Punditry is seriously exercised about the worldwide shortage of food, which is realenough, but not an act of nature or a result of market failure. Rather, it stemsfrom the combined failures of government, and with results that are potentially

catstrophic. Paul Krugman suggests that this has come about mostly for these reasons: new

food demand by China; the high price of oil; bad weather in important farming areas(particularly Australia); and the reduction of farmland available to grow foodstuff—in favor of growing biofuel crops, for the purposes of alternative, (reputedly) environ-mentally safe energy sources such as ethanol.

Krugman’s proposed solution to these problems is for us to give more of ourmoney to government, so that it can solve the problem the market is apparently inca-pable of solving.

And now, the real story. Regardless of whether one thinks the above-listed factors play a role in world food

shortages, there are in fact two issues of primary importance related to food shortagesand food costs that Krugman does not mention and may not know.

First, the underlying cause of any shortage is the lack of a free market, since gen-uine shortages cannot appear in a free market. Instead, while prices of goods wouldlikely rise at the onset of reduced supplies, the goods in question would always beavailable at some price—and the higher the price, the more the supply would increaseto meet demand, which would then of course reduce the price.

If we had free world markets, food would be exported from some countries, suchas the United States and Europe, where food is plentiful, to countries where it isneeded. This is because it would be profitable to ship goods to needy areas likeAfrica, where shortages were making prices rise.

The fact that this is not currently happening can be a result only of governmentprice controls (which prevent prices from rising in needy countries), trade restric-tions, or some other government barrier that prevents people from getting what they

Vol. 26, No. 5, May 2008 Ludwig von Mises Institute • Mises.org

PUBLISHED 11 TIMES PER YEAR BY THE LUDWIG VON MISES INSTITUTE

FREEMarketThe

Kel Kelly is a finance consultant who has specialized in globalization research and analysis. He lives in Atlanta, where he is taking time

off to write a book on political economics (kelkelly@rose.net).

THE CAUSE OF THE FOODSHORTAGE

Kel Kelly

K

need. The World Bank has cited a list of21 countries that have price controls onbasic staples.

We all remember the stories of peo-ple in Ethiopia starving in the 1980s,when 3 million people went hungry.What was unreported was that therewere 60 million people in Ethiopia at thesame time who were unaffected byfamine. The moving of food from onepart of the country, where it was plenti-ful, to the other part, affected bydrought, was prevented by fightingbetween the government and rebelgroups near the area of the drought.

Economic incentives were prohibitedby the government’s forced withholdingof food shipments (so that rebel soldierswould not have access to supplies), byprice controls, by the declaring of grainwholesaling illegal in much of the coun-try, and by the prohibition of the privateselling of farm produce or machinery.

A similar situation occurred in Zim-babwe in the early 2000s. Indian econo-mist Amartya Sen won a Nobel Prize fordemonstrating that most famines arecaused not by lack of food but by gov-ernments’ ill-advised intrusions into thefunctioning of markets. “Since money isnow being created faster than goods arebeing created, prices are rising.”

The second issue Krugman fails tomention is that high food prices are amanifestation of current worldwideprice inflation. World governments havebeen printing money at very high ratesthis decade. While the United States hasbeen expanding the money supply by“only” about 10–15 percent per year,many countries have printed money atrates exceeding 50 percent per year.This money, which had been previously

2 May 2008 The Free Market

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contained mostly in world stock mar-kets, has now also spread to commoditymarkets, from which the prices of foodare derived. Since money is now beingcreated faster than goods are being cre-ated, prices are rising.

As another example of this phenom-enon of the increase of money exceedingthe increase in supply of goods, we maycite the rise in oil prices. Although thishas been attributed in the press and otherpublic forums to speculation, greedy oilcompanies, and increased demands ofoil from China, the real cause is theincreasing disparity between availablemoney and available oil.

