Paul Krugman, "Ricardo's Difficult Idea." Available at http://web.mit.edu/krugman/www/ricardo.htm, accessed on December 16, 2010.
FEATURED ARTICLE | JANUARY 3, 2011
The Locavore's Dilemma: Why Pineapples Shouldn't Be Grown in North Dakota
A major flaw in the case for buying local is that it is at odds with the principle of comparative advantage. This principle, which economists have understood for almost 200 years, is one of the main reasons that the vast majority of economists believe in free trade. Free trade, whether across city, state, or national boundaries, causes people to produce the goods or services for which they have a comparative advantage and, thus, makes virtually everyone wealthier. Princeton University economist Paul Krugman, who won the Nobel Prize in economics for his contributions to the economics of international trade, called comparative advantage "Ricardo's Difficult Idea"1 because so many non-economists deny it and are unwilling to understand it. But if people understood comparative advantage, much of the impetus for buying local foods would disappear.
When the tomatoes are ripe and the price is right, we, the two authors, enjoy local food. In fact, we grow vegetables in our own backyards. But, according to some bestselling authors, daytime talk show hosts, celebrity chefs, and the U.S. government, we aren't growing and buying enough. These groups have offered a host of economic arguments to promote the sale of local food—arguments that are fundamentally wrong.
The public is prone to chasing fad diets, so given the touted benefits of local foods and the limited information consumers possess, we are not surprised that the general public has jumped on the local-foods bandwagon. But we are surprised by the seemingly large numbers of agricultural economists who actively support the local-food movement or, at a minimum, don't oppose it. In fact, Choices (an agricultural economics magazine) devoted a whole issue2 to the local-foods movement, neglecting to note its inconsistency with economic principles. A recent Choices article on local foods argued: "An ideal regional food system describes a system in which as much food as possible to meet the population's food needs is produced, processed, distributed, and purchased at multiple levels and scales within the region."3 But the article fails to justify this position on economic grounds. One of our alma maters, via the N.C. Cooperative Extension Service, is actively encouraging local-food consumption, arguing that the money diverted from non-local to local food would "be available in the state's economy."4
To support local foods and deny comparative advantage and gains from trade, surely there must be offsetting benefits from the sale of local foods that would produce a positive cost-benefit calculation. The aforementioned issue of Choices outlined several such benefits. We are not convinced. We are not against consumers choosing to buy local food, and indeed, we both regularly stroll through our local farmers' market. What we find disturbing is the state or federal policy agenda on local foods and the almost complete silence of agricultural economists on its adverse consequences. Consider the main arguments for buying local.
Tom Vilsack, the current Secretary of Agriculture, stated, "In a perfect world, everything that was sold, everything that was purchased and consumed would be local, so the economy would receive the benefit of that." 5 Apparently Vilsack believes that we'd be richer if we made our own shoes, iPods, and corn. Adam Smith and David Ricardo must be rolling in their graves.
Local food is generally more expensive than non-local food of the same quality. If that were not so, there would be no need to exhort people to "buy local." However, we are told that spending a dollar for a locally produced tomato keeps the dollar circulating locally, stimulating the local economy. But, if local and non-local foods are of the same quality, but local goods are more expensive, then buying local food is like burning dollar bills—dollar bills that could have been put to more productive use. The community does not benefit when we pay more for a local tomato instead of an identical non-local tomato because the savings realized from buying non-local tomatoes could have been used to purchase other things. Asking us to purchase local food is asking us to give up things we otherwise could have enjoyed—the very definition of wealth destruction.
If we, as consumers, require that our food be grown locally, we cause the food not to be grown in the most productive, least-cost location. When the government encourages consumers to pay higher prices for a local product when a lower-cost non-local product of equal quality is readily available, it is asking the community to destroy its wealth because the local farmer cannot compete with non-local farms. If we really want to help local farmers, we'd be better off giving them a donation equal to our savings from buying non-local food. We would have redistributed our income, but at least we wouldn't have destroyed wealth.
