Famine speculators – the Adam Smith view

In a time of plague or scarcity, there is little love for the speculator who raises prices, and often a call for the government to intervene. Adam Smith however had this in view and observed that government intervention does more harm than good:

The interest of the inland dealer, and that of the great body of the people, how opposite soever they may at first appear, are, even in years of the greatest scarcity, exactly the same. It is his interest to raise the price of his corn as high as the real scarcity of the season requires, and it can never be his interest to raise it higher.

By raising the price, he discourages the consumption, and puts every body more or less, but particularly the inferior ranks of people, upon thrift and good management. If, by raising it too high, he discourages the consumption so much that the supply of the season is likely to go beyond the consumption of the season, and to last for some time after the next crop begins to come in, he runs the hazard, not only of losing a considerable part of his corn by natural causes, but of being obliged to sell what remains of it for much less than what he might have had for it several months before. If, by not raising the price high enough, he discourages the consumption so little, that the supply of the season is likely to fall short of the consumption of the season, he not only loses a part of the profit which he might otherwise have made, but he exposes the people to suffer before the end of the season, instead of the hardships of a dearth, the dreadful horrors of a famine.

It is the interest of the people that their daily, weekly, and monthly consumption should be proportioned as exactly as possible to the supply of the season. The interest of the inland corn dealer is the same. By supplying them, as nearly as he can judge, in this proportion, he is likely to sell all his corn for the highest price, and with the greatest profit; and his knowledge of the state of the crop, and of his daily, weekly, and monthly sales, enables him to judge, with more or less accuracy, how far they really are supplied in this manner.

Without intending the interest of the people, he is necessarily led, by a regard to his own interest, to treat them, even in years of scarcity, pretty much in the same manner as the prudent master of a vessel is sometimes obliged to treat his crew. When he foresees that provisions are likely to run short, he puts them upon short allowance. Though from excess of caution he should sometimes do this without any real necessity, yet all the inconveniencies which his crew can thereby suffer are inconsiderable, in comparison of the danger, misery, and ruin, to which they might sometimes be exposed by a less provident conduct.

Though, from excess of avarice, in the same manner, the inland corn merchant should sometimes raise the price of his corn somewhat higher than the scarcity of the season requires, yet all the inconveniencies which the people can suffer from this conduct, which effectually secures them from a famine in the end of the season, are inconsiderable, in comparison of what they might have been exposed to by a more liberal way of dealing in the beginning of it the corn merchant himself is likely to suffer the most by this excess of avarice; not only from the indignation which it generally excites against him, but, though he should escape the effects of this indignation, from the quantity of corn which it necessarily leaves upon his hands in the end of the season, and which, if the next season happens to prove favourable, he must always sell for a much lower price than he might otherwise have had.

Whoever examines, with attention, the history of the dearths and famines which have afflicted any part of Europe during either the course of the present or that of the two preceding centuries, of several of which we have pretty exact accounts, will find, I believe, that a dearth never has arisen from any combination among the inland dealers in corn, nor from any other cause but a real scarcity, occasioned sometimes, perhaps, and in some particular places, by the waste of war, but in by far the greatest number of cases by the fault of the seasons; and that a famine has never arisen from any other cause but the violence of government attempting, by improper means, to remedy the inconveniencies of a dearth.

Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations

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The Case of China

Adam Smith observed in The Wealth of Nations (1776):

China has been long one of the richest—i.e. one of the most fertile, best cultivated, most industrious, and most populous—countries in the world. But it seems to have been long stationary. Marco Polo, who visited it more than 500 years ago, describes its cultivation, industry, and populousness in almost the same terms in which they are described by travellers today. It had, perhaps even long before his time, acquired the full complement of riches which the nature of its laws and institutions permits it to acquire.

The accounts of all travellers, though inconsistent in many other respects, agree on the low wages of labour and on how hard it is for a labourer to bring up a family in China.

If by digging the ground for a whole day he can get what will purchase a small quantity of rice in the evening, he is contented. The condition of skilled workmen is perhaps even worse. Instead of waiting patiently in their workshops for the calls of their customers, as in Europe, they are continually running about the streets with the tools of their respective trades, offering their services—begging for employment.

The poverty of the lower ranks of people in China is far worse than that of the most beggarly nations in Europe. It is commonly said that in the neighbourhood of Canton many hundreds or even thousands of families have no home on the land, but live permanently in little fishing-boats on the rivers and canals. The subsistence they find there is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any European ship.

Marriage is encouraged in China not by the profitableness of children but by the liberty of destroying them. Every night in all large towns several babies are exposed in the street or drowned like puppies in the water. The performance of this nasty task is even said to be the avowed business by which some people earn their subsistence.

However, although China may be standing still it does not seem to go backwards. Its towns are nowhere deserted by their inhabitants. The lands which have been cultivated are nowhere neglected. So just about the same annual labour must continue to be performed, and the funds for maintaining it must not be noticeably diminished. So the lowest class of labourers, despite their scanty subsistence, must somehow find ways to continue their race far enough to keep up their usual numbers.

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