Fundamental Factors

Economists refer to value used in production as a factor of production. In any modern economy, factors are generally too complex, both in terms of numbers and in terms of interrelationship, for conventional analysis. There are, however, root factors, that will, in my humble opinion, yield to analysis.

By root factors, I mean things that are fundamental to the survival of labor. Essentially, without labor nothing gets done because the labor itself demands things and must work to acquire them. Hence, the things the labor wants are the things it trades its labor for. Most of the things labor trades for in a modern economy are not fundamental to survival. Generally recognized survival requirements include food, water and shelter.

Water is largely a government thing these days, although drinking water is increasingly produced by private entities because (no surprise) they produce a so much higher quality product that people are willing to pay a premium over the essentially free the government charges for water.

Shelter refers, of course, to housing. A significant sign of decay in an economy is a reduction in the availability of high quality afordable housing. We don't have that problem right now, thanks to the housing market implosion.

Food, however, is a problem. The old saying goes 'Communism can work until the food runs out.' Food is one of the most basic of basic factors. It is also one of the most commonly ignored ones. Margins are razor thin and prices have been historically low as a percentage of the general economy for so long people simply don't worry about it.

Now, food prices are rising. Some of this is due to monstrously stupid responses the government put in place after the food production bubble that coincided with the general production bubble the US suffered that ultimately led to the great depression. These subsidies, taxes and price controls have ensured a fairly inefficient food market ever since.

At the heart of most of this meddling is price fixing. Price fixing is, of course, any attempt to make a given thing worth something other than what labor wants to pay for it. In this case, it was an attempt to make food worth more than what anyone would give for it on the theory that over production was not the farmer's fault. This had the effect of increasing the margin the farmers received, thus increasing their share of production. As long as production continued to rise, this situation didn't annoy the rest of the economy.

With the advent of far more scientific production, ie, agribusiness, the farmer as a tradition began to lose out. Agribusiness began using marginal land effectively, thus bypassing local laws that would have constricted it. As more and more farmers became insolvent, produciton declined. Now, as demand is increasing, production has met it on the way down.

Fortunately for us, agribusiness still has the ability to respond and increase production. In a more directed society, this is often not so.

For instance, in a communist society, where the farm producers receive exactly the same compensation as any other producer, the continuous reduction in quality and quantity of goods reduces the marginal benefit to farmers from floating their excess goods into the market, causing them to both reduce production and reduce the quality of the goods they release into the market. In the case of a free market, however, since food is a factor that has a minimum floor, production must increase to meet need, and price will increase in the short term to cover the increased need, which will lead to producers increasing production, leading to a new equilibrium.