DRI-398 for week of 8-5-12: ‘Buying Local’: Reinventing the Wheel – Square

‘Buying Local’: Reinventing the Wheel – Square

According to popular folklore, the 1950s were temperamentally straitlaced and artistically straitened, a time of airless conformity and retrograde sentiment. By contrast, the present day is technologically advanced, artistically avant garde and politically progressive.

Neither stereotype stands up to scrutiny. The 50s produced critically acclaimed cinematic masterpieces like Vertigo, The Searchers, Singin’ In the Rain, Touch of Evil and The Night of the Hunter. They spawned the Civil Rights movement, Jack Kerouac, the Beats and the birth of National Review magazine. The current cinema is top-heavy with inferior remakes of previous classics, knockoffs of television series and comic-books. Our politics is poisoned by the zero-sum implications of the bi-partisan devotion to big government. We stand on the verge of repudiating the commitment to freedom and individualism made by the Founding Fathers over two centuries ago.

Historians will one day cite the doctrine known as “political correctness” as one of the most toxic pollutants of the political climate. One ingredient in the politically correct brew is the behavioral posture known as “buying local.”

The Principle of Buying Local

The guiding principle behind “buying local” (hereinafter, “BL” for purposes of brevity) calls for consumers to confine their purchases, as much as possible, to production originating in the local community. This program is deceptively simple. Close examination, however, reveals that it is adherents who are deceived.

The simplicity of the plan dissolves as soon as one tries to put it into practice. In order to limit purchases to goods produced in the local community, one must distinguish local from non-local. For exemplary purposes, consider the metropolitan area of Kansas City, MO/KS. This is an area of over 2 million people, overlapping the border between two states, consisting of over 30 separate, contiguous municipalities.

Does each one of those municipalities constitute a “local community?” Do the residents of Fairway, KS (population 3,952) pointedly refrain from shopping in neighboring Westwood, KS (population 1,533)? Should they both religiously shun neighboring Kansas City, MO (population 440,885), immediately across the state line to the west and MIssouri’s largest city? In practice, it is safe to assert, virtually nobody does. After all, Kansas City is where the lion’s share of gastronomic, artistic, athletic and cultural amenities are located – not to mention more mundane but even more practical venues like Wal Mart, Target, Costco and the Country Club Plaza (the world’s first outdoor shopping center) are located.

Very well. We will assume that advocates of BL will stipulate that the entire Kansas City metro area qualified as a “local community.” Once that’s settled, we confront questionable cases like Olathe, Leavenworth and Lawrence, KS and Peculiar, Harrisonville and Belton, MO – all small towns lying within a 40-mile radius of Kansas City. And the argument is reversible, since residents of Kansas City will want to travel to and import goods and services from these outlying communities.

Suddenly, it dawns that there is no objective, universal meaning to the term “local community.” This effectively torpedoes the concept. But that does not destroy its usefulness, which is utterly independent of economic logic and practical value.

Emotion and Politics

BL is a useful concept because pretending to use it allows people to regard themselves favorably. Because they associate the term with pleasant feelings, they do not react badly when they see the concept used to practice economic protectionism;that is, totake money away from efficient producers and give it to inefficient producers. Thus, buying local is useful to those who advocate and promote protectionism. Mostly, these are left-wing sympathizers like union members, environmentalists and central planners.

Ever since the dawn of the Industrial Revolution and the advent of mass production, small-scale production has been gradually but continually displaced by large-scale, mass production. The assembly line allowed larger quantities of output to be produced at lower unit cost than older production systems such as handicraft and piecework. All other things equal, the law of demand states that consumers will wish to buy more of any good at lower prices of that good. A corollary implication is that consumers will prefer to buy a lower-priced good to a higher-priced one – provided they view the two goods as otherwise homogeneous.