Along this same line, the steep rise inprices—of housing, stocks and bonds,oil, gold, commodities, food prices, etc.that we have seen this decade—would bemathematically impossible without theincreased supply of money circulating inthe world economy. In fact, if the supplyof goods were increasing, as it has been,and if at the same time the quantity ofmoney remained stable, prices wouldnecessarily fall.

Make no mistake: for various funda-mental reasons related to production,supply, and demand, there is a lack ofsupply of some commodities availablerelative to the growing real demand forthem. Still, this lack of supply is not theroot cause either of the occurrence ofshortages or of the extreme increase inworld food prices (by over 80 percent inthree years). Additionally, though manycommodities such as wheat have beenstagnant or in reduced production overthe last several years, other commoditieshave seen continued increases in produc-tion; other food groups such as cereals,fruits, livestock, and fish and seafood

Copyright © 2008 by the Ludwig von Mises Institute. All rights reserved. ISSN: 1051-4333.

Editor: Jeffrey A. Tucker. Contributing editors: Thomas J. DiLorenzo, Jeffrey M. Herbener, Robert Higgs, Mark Thornton.

Publisher: Llewellyn H. Rockwell, Jr. The Free Market is published 11 times a year.

Note: the views expressed in the Free Market are not necessarily those of the Ludwig von Mises Institute.

Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832-4528 Phone: 334-321-2100; Fax: 334-321-2119; Email: info@mises.org; Web: mises.org

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products have seen mostly increasedsupply.

Data from The Food and AgricultureOrganization of the United Nationsshow that both agriculture productionand food production per capita has risensince 1990, and stayed steady since2000. In comparison, commoditiesprices have been rising since 1999.

Returning now to Krugman’s piece,we can see that the reasons he adducesfor the food shortages and rising pricesare illogical. For example, “newdemand” for food from China wouldnecessarily have resulted not only in theChinese themselves producing morefood to meet this demand, but in the restof the world doing so as well. (In fact,China has increased agricultural produc-tion per capita by 22 percent since2000.)

Can we really imagine that worldfood producers would not have spottedthis demand and tried to make profits bysatisfying it? In fact, they have spotted itand have therefore been producing morefood. The Chinese population is increas-ing by just over one-half of one percentper year. How, then, could the Chinesesuddenly have a desire and need for 30percent or so more food per year inrecent years? Further: how could theypay for it, even if they had the want ofmore food?

As a concept, “demand” is liable tomisunderstanding because we use theterm in several different ways. I mighthave a demand (desire) for a house in thesouth of France in order to have a placeto park the yacht I also demand (desire).In this case “demand” is without conse-quence, because I do not have the meanswith which to pay for these items. Realdemand can affect prices only if there isreal purchasing power, in the form ofmoney, to support the demand.

Chinese consumers cannot demand,and thus pay for, increased consumptionof food without more money, which canonly arrive in their pockets after beingprinted by their central bank. They canhave an increased real demand by way of

producing more goods with which to payfor more food, but this would serve toreduce prices, not raise them.

To be clear, it is not the companiesthat people work for that are producingthe money, as companies don’t producethe money they pay out as wages; theyproduce only goods. For companies tohave more money (i.e., sell their goodsat a higher price than last year) and thenpay out more money in wages to work-ers, more money has to be created bytheir government in the form of creditexpansion.

With regard to China, then: if therewere as much of a new demand for foodin China as Krugman claims—given aconstant amount of money in the econ-omy, there would necessarily be a corre-sponding reduction in the demand andprices of other goods. Therefore, theChinese may well be consuming morefood, but this increased consumptionwould not be responsible for (absolute)higher prices or shortages.

What, then, about the bad weather?Bad weather could well play a role in theshort run. But in the longer run, if Aus-tralia has bad weather, even for fiveyears straight, other countries could andwould step up their production andincrease supply. As an example, moreland in the United States would beturned to farming. Food shortages inone country would cause world prices torise by some degree temporarily; but theresult in a situation of free trade wouldbe increased production in and increasedsupply from other countries, a result thatwould then push the price back down.

