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Eric Michael Johnson

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Commodity Traitors: Financial Speculation on Commodities Fuels Global Insecurity

Posted: 09/29/11 06:39 PM ET

"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 18th 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 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. In other words, as the price of food shot upwards many people were unable to buy the food that was actually grown.

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."

Cross-posted at Scientific American.

 

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