Free Markets and Corn

More on Adam Smith and the Wealth of Nations....

Chapter 5- The Price of Commodities

Smith’s attempt at explaining how commodities are actually priced is well thought out and rather ingenious. His basic premise that real value is tied to labor is continued in this chapter. In Smith’s view the real price or value of anything is ultimately the amount of labor that goes into either its production or the amount of labor that it can be traded for. In other words, the best estimate of real value is the amount of labor it may ultimately claim in exchange.

However, in reality most exchanges are not direct barters for labor but rather involve exchanges of goods or money instead. These exchanges in Smith’s view still have their ultimate value in labor even though it is an indirect comparison. Since all goods and services are necessarily susceptible to market fluctuations this can sometimes become a hard equation to work all the way out as each exchange has to take into account the actual real price or value of the goods or services being exchanged.

Being a keen observer of the economy he saw all around him Smith hit upon the idea of finding one good or service that was more stable than others to use as a base value to judge all others against. As he explains in the book he hit upon corn as being a rather stable commodity over a long period of time as in his view it was largely analogous with the amount of labor used in its production. Smith recognized and postulated that although corn prices regularly rose and fell in rather large cycles based upon atmospheric conditions, political stability, and the lack of war; over longer periods of time corn prices were fairly stable. He surmised this was because the amount of labor involved in its production was fairly steady which gave him a ready method of computing value back to what he considered its true core.

There are numerous examples in the book where Smith used corn, at least on a time averaged basis, as the best reflection of the relative value of labor. Smith recognized that advances in methods necessarily increased corn yields but over long periods of time that he studied, he considered these advances to be relatively small and unimportant in comparison with fluctuations in other goods tied to labor. It is really a remarkable methodology that forms one of the core measurements of the true value of labor. This is in Smith’s view the most important factor to be tracked as we must remember that he considered the value of labor to be the true basis of all economic value.

It is a little ironic that the very staple Smith recognized as the best commodity to peg the true value of labor to has in modern times in this country become a powerful lobby; so powerful that there is little or no resemblance to the free market concepts Smith found to be immutable in the corn industry today. It is also ironic that some of the staunchest conservatives of free markets installed the government subsidies that forever removed corn from the influence of free markets while simultaneously allowing the creation of market monopolies by large farm corporations.

The first efforts at corn subsidies came from within the Roosevelt administration during the Great Depression. As the economy collapsed and real wages and crop prices fell to record lows there was a real danger of the collapse of agriculture as an industry. Farmers who had long relied upon credit to plant their crops found that it simply did not exist. The government, recognizing the necessity of maintaining agricultural expansion set about making efforts to stop the collapse by a two pronged approach. The first prong was to provide needed farm loans for planting crops as this was the immediate necessity to forestall collapse and wide scale starvation in the country. The second prong was an effort to modulate prices by government assisted control of supply. Farming in the US had always been a free market enterprise before this effort with years of profit followed by loss in a cycle that often led to widespread epidemics of foreclosure and boom. Farmers themselves had several times attempted to organize themselves into cooperatives to better regulate the cyclical nature of the industry but had never had the financial ability to make good on such ventures. It must be remembered that such efforts were despised by the moneyed interests in the US as encroaching socialist and communist tendencies and bankers were not slow to react to such perceived threats by tightening credit in those days.

Roosevelt’s efforts at price control consisted of encouraging farmers to hold down production in years of plenty to avoid gluts of the market which would cause prices to collapse. This amounted to stockpiling produce by government warehouses as well as paying farmers not to plant crops in some years. These methods were fairly effective as farmers began for the first time to see these damaging cyclical movements modulated so that the business became more predictable. Along with government sponsored low interest loans this stability led to farmers being able to invest in their own future by making capital outlays in the form of better equipment and more efficient planting and harvesting techniques.

