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Commodity Traitors: Financial Speculation on Commodities Fuels Global Insecurity


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"Greed is Good" by Nathaniel Gold

         "Greed is Good" by Nathaniel Gold

“Food is always more or less in demand,” wrote Adam Smith in The Wealth of Nations. While the founder of modern capitalism pointed out that the wealthy consume no more food than their poor neighbors, because the “desire of food is limited in every man by the narrow capacity of the human stomach,” the desire for material luxury “seems to have no limit or certain boundary.” Hunger, therefore, is the foundation of wealth.

“The poor, in order to obtain food,” Smith wrote, “exert themselves to gratify those fancies of the rich.”

The modern investor, epitomized by the insatiable appetite of Gordon Gekko from the movie Wall Street, has taken Smith’s advice to heart. But new financial instruments have now been introduced that have taken food inequality to levels unheard of in the eighteenth century. As it turns out, there is a downside to playing with your food.

Research now shows the uprisings in North Africa and the Middle East this year were triggered by spikes in global food prices fueled by speculators betting on the price of agricultural commodities [see my earlier piece Freedom to Riot: On the Evolution of Collective Violence]. This is the conclusion of a new study released today by Marco Lagi, Yavni Bar-Yam, Karla Bertrand, and Yaneer Bar-Yam of the New England Complex Systems Institute in Cambridge, Mass (pdf here). This financial speculation was made possible thanks to market deregulation under the Commodity Futures Modernization Act of 2000, the same legislation that introduced obscure financial derivatives like “credit default swaps” into the American lexicon and ultimately caused the collapse of mortgage and stock markets in 2007 and 2008.

“This analysis,” conclude the authors, “connects the bursting of the US real estate market bubble and the financial crisis of 2007-2008 to the global food price increases.”

Following this collapse many investors shifted their assets into “index funds” that allowed them to bet on the likelihood that commodity futures would increase. These index funds would be purchased by commodity traders and then repackaged as derivatives to be resold for twice or three times the initial purchase price. According to data from the United Nations, this investment rose from $13 billion in 2003 to $317 billion in 2008 (pdf here). This flood of cash caused intermittent bubbles as prices increased under artificial demand only to crash because there was no consistency in actual supply and demand (see Figure 1 below). In other words, as the price of food shot upwards many people were unable to buy the food that was actually grown.

Figure 1 - Impact of food prices on grain inventories.

Figure 1 - Impact of food prices on grain inventories. Food prices (blue line) grew out of proportion to global food production (green shaded area). Reproduced from Lagi et al. (2011).

According to Bar-Yam and colleagues, by September 2010 there was 140 million metric tons of grain sitting unsold in storage facilities around the world, an amount that would normally feed 440 million people in a single year. In the face of widespread global hunger, playing with food prices as if it were a casino pushed them beyond the ability of people to pay in regions of the direst need. Jean Ziegler, the UN Special Rapporteur on the Right to Food, has called this “a silent mass murder,” entirely due to “man-made actions.”

“We have a herd of market traders, speculators and financial bandits who have turned wild and constructed a world of inequality and horror. We have to put a stop to this,” he said.

The model that Bar-Yam and colleagues developed had earlier predicted the uprisings popularly known as the Arab Spring. On December 13, 2010 the researchers submitted a report to Congress warning of the link between rising food prices and global unrest. Just days later uprisings began in Tunisia followed soon after by Libya and Egypt, eventually spreading to 30 countries and toppling multiple governments. However, Bar-Yam and colleagues also predict that if global food prices continue to rise at their current rate the threshold that resulted in uprisings in the Arab world will become global between July 2012 and August 2013. In this context, the riots in London could be an early warning of greater conflagrations to come.

While Adam Smith may be known as the philosopher who first promoted the idea that “greed is good,” his earlier work suggests we are not condemned to exploit others for the benefit of a few. In his book The Theory of Moral Sentiments, written in 1759, Smith proposed that sympathy for the plight of those who suffer is an inherent part of human nature.

“When we see one man oppressed or injured by another,” he wrote, “the sympathy which we feel with the distress of the sufferer seems to serve only to animate our fellow-feeling with his resentment against the offender.”

