Wheat for Winter

Game of Thrones: S2, E1 “The North Remembers”

Supply and Demand: Expected Future Prices

The small council provides the primary governance of Westeros. Their next order of business: preparations for winter and the drop in food production that follows.

Maester Pycelle: “A raven arrived from the Citadel this morning, Your Grace. The conclave has met, considered reports from Maesters all over the Seven Kingdoms, and declared this great summer done, at last. The longest summer in living memory.”

Varys: “The peasants say, a long summer means an even longer winter.”

Maester Pycelle: “A common superstition.”

Lord Baelish: “We have enough wheat for a five-year winter. If it lasts any longer, we'll have fewer peasants.”

Littlefinger reveals that the crown has a stockpile of grain ready for this scenario. Why would the crown stockpile wheat? Westeros does not have an entirely centrally planned economy. There is voluntary exchange in accepted currencies: golden dragons and silver stags. And that means there are markets with prices.

To analyze the council’s stockpiling strategy, suppose the market for wheat works like this:

There are two seasons: summer and winter.
People have the same appetites across seasons, so demand is identical in summer and winter.
During the summer, supply of wheat comes from all Seven Kingdoms. But in the winter, only Dorne (and maybe the southern parts of The Reach) can still produce wheat.
Wheat is a transportable product, such that there exists one price for a bushel of wheat in all of Westeros.¹

First, suppose wheat producers across Westeros have little to no ability to forecast future market conditions. Wheat is sold immediately after being harvested. This would mean that when winter arrives, the supply of wheat nearly vanishes. The consequences would be severe.

As supply dries up, wheat prices double and the market provides half as much as before. The only people who can afford pies are lords and ladies of noble birth. Peasants get bowls of brown if they are lucky.

But given the common superstition about long winters, it seems that wheat producers can forecast the future and are attuned to Westerosi seasons. They have Maesters to advise them too. Why not hold back some of the harvest during the summer, store the wheat, and sell it at sky-high winter prices later? If they forecast high winter prices, it’s in their best interest.

As individual wheat producers do this, they decrease summer supply of wheat (bushels go into storage instead of being delivered to the market) and expand winter supply (bushels later leave storage to be delivered to the market). This goes some way toward solving the winter wheat problem without intervention from the small council.

Suppliers storing summer wheat for winter sale yields the following results:

Lower wheat prices in the winter and greater winter consumption
Higher wheat prices in the summer and less summer consumption

This outcome is desirable, because it smooths consumption across the seasons. Rather than fatten up in the summer and starve in the winter, people always eat modest amounts. Fewer peasants starve. The fact that storage of grains brings summer and winter prices closer together facilitates this outcome.

Why don’t summer and winter prices fully equalize? If they did, consumption would be perfectly smooth, as desired. But if the prices were exactly equal, wheat producers would rather sell now than wait:

Storage may be costly. It creates extra steps and requires additional capital.
There may be spoilage or theft. There’s no guarantee that every bushel stored makes it to the market in the winter.
A silver stag today is more valuable than a silver stag in the future. Producers could lend silver stags earned today and earn interest.²

If the two prices get too close, producers sell now and store less, widening the spread. The spread reflects the costs of waiting to sell until winter.

If smoother consumption is good, perhaps equal consumption across the seasons is optimal. Is this where the crown’s stockpile comes in handy? Not necessarily, because government plans often run into market realities. To gather five years’ worth of wheat, the crown must buy or confiscate during the summer. Either way, this puts upward pressure on summer prices. Private producers would respond by selling more wheat in the summer and storing less. The crown’s stockpiling over the summer is offset by reduced private storage. Then when the crown releases its stockpile in the winter, the resulting prices and consumption differences across the seasons are identical to a realm with no government intervention.³

What if winter turns out to be longer than the wheat producers expect? Might the council’s stockpile save the day? Not at all. The same crowding out argument holds. Whether the council stockpiles wheat or not, a similar quantity of wheat will be held for winter consumption.⁴

Instead, if the crown is trying to prevent starvation, it should focus on making storage more efficient for private producers. For example, the crown could more strongly protect property rights and prevent theft of private stores of wheat. This would reduce storage costs, lower the summer-winter spread of prices, and further smooth consumption across the seasons. If private producers are not currently storing enough for winter, high storage costs are the culprit.

It’s true that individual wheat producers are only storing supplies for the winter to benefit themselves, not the good of the realm. And yet it does benefit the realm!⁵ It’s also easy to assume that government intervention is always for the common good and is therefore justified. But not all governments have such pure intentions, much less the ability to carry them out.

Janos: “The city's drowning in refugees, Your Grace, fleeing the war. We have nowhere to house them, and with winter coming, it'll only get worse.”

Cersei: “You command the City Watch, do you not, Lord Slynt?”

Janos: “I do, Your Grace.”

Cersei: “And are you not a Lord at my command?”

Janos: “I owe my title and lands to your generosity, Your Grace.”

Cersei: “Then do your job. Shut the gates to the peasants. They belong in the field, not our capital.”

¹ This makes Westerosi wheat similar to oil, where there is a global price and supply shocks in the Middle East affect prices all over the world.

² Does Westeros have financial markets to facilitate this? Absolutely! The crown is currently heavily in debt, so there’s already an identifiable borrower. Also, producers sell their wheat and consume from the revenues collected. Consumers are impatient and would rather consume today than in the future, all else equal.

³ This is an example of government action crowding out private economic action. “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” – F.A. Hayek

⁴ Full crowd out, where the reduction in private storage is identical to the amount the council stockpiles, occurs if private producers (or at least enough of them) can freely adjust storage amounts, have similar forecasts as the crown, and are not credit constrained. Otherwise, partial crowd out is more realistic.

⁵ Almost as if these producers are guided by an invisible hand.