Following World War II the industry took another quantum leap forward in terms of production capability when ammonium nitrates began to see widespread usage as a fertilizer. While usage of chemical fertilizers had been being experimented with for the previous century it was the confluence of an abundance of this chemical due to the large scale buildup of its production during the war for explosives and the end of the war which caused a divergence between supply and demand that led to its widespread increase as a fertilizer. Farmers soon realized that production could be vastly increased by application of this fertilizer and the government owned a large supply of it that they quickly began discounting to farmers for this usage.

This was largely the methodology of controlling agricultural markets up until the early 1970’s in this country. While it was not in fact a free market, it was closer to a free market than what we have in this country today as it was dominated by small farmers who were largely free to compete with each other and other farmers in the world in the market. This all changed in 1972 while Richard Nixon was in office.

In 1972 a large sale of grain to Russia that was brokered by the US government led to a rapid increase in grain prices across the country. Americans were incensed as food prices at the grocery store suddenly took sharp rises and demanded that the government respond. After all, the government had largely precipitated the crisis by the grain sale and it resultant clog of the agricultural national transfer system and Americans understood this. Nixon, desperate to quell this unrest as he had other problems linked to a little matter called Watergate to deal with, turned to his secretary of agriculture for an answer.

Earl Butz was raised on a depression era farm. He had been appointed Secretary of Agriculture based upon his accomplishments as a well respected professor at Purdue University and was an avid proponent of larger, more efficient farming operations. With the grain shortage and resultant outcry he saw his chance to change the system. Butz was an outspoken critic of the system Roosevelt had put in place. Having been raised on a depression era farm and seeing both the widespread hunger of the depression and the simultaneous price control efforts whereby the government paid farmers not to produce food; he could not see how such a system made sense logically. Butz believed that a more efficient system was needed and he thought he knew how to put one in place.

Butz’s ideas were as simple and straightforward as the man he was. Butz proposed that the government should control prices by simply guaranteeing a price on crops. In other words, Butz encouraged farmers to grow as much corn as possible and simply guaranteed a price that would be paid for the corn. In his words farmers should plant “from fence row to fence row” and the government would guarantee the price when it came harvest time. When critics of this plan pointed out that it would necessarily lead to monopolies of the industry by large farm corporations, Butz responded with the instruction that farmers should “get big or get out.”

In other words, Butz proposed to remove the free market completely from the picture by interposing the government between supply and demand. When supply rose and demand fell, the government would make up the difference. By producing as much corn as possibly Butz believed that the price of food would necessarily come down. He was right of course but it is remarkable that a country based upon free market capitalism could swallow such a pill but we did.

Any sort of regulation that tends to remove an industry from the free market inevitably leads to excesses and this one was no exception. At first, the government offset the ability of larger corporate entities to drive small farmers out of business by increasing the availability of low interest farm loans. While this necessitated that small farmers go deeper and deeper into debt to maintain their competitive edge with larger producers it did allow them to remain in business for a short while. Since the main goal was maximum yield it also necessarily increased fertilizer usage and narrowed crop choices until American farmers were largely producing only two crops, corn and soy beans. This wasn’t a choice of American farmers, it was a necessity as these were the crops that were subsidized and they were the maximum yield crops that became a necessity to keep up with the debt loads.

As in all cycles where debt increases there is eventually a reckoning and this particular cycle ended with a grain embargo that the US imposed against the USSR after this country invaded Afghanistan. With falling prices and a US economy under strain as well the government began backing off of subsidies and low interest farm loans at the same time. This put the squeeze on small farmers to the point that they have largely disappeared in this country. Unable to service their debt they began defaulting in record numbers in the late 1970’s and early 1980’s. Large corporate farms began snatching up farmlands at record low prices. As they had larger cash reserves, better tax rates, and greater ability to acquire financing it didn’t take long for them to monopolize the industry. It was the “perfect storm” of economics for small farmers and a time of great profits for large corporate farm entities.

