Keynes on Buffer Stocks

In 1938, Keynes published the paper “The Policy of Government Storage of Foodstuffs and Raw Materials” (The Economic Journal 48.191 [1938]: 449–460).

This is an interesting paper that anticipates Kaldor’s plan to stabilise prices and control inflation by means of buffer stocks (Kaldor 1976: 228–229).

Keynes first notes that a fault of modern market economies is the failure of the private sector to make effective use of stocks (Keynes 1938: 450).

A consequence of this is that price fluctuations in the fundamental raw materials commodities can be severe, and Keynes reviewed some price data from the 1930s with respect to rubber, wheat, lead and cotton to prove this (Keynes 1938: 451).

The price fluctuations in raw materials, Keynes noted, induce a concomitant and unnecessary economic and trade instability (Keynes 1938: 451–452).

Keynes pointed out that monopolies and cartels actually promote a kind of price stability that is not necessarily a bad thing (Keynes 1938: 452).

At this point, Keynes shows us quite clearly that he was familiar with the concept of administered prices:

“For we have to-day two contrasted types of marketing policy existing side by side. On the one hand, those enjoying what have been called ‘administered’ prices¹—that is, with prices comparatively stable and fluctuations in demand met by a centralised control of output and by organised arrangements for the withholding of stocks on the part of the producers themselves—and, on the other hand, those with ‘competitive’ prices, where the producers themselves are not in a position to withhold their stocks and the scale of output is governed by price fluctuations. The former arrangement is apt to be objectionable in general, even when it is highly desirable for the particular purpose of meeting fluctuations, because it may be part and parcel of conditions of almost uncontrolled monopoly; whilst the latter arrangement is hardly less objectionable, in that it so greatly increases the risks and losses of enterprise.

The fact that we have two major groups of commodities which respond quite differently to fluctuations in effective demand is of great importance to the general theory of the short period.

[note]
¹ The term ‘administered prices’ is due to Mr. E. G. Means [sic] of the U.S. Dept. of Agriculture.”
(Keynes 1938: 452–453).

So Keynes knew of cost-based pricing and even mentioned Gardiner Means, though he got the initials of his name wrong (if this was not just a typographic error).

Even though Keynes thought administered prices were “objectionable in general” (and perhaps missed the point that such mark-up prices are widely used in quite competitive industries, not just in monopolies or oligopolistic markets), he nevertheless already understood the important insight that subsequent Keynesians were to make: that cost-based prices are beneficial to a market economy and promote price stability, when businesses meet fluctuations in demand through direct changes in the quantity of output produced and the use of stocks, rather than through price adjustment.

Next, Keynes noted that the depression had induced governments around the world to experiment with price stabilisation programs, including the use of buffer stocks (Keynes 1938: 453).

The UK itself had passed an “Essential Commodities Reserves Act” in May 1938, though admittedly for the purpose securing stocks of basic goods in the event of war with Germany (Keynes 1938: 454), and the rest of Keynes’ paper is insightful discussion of how government buffer stocks should be a normal, peacetime policy to secure macroeconomic stability – a policy which was in fact adopted by the United States after WWII and which was part of the price stability that characterised virtually all of the golden age of capitalism (1946–1971).

In the late 1960s and 1970s, this buffer stock policy was dismantled and rendered ineffective by US policy-makers, as Kaldor noted with dismay after the first bout of 1970s stagflation:

“… the duration and stability of the post-war economic boom owed a great deal to the policies of the United States and other governments in absorbing and carrying stocks of grain and other basic commodities both for price stabilisation and for strategic purposes. Many people are also convinced that if the United States had shown greater readiness to carry stocks of grain (instead of trying by all means throughout the 1960s to eliminate its huge surpluses by giving away wheat under PL 480 provisions and by reducing output through acreage restriction) the sharp rise of food prices following upon the large grain purchases by the U.S.S.R. [in 1972–1973], which unhinged the stability of the world price level far more than anything else, could have been avoided.” (Kaldor 1976: 228).

BIBLIOGRAPHY
Kaldor, N. 1976. “Inflation and Recession in the World Economy,” Economic Journal 86 (December): 703–714.

Keynes, J. M. 1938. “The Policy of Government Storage of Foodstuffs and Raw Materials,” Economic Journal 48.191: 449–460.