Onion Economics

There is something about onions which brings out the worst in bureaucrats. Orlando Figes’ A People’s Tragedy chronicles the early years of the Russian revolution. Under war communism, the Bolsheviks attempted to exert state control over the entire economy. A long list of vegetables was drawn up, specifying the prices at which they could be traded. Through incompetence, onions were omitted. The result was a huge glut of onions, as everyone rushed to take part in one of the very few areas of private enterprise left to them.

Congressman Gerald Ford, the future American President, made no such mistake. In the late 1950s, he promoted the Onion Futures Act, which means that onions are the only commodity in which futures trading is banned in the United States. This was in response to a massive coup in which two traders literally cornered the market in onions. But in general, futures markets helped rather than hindered producers by providing a guaranteed price and protection from price fluctuations.

The temptation for bureaucrats to imagine they have special knowledge, that they can intervene and make things better, is irresistible. The European Union is getting in on the act. A revised Markets in Financial Instruments Directive provides for regulators to impose limits on the size of the bets which dealers in commodity futures can place. Time will tell how successful this will be, though recent academic work suggests that interventions such as this, or the Tobin tax, may actually increase rather than reduce price volatility. The Taiwan stock market, for example, has a tax on most transactions, yet it is one of the most volatile. The UK housing market has a very large tax on transactions – stamp duty – but this has not prevented the development of speculative bubbles and huge swings in prices.

We might perhaps think of the bureaucrats at the Environment Agency as a bunch of onions. Rather, as a group of people who imagine they can improve the outcomes for onions. Of course, their concern is the environment rather than markets, but the mentality is the same. It is not that bureaucrats lack imagination. Whether it is the Soviets believing they could control vegetable prices, of the denizens of Brussels who think they know the maximum amount of speculation which is to be allowed, a future which is different to the past has to be imagined. And this vision has to be held with conviction

This conviction is often the root of the problem. A narrative emerges within a bureaucracy that there is a correct line, one best way of doing things. The Environment Agency came to believe that flora and fauna were more important than humans, and everything became subordinated to this narrative.

It is when a dominant narrative emerges within an organisation, when dissent is not tolerated, that the chances of making bad decisions rise sharply.  Recent developments in algorithmic text analysis enable such situations to be detected from internal memos and emails. The first task of a regulator should be to monitor itself against this danger.

Paul Ormerod

As Published in City AM on Wednesday 12th February 2013

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