Mass production allowed firms to serve national markets. Larger firms tended to displace small, local firms. This trend began in the 18th century and continues today. Decades ago, Wal Mart established itself by entering small-town markets and displacing the monopolies enjoyed by local merchants through Wal Mart’s low prices and tremendous variety of goods. Now it faces competition from discount retailers like Target and Costco.

The economic logic underlying this historical evolution is unassailable. Countries, states, regions, cities and municipalities specialize in producing goods that highlight their “comparative advantage,” which means goods whose production they can accomplish with the smallest sacrifice of alternative output. After production, the goods then travel throughout the world via trade – international, intranational, inter-state and inter-local. Money tends to obscure the underlying barter nature of this trade by interposing itself as a medium of exchange.

Although efficient trade tends to optimally enhance the real income of just about everybody, less efficient producers often object to the outcomes realized under competition. That is where BL comes in. Promoters use it as a pretext for preventing consumers from buying lower-priced outside alternatives to local goods, or trying to, or scolding consumers who succeed. The local producers and their employees gain from this interference. The promoters of BL gain power and influence as brokers of the benefits enjoyed by local producers. And these gains come at the expense of everybody else.

The Tribal Roots of BL

The pleasant feelings associated with BL are stimulated by human instincts traceable to the evolution of our species. When male/female pairs began to aggregate into groups, the human race spent thousands of years developing habits conducive to the survival and growth of the local tribe. Production was organized to benefit the group; dependence on outsiders was dangerous. Although trade dates back as far as recorded history, the full realization of its advantages developed slowly.

Over time, more sophisticated institutions took the place of the tribe. Religion provided a form of group identification, as did geographic origin and residence. With the nation state came confederations bringing together towns, states and regions under one banner. The common denominator of appearance made ethic membership another popular source of group differentiation.

The ambiguity of the word “local” makes the concept of buying local to stretch far enough to cover all of these bases. Jews can feel good about keeping kosher. Residents of Tightwad, MO can feel virtuous about keeping their deposits at Tightwad Bank instead of Bank of America. Without quite realizing why, we can all bask in the inner glow of belonging to the tribe.

What’s the Harm?

Casual boosters of BL may object to the objections raised by economists. What’s the harm in a little local color, a little local favoritism? After all, we’re going to buy our vegetables somewhere, aren’t we? Surely economists aren’t suggesting that we shouldn’t root for local sports teams and nourish local traditions, are they?

An example may clarify the relevant distinction. Professional sports leagues were organized by creating teams linked to geographic localities (typically cities). Observation indicates that most people root for and identify with teams based on “tribal” factors like geography. On the other hand, some people derive pleasure from sports based purely on the athletic excellence displayed, regardless of geographic loyalty. If tribal loyalty is itself an originary source of happiness or utility, economists have no basis for decrying it. But the suggestion that tribal loyalty should be artificially elevated above otherwise higher-ranking considerations of economic efficiency is wrong.

There is nothing wrong with being a fan of the New York Yankees. There is nothing wrong with living in New York and being a fan of the New York Yankees. But saying that New York residents must (or should) be Yankees fans is wrong. And the inherent meaning of buying local is that natural market outcomes cannot be trusted and must be overridden in favor of local loyalty. Otherwise, why would we need the slogan?

Most people are quite willing to subordinate the appreciation of athletic excellence to tribal loyalty because it costs them little or nothing to do so. But in cases where it does cost- perhaps quite heavily – to elevate the tribe above all else, it is idiotic to do so.

Price and Perishability

This is the moment to point out that local production has its own set of countervailing advantages and efficiencies, sometimes offsetting those of mass production and national markets. The beauty of free markets is that these are already reflected in the data generated by market competition – we do not need the artificial intervention of BL to make us aware of them.

One of the most frequently cited products by BL advocates is local produce. This is hardly surprising. Consumers across America have come to know and love the products purchased in New York’s Fulton Fish Market, San Francisco’s Fisherman’s Wharf and the Farmer’s Market in Los Angeles’ Westwood Village. There are sound economic reasons why these markets arose and endured throughout the era of corporate farming and aquaculture.

