Mexico and Tortillas
Corn prices have just peaked, reaching record heights in a decade. The issue is of utmost importance, especially given that tortillas –which are essentially made of corn- account for 40% of the proteins in the average Mexican’s diet.
Different explanations have been provided for this rise in price. It has been assessed that the increase in the price of corn was due to monopolistic practices on the part of major producers such as Gruma, which controls 70% of the tortilla market. It has also been suggested that increase in demand for corn-based ethanol in the U.S. was responsible for the rise in price of the tortilla in Mexico. Indeed, both these monopolistic practices and demand for ethanol increase the price of corn in the short run, just not that of the same corn.
As a matter of fact, where the tortilla is made of white corn, ethanol is made of yellow corn. The recent hike in demand for ethanol, partly attributable to president Bush’s call for greater use of biofuels in his State of the Union, has increased the demand for yellow corn, which brought about an increase in its price and quantity supplied. On the other hand, the monopolistic practices of the Mexican corn giants have succeeded in decreasing supply of white corn, which brought about an increase in price and a decrease in quantity demanded; nevertheless, Gruma and others were left with greater profits, especially given that Mexicans are so dependent on tortilla and thus have an “inelastic” demand. Hence both events, since they do not relate to the same product, are unrelated in the short run. This is what The Economist partly debunked. That said, even though it doesn’t have any effect on the price of the tortilla in the short run, the increase in demand for yellow corn has an inherent effect on the tortilla price in the long run.
Eventually, as Felipe Calderón cracks down on monopolists and either catches them or makes the cost of inflating prices –also known as rent seeking to economists- too high, the artificial increase in price due to supply control on the part of Gruma and its partners in crime will fade.
But most importantly, what was hitherto an irrelevant increase in demand for different products will soon become direly relevant for Mexicans.
To be sure, in the long run, demand for tortillas will shrink as Mexicans develop alternatives. Be that as it may, recalling the extreme social importance of an aliment which, in the Mexican culture, was created by the gods, we are not to expect any staggering decrease in demand. This is vexing because it would have implied that Mexicans had found other cheaper alternatives to satisfy their needs, and a decrease in the price of the tortilla.
On the other hand, we are to expect a great elasticity of supply of yellow corn in the long run, causing an increase in output and a decrease in price of yellow corn. But this elasticity of supply does not fall from the sky; it comes from close production substitutes. And what is a close substitute to a field growing yellow corn? A field growing white corn, of course. With the high and increasing demand –and thus price- for yellow corn, many white corn producers will turn to producing yellow corn, which sells for more.
But will this go on forever? Until there is no more white corn in the market? No, of course. Producers will stop switching to yellow corn when the scarcity of white corn will have brought its price equal to that of yellow corn –comfortably assuming that they cost the same to produce. In other words, the price of white corn will increase until it is….high enough. Not too pretty a picture for low-income Mexicans.
Turmoil Beneath the Calm Surface
We but scarcely notice the impact of a change in the price of a given commodity on the price of others. This is normal because these impacts are negligible to the naked eye. Nevertheless, microeconomic theory reminds us that a change in the price of a commodity alters the money weighed diminishing marginal rate of substitution linking the given commodity to one, many, or all others, i.e. when goods decrease or increase in value, they become comparatively more desirable –per unit- than other goods –per unit.
Why, then, do we not witness apparent changes?
The answer is that, in the case of a change in the price of a mildly substitutable good, the two effects of the change will counteract.
Few goods are complementary –if you buy a car it will increase, from your standpoint, the utility of gas- or inherently competitive –if you by a car it will decrease, from your standpoint, the utility of a bicycle. Most goods are competitive, or substitutive, by the zero-sum nature of consumer choice –if you buy a car, you will have less money to buy other things, say apples- these are mildly substitutive goods.
Hence, most goods are mildly substitutable goods with which we witness the bewildering counteracting actions of the substitution effect and income effect.
To understand the nature of the substitution effect, one has to grasp the concept of the diminishing rate of substitution, the price rate, and their compound.
The price rate is given by the ratio: price X / price Y.
