Adam Smith wrote about markets in his famous book 'The Wealth of Nations' published in 1776, almost 250 years ago. He talked about many things, but most people remember the idea of 'the invisible hand' of the market that helps to optimize the economy so that there is the best allocation of resources.

This idea has worked better than, for example, the communist system of state control of the economy.

In my view the old communist bloc of the cold war had two separate issues: (1) the economic idea that there should be state control of the economy; and (2) the concept of totalitarian control of the individual by the state. Both were bad ideas, but for me, it is helpful to separate the two issues.

The market mechanism has been called into play to help define what “price” should be ... but it really does not work very well. And when it is decided that the government can administer price better than the market, the results are usually horrendous. Examples abound:

Staff costs in the relief and development sector

Staff costs are important ... and especially the huge difference between the remuneration paid to local staff and remuneration paid to international staff. This subject has not been much discussed though it is very important in the design and cost effectiveness of almost every development intervention.

Frankly ... this subject has been kept off the table for at least the last three decades because it is key to most development experts' career planning ... and many who aspire to this group. But it is too important a matter not to get it addressed.

Powdered milk – impact of subsidy

I tried to organize the supply of powdered milk for a West African importer ... and what I expected to be relatively easy was a nightmare. The cost of milk is very variable depending on how much subsidy the farmer has negotiated and where the cows are located. Both the European Union and the United States have highly subsidized cows. Of course the ex-farm price of milk becomes a component of the cost of powdered milk ... but then there are programs that encourage export of agricultural products including powdered milk, and these programs are further subsidies. With the maximum of subsidy the price of powdered milk turned out to be about $1,050 per MT in Europe and $1,100 per MT in the United States ... and by the time shipping and insurance were factored in the cif cost was going to be somewhat lower from Europe than the United States.

But then it appeared that there were quantity questions ... and if the quota was exceeded and all the subsidy used, then the prices would not be $1,050 and $1,100 respectively but more like $2,050 and $2,100. At the lower price, the price being paid by our West African importer would have generated a modest trading profit ... at the higher price, a considerable loss. And then it started to appear that the problem of the missing subsidy on the supply side would go away if we ordered immediately with some premium to be negotiated. In other words everything had a price.

Meanwhile, our customer in Africa was relatively new to this business ... and the established importers did not want new competition. Suddenly his bank needed all sorts of additional information, and it became pretty clear that there was what amounted to an import cartel that also had influence in the bank.

Lesson ... while the market may be powerful as a theoretical construct, it is puny relative to the many different centers of economic power that control and profit from the status quo. The incentives that really matter ... the profits in the value chain are complex and usually driven by some important private relationships.

Tea auction – Malawi The conventional wisdom is that I

Cashew – farmgate prices in Kerala I

Controlled prices for everything – Guinea Bissau I

Coffee auction - Burundi I

Exchange control distortion – Nigeria I

Price projections – World Bank getting it wrong I

TVM Value Accountancy aims to put data about community economics into a balance sheet ... and see what are the constraining factors ... and how they can be removed so that the community progresses.