the growth of biofuels, agricultural protectionism in the developed world, population pressures in some poor countries, growing consumption in India and China and trends in agricultural productivity. All were bundled together in generalised assertions about the gravity of the food crisis and the urgent need for action.
But each of these features of the world food market has different origins and different implications and raises different policy issues. The rises in food prices in the past year make agricultural policy topical. The proximate cause is that the caravan of prospectors for alternative investments, having bid up the prices of every other asset, has now arrived in the territory of oil and soft commodities. As in earlier booms and busts, the speculative interest is self-sustaining, as momentum traders follow fashion; and analysts and consultants are ready to explain why irrational gyrations are founded on changes in the fundamentals of supply and demand. These claims of changes in fundamentals, although much exaggerated, have some basis. Rising incomes in Asia do increase demand for food. But this is not the explanation for the higher price of basmati rice at Waitrose…”
“…Nor has the cheaper – or any – rice gone to make biofuels. Green measures are implemented not when they benefit the environment, but when they meet the needs of powerful industry lobbies, and the farming interest is the most powerful of all. US and European ethanol subsidies are another means of agricultural protection but the principal damage done is to ourselves…. We make the poor better off not by holding back technical and economic progress, but by accelerating it. People suspicious of science and resistant to the expansion of markets, extensively represented at these global meetings, often damage the causes they espouse.
The most important factors reducing world poverty in the past 50 years have been the green revolution and the opening of the Indian and Chinese economies. If advocates of the precautionary principle and anti-globalisers had been as influential then as now, these developments might never have occurred. But it is easier to engage in windy rhetoric than to accept the rough justice of economics. Perhaps Mr Mugabe’s contribution was useful, even if not in the way he intended: he reinforced the message that the causes of food shortages are usually political rather than economic, even if the politics are those he represents rather than those he assailed.
So the summit ended as such summits always do. The delegates agreed on the importance of the problem, the urgent requirement to spend more money: they emphasised the need for co-ordinated action, and resolved to meet again in future to reach the same conclusions. If you have no substantive analysis or common principles beyond acquiescence in platitude, that is the nature of your consensus.”
[John Kay, Rhetoric will never feed the world’s hungry; 11 June 2008, Financial Times; Taken from Internet 27.10.2013 – http://www.johnkay.com/2008/06/11/rhetoric-will-never-feed-the-world%E2%80%99s-hungry]
Moral hazard is associated with principal–agent problems. The agent, in most cases, has more information about their actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. From the viewpoint of the principal, the agent may have an incentive to act inappropriately if the interests of the agent and the principal are not aligned.
In situations of risk and reward we can approach an understanding of a diffused scheme of the principal-agent problem where we can understand the interrelationships of the different stakeholders and the outcome of each behaviour. Ownership (agency) can be viewed from different positions and levels, and the involvement of moral hazard explored from the perspective of the ‘ruled’ – those who carry the price of the actions (principal). This methodology borrows from Institutional Ethnography research methods and ways of viewing the complex situations.
[Smith, D. E, 1987, The Everyday World As Problematic, Boston: Northeastern University Press]
An example to clarify this might be the so-called “too big to fail” lending institutions which make risky loans that will pay opulant dividends if the investment turns out positively but however they will be bailed out by the taxpayer if the investment turns out badly.
Equally, one might view the ideological experiment of deregulation of markets in the context of the principal-agent problem where the risk might be paid by populations who become endentured to companies and corporate forces which lack the core of social responsibility which a government in theory holds.
Lastly, we can conceive of this scheme illustrating the relationship between human development and natural ecosystems which bear the price for hubritic and ill thought out industrial developments imposed on the landscape decimating all forms of natural life.
Here we are primarily concerned with the financial speculation on staple food stuffs; the relationship between owner and enterprise; and the moral hazard which emerges when profit is put before welfare…
Commonly you might put your money into a hedge fund, often advertised as agricultural and including various commodiites in a portfolio. Hedge Fund managers are profiteers who take large risks with the money of a number of people who invest their money in the ability of the manager to return profit. They invest. Another way of putting this is that they gamble – as it is gambling – aggressively on falling or rising food prices hoping to create big money.
Frederick Kaufman wrote the book ‘The Food Bubble: How Wall Street Starved Millions And Got Away With It’ exploring the issue of how a stockmarket bubble formed around staple foods and drove prices up significantly thus causing famine for millions of people:
“The wheat harvest of 2008 turned out to be the most bountiful the world had ever seen, so plentiful that even as hundreds of millions slowly starved, 200 million bushels were sold for animal feed. Livestock owners could afford the wheat; poor people could not. Rather belatedly, real wheat had shown up again—and lots of it. U.S. Department of Agriculture statistics eventually revealed that 657 million bushels of 2008 wheat remained in U.S. silos after the buying season, a record-breaking ‘carryover.’ Soon after that bounteous oversupply had been discovered, grain prices plummeted and the wheat markets returned to business as usual.
The worldwide price of food had risen by 80 percent between 2005 and 2008, and unlike other food catastrophes of the past half century or so, the United States was not insulated from this one, as 49 million Americans found themselves unable to put a full meal on the table. Across the country demand for food stamps reached an all-time high, and one in !ve kids came to depend on food kitchens. In Los Angeles nearly a million people went hungry. In Detroit armed guards stood watch over grocery stores. Rising prices, mused the New York Times, “might have played a role.”
Task 1: Pick a business and identify some of the externalities, positive and negative, which its business practices bring about. Be sure to describe who or what is the principal and who or what is the agent.
Task 2: Identify a moral hazard, explain it in its context and give details as to why it is a moral hazard in a short piece of writing. Be sure to describe who or what is the principal and who or what is the agent.
This is part of a series of articles and exercises exploring food speculation and its relation to famine: