Skip to content

Category: Economics

Published April 24, 2012

Identifying Causal Relationships vs. Ruling Out All Other Possible Causes

Portrait of Artistotle (Source: Wikimedia Commons.)

I was in Washington last month to discuss my work on food prices, in which I look at whether food prices cause social unrest, at an event whose goal was to discuss the link between climate change and conflict.

As many readers of this blog know, disentangling causal relationships from mere correlations is the goal of modern science, social or otherwise, and though it is easy to test whether two variables x and y are correlated, it is much more difficult to determine whether x causes y.

So while it is easy to test whether increases in the level of food prices are correlated with episodes of social unrest, it is much more difficult to determine whether food prices cause social unrest.

In my work, I try to do so by conditioning food prices on natural disasters. To make a long story short, if you believe that natural disasters only affect social unrest through food prices, this ensures that if there is a relationship between food prices and social unrest, that relationship is cleaned out of whatever variation which is not purely due to the relationship flowing from food prices to social unrest. In other words, this ensures that the estimated relationship between the two variables is causal. This technique is known as instrumental variables estimation.

Identifying Causal Relationships vs. Ruling Out All Other Causes

As with almost any other discussion of a social-scientific issue nowadays, the issue of causality came up during one of the discussions we had at that event in Washington. It was at that point that someone implied that it did not make sense to talk of causality by bringing up the following analogy:

Continue readingIdentifying Causal Relationships vs. Ruling Out All Other Possible Causes
Published April 17, 2012

Commodity Exchanges, Commodity Speculation, and Food Security in Africa

The Floor of the Chicago Board of Trade

A farmer lives with two time horizons in mind. One is the months-long growing seasons his crops abide by. The other is the immediate reality of having to feed his family each day, regardless of the price of grain at harvest in three months, whether a drought will wither plants in the field, or whether perfect rains will yield a bumper crop.

Across rural Africa, such uncertainty hounds smallholder farmers—which is nearly everyone. In Ethiopia, 80 percent of the population of more than 80 million are small-scale farmers and produce 95 percent of the country’s agricultural output.

If more and better information within agricultural markets can make uncertainty recede like darkness in front of a candle, the Ethiopian Commodity Exchange is a bank of high-powered floodlights. A commodity exchange that broadcast crop prices to rural farmers not only helps them get higher prices for their produce, but also improves the food distribution system to resist shortages in times of drought.

That’s from a recent article in GOOD magazine by Tate Watkins.

The article discusses the potential for commodity exchanges to improve food security in Africa. In a nutshell, at times of impending food scarcity, commodity exchanges can help by raising food prices, which can help avert food crises and famines. This helps food consumers by improving their food security.

But commodity exchanges can help food producers by smoothing prices over time. That is, commodity exchanges can help reduce the uncertainty over the prices farmers will face come harvest time, which in turn leads farmers to making more efficient production decisions.

What about Commodity Speculation?

This is in stark contrast with the oft-touted “fact” according to which commodity speculation caused the food crisis of 2008. If you are interested in commodity speculation, see this Energy Economics article by Scott Irwin and Dwight Sanders, in which the authors argue that there is little to no causal evidence that commodity speculation led to the 2008 spike in food prices.

Tate interviewed me for the GOOD magazine article quoted above, and one of the things I said ended up making it to the article. I will always be grateful to Tate for bringing to my attention the Kansas City Star‘s style guide, which supposedly helped Ernest Hemingway develop his distinctive style. Tate has his own blog here, and you can follow him on Twitter here.

Published April 6, 2012

Beyond the Market, Part 3: A Paradox Discussed

I wrote two posts on the topic of markets last week. The posts were parts 1 and 2 of a longer post titled “Beyond the Market,” in which I highlighted some interesting facts and paradoxes about markets.

In response to those one of those paradoxes, Saleem writes:

I liked that bit:

‘It is always good, however, to keep in mind that those of us who live in industrialized countries — those of us who live in North America and in Western Europe, especially — are much less in contact with markets than some of us would like to believe.’

Would be cool to see that developed a bit more…”

So what did I mean when I said that we come in contact with the market much less than some people would have you believe?

Continue readingBeyond the Market, Part 3: A Paradox Discussed