Thursday, June 12, 2008

Opportunity Cost of Life

In economics, one principle concept is that of opportunity cost. Essentially what it means is the cost of what you are not doing. For example, you have $5 and you can chose to eat a filling meal at a Thai restaurant or you can put that into the bank. The opportunity cost for eating is the interest you would gain from that $5 in a set of time. Pretty simple right? Well, let's apply this to current events.

As most people know, there is a global food shortage. Well, part of the reason for this is that it is an opportunity cost.

You have a fixed amount of corn in the world and a fixed amount of land on which you may grow corn and other similar vegetables. As such, farmers must determine what they are going to invest their land and their resources in. Should they put it into feeding people as tradition states one should and earn a decent profit? Or should they put it toward growing corn with which they are able to sell to ethanol plants for a very high profit. Simple supply and demand states they will do the latter. As such, they ignore the other market for corn (and subsequently the land upon which it is grown) making costs skyrocket.

The ignored opportunity cost of doing this though is the lives of people across the world who need that corn, or those soy beans, or that wheat, etc. But, according to French Agriculture Minister Michael Barnier, we shouldn't put "too much trust in the market" just as "[w]e must not leave the vital issue of feeding people to the mercy of market laws and international speculation." Yes, Mr. Barnier we shouldn't put too much trust in a free market, that is why your beloved French farmers have been receiving about $8.2 billion from the EU in agriculture subsidies. Moreover Mr. Barnier, market laws are laws for a reason, the market follows them! As such, we do not leave people to the mercy of them, they simply are prone to them, just as they are prone to international speculation. But, had your precious farmers not had the great subsidies they did receive, most likely (as many economists will tell you), the world would have been able to adjust to a gradual rise in food prices instead of the 80% jump in 3 years it did experience according to the UNFAO.

All in all, this is an issue that needs to be dealt with now, but without mandates being put in place for what crops are to be grown in certain areas, and where percentages may be sold, this will be with us for a long, long time. In fact,according to The Washington Post's Anthony Faiola: "the world must cope with a new reality of more expensive food". Sadly, many people (over 100 million) will be unable to survive this. and according to UN Secretary General (and personal hero) Ban Ki-moon: "This crisis could result in a cascade of others... and become a multidimensional problem affecting economic growth, social progress and even political security around the world."

Excuse me Secretary General Ki-moon, but have we not already seen this? Haiti's prime minister was brought down, children in Mauritania must go to bed hungry, Manjeet Singh and others in India must hoard rice for fear that it will be a luxury within the coming months, and Sam's Club has started to restrict sales of rice. In these examples alone, I count social progress, political security, and economic growth all present. If I can see that, why can the leaders of the world not?

I am all for a free market, but in times like this, we really need to either mandate a percentage of sales of certain crops to go toward food, or the government needs to start buying it like crazy so as to provide some to those in need. There needs to be quick, efficient legislation both nationally and internationally dealing with domestic as well as international issues so this may be quelled. Otherwise, we may see another Haiti; and I fear that this time, the citizens will not be stopped as easily and that the country may just be a developed or developing one.

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