Tuesday, December 19, 2006

Economics of Voting with your Pocketbooks

Recently, the Economist published two articles that argued that recent trends in Fairtrade products, organic food, and locally-grown produce not only are not good for poor farmers, but also are detrimental to the environment ("Voting with your Trolley," and "Good Food" in the December 9th-15th 2006 print edition. Page numbers in the following blog entry refer to this issue unless otherwise noted.) The article was also discussed in Dan Mitchell's "What's Online" column on the New York Times website, December 16th, 2006. As a number of blogs have pointed out, some features of the argument were remarkably lacking in evidence, and there may be some reasons to doubt its truth (For the latter, see usfoodpolicy.blogspot.com).

But even though you can argue that it wasn't a particularly good argument in some respects, it did raise a number of important issues that seem worth addressing, and indeed, it may have been worth publishing for the quality of the discussions in the blogosphere alone.

Some of the arguments the Economist offers certainly seem worth thinking about. In particular, I found the arguments that seemed right out of Adam Smith were quite interesting, and certainly raise a number of important questions. It is not surprising that the Economist would adopt such a perspective, since, after all, the magazine is crucially linked to that eighteenth-century writer. A fundamental idea in Smith's work, and indeed of much of our current economic theory is that when prices go up unnaturally, they have a tendency to go down again. That is, if there is a lot of money to be made in the sale of a certain commodity, then more people will want to move stock into that market. But when more people move stock into a market, they have to be more competitive, which will cause the participants in that market to lower the price to it's "natural price" - to use some of Smith's jargon - or perhaps even below that value. I suppose there are at least two possible consequences to this action. In the first case, the price will fall, and more farmers will be poorer in just the way the Economist suggests. In the second case, even if the price were kept at a constant level, e.g. remain fixed, it seems that negative consequences could follow. Since in this case the price could not be lowered, there is nothing a seller could do to further encourage purchases. And given the limited shelf life of coffee before it's processed, it will have to be sold or the money invested in it will be counted as a loss. But since an investor will want to avoid this situation in the future, the consequence may be that they will produce a smaller crop the following year, hire less labor, or even fire some of those employees that they have. So the workers also would suffer.
It is a fairly solid argument, although it is predicated on the idea that the market has reached a saturation point. In order to determine whether this is true we need to have a clear conception of what the market in fact is. Fairtrade coffee works by adding a small premium to the current price of coffee when it is produced in a certain way. Thus it is certainly linked to the price of non-Fairtrade coffee. But you can argue that it is a mistake to subsume both into the same category. I find it interesting that most of the articles I've read on this subject, including the two in the Economist article seem to presume that Fairtrade coffee is the same product as non-Fairtrade coffee. In one sense, this is obviously true, since the only distinction is through the process by which the coffee is produced, and consequently there often is no discernable difference in the product itself (The Economist article makes a passing aside on page 74 to the decrease in quality of the coffee that is sold as Fairtrade, but offers no evidence for this, and I know from experience that this is not inevitably the case, as my local coffee shop demonstrates every day). As evidence for treating both coffees as the same product, the Economist article makes a passing reference to Tim Harford's book The Undercover Economist, and the Economist observes that the "basic problem" is that "too much coffee is being produced in the first place." (p.74) It strikes me, however, that part of the Fairtrade movement is predicated on convincing customers that there actually is a difference in the product. If people are not interested in 'purchasing coffee,' but 'purchasing Fairtrade coffee,' then there is not only an incentive for more people to put their stock into Fairtrade coffee, but also an incentive for current producers to take their stock out of non-Fairtrade coffee. Thus while the overall market comprised of Fairtrade and non-Fairtrade coffee may be reaching a saturation point, or perhaps even a super-saturation point, the Fairtrade coffee market can still offer tremendous possibilities for growth. Fairtrade is thus a tricky thing to model because it not only encourages an increase in supply of a certain product, but the advertising campaign aims to change the nature of the market in a fundamental way.

But regardless, there are a number of further objections to Fairtrade coffee. For one thing there is the issue of whether the movement should only focus on cooperatives and not the larger plantations that may even have more egregious hiring practices. (p.74) In fact, so far as this prevents the expansion of the market, it could reach the problem of a saturated market mentioned above. Further, there is the question whether the money is actually going to go to the poor farmers who are the intended beneficiaries of the Fairtrade movement. And indeed, it seems imperative that the public know precisely what the premium is that is going to the farmers, and how it is distributed once it reaches them.

These are all things that should be taken into account in evaluating the success of the Fairtrade movement. At present, it is worth noting that there is a lot of controversy over whether the Fairtrade organizations are succeeding in their mission, and the Economist article is only one of the more recent critical voices. One problem is that the actual financial data that would affirm or fail to validate the organization's claims does not seem to be freely available. As I say, we not only want to know what percentage of the premium is actually going to the producers, but also how this money is distributed once it gets there. The Internet seems an ideal place for this information to be distributed, although it is true that it might be a rather large undertaking. Yet, it seems that having this information available online might not only assuage doubts in an organization's effectiveness, but also open up the possibility for a whole new level of transparency within the markets it aims to improve. For ultimately this is the strongest weapon that we have against unethical companies, and nothing protects an unethical business more - be it farm or factory - than a lack of transparency.

In the meantime, I’m going to be spending a bit more time with Adam Smith this week.    

1 comment:

  1. it was informative, as always! I like Adam Smith oeuvre too! in order to be like your idol, use essay help and work hard!