It’s possible that the lack of free mar-kets has prevented this from happening,but it’s certain that free supply anddemand would preclude the possibilityof global emergency.

If there were bad weather in mostregions of the world at the very sametime, the supply of food would in factdecline and prices would rise. But in afree market shortages would still notappear. And in a world of an unchangingsupply of money, this effect would be

4 May 2008 The Free Market

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temporary, as prices would fall whensupply later increased. Again, as theprice of food rose, the price of othergoods would have to fall. Sustainedprice rises among all goods can resultonly from new money entering the(world) economy.

As for Krugman’s last argument, thatfarmland usable for food is now beingused for the growing of biofuel feed-stock instead, this is a question mark. Ina free market, if there were a shortage offood and if the necessarily associatedhigh prices of food gave that market sig-nal, land used for any other item—bio-fuel feedstock, car lots, movie theatres,houses, or whatever—would be con-verted to use for farming.

If we had sustained food shortages inthe United States, for example, this iswhat would happen. Indeed, agricultureused to represent 50 percent of GDP atthe beginning of last century, but is nowless than one percent. Land use haschanged to meet changing demands. Butif we needed food, we could and wouldbuild agriculture back up toward that 50-percent level. On a worldwide scale, asfood prices rose, land would be turned tothe more profitable growing of food

instead of the less profitable growing ofbiofuel feedstock.

Only if government subsidies werehigh enough to obscure these marketsignals, or if government requiredenergy companies to purchase feedstock(which this author is told is the case inthe United States), could the agricultureproduction structure be deformed so thatthis market response would not takeplace. Similarly, if agricultural landsbecame difficult to develop due to gov-ernment regulations to, e.g., protect cur-rent farmers, increased production couldbecome difficult.

In sum, the real cause of continuallyrising food prices is the printing ofmoney by world governments. And thereal cause of actual food shortages is theprevention of profitable global trade infood by the ill-advised policies of thegovernments of the very people who arestarving. To the extent that any other rea-sons proposed contribute to a reducedsupply more than temporarily, it is likelybecause governments prevent the marketfrom working. To ignore these primarydrivers of current world food shortagesis either willfully to dismiss economiclogic, or to be unaware of it.

Christopher Ratte, professor in thedepartment of classics at theUniversity of Michigan, was

recently turned into a jailbird and hadhis son taken away from him, all in thename of protecting the child from thefather. He had taken his 7-year old son toa baseball game in Detroit and orderedhim lemonade. What was served up wasa “Mike’s Hard Lemonade,” which hisson prepared to drink. Suddenly securityarrived.

“You know this is an alcoholic bever-age?” the security guard asked.

“You have got to be kidding,”responded the professor. And before theprofessor could examine the bottle, theguard snatched it away, and the boy wastaken to the hospital where no traces ofalcohol were found in him. The boy wasthen promptly put in foster care. It wastwo days before the mother, a professorof architecture, was allowed to take himhome, and a full week before the father

Llewellyn H. Rockwell, Jr. is president of the Mises Institute and editor of LewRockwell.com (Rockwell@mises.org).

THE CHILDRENLlewellyn H. Rockwell, Jr.

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The Mises Circle The Mises Circle meetings that we have been holding around the country, under

donor sponsorship, have been smashing successes. The most recent one in Seattle wascompletely full weeks in advance. It is a great chance to meet old friends and makenew ones. And it doesn’t require a large time investment: most are one-day seminars.If you are interested in sponsoring one in your town, please let us know.

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entire online catalog, as well as new opportunities to acquire full libraries on particulartopics at a discount. So we now offer a law collection designed for students headed tolaw school. There is a beginner’s collection, a libertarian collection, a collection on his-tory for history majors, and more. Each provides you a convenient way to send freedomliterature to students who are much in need of serious books that they will not otherwiseencounter in school.