It is without doubt that these policies have decreased the real cost of food in the average American household. Most studies indicate that the percentage of a family’s income spent on food every month is now down around 10% while in post WWII years it was around 23%. This has also tended to increase the amount of food that most Americans spend on eating out every month which has accordingly seen a marked rise in the restaurant industry. American farmers now produce more food with greater efficiency than has ever been seen on this planet up to this time. Based strictly on efficiency, Butz’s ideas were a tremendous success even though he basically removed agriculture from the free market to do so. Lest anyone start polishing up the medal for Butz too quickly it is worthwhile to remember how he lost his job.

Butz had all the diplomacy of a rusty bulldozer and the temerity around reporters to match. In 1974 at a World Food Conference in Rome, Italy Butz made a remark to reporters that got him into trouble for the first time. Making fun of the Pope’s recent comments about birth control Butz commented in falsetto pidgeon Italian, “He no playa the game, he no maka the rules.” In response to widespread indignation to his comedic attempts he half heartedly apologized by stating he had not, “intended to impugn the motives or the integrity of any religious group, ethnic group, or religious leader.” This managed to save his jobs for a while but he was soon to show his lack of understanding of the effect of public statements again.

On a commercial flight to California in 1976 after the Republican National Convention Butz was entertaining former White House Counsel John Dean and Republican advocate Pat Boone with a story about intercourse between a dog and a skunk in full hearing of reporters. Boone, in an effort to change the subject, asked why the party of Lincoln seemed to be having troubles attracting black voters. Butz responded, “All the colored are looking for in life are loose shoes, tight pussy, and a warm place to shit,” in hearing of several reporters on the flight. The first defense for this remark was Butz assertion that the remark was off the record and should not have been reported. When that failed to calm the storm, he offered his resignation which President Ford seemed glad to accept before he made some other statement of equal or greater crudity.

As in most defections from free market thinking, these policies have had unforeseen results that are definitely not on the good side of the ledger. The mono-crop technology of corn has changed the agriculture of the US in all other areas as well. By holding the market price of corn to unrealistically low prices it has changed the beef, pork, and chicken industries completely. Large scale CAFO’s or Concentrated Animal Feeding Operations dominate these industries to a degree that would not have been thought possible even 20 years ago. Cattle, hogs, and chickens are fed corn and corn by-products exclusively on these CAFO’s without any vegetation needed. This necessarily decreases the need for space for these animals while simultaneously increasing the area available for corn production. Such large scale CAFO’s are terribly efficient and at the same time terribly effective at producing some nasty side effects that are currently causing problems all over the world. Cattle through millions of years of evolution evolved as grass eaters. Their whole metabolism is geared towards converting grass to meat. They were not designed as corn eaters and CAFO operators have learned that they will not survive long under such conditions without large doses of antibiotics. These antibiotics inevitably find their way into the meat and into our stomachs as consumers. Studies are currently underway linking these changes to new and potent micro-organisms that we ingest on a daily basis. The same can be said of chickens and hogs. While large corporations that run CAFO’s understand these problems and are trying to combat them their efforts are largely geared towards adding more chemical concentrations to kill these new germs.

For example, most hamburger meat bought in grocery stores today is treated with ammonia before being packaged. The ammonia necessarily removes the natural color of the meat so dyes are added after the treatment to give the meat back its natural color so the consumer is not put off by the raw pink color of the meat after the treatment. Animals raised in CAFO’s typically live in a sort of nasty squalor that is hard for most Americans to imagine. Closely confined pens knee deep in their own manure, the animals are so dirty that CAFO operators find it easier to chemically treat the meat after their slaughter than to try to establish sanitary conditions in the actual slaughter operations.

Animal husbandry is not the only industry that has changed due to corn subsidies. The very abundance of corn has led to a proliferation of chemical treatment processes whereby corn is converted into other foodstuffs, carefully packaged to be something besides corn. High fructrose corn syrup is the basic sweetener that is used in almost all mass produced products instead of sugar. It is cheaper, easier to transport, and readily available but it would not be so without the subsidies holding corn prices unrealistically low. As a matter of fact most estimates put some 75% of the products in grocery stores today as corn products that have been refined chemically in one way or another. Studies linking the nationwide epidemic of obesity to the increase of corn based sweets in the American diet are hard to ignore as well. It is without question that CAFO’s and the massive doses of antibiotics they require have also affected Americans health.