The diminishing rate of substitution is the diminishing quantity of X that one will be willing to submit in exchange of a unit of Y as one goes on submitting X for Y; the more Y you have, the less X you have, the more X has utility, from your standpoint, comparatively to Y. This, of course, is a corollary of the law of diminishing marginal utility.
If we conflate both the price rate and the diminishing rate of substitution –and hence create a money weighed diminishing rate of substitution- we come to realize that the price of things “relativizes” their utility. For example, of two goods having the “same utility”, the one whose price is decreased will become more desirable, i.e. the consumer will reach maximum utility when he will have submitted enough of the expensive good for the inexpensive and that the utility per item of the expensive good will have decreased enough –because the consumer bought more- to reach the increasing utility of the expensive good –of which the consumer buys less and of which the marginal utility is hence “undiminished”- even though it is divided by a greater price.
We now have an idea of the substitution effect in the case of a decrease in the price of X. As X has a lower price, it will be to the benefit of the consumer to sell Y and buy X until the money weighed diminishing rate of substitution of both X and Y equals again. At that point, the consumer reaches equilibrium and is not better off if he trades any X for any Y or the reverse.
We thus witness a decrease in demand for Y.
We may ask again but now with more precision why, then, do we not witness a change in the price of Y?
Some factors may restrain a change in price. The seller might be very close to his “cost” price or the expense necessary to change the price of his goods might be greater than his additional profit at equilibrium –his equilibrium now, not that of the consumer.
What is more important than hampering effects, is the counteracting action, the opposite action, of the income effect.
The income effect is much more simple than the substitution effect. When the price of X diminishes, the consumer buying a given amount of X allocates less capital to that use and therefore liberates income for other purposes –which can include buying more of X. The demand for all goods –including X- is thus created by this increase in real income.
In the case of mild substitutes, this increase in demand counterbalances the decrease in demand for Y created by the substitution effect. To be sure, the demand for X is even more increased by the income effect because it increases demand for all goods except inferior goods –once you are rich and have demand for a car, you have no more demand for a bicycle.
Consequently, even though more X is sold, the demand for Y being stable, so is its relation to supply and hence its price.
To those who dared to speak against economics or call it purposeless
This is a quote I found, it is from The Dynasts;
"A new and penetrating light descends on the spectacle, enduing men and things with a seeming transparency, and exhibiting as one organism the anatomy of life and movement in all humanity and vitalized matter included in the display."
The quoter is John R. Hicks and the book is Value and Capital.
Pouliot on Royal’s discrimination positive and referendums
“Ségolène Royal, the current front-runner for presidential nominee for France’s Parti Socialiste has said that she would put the issue of discrimination positive to a referendum”.
Positive discrimination –or affirmative action- is a policy tool intended to “correct” an inequality of the chances among a given population.
Positive discrimination is often used to provide equalized chances to “under-represented” groups, i.e. to members of a minority. They will be those who come from poorer neighborhoods and have scarcer opportunities to get good education, health care, and work good jobs.
There is much debate about the legitimacy of such a measure; I will not take part in that argument but will develop on the political coherence of putting it to a referendum.
That said, if the social tool is meant to buttress the opportunities of one or more minority groups, it is highly paradoxical, considering the actual nature of our democracies, to put it to a referendum. Indeed, one has to grasp the difference between a Millian elector and what we shall call a Smithian elector. John Stewart Mill believed that people would progress to become such empathetic individuals that they would confound the general interest of the people with their own. Adam Smith, holding a different point of view, argued that the economy would reach proper equilibrium if everyone endeavored to fulfill his or her own desires. It is of course assumed that a Smithian individual would approach elections as he approaches the market.
A Millian elector would certainly see that aggregate utility would be enhanced by a pertinent and well-achieved positive discrimination for it gives more to the minority in question than it takes away from the majority. Plus it bolsters the equality of the country as a whole. To a Smithian elector asked if he is willing to allow a handicap to someone potentially competing with him for a job, the answer is all too obvious.
