Countering rising food prices

In: Uncategorized

16 Aug 2010

This is my latest comment from Fund Strategy magazine.

Do rises in affluence, population or meat consumption necessarily lead to increases in food prices?

It is a fair bet, judging by the discussion of the surge in global food prices, that most people would answer “yes”. The correct answer of course is “no”.

The key word in the question is “necessarily”. It is true that, all things being equal, food prices will rise along with affluence, population and meat consumption. However, all things are rarely equal. The historical trend is the opposite. Affluence, population and meat consumption have all risen while food prices have plummeted in real terms. Prices have fallen as supply has risen faster than demand.

For example, back in the 1790s – when the first edition of Thomas Malthus’s Essay on the Principle of Population was published – the average English farm labourer spent about three-quarters of his wages on food. By 2005 the average British consumer spent about 14% of their income on food, non-alcoholic drink and restaurants (these figures are from Matt Ridley’s highly recommended Rational Optimist).

And such figures, if anything, underestimate the improvements in living standards during the two centuries or so of modern economic growth. The 18th century labourer no doubt worked longer hours and had much more physically demanding work than the average person today. Nor could the average person back then dream of having access to food of the quality routinely served in establishments such as McDonald’s or PizzaExpress today

Commentators who attribute rising food prices to rising affluence, population or meat consumption are falling for the hoary old Malthusian fallacy. They are fixated on the rising demand for food without considering the enormous potential to increase supply.

Malthusians have forgotten the elementary ­economic axiom that prices are the result of the interaction of both supply and demand. Prices can and often do fall with rising consumption because production can increase even faster.

It is tempting to assume that Malthusians – a ­category that includes many government figures, international organisations, non-governmental organ­isations and influential pundits – are simply dumb. But it would be more accurate to depict them as suffering from a staggering lack of imagination.

The popularity of Malthusianism is a product of the social pessimism of these times. It is a manifestation of a pervasive lack of confidence in the ability of human ingenuity to overcome challenges.

In principle the solution to surging food prices is simple: we need to produce more.