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Cotton and Crocodiles

Nov 9, 2010 • Businesses, Demand, Supply, and Markets, Developing Economies, Financial Markets, Government, Innovation, International Trade and Finance • 177 Views    No Comments

A Malaysian proverb tells us, “Don’t think there are no crocodiles because the water is calm.” Looking at cotton markets, perhaps we should remember the crocodiles.

According to The Wall Street Journal, cotton prices are soaring. Speaking as economists, it all sounds so logical. On the supply side, in Pakistan and China, weather was bad. The economic response? Move that supply curve upward to the left. On the demand side, with the economy improving, consumers are buying more clothing so move the demand curve to the right. A decrease in supply and an increase in demand have only one result: higher prices for our t-shirts.

Beneath the surface, though, so much more is happening. In an earlier post, we noted the cost of policies that save domestic jobs in the textile and apparel industries. The cost of saving 168,786 jobs is $33,629,000,000 or $199,241 per job.

Furthermore, a recent Planet Money podcast tells us that U.S. farmers are not only subsidized and protected by tariffs but also that the U.S. government began to subsidize Brazilian cotton farmers after a World Trade Organization dispute.

Next, throw cotton speculators and congressmen into this pot with demand, supply, weather, tariffs, China, Pakistan, subsidized farmers in Lubbock, Texas and Brazil. Don’t we have lots of crocodiles in a seemingly logical world of cotton buyers and sellers?

The Economic Lesson

A Yale graduate, Eli Whitney could not find a job. His one offer was to become the tutor in Georgia for the Nathaniel Green family. Urged by Yale president Ezra Stiles to say yes, he went. The rest is history.

It all began with never-ending discussions with Mrs. Green and her estate manager about the difficulty of cleaning cotton. The result, in 1793, was Whitney’s invention, the cotton gin, and the birth of an industry.

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