Easy solution to global climate change: ban thermometers.
I imagine even the most ignorant politicians would not promote the onion-esque policy I’ve chosen as a headline for this post as a serious solution to the issue of climate change. And yet…
An increasing number of politicians around the world - in both developed and developing nations - are touting entirely analogous ’solutions’ in order to deal with rising commodity, especially food, prices. Stop transparent and efficient markets from functioning, from doing their job - ie aggregate vast amounts of information into an accurate and concise price signal - and voila problem disappears. Makes sense right? If we can’t see the price going up, it must mean that it isn’t. Brilliant.
As a bonus, let’s apply the same logic to climate change and instead of spending billions on developing alternative and more efficient energy technologies, or wasting time with the whole palaver of carbon markets and such; let’s just pass legislation that restricts those pesky thermometer manufacturers to stop making thermometers that go past 30 degrees. Of course you could apply for a special permit to produce say meat thermometers or gauges used in steel mills or nuclear plants that can show higher temperatures. And in order to enforce strict adherence to ‘authorized’ uses only (so no wise guy could hack a meat thermometer to discover it’s really 37 degrees in Hyde Park) you could of course set up a Federal Temperature Control Agency and in the bargain create a new bureaucracy and a lot of new jobs. Win/win!
Joking aside, the knee-jerk, supposedly populist policy reactions of too many governments seems to be to stop markets from functioning. I say “supposedly populist” because these policies ultimately (which is to say pretty damn quickly) hurt the most vulnerable to the benefit of a small elite who then control the distorting gates through which all commerce must pass. The greater irony is that at best it creates an ‘opportunity loss’ for those bogeymen the speculators (oooh!) who such politicians love to hate, and at worst creates even more lucrative opportunities for (especially the least ethical) of them. (See Oxonomics for an excellent and compact deconstruction of the evil speculator myth.)
Instead of shutting down or curtailing the activities of dynamic and empowering markets like the MCX in India:
India’s Forward Markets Commission, a regulatory authority, has banned trading in the four commodities for at least four months, according to media reports on Thursday.
Last year, India banned trading in rice and wheat futures……The four commodities, which were suspended from trading Thursday, account for a daily turnover of about $288 million on the Multi Commodity Exchange of India (MCX) and the National Commodities and Derivatives Exchange (NCDEX), the International Herald Tribune reported Thursday.
…governments should be encouraging them to develop even faster - especially in the developing world. Eleni Gabri-Madhin’s TED Talk from Arusha last June should be required viewing for any senior policy maker considering regulation of agricultural markets:
As Eleni points out, observed (agricultural) price volatility is higher in Africa than anywhere else in the world because there is no (or relatively very few) functioning ‘exchange’ markets. This is exactly contrary evidence to the fallacy propagated by so many politicians, that exchanges are the cause of price volatility. Yeah, just like thermometers are the cause of high temperatures, and barometers cause droughts or floods…
A big part of the solution is encouraging robust and transparent markets in agricultural goods (and inputs) and in particular facilitating access to these markets by producers everywhere. The thing is, for probably the first time in history - thanks to technology, in particular the mobile phone - this is a tractable problem even for small and relatively poor farmers in the rural developing world.
Update:
What can governments do to bring down the price of precious food crops like rice? How about eliminate export restrictions? Rice futures slumped by their daily limit of 50 cents for a second day on Tuesday after Cambodia, one of the world’s top 10 rice exporters, said it will lift restrictions on exports.
May 14th, 2008 at 6:08 pm
Sean, great post. Keep writing on this topic. There has been work through the world bank to get not only price markets in Ethiopia, but also to trigger food aid based on weather triggers (think weatherbill where the ticks denominated in food aid units not dollars).
I could not agree more that transparent pricing is amazingly important to an efficient market. It’s basic economic theory that some politicians choose to ignore!