Summer 2008 The living is not easy but the experience is unforgettable from an educational point

of view. Students are here from all over the world, those fortunate enough to be acceptedinto our fellows program as well as the Mises University and the Rothbard GraduateSeminar. These are critical moments in students’ lives when they can seriously focus onbuilding an intellectual foundation for the future. The Mises Institute is providing thekind of training that sticks through graduate school and onward to reappear in classesthe young professors teach. The investment is heavy and early but it pays big returnslater for freedom.

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Continued on page 6

was allowed to come back into the homeagain.

The case provides a remarkable lookat the workings of bureaucracy. TheDetroit Free Press interviewed all thepeople involved. It turns out that no onewas happy about what happened, but thegears of the bureaucracy ground away,ruining people’s lives for no good reason.

The cop on duty thought it was a mis-take, but his supervisor was insistingthat he act. When Child Protective Ser-vices came to take the child into theircruel foster care, the police objected.But CPS was just doing its duty. It hadno choice but to take the child since the

police had requested a court order—alsotriggered by events—to remove thechild. Observers who know the systemsay that the only surprising aspect to thiscase is that the child was returned soquickly. Had the couple been poor, une-ducated, and unconnected, the casemight still be tied up in the courts.

The lesson many people draw fromthis is that social workers are beinggiven too much authority, that govern-ments need to be reformed so that theydo not take extreme measures toohastily, that cops need to use good sense

before busting up families, etc. Theproblem is that all of these reforms ulti-mately depend on the state to use its dis-cretionary power judiciously.

The real issue concerns the locus ofthe control. Does it belong to the familyor the state? When there is a dispute, towhom does the presumption of inno-cence belong? It is not enough to say,here is a bad family environment, so ofcourse the state should control the out-come. When it comes to the power of thestate over the family, there is no suchthing as a judicious use. The state hasevery reason to invent excuses to destroyfamilies, and the families themselveshave no choice but to crawl and beg.

State campaigns for the welfare ofchildren have long been a major justifi-cation for the expansion of Leviathan.This is the primary basis for the war ondrugs, which has robbed us of so manycivil liberties. It is the basis for thenationalization of education that is tak-ing place, administration by administra-tion, in the name of preventing any childfrom being left behind. If the Internet isever regulated in the United States theway it is in China and parts of Europe, itwill be in the name of protecting thechildren. Indeed, it is possible to erect atotalitarian state in the name of helpingthe children.

So it was in Texas, when the stateswept in to remove 416 children fromtheir mothers. The police were respond-ing to a call claiming abuse, but therewas no other basis for this incredibleaction than the desire to crush a religioncompletely. The state decided the dissi-dent church shouldn’t exist, and so itclaimed all power in the interest of thechildren. The state could count on sym-pathy from mainstream American cul-ture, which disapproves of polygamy andunderage marriages. And that is preciselywhy the group separated themselvescompletely from the rest of the culture.

6 May 2008 The Free Market

Should people be free to set up cults,to live undisturbed to practice their reli-gion, to deviate from mainstream ethicalcodes? Certainly if we believe in free-dom, people should be able to do this. Infact, the group was already under a greatdeal of pressure to reform from the out-side and inside, with former members ofthe group reporting despotic control bythe leader and many men who had beenexcommunicated putting pressure onthose inside to leave. We don’t knowwhether the entire matter—if indeedabuse was taking place—might havebeen handled in this way, because thestate intervened to impose the cruelestpossible solution, namely, taking chil-dren from their mothers’ arms and put-ting them in the hands of governmentsocial workers.

Thus can we see the power of propa-ganda—and its uses. State authority overthe family is a basis for the loss of lib-erty in our time, and that the state alwaysposes a greater threat to society thanwhatever problem it purports to solve.To concede that there are social prob-lems that cannot be corrected withoutthe state is to give up the entire argumentover the future of liberty itself.

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