After goods are produced, they must find their way into the hands of consumers. Since the locus of production is chosen to minimize production costs, it will be close to some consumers but distant from others. The price of any good must reflect not only the costs of production but also the costs of transportation from production site to the consumer. In this respect, local production has a built-in advantage – by definition, transport costs are lower for local production than for non-local. But this advantage is automatically conveyed to consumers via the price system, in the form of a lower price – or rather, a lower transport-cost component of the price. This invisibly nudges consumers towards local production. There is no need to interpose BL in the decisionmaking process. Of course, the influence of lower transport costs may not be decisive, since other factors may more-than-counterbalance it.

Although economics textbooks sometimes downplay the fact, quality is a choice variable no less important than price. One drawback of produce is its perishability. Local production enjoys another automatic advantage over non-local here and in the closely-related characteristic of freshness. And once again, markets transmit the qualitative superiority of local produce to consumers without the quasi-coercive force of BL being applied. The continuing survival of city produce markets and roadside vegetable stands is tacit evidence of this.

BL in Action

In its most innocuous form, BL is found in casual references on a variety of media. Hosts and callers to sports-talk shows will urge fans to support the home team by implying or stating outright that “loyalty” demands it. While analytically indefensible, this is comparatively harmless. The relevant comparison is to demands that taxpayers be made to support sports teams with subsidies ranging from operating subsidies to sweetheart stadium leases to bond issues supporting stadium construction. Although the rationale for sports-team subsidies often invokes secondary, multiplier benefits and job creation – none of which has the slightest logical or empirical validity – the tacit premise lurking underneath the pseudo-economic jargon is that tribal loyalty, usually disguised as civic pride, should rule.

In hiring, there may be something to be said for resolving toss-ups or obscure choices in favor of local candidates. For one thing, familiarity with local conditions may carry some advantages in buying, negotiating or adhering to protocol. But BL is a time-honored means of delivering graft by requiring city contracts to give preference to local contractors, vendors or labor.

An all-star example of the BL fallacy is the insistence that BL will “keep your money in the local economy” – as if that were a desideratum devoutly to be wished. The best way to apprehend the money-leakage fallacy is to compare a local community to a country in international trade. When U.S. citizens buy foreign goods, they send dollars outside the country – or, more precisely, to the foreign-exchange market, where the dollars exchange for foreign currencies. But this dollar exodus is not permanent. Foreigners do not consume dollars directly by eating them or using them to mop their brows. As a first approximation, they will buy them from foreign-exchange dealers to use in buying U.S. goods. Now the dollars return home. (Observe that the fundamental nature of exchange is barter, the trade of goods for goods, even though money greatly facilitates this exchange process.) This logic applies to purchases of financial assets as well; the only effect of BL will be to prevent local residents from enjoying a higher rate of return on their money.

Movements in exchange rates and trade in financial assets will tend to equalize the value of a nation’s imports and exports over time. This even holds true when exchange rates are fixed and invariant, although the outcome is accomplished not through movements in exchange rates but through money flows and changes in real income and employment. The same thing applies to local communities – trade inside the U.S., for example, is conducted in a common currency, so imports and exports between the community and the rest of the country tend to equalize. It is true that occasionally a “dying” community will suffer when business leaves and money flows in only one direction. BL will not rescue this situation, though – it will merely lower the standard of living of remaining inhabitants. Lack of tribal loyalty did not cause the civic mortality and BL cannot cure it.

The international realm is the venue for perhaps the most popular display of BL. It is also the only one to attract much serious support from economists. This is the demand for preference towards “indigenous production” in developing countries. In practice, it is usually invoked in support of local agriculture. Expressed concisely, it invokes a scenario in which the real income effects of price changes overshadow the substitution effects. Farmers are so numerous that they cannot benefit from purchases of imported agricultural products, even when those products are lower-priced. The resulting loss of demand for their output causes farmers to lose more as producers than they gain as consumers. Farming is so dominant that the gains in non-agricultural sectors cannot compensate for the net losses suffered by farmers.

