Onions and Oil: Flawed Analysis

I came across a blog post (link, and also a column: link) that talks about the effects of futures market on the oil and onion market. Many think that futures market is responsible for the oil price fluctuation (link). The author notes that despite the absence of futures market in the onion markets (due to Onion Future Act (link)), the price fluctuations are more severe than that is seen in oil trading. The authors uses this example to argue some academics’ belief that futures markets control extreme price swings. I think the analysis is poor for the reasons I describe below. I am not an economist; but, being trained as an engineer, I can say that their analysis is flawed.

First, the statistical analysis of price fluctuations in the posts is poor. The author of the blog post compares the monthly changes in the price of onion to that of oil. We have seen that oil prices have a two- or three-year cycle. Obviously, the monthly changes in oil prices is not as big as the changes in onion prices. A better statistical analysis is needed. Also, volatility of onion prices before and after the Onion Futures Act was passed is open to debate (link).

Second,  it is not a controlled statistical sampling of commodity value because there are a number of factors that affect each the price of commodity. The oil market has a seasonal supply-and-demand cycle, whereas the onion market experiences abrupt supply issues due to inclimate weather. There are plenty of other factors, including the price of oil, that determines the price of onions. Oil prices are globally uniform while onion price vary geographically. Future trading is not the only factor that differs between the two markets.

Third, if the cycle is two to three years long, ten-year data of oil prices fluctuation is not enough to statistically conclude anything about futures trading. We either need a different form of analysis for the data from the limited time period or need data from a larger time period. But it is hard to control all the factors when the time period is large. Thus, statistical analysis would likely be meaningless.

The authors may be right about their conclusion, but they have not provided sound evidence to back it up.

Casting Aspersions

Is it right to question the integrity of people of a country based on what their democratically-elected government does? My opinion, based on the current global context, is that it is not correct. In this post, I will explain why. This is mainly in response to Great Bong’s post (link), in which he holds the opposite view. I respect his opinion as long as he is consistant. I will also relate this to blaming every bank employee (in Goldman Sachs etc.) for the banks’ role in the global economic crisis.

A view held by many is that the citizens on the country are ultimately responsible for the actions of the government. Thus, any state-sponsored activity, including terrorism, can be blamed upon every individual from the country. In theory, the government is suppose to reflect the views of the majority in the country, and therefore, the actions of the governments are indicative of the mass opinion in the country. I respect this view, but do not agree with it.

I question that basic premise of the argument that the government reflects the views of the majority. I have seen overwhelming evidence off-late that most democratically-elected governments today are plutocracies. First, there was the plutocracy memo (link) by the Citigroup. Second, I read this Al Jazeera article on the power of lobbying in the US (link). These pieces, among others, make me believe that common man has absolutely no voice in the governance of the country because he does not belong to the elite. Is my vote really worth a billionth of the value of all billion Indian voters put together? Regardless of what most of the country thinks, it is the wealth-driven lobbies, which dictate the domestic and foreign policy. That is disturbing.

Also, when we accuse a nation of being immoral, we should be willing to accept similar, well-reasoned aspersions on us. Let’s take Kashmir and the Northeastern India as examples, where our lawmakers have wrecked havok. We have rigged elections in Kashmir (link) and misused Armed Force Special Provision Act (AFSPA) in Kashmir and the Northeastern India (link) (Also look my post on Kashmir (link)).Based on these irresponsible acts, a Kashmiri or a Manipuri can easily label the rest of the nation as traitors. I am personally not responsible for these acts by our government. We all blame it on factors beyond our control such as the politicians and their vote-bank politics. Just like how I am not willing to take criticism for the atrocities my government commits (maybe, I ought to accept those criticisms), I do not want to blame another nation in entirety for actions of a few individuals of their government.

I apply the same moral compass in blaming bankers working for big banks for the sub-prime crisis. The contempt against the big banks for their hand in the crisis is well justified (link). But are we right in holding every individual who work in these firms responsible for the chaos? I assume that it is an “elite few” at the top who made those decisions that led to the downfall. Most worker have had no role in the crisis. Thus, I do not hold every banker accountable for the crisis.

There is one point for which I don’t have an answer. You may argue that the bankers have a choice to quit their job and work elsewhere. I think that’s a fair point. But I also think about the reality of their choice. After a fairly-long career, changing domains is not easy. The real choice is between a great lifestyle and being unemployed for a long time. Should one’s values be strong enough to punish oneself by being unemployed for no fault of their own?

This post appeared as a column in The Viewspaper (link)