The "keep the dollars local" argument fails to recognize that a dollar sent out of the local economy by buying a non-local food must, eventually, return to the local economy in terms of dollars spent on exports. Consider a concrete example. What if people in our city of Stillwater, Oklahoma kept spending dollars on "imports" from places other than Stillwater, and none of these dollars ended up being spent on Stillwater "exports?" Then, Stillwater would run low on money to buy even local goods and services. With less money chasing goods and services, prices in Stillwater would fall. This fall in prices would entice outsiders to buy Stillwater goods—and those sales to outsiders would be exports. Simultaneously, the extra dollars available outside Stillwater would cause outsiders to bid more for outside goods and services. Outside prices would rise, further discouraging people in Stillwater from "importing." In real life, it takes only a few pennies' difference in price to cause people to shop elsewhere. Economists call this arbitrage. Arbitrage opportunities would quickly cause the outsiders to start importing from Stillwater, causing Stillwater's imports and exports to balance. Of course, we use the words "imports" and "exports" broadly to include purchases or sales of bonds, land, etc. The balance-of-payments formula that applies to countries operating with different currencies is equally applicable to local economies trading in the same currency with their neighbors.
The balance-of-payments equation must hold: it is not a conjecture. If an economy is in what economists call a "steady-state equilibrium," local consumption must equal income from local sales and therefore, imports must, over the long run, equal exports:
Local Consumption + Consumption of Imports = Income from Local Sales + Income from Exports
Locavores seek to export goods without importing, which can happen only if the exports are given away for free—the equivalent of foreign aid. This cannot be the objective of the local-food movement, can it?
Consider an example. Suppose that local lettuce sells for $5 and non-local lettuce of equivalent quality sells for $3. Purchasing local lettuce creates $5 of income for local vendors. So far, so good. However, purchasing non-local lettuce and spending the $2 saved on local (or non-local goods) also creates $5 of income for local vendors—giving the consumer both the lettuce and whatever can be purchased with the extra $2. If $5 is spent only on local goods, then there is no offsetting export. If $3 is spent on non-local lettuce and $2 spent on local goods, the $3 in imports is eventually offset by $3 of exports, providing $5 of income to the local community. Finally, if the whole $5 is spent on non-local goods, the local economy will realize $5 in exports. Thus, purchasing local lettuce provides the same income to the local community (the accounting identity must hold), but it causes the individual to forgo the pleasure of what the $2 could have purchased—again, the definition of wealth destruction. Wealth is destroyed because the local-food movement convinced individuals to forgo the increase in wealth provided by comparative advantage.
Surely a critic would stop us here and argue that our logic breaks down because local and non-local foods are not of the same quality. That may be true (at least during certain seasons), but the oft-cited argument is that local food is implicitly better for the local economy because it is local. The "keep the dollars local" argument is not an argument about quality.
Even if local foods aren't a boon to the economy, we are told that the environment benefits from the purchase of local food. 6 Whether this is true is ultimately an empirical question. Local foods travel fewer miles, but an environmentalist must be concerned with more than the tailpipe emissions from farm to market. Consumers must also travel to buy their food, and the variety of foods offered in supermarkets minimizes the need to make multiple trips. An extra trip by a consumer to the farmers' market is likely to expend more energy than was saved by reducing the distance the food travels. Moreover, fresh local foods often require more at-home preparation, where energy use is less efficient relative to that of large-scale processing facilities.
The truth is that the energy expended transporting food is relatively unimportant. According to USDA-ERS data, consumers spent $880.7 billion on food in 2006. Only four percent of these expenditures can be attributed to post-farm transportation costs. One recent study indicated that over 80 percent of the global-warming impacts of food consumption occur at the farm, and only ten percent are due to transportation.7 After an extensive literature review, other researchers have concluded that "it is currently impossible to state categorically whether or not local food systems emit fewer [greenhouse gