Smith and Oil and Corn

As noted earlier, I am re-reading The Wealth of Nations. One of the interesting discussions is Smith's discussions of the relative values of land and other capital. Smith spends a lot of space in looking at the comparative advantage of various employments of land and capital - the differences between values of oats and corn or butcher's meat and corn or gold and silver and coal or coal and wood. His fundamental conclusions involve the relative benefits of exchange (people benefit from specialization) and the benefits of translating values into specie (or money).

But as you look at stories today, Smith comes back to explain a lot of things that are going on in the economic world today.

Witness the following stories -

George Bush proposes an increasing commitment to ethanol to reduce our commitment to oil. That supposedly helps our balance of payments problems (because we grow our own energy) and potentially help in global warming - but the price of corn (because of the increased demand) will go up - and that will have consequences too.

In recent months, Oil goes to close to $50 per barrel. And corn prices, in part, because of the commitments that the president has made to alternative fuels, increase.

Mexicans are grumpy because the cost of tortillas (mostly made of corn not flour) have increased and are now asking the Mexican government to subsidize the price.

And Tyson's food (a large poultry processor) says the price of food will go up as a result of the rising price of corn (poultry get fed a lot of corn before going to market).

And the Iranians, with $50 oil have a much harder time of funding their nuclear program. (and Hugo Chavez has a much harder time of hiding his financial mismangement of Venezuela).

And the Saudis need to think about how much $50 oil they want to sell into the world market. More means they sell their declining resource at a relatively discounted price - less means the price will go up but induce ill humor in the oil consuming nations. The Saudis understand the balancing tradeoffs of those differences.

All of those things fit together - and the balance among the prices of corn (which induce the grumpiness in Mexico on the price of tortillas and make US corn farmers happy and Tyson grumpy) to Oil prices (higher prices work somewhat, although not entirely in the opposite direction of the price of corn).

Do you have it straight? See why Smith is interesting?