Bathtime Economics

Eddy Richards, Global Connect Project Officer

In an online debate in July last year a respected economist, Mr Homi Kharas, rebuts claims that because most small farmers in the developing world are net buyers of food they will lose from higher prices. "That is a static argument. It does not incorporate the supply response that would surely follow."

Now I don't propose to look at this particular issue, interesting and important as it is. What I am concerned about is the underlying attitude economists often seem to display in this type of debate. They look at the (theoretical ) economic response - in this case that growing more food is incentivised - as if that is the be all and end all, without apparently considering what happens in between times. Maybe an analogy would help.

When you get into a bath the water level will rise, depending on your mass and volume. However, if you lower yourself in gradually the change is slow and smooth; whereas if you leap in, the water splashes around, your rubber ducks are hurled over the edge and your towel is soaked.  So even though the water ends up at the same level the process of getting there is very different.  The end result is not the only important thing, particularly if you are one of the unfortunately stranded rubber ducks.

Yet when economists talk about supply and demand it always appears that we can move from the present situation to a new position without any time delay or complications. Fuel prices are up? People will obviously use less fuel, according to economic 'laws'.

Except that in the real world, you probably don't have a totally free choice. I would love to take the bus to work instead of driving, but there isn't one.  It would be great to heat my house less except that it's already as insulated as it can be and if I wore any more jumpers I wouldn't be able to move. Even if I could change any of this I wouldn't be able to do it instantly or without cost or complication or time passing. Yet economists appear to assume that any adjustments (and they do love a neutral sounding word) just happen silently and efficiently.

To stretch the analogy further, the taps are both on and the plug is out, and when we get in we also decided to fiddle with some of these according to what we think we want to end up with, but because of all the splashing it’s actually quite hard to work out what the ultimate effect of turning the tap on more or less, or blocking the plughole, never mind the fact that the addition of bubble bath has made it all much harder to see.

Now models are great. They help make sense of the world and allow predictions to be made. But my plea to economists, and particularly to those influencing public policy, is to consider what happens to real people in the stages between the now and the future. The models focus on equilibrium states, but miss off what happens in the change between one and the other. It's easy to produce a glib sounding statement which might even be broadly true. But it can mask the true cost to people, especially the poorest people who tend to have the least ability to ride out the waves and absorb the splashes.

Even if higher food prices might eventually benefit the poorest people, ignoring the inevitable hunger and starvation during the process of change is criminal. Speculation on commodity prices can only make the waves more violent and the splashing worse - which might be fun in a bath tub but isn't when real people's lives are at stake.