More economics: "Fair trade" coffee

[It’s] typical of most products today: the material portion of their costs is small. Thus the question is not the difference between what different parties to the production get paid, but rather who adds value, how much, and where.

This is John Larrivee, assistant professor of economics at Mount St. Mary’s University in Emmitsburg, Maryland, on the fair-trade coffee movement, on the Acton Institute site, asking “Why Not Fair-Trade Beer and Cakes?” whose raw material sells for so little compared to the finished product? 

If Starbucks is evil for the vast difference between what growers get paid and what Starbucks receives for its coffee, these other cases [a few cents worth of barley for beer at $3 to $9, $10 of flour for a $300 wedding cake] are worse.

Citing low productivity in coffe-growing countries, he says

The real problem is that in a market with low entry barriers (like agriculture), how much people earn depends upon how society-wide productivity affects the quality of outside opportunities. In the United States, farmers’ standard of living is higher because if the difference between how they can live farming and how they can live with another occupation grows too great, they will pursue other options.

Where there are no options, farmers are stuck.  In addition, “fair trade” prices would draw more producers into the raw-coffee market, driving down prices.  In which case you would have to keep selected, or non-selected, producers out, guild– or labor-union style, limiting beneficiaries arbitrarily.

All for the sake of “social justice” by of a “just price,” when (as late-16th-century Spanish Jesuits Molina and others argued) it’s the market that determines the just price.  In this case, Starbucks makes a better coffee and a better sales pitch and succeeds, vastly expanding the coffee market, to the benefit of coffee producers.  Meanwhile, Caribou and Seattle’s Best have their go at it.  This free-market process

will ultimately support more farmers around the world, and may transfer more funds into those countries than would have been the case in any “fair-exchange” system. These funds will gradually improve productivity in those countries, and do so far more effectively and fairly than any fair-trade program ever could.

Social justice promoters have good motives, but they should consider how the world works before they try to remake it.

1 comment:

Anonymous said...

You might be interested in the analysis I did of this article. For the record, I disagreed sharply with him and you.