Presidential Economist Jeffrey Frankel

Presidential Economist Jeffrey Frankel

Professor Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth at the John F. Kennedy School of Government at Harvard University.

He directs the Program in International Finance and Macroeconomics at the National Bureau of Economic Research, where he is also on the Business Cycle Dating Committee, which officially declares recessions. He served at the Council of Economic Advisers in 1983-84 and 1996-99.

As the Council of Economic Adviser Member in the Clinton Administration, Jeffrey’s responsibilities included international economics, macroeconomics, and the environment.

Before coming to Harvard in 1999, he was Professor of Economics at the University of California at Berkeley. Jeffrey currently serves on advisory panels for the Federal Reserve Banks of New York and Boston, the Bureau of Economic Analysis, and the Peterson Institute for International Economics. His research interests include international finance, commodities, currencies, crises, monetary policy, fiscal policy, regional blocs, and international environmental issues.

Jeffrey was born in San Francisco, he graduated from Swarthmore College, and received his economics PhD from the Massachusetts Institute of Technology.

Karim to Jeffrey

Jeffrey, food security is frequently an elemental factor that can perpetuate economic disparity and Economic Apartheid.

Something as elemental as fairly priced bread is essential in at least two-thirds of the world’s population that are at risk of being on the wrong side of Economic Apartheid.

Wheat of course, is the most common component of flour for bread, but bread can also be made from rye, barley and maize. The prices of all of these ingredients, and food prices in general, are subject to fluctuation. It seems common sense that as food prices fluctuate and speculators enter the markets, these speculators are there to make a profit and wheel and deal to the highest bidder. Most non-experts like me, also assume that speculators are often the cause of bread shortages and unfairly spiked prices. Speculators make things worse, surely?

Yet you have said that speculators “often are a stabilizing force”.

That position would appear counter-intuitive to most of us reading this site.

Jeffrey, can you explain how speculating in food prices (like wheat) can actually have a stabilizing effect?


Jeffrey to Karim

Karim, it is certainly true that “speculators are there to make a profit and wheel and deal to the highest bidder.” And I understand that many people who are not economists “assume that speculators are often the cause of food shortages and unfairly spiked prices. You say:

“Speculators make things worse, surely?”; but few economists would agree with this.

Yes, it can happen sometimes in what we call “speculative bubbles.”

But, most often, the big movements in commodity prices are caused by fundamentals of supply and demand, such as good or bad harvests, strong demand from rapid growth in China, government controls or subsidies, low real interest rates, and so on.

Speculators are merely the messengers who convey the news slightly ahead of when it would otherwise hit. Don’t shoot the messenger. In fact, in normal circumstances food prices are less volatile when speculators are allowed to operate in the market than when they are not.

In the 1955 movie version of East of Eden, the legendary James Dean plays Cal.

Like Cain in Genesis, he competes with his brother for the love of his father, a moralizing patriarch. Cal “goes long” in the market for beans, in anticipation of an increase in demand if the United States enters World War I.

Sure enough, the price of beans goes sky high, Cal makes a bundle, and offers it to his father to make up money lost in another venture. But the father is morally offended by Cal’s speculation, not wanting to profit from others’ misfortunes, and angrily tells him that he will have to “give the money back.” Cal has been the agent of Adam Smith’s invisible hand:

By betting on his hunch about the future, he has contributed to upward pressure on the price of beans in the present, thereby stimulating farmers to plant a larger crop and increase the supply that it is available precisely when needed (by the British Army). Without the prior speculation, bean prices would have gone even higher when the US joined the war.

The movie even treats us to a scene where Cal watches the beans grow in a farmer’s field, something real-life speculators seldom get to do.