A worker adjusts a pipe at the Nassiriya oilfield in Iraq.© Atef Hassan / Reuters/Reuters
If you are an economist, you tend to believe that you can solve any supply problem by adjusting prices.
Not enough Tickle Me Elmo dolls at Christmas? Raise the price to $400 and the number of people asking for them will go down. Too many blueberries at the height of the season? Lower the price and you can sell them all.
Easily said. But can prices adjust enough to deal with the really important commodities – like wheat and oil, say – in a way that ensures there is enough for everyone who needs them and we never actually run out? The answer seems to be a tentative "yes," according to a new paper by David Jacks, an economist at Simon Fraser University.
The debate about whether there are enough resources for everyone has been around for centuries. Thomas Malthus (a downer-economist who wrote a seminal paper in 1798) suggested that there would soon be too many people in the world to feed. He was wrong, apparently; technology and aggressive planting expanded the food supply. More recently, the energy crisis of the 1970s started a debate about the end of oil supplies. That one is still up for grabs, although most of us have gotten our minds around to paying ever more for energy.
As a way of looking at how the markets have dealt with resource allocation, Mr. Jacks looked at the prices of 30 commodities over a period of 160 years. During some of that time, there were pressing demands for the commodities in question. In periods of rapid development, not surprisingly, prices went up. They did not stay up forever, however: at higher prices, the market came up with ways to supply more, even if it took a while. Price hikes also caused demand to adjust; when prices of one thing go up enough, people buy something else, and prices fall.
According to his research, the supply of some commodities is more easily expanded than that of others. Since 1950, agricultural prices have actually declined as a group, meaning that in real (inflation adjusted) terms it costs less to buy cotton, coffee, wheat, corn and rice than it did 60-odd years ago.
So, what to make of the recent spike in the price of some of these things? Well, hopefully it is what Mr. Jacks observed many times in his analysis of the past couple of centuries – a short-term gyration rather than something for keeps. If history repeats, the recent price hikes will lead to more production and falling prices.
Other commodities – notably petroleum, gold and natural gas – are quite a bit more expensive than they were in 1950, and in most cases are certainly more expensive than they were a decade or so ago. There are two things going on here. One is that you cannot increase the supply of most of these things as easily as you can agricultural goods, so of course there is going to be a bias to higher prices. The other is that there seems to be a new supercycle going on.
Mr. Jacks defines a supercycle as something that pushes prices up by at least 20 per cent, and lasts up to 40 years. He has observed such cycles multiple times over the 160-year horizon. In the most recent case, commodity prices are being sent higher by the recent boom in the Chinese economy (which started in the mid-1990s). As that boom matures, prices may well decline in tandem, although there is nothing to say that other industrializing countries will not pick up the slack.
So are some prices going to be bid up forever? We will see upward pressure for sure, but it is interesting how well the supply-demand mechanism explains the pricing history of commodities. It may take a while, but apparently anything can be replaced, at least partly, if the price is right.
Linda Nazareth is the principal of Relentless Economics Inc. and a senior fellow at the Macdonald Laurier Institute.