With the current occupation of Wall Street and the international condemnation of an economic model that would take advantage of those most in need, we are witnessing Smith’s prediction in action. It is only when the reality of people’s suffering is hidden that greed is allowed to dictate policy. While our current system has chosen the greed of the few over the needs of the many, the intellectual founder of modern capitalism suggests it doesn’t need to be this way. “When we think of the anguish of the sufferers, we take part with them more earnestly against their oppressors.”

Reference:

Marco Lagi, Yavni Bar-Yam, Karla Z. Bertrand & Yaneer Bar-Yam (2011). The Food Crises: A quantitative model of food prices including speculators and ethanol conversion. New England Complex Systems Institute.
URL: http://necsi.edu/research/social/foodprices.html

Eric Michael Johnson About the Author: Eric Michael Johnson has a Master's degree in Evolutionary Anthropology focusing on great ape behavioral ecology. He is currently a doctoral student in the history of science at University of British Columbia looking at the interplay between evolutionary biology and politics.

Follow his work on Facebook and Google+. Follow on Twitter @primatediaries.

The views expressed are those of the author and are not necessarily those of Scientific American.





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  1. 1. Kwyjibo 2:37 pm 09/22/2011

    Thank you for this article, and it is sad that it has to include the disclaimer ‘The views expressed are those of the author and are not necessarily those of Scientific American’. If these are NOT the views of SciAm, then I don’t want to even read it anymore. These are the greatest criminals in the history of civilization. The mass murders, and the utter destruction of society for the benefit of the few. And, these people continue to be protected by the government, since most of them are ex-executives of the same companies.

    I still don’t understand why the majority of Americans are so content to sit back and watch their country be murdered from the inside. The true terrorists are on Wall Street and at the Federal Reserve, while the top news stories are still about what dress some celebrity wore to an awards show. How pathetic. By the time people finally wake up, there won’t even be a country anymore.

    The people pushing for deregulation knew it would make them insanely rich at the expense of everyone else. The warning signs were all over the place, but they did it anyway. They did it on purpose. And they continue to get rewarded for their crimes.

    Link to this
  2. 2. candide 3:40 pm 09/22/2011

    One has to wonder about the people that needed a study to come to that conclusion…

    Link to this
  3. 3. scigeek 4:29 pm 09/22/2011

    Well, even though it was obvious that the greed of Wall street is the root cause of the mass annihilation of wealth while benefitting only a few , the study of these sorts help to support that ‘obviousness’. So we do need them. It brings out in the open the reason. The book by Professor RAJAN of University of Chicago, called Fault Lines:How Hidden Fractures Still Threaten the World Economy, also contain some stunning revelation about how few in the Wall STREET mishandled the economy which has brought about such misery on the ordinary people of this country and plunged the world economy into recession.

    Yes, it is sad to see that those very people who are responsible for this debacle are also the ones who are benefitted and the ones who set up rules and regulations (or the lack of it) that govern the financial health of this country and that of the world. But the surprising fact is that most ordinary americans who see that by each passing day, they are sinking more and more in to the financial quagmire, are sitting back and watch it happen by voting/supporting people who are in turn appointing these CEOs at key positions. One explanation which I came across in some articles in foreign newspapers may hold some water: it says that most americans dream of becoming rich in one point of time in their lifetime and then they imagine that they will be sitting on the other side of the table. But the problem is, if the economy is exploited the way it is being done now and has been done in the past 20/30 years, that chance may never present itself to 99.9% of the ordinary american. Having said that, we must also acknowledge that there is a quite protest going in Zucotti park in New York about the Wall street greed. But the sad part is that news organizations like Yahoo has already started blocking emails referencing it (SO MUCH FOR FREE SPEECH ). But lets not be too pessimistic. Lets hope that something will eventually be done about it.

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  4. 4. jcvillar 5:58 pm 09/22/2011

    Fascinating global conspiracy theory by those with no credentials in the field of futures trading. You have no idea how laughable it is to see a sophistrist try to link comoddities trading with mortgage derivatives, two entirely different fields. We don’t stop there, though: we go on to predict the Arab Spring from this nonsense. Noam Chomsky couldn’t do it better.

