Free Market Signals

11 Dec

A report by a london based think tank, as reported by the FT, talked about the problems posed by resource nationalism, particularly in emerging countries where basic resources take up such a large portion of their overall consumption. The report attempts to frame the discussion in such a manner as to suggest that countries and private industry should work together to ensure that prices remain relatively low and stable.  The report suggests that countries should work intimately with industry in certain situations where shortages and supply gaps threaten the stable price picture.  The one part of the report that stood out for us however was when the report described the much needed investment in new production that is currently being hampered by an excessively volatile operating environment.  The report states that “market signals are not right for investment in these long-term projects”, however the report fails to mention what market signals would be considered to be “right”.  In a free market, prices send signals to producers and consumers which in turn is reflected in some new level of pricing. The absolute level and amplitude of pricing over time will determine overall shifts in productive capacity.  It is naive to think that the private owners of resource productive capacity should be willing to work with Governments in an effort to smooth out price movements over time, as they oftentimes are the prime beneficiaries of such instability.

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