Last but not least, there are the international implications. One would think that a huge increase in our ability to produce a basic food such as corn would also result in eradication of hunger around the world. Unfortunately, this does not seem to be the case and I will give a couple of examples why.

In 1994 the United States, Mexico, and Canada instigated the North American Free Trade Agreement or NAFTA. This agreement basically removed trade barriers between the three countries with some exceptions. Interestingly, Canada instantly recognized that American corn subsidies would necessarily harm Canadian farmers and insisted upon protection in the form of tariffs on corn in the agreement. Mexico, however, had no such reservations or understanding and has suffered the consequences since.

It is estimated that some 75% of farmers in Mexico grew corn as their main crop in 1994 when NAFTA came into being. They soon found out the same thing that American independent farmers had found out 15 years earlier, they could not compete with large corporate American farms that enjoyed corn subsidies. The cheap price of American corn soon resulted in massive drops in price in Mexico which forces a large emigration of rural small farmers into industrial areas looking for work. Whatever employment gains for production industrial work that were gained in Mexico were more than offset by the loss in small farmer’s abilities to subsist. Most studies suggest this was one of the main catalysts for the recent rise in illegal immigration into this country from Mexico. The same can be said for cattle and hogs in Mexico as cheaper American animals raised on subsidized corn drove prices down to the point that Mexican farmers could no longer compete in the market.

Mexico has since started instituting corn subsidies of their own to protect the agriculture they have left but the government can’t hope to sustain these subsidies when it is constantly on the verge of bankruptcy itself. It is only a matter of time before the whole structure collapses. Most studies show that the government there is unsustainable without continued financial assistance from the US government that will have to increase steadily in the years ahead.

In the late 1990’s the US government began increasing subsidies for alternative fuel technologies in an effort to lower our dependence on foreign oil. Naturally, the huge corn lobby in this country already unimaginably wealthy and powerful garnered the largest share of this money as well. Never mind that corn is very likely the worst crop we could possibly pick to convert to fuel. Most scientists agree that corn is a net loss in the conversion rate as ethanol is extremely inefficient as a fuel and our current process of growing corn involves pouring fertilizers largely garnered from oil onto the field plowed by tractors burning oil in the form of diesel or gasoline. The long term results are largely out on the efficacy of bio-fuels of any kind but there is almost universal agreement that corn is amongst the worst candidates as a bio-fuel of any crop. Still…. there is a strong lobbyist group from corn producers in Washington so that is the path we are taking as far as bio-fuels are concerned.

While this is ridiculous enough it has managed to impact food supplies around the world. Suddenly, third world countries dependent on corn for basic sustenance find their interests in conflict and competition with corn being used as animal food and bio-fuels in the US. This has led to a marked increase in the real price of basic food commodities in many third world countries; to the point where some studies show the basic percentage of family income spent on food in these countries rising significantly.

It is interesting to suppose what Adam Smith would have thought of our “free economy” in the United States today. Undoubtedly, he would find it unrecognizable as a free economy and instantly recognize that it is basically an industrially owned and operated autocracy with decidedly monopolistic tendencies supported by an industrial hierarchy that owns and manages the government in its own best interests. He would undoubtedly be puzzled how a representative government could get to this situation but then again…. I am too.

Maybe he would understand if he could just watch “American Idol” on TV for a little while. After all, it seems to be the modern day equivalent to the hypnotist’s watch… dangling slowly back and forth, back and forth while commercials periodically interrupt to tell us how lucky we are and sell us everything from pill form mental health to instant erections that last up to four hours. Religion may be the opiate of the masses but American television is the crack cocaine of the electorate.