Bad Coffee is Usually Bad
Economics
Alexander C.
Cartwright ‘13
There has
been plenty excitement on campus about our new food service. Aside from a re-modeled Tiger Inn and a
completely revised menu, there is a series of new decorations in the commons.
Next to the windows that overlook Chalgrove Lake is a poster promoting “Fair
Trade” coffee. Fair Trade products, especially coffee, are more and more
popular, yet few people understand what “Fair Trade” actually entails. Some
basic economics can help us understand why it’s confusing that buying “Fair
Trade” is counterproductive to what the practice seeks to achieve.
“Fair
Trade” is a relatively simple idea. Fair
Trade cooperatives agree to put their certification logo on a coffee producers’
products if the producers agrees to meet certain social and environmental
standards. These usually include paying a specified minimum wage, and using
certain harvesting practices. In return for complying with the Fair Trade
cooperative, the coffee producers receive a premium for their coffee, which is
typically the market price plus a certain percentage. Additionally, if the
market price falls, fair trade producers are guaranteed a minimum price.
Ultimately, the program aims to raise wages for poor coffee producers in the
developing world, and encourage them to produce coffee in a more socially
productive way. A better livelihood for coffee producers and an increased
capacity to hire new them to higher new employees are certainly noble goals.
Unfortunately
good intentions don’t necessitate good results; there is great deal of
unsettled debate around the benefits of fair trade. In fact, there is a large
lack of accounting on how of the fair trade premium the actual coffee workers
get; some suspect that most of the premium is collected by the fair trade
cooperative themselves. Of the few estimates that exist, all of the one’s I
found cite that coffee producers are actually receiving less than 10% of the
fair trade premium. However, this is an empirical argument. Just because a
small percentage of the premium actually gets to the hands of the poor coffee
workers, doesn’t not discredit the free trade movement, it just question’s the
movement’s effectiveness.
Aside from
being potentially ineffective, free trade advocates don’t seem to understand
basic economics. Simply paying coffee producers higher prices can’t lead to
more profits without an increase in consumer demand.[i]
The standard supply and demand graph can easily help us visualize how an
artificially higher price leads to decreased quantity demanded by consumers. Because
there is no actual increase in demand on the consumer side, an artificially
higher price for coffee will necessitate a lower quantity demanded. If less coffee
is bought, fair trade certified or not, the coffee producers will be selling
less and subsequently won’t be better off.
Interestingly
under fair trade, just because there might be less coffee sold does not mean
there will be less coffee produced. Because members of a fair trade cooperative
are guaranteed a minimum price independent of the market price for coffee, they
have an incentive to over produce. If fair trade producers know that they will
always be guaranteed a certain price for coffee, they can maximize their own
profits by continually producing, even as the price for coffee falls. By guaranteeing
a minimum price and incentivizing producers to over-produce, fair trade
producers could flood the market to a point where it’s hard to sell any coffee.
A bigger
problem with guaranteeing the coffee producers a minimum price is that it
insulates fair trade producers from competition. By knowing that, regardless of
their product’s quality they will receive a certain minimum price, producers
have a marginally lower incentive to care about product quality. After the fair trade cooperative pays a
higher price for the (lower quality) coffee that meets the cooperative
requirements, consumers that buy the coffee are actually paying a higher price
for a lower quality product.
Fair trade
advocates maintain that even if the coffee is a little lower in quality, and
even if the producers end up only getting a small amount of the fair trade
premium, buying fair trade is still a worthwhile way to support working
conditions for coffee workers. This position accurately recognizes that better
working conditions require a higher cost, but fails to recognize that producers
can more easily substitute out labor for capital with a higher coffee price.
Thus assuming that fair trade actually convinces consumers to pay higher prices
for coffee, it is certain that fewer workers will be employed as working
conditions are improved[ii].
Still the
fair trade proponents maintain that the only alternative to artificially
raising prices is to let some poor coffee producers go out of business. Yes-
they are correct, and that is the appropriate alterative. Even though allowing
producers to go out of business seems like a heartless response from someone
outside of the developing world, the fair trade program will make coffee
producers even worse off. The fair trade system encourages producers to produce
coffee when the market isn’t demanding it, and it encourages lower quality
coffee that market prices aren’t signaling demand for. If allowing businesses
to go under is heartless, I can’t imagine what the makes the people who support
a program that perpetuates and institutionalizes loosing.
Advocates
of fair trade certainly want a world that is more just and prosperous for all,
but their program won’t produce either. In
the meantime, coffee chains and grocery stores are glad to capitalize on
selling lower quality produces at higher prices so long as consumers demand the
fair trade label. The only benefit that seems to come from fair trade is the
good-feeling that a consumers gets from buying something with the fair trade
label- a feeling that is unjustified. The very term “Fair Trade” illustrates
that proponents do not understand how markets work. Markets do not adversely
favor the rich over the poor, nor are prices fair or unfair, just or unjust.
Prices are signals that communicate countless pieces of knowledge like the
relative demand, substitutes, and scarcity of a product to nearly countless
numbers of producers who use that information to modify production. They cannot
be fair or unfair- they are signals determined by consumer demand- not a decree
of the rich and powerful. We don’t need to ignore poor coffee producers in the
developing world; we need to remember that justice and prosperity are the
result of economic freedom, not fair trade.
No comments:
Post a Comment