As the existence of growing individualism in modern Occident needs not to be argued, it seems clear to me that the Smithian elector has not yet progressed to become a Millian one. Therefore, my prediction is that a positive discrimination project to be put through a referendum is stillborn. It is even more so considering that the French Muslim minority does not vote in high proportion because of its low confidence in representative institutions.
Hence, I accuse Ségolène Royal of hypocrisy. As everyone in this race to presidency, she is trying to court Le Pen’s supporters –the radical nationalists- and France’s social liberals at the same time. The paradox has to be pointed as it still is nothing but words for it is impracticable. It’s promoter, once at l’Élysée, would thus only make the decline of France even more abrupt.
Pouliot ---- Smoking lies
It is now common knowledge that cigarettes are addictive, and it is an almost unchallenged common belief that the tobacco giants are making their products more and more addictive.
However, in the midst of these persuasions, scientists are concluding that cigarettes are not more addictive than they were one or even ten years ago. Still, the tobacco corporation’s advocacy remains a feeble one, as if they weren’t willing to use these newfound facts to defend themselves. So what’s the story?
The vulgarization of scientific data concerning the levels of active addictive ingredients in cigarette tobacco has been “widely misleading” says Dave Romanow, a fellow at the London College University who is actually doing research at the University of Sydney, adding “we have a very well furnished bank of data grading the concentration of addictive ingredients in cigarettes over the past three decades, and they show significant increase for none of the labels observed.”
“Put plainly, cigarettes are just as they were 20 years ago” utters François Dutelin, the outspoken secretary of Médecins de France, and a heavy smoker himself.
Then where does this believe comes from? Why is it now almost conventional wisdom that the tobacco giants are adding addictive ingredients if they aren’t?
Many point at the lawsuits, the archetype of which is the famous RICO case opposing the US Department of Justice to the tobacco industry. The RICO case was founded on five allegations, of which only one concerned nicotine levels and addictive ingredients. The official claim is that ”corporate members of the industry are adding ingredients such as ammonia to allow nicotine to enter the smoker’s blood faster.”
So what the tobacco producers really are doing is enhancing the effect of their product –or, from the standpoint of the consumers, upgrading their quality. Robert Mckinley, research supervisor at the Milan School of Medecine, acknowledges: ”the long term physical effect, the development of a need for nicotine, is almost or completely unchanged.” As pointed out by Frank Hopkins, a New York State senior procurer now specialized in medical issues, a quantitative addition of addictive ingredients would be legal suicide: “adding addictive ingredients or raising nicotine levels would be so obvious, even the tobacco empires wouldn’t last ten minutes in a court room with backed accusations of the kind against them.”
Nevertheless the belief survives the facts. One would think about the many alleging articles or the Hollywood box office “The Insider”, featuring Russel Crow. But what remains the guiding strength of such a persuasion is the widespread perception of tobacco corporations as mean, wealth thirsty and perverse enterprises –not a completely unjustified one. As wrote Glen Gordon in her best Seller The Truth About Tobacco: “any intricate or ill-intentioned scheme you can think of, they have probably already achieved.” But in this case, obviously, the rule of thumb fails the truth.
In this whole story, the most intriguing part remains the tobacco corporations’ attitude. Why not present these facts instead of the actual feeble arguments? Why not defend this case with vigor instead of the now demonstrated weakness? The truth is for once on their side, and they stay mute.
The tobacco industry obviously knows about this and they are responsible for this stain remaining on their image; this hit at their reputation is taking more and more the allures of a self-inflicted wound. The truth is actually “as simple as it is Machiavellian”, says John Mitchell of the Stern University School of Business: “this feeble denial is intentional and aims at maintaining doubt around the addictiveness of cigarettes.” As a matter of fact, Mitchell claims, in a recent paper written jointly with colleague and friend Marsia Delingo of the Rome Center for Empirical Psychological Studies, that “the smoking public will believe that cigarettes are more and more physically addictive; a belief which, in turn, will make them more and more psychologically addicted.” Such a psychological phenomenon –developing a certain tendency from thinking you have it- is called the self-fulfillment of prophecies, and pulling the trick is just as easy as effective.
