Agricultural Market Regulation:
Lessons from History and Economic Thought
former research director at INRA
and Member of the Academy of Agriculture
For a number of years, following the series of financial, economic but also food crises experienced around the world, there has been greater resolve to regulate markets. This was demonstrated during the discussions of the agricultural G20 last June. Bearing this in mind, we thought it interesting to publish excerpts from an article by Jean-Marc Boussard, which traces the history of the economic thought process on the regulation of agricultural markets, which appeared recently in a study made by the research and exchange group on agricultural market regulation (GREMA)1.
Reminding us that periods of regulation and liberalization have always alternated, Jean-Marc Boussard demonstrates that for the past two centuries, the heart of the debate has changed little and a pragmatic approach is needed when looking at agricultural markets in order to realize that the specificities of this sector and its strategic dimension have never been more relevant.
momagri editorial board
Antiquity and the Middle Ages: From the Search for Food Security to the Emergence of the Modern State
The history of societies until the Middle Ages shows us that food security wa s rarely left to purely private interest. Rather, family groups or collective institutions were in charge of this important task: for instance, in African villages or in medieval societies the village leader or the feudal lord was responsible for stocks. Trade was almost inexistent, because exchanging was pointless whence food was the only production and the only consumption.
With the appearance of food surpluses, and the possibility of urban dwelling, where handcrafters could produce “luxury” non food goods, exchanging became a necessity. The market was a natural intermediate for that. Yet, even in this case, food security, although no longer ensured by the village leader or feudal lord, was often achieved through hierarchical forms of coordination. […]
However, until then, approaches were exclusively pragmatic in nature and aimed to resolve a concrete problem at a given moment in time. It was during the 18th century that the need to understand what was happening and justify public action (or inaction) by an in-depth analysis of the causes behind the phenomena emerged. It was also during this period that “liberalism” emerged—the idea that the selfish pursuit of individual interests could lead to the good of all through trade and the market.
The 18th Century and the Birth of Liberalism
The idea of liberalism is rooted into the English philosophers of “natural law.” Relayed by the “Physiocrats,” it was then taken up (not without reserves) by Adam Smith.
In regard to the central question of agricultural and food products, the Physiocrats, and notably François Quesnay, recommended eliminating public storage, transport control and diverse regulations, emphasizing their inconveniences but forgetting their advantages. They therefore counted on speculators self-interest (buy in periods of abundance, sell in periods of shortage) to ensure the inter-annual offsetting of good and bad harvests, as well as on the interests of traders for the geographical offsetting of under by over producing provinces.
These ideas were fought by a few authors. For instance, Ferdinand Galiani explained the difficulty of developing trade for a product such as wheat, a crucial product that was the same everywhere and produced almost everywhere. Because of production and transportation delays, the wheat trade imposed risks that only bankers holding a monopoly could support. Supply and demand could therefore not be regulated by the market alone.
Galiani was not heard. At the end of Louis XV’s reign and during the start of Louis XVI’s reign, France undertook liberalization several times, but backtracked many times because of the negative consequences of liberalization, notably the Paris uprising of 1775. […]
The 19th Century: The Canonic Form of Liberal Theories and the Difficulties Applying Them
Although the 18th century ended with a posthumous victory for Galiani’s analyses, based on the observation of what would later be called “market failures,” the question of liberalism came back at the start of the 19th century in England under a slightly different light. The justification was much more rigorous than that given by the Physiocrats and, above all, the question was a new one: should Europe continue to produce all its food or would it not be better to count on more fertile distant lands (notably America) to ensure more efficient production ?
In England, Adam Smith, David Ricardo (the beneficial nature of national specialization) and John Stuart Mill (single equilibrium theory) helped build a true economic science. However, their analyses, which led to advocating liberalization, were static; they ignored the phenomena tied to the accumulation of capital, expectation errors, and income distribution. What is more, they relied on more or less arbitrary assumptions and assumed that the market operated properly, which is debatable for agriculture which these authors did not think to treat differently from other economic activities. These authors’ influence can be seen in the abolition of the Corn Laws in 1846. […]
Liberalism dominated until the 1870s, but it then became apparent that cheap agricultural imports lead to poverty in the countryside. In this way, farmers were no longer able to provide outlets for industry (deflationary spiral). European countries then adopted protectionist agricultural policies (in France, the Méline tariff of 1892). […]
World War I led to an increase in state-controlled economy, but liberalism returned in force during the post-war period.
The 1929 Crash and its Consequences
The causes of the 1929 Crash were numerous, and the agricultural sector was not uninvolved (bank seizures of land impossible to resell).
In the United States, Franklin Roosevelt implemented a stable price policy that led to the post-World War II surpluses. This policy was driven by pragmatism rather than by theory : In reality, the reasons why the market did not work remained a mystery until the elaboration of the cobweb theory by Mordecai Ezekiel.
The “cobweb” is an economic model showing the existence of “endogenous” causes of price fluctuations. It is based on the time delay between producers’ decisions and the consequences of these decisions (e.g., the fall in price in June as a consequence of increased surfaces last September). The model generates price and quantity measurements which fluctuate, alternating “highs” and “lows.” […] The crucial lesson is that, on agricultural markets, the market equilibrium point is dynamically unstable and the equilibrium can never be maintained sustainably. In addition, this phenomenon eventually extends itself to the entire economy.
While he had little influence on general economists, Ezekiel has long been described as the man that justified the agricultural exception because of the rigidity of demand and its consequences for market stability.
State-Control of Agriculture After World War II and its Contestation
The post-war period was marked by a revival of interventionist agricultural policies. The theory of public policy assessment and “cost/benefit analysis” developed and spread.
The cost of price fluctuations for the various actors and for society as a whole was analyzed. Their high social cost justified policies aiming to eliminate them. […]
Several elements then led to the domination of liberal ideas:
• The theory of “lobbies”: farmers, highly organized, managed to extort extravagant advantages from society. To end this, the market should be allowed to balance supply and demand, only allowing vested interest to be preserved thanks to “decoupled payements”. • Studies based on “Computable General Equilibrium Models ” showing that exploiting comparative advantages would be likely to increase global incomes significantly.
Faced with the risk that liberalism would in return lead to price fluctuations, the authors counted on futures markets, financial products, and harvest insurance systems to guarantee farmers’ revenues.
• The observation that many countries have not developed at the expected pace. The “structural adjustment” policies followed.
The Return of Liberalism After 1980, Contested by “Chaos” Theorists
Liberal ideology had a considerable influence on European and American agricultural policies from the 1980s to 2007, and on the inclusion of agriculture in the Uruguay Round.
The problem linked to price fluctuations was ignored, partially because we had forgotten that agricultural prices fluctuated and partially because we believed that liberalization (and therefore the substitution of a global market for a “narrow” international market acting as an outlet for surpluses) would resolve this fluctuation due to the “law of large numbers.”
The outcome of these liberalization efforts is currently mixed, with the degree of liberalization much higher in Europe and the United States.
The recent progress in economic theory when it comes to the chaos dynamic could be the starting point for a new approach to the problem of agricultural price fluctuations. In fact, despite liberalization, international prices currently continue to fluctuate with the same magnitude as before.
From this standpoint, it should be noted that the theory that fluctuations would be lessened by expanding the market depends on a crucial assumption: that supply fluctuations depend on phenomena beyond farmers’ control, such as weather incidents or epidemics (“exogenous” causes). However, some research based on mathematical “chaos” theories shows that, while the causes are “endogenous” (that is to say linked to anticipation errors and production times), the fluctuations can be highly irregular, with the absence of any periods. […]
Despite infinitely more sophisticated research instruments supplied with more reliable and more complete statistical sources, the heart of the debate has not much evolved since the time of the controversy between Turgot, a brilliant theoretician whose theories relied on fragile axioms, and the pragmatic Galiani who attempted to measure theory against the yardstick of reality and examine specific cases. In the alternation between phases of liberalism and interventionism, the rapidity with which the political leaders forget the conditions under which the previous episode happened and their incapacity to learn the lessons from them is surprising.
Galiani’s pragmatic viewpoint seems better suited to real conditions than the theory of global general equilibrium. The interest of the general equilibrium theory as the basis of comparison and as an ideal is not up for discussion: in economics, this theory plays somewhat the same role as the notion of lack of friction plays in rational mechanics. But in the real world and on the Earth’s surface, friction always plays a major role, and all applications of mechanics take it into account. It should be the same in economics.