    I’ll tell you the real secret, though. It’s all the fault of UFO’s and Bigfoot.

    Link to this
  5. 5. Jennifer Ouellette 3:46 pm 09/24/2011

    @jcvillar: You have no idea how laughable it is to see someone dismiss a rigorously peer-reviewed study as mere “sophistry.” On what basis do you make your assertion that the study authors have “no credentials in the field of futures trading”? They are experts in complex systems, which certainly applies to futures trading. To assume they undertook this study with no knowledge of their chosen subject is the epitome of foolishness. Just sayin’. :)

    Link to this
  6. 6. Aiser 7:13 pm 09/25/2011

    @Jennifer Ouellette

    You have no idea how laughable it is when a scientist writes an article on economics. It is no surprise that most scientist hold an anti-capitalist mentality, considering most spend too much time in academia. Did you know that not only did Einstein fled from a socialist country but also advocated socialist in the states as well? http://www.ucm.es/info/bas/es/einstein/html/why.htm

    An expert on a complex system by no means results in expertise in another system such as futures trading, for such a case I would like to invoke Rothbard’s law.

    Fact of the matter is that the speculators are providing a much needed service on Ag and commodity speculation http://www.lewrockwell.com/orig6/karlsson9.html and http://mises.org/daily/320.

    The answer is MORE speculation, even if it applies to the Euro, Yuan and U.S Dollar ;) .

    Link to this
  7. 7. old dingo 7:03 am 09/27/2011

    @jcvillar: and your qualifications are?

    if you define qualifications tightly enough, you can make a group that only includes the robber barons in question. What is a qualification, anyway? Play the ball, not the man!

    The view that this article takes is not new, and is held by others. Food production needs to be treated separately to other commodities. We don’t want to build the support base for people who would fly aeroplanes into buildings filled with stock market types, nor do we wish to create hatred against a perfectly reasonable market system. Have a care, US power is finite and needs to be conserved for essential purposes.
    A great country, who contributes generously and of its own free will to the struggle to eliminate human misery (nod to capitalists that fund the Gates foundation, and many others), should not be tarnished by the unregulated greed that leads to misery and death. US accepts that not all things can be traded (witness the end of the slave trade) – it is time to fix up this monstrosity, and regain the moral high ground that it relinquished in the early 2000′s!

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  8. 8. Mike from Ottawa 11:44 am 09/29/2011

    It is amusing to see jcvillar criticizing scientists for not understanding economics and in the same breath demonstrating he doesn’t understand economics. There are no “entirely different fields” when it comes to capital. What capital is invested in mortgage derivatives now can be invested in commodities futures in seconds. There are no isolated markets unless you’re talking some place like North Korea or an as yet uncontacted people in Papua New Guinea.

    And then, just to show he doesn’t get science either, jcvillar poo-poos the fact that these same folk predicted the unrest that actually occurred, which in science is usually a pretty good sign you’re on to something.

    What’s sad is that some supporters of entirely unfettered markets will claim the Arab Spring as a benefit of their ideology while ignoring the fact that more democratic governments in Tunisia, Egypt and Libya will be no more able to insulate their people from huge food price rises than were their oppressive predecessors. There isn’t exactly a lack of precedent for people supporting strongmen who’ll promise to put food on the table.

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  9. 9. Mike from Ottawa 11:51 am 09/29/2011

    I should also add that the vaunted economists are the folk currently urging governments in Europe and the USA to cut spending in a time when demand is already depressed, guaranteeing that high unemployment and low growth will persist for the foreseeable future. And their whole thesis is that business people will be filled with confidence about fiscal soundness ten years in the future and so will hire more employees right now even though they already have enough employees to meet the present weak demand. Paul Krugman, one of the minority of economists who’ve been right about the housing boom, the bust, recession and the continuing stagnation, rightly refers to this as pinning your hopes on the confidence fairy.

    By the standards of science, most of the economists have been shown to have failed when it comes to macroeconomics. If you have to choose between the theories of economists who can’t get anything right and scientists who can, well, it’s not much of a choice for those in what Karl Rove sneeringly referred to as “the reality-based community”.

    Link to this

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