The remedy prescribed by the left-wing is BL on a national scale – the restriction or outright prohibition of agricultural imports from developed nations. The problem with this cure is that its success keeps the patient on permanent life support. The only hope for economic growth is to diversify the economic base sufficiently to achieve some measure of balanced development. Protecting domestic agriculture has the opposite effect; it keeps resources employed in agriculture instead of diverting them into alternative sectors.

BL, Raw Materials and Economic Development

The case of (potential) immizerizing trade is by far the exception in international economics. The typical case is that of a developing country producing raw materials, particularly extractive substances such as tin, oil, or rare minerals, or raw agricultural commodities such as cocoa or coffee beans. It would be absurd to limit consumption of these substances to their production locus; in fact, they are transported throughout the world and used as production inputs in thousands of goods and services. Less developed countries are heavily dependent on income from their export. Yet the BL doctrine, taken literally, would dictate their exclusion.

Really, the current flap over BL is simply the same as the “buy American” imbroglio that periodically emerges to bedevil U.S. consumers and economics instructors. Scratch almost any product and you discover that there is no such thing as a purely American good, because the complexity and efficiency of modern markets enables least-cost production to combine inputs from around the globe. Toyota is a “foreign” car because of its nameplate, but it is assembled in the U.S. and its so-called “American content” exceeds that of many domestic models. Meanwhile, goods with impeccable American pedigrees nonetheless employ inputs and labor from abroad.

A list of thousands of key imported inputs used in everyday U.S. production is sufficient to scotch any realistic notion of BL as an actual program. Some of these inputs are imported because they do not exist within our national borders. Others could be produced here, but only as astronomical cost. Still others were domestically produced or still are, but cannot be produced in sufficient quantities to meet domestic demand.

BL and Environmentalism

BL is so economically unsound that only political coercion could even begin to put it into widespread practice. Thus, it has much in common with environmentalist doctrine, which is likewise based on emotive, tribal considerations that dissolve into contradiction when subjected to scrutiny.

The modern reaction against “globalism” is clearly related to BL; indeed, “localism” may be viewed as the opposing metaphor to “globalism.” Environmentalists have hopped onto the anti-globalist bandwagon and made common cause with such fellow left-wingers as labor unions and socialists. Labor unions oppose international trade because trade seeks out least-cost production, and this enables producers to circumvent the local labor monopolies created by unions by importing goods created using non-union foreign labor. Consumers and foreign workers gain from this trade, but union monopolists are left out in the cold – at least in their capacity as sellers of labor, anyway.

The environmentalist link to BL Is forged by the trendy recourse to the theory of man-made global warming, which pinpoints the atmospheric release of carbon dioxide as the culprit. The environmentalist mania for reducing individual and corporate “carbon footprints” has provided a pretext for BL, on the presumption that less transport must mean less carbon usage. Not only is this an unsound generalization, it is also wildly impractical. Even the most powerful socialist dictatorship would not possess the necessary knowledge to calculate the carbon footprints of the hundreds of thousands of goods and services produced and consumed by billions of humans, let alone to successfully coordinate economic life in such a regime. The problems posed are those of “buy American” increased exponentially. And, of course, all this assumes the correctness of the initial theory.

BL is BS

BL pretends that economic problems can be reduced to a crude level and solved with reference to simple geography. But the only valid points made by the BL program are already automatically incorporated into the data transmitted by the free, competitive price system. Meanwhile, that price system also integrates a vast amount of additional subtle and complex data that BL does not even begin to contemplate. Thus, BL not only represents an attempt to reinvent the wheel – it reinvents it square.

In sum, then, BL veers between meaningless platitude and hard-core protectionism. Sliced either way, it is baloney. BL is BS, a victory of style over substance in the great politically correct tradition of the left wing.