I am currently reading The Wisdom of Finance: Discovering Humanity in the World of Risk and Return, by Harvard Business School Professor Mihir A. Desai. As a rule I tend to steer clear of books written by teachers at business schools. I find that they are often too academic, and rarely hold up in the real world of business. This book, however, is an exception. It tries, and succeeds, in explaining finance to a wider public, and it does this by bringing in examples from the world of literature and art.
The book also tries to de-demonize the world of finance and its inhabitants. Traders generally have a bad reputation, no more so than financial traders, particularly in banks and hedge funds. Dr Desai tries to explain that financial traders do actually play a valuable role in efficiently allocating resources, and do contribute to general global welfare.
De-demonizing agricultural commodity trading was part of the reason why I wrote my latest book, “Commodity Conversations”. My goal was to explain to a wider audience what agricultural commodity traders actually do, and how markets work. I wanted to show that agricultural commodity traders are not the evil geniuses that the media often make them out to be, and that they do contribute to global welfare by moving food from where it is not needed to where it is needed. Without agricultural traders, your food would not arrive on your plate.
Although Dr Desai demonstrates that financial traders do add value to global welfare, he just as clearly demonstrates how the financial system can be corrupted. He explains this in terms of the relations between agents and clients. Does a CEO always work in the best interests of his stakeholders (shareholders, clients, employees, suppliers, and the environment), or does he sometimes work in his own interest, boosting short-term profits in order, say, to meet bonus-earning targets?
This problem of misaligned incentives is not something that I covered in my book, but in retrospect I probably should have. If you want to convince a wider public of the merits of a system, you need also to explain that system’s weaknesses and flaws. Finance as it is currently practiced does have flaws, as too does agricultural commodity trading. Incentives do not always lead to the best outcomes.
But this does not mean that we—to use an old English expression—should throw the baby out with the bathwater. If a system sometimes fails, we shouldn’t necessarily discard the whole system. Instead we should all work to structure incentives to create the best outcomes, in terms of market efficiency, as well as of social and environmental welfare. Market regulators are doing a good job at the former, while a mix of consumer awareness and civil society is making progress with the latter.
No hard how anyone tries, however, the world of agricultural commodity trading will never be perfect. There will always be inefficiencies, badly targeted incentives and a preference for personal wellbeing over general wellbeing.
Many sectors try to compensate for the bad that they do in the course of their business by doing good somewhere else. A coal-burning power plant may be the only source of electricity in a remote region of China, but it can offset the pollution it emits by investing in renewable energy somewhere else. That is what carbon credits do.
Some notable businessmen, such as Bill Gates, give back to the community once they retire. But as companies never retire, what can a company, or a sector, do to give back to the community?
A friend recently drew my attention to a public education initiative by the UK’s private equity sector. Although private equity companies do add value in ensuring that assets are allocated efficiently, the general public views them as evil asset strippers who fire workers and close factories.
But what could agricultural traders do to compensate for the occasional harm that they may do, while at the same time improve their public image? One way would be for them to help the poorer sections of their supply chains to reduce crop waste. This could be done, for example, by giving subsidised financing or grants for warehouses, packaging or refrigeration plants close to farms.
Although any individual project might not in itself be economically feasible—or it might be too risky for an individual company alone, it could result in net gains for the sector as a whole.
So maybe what agricultural trading needs is a foundation similar to one set up by the UK’s private equity sector, but with the goal of improving efficiency and reducing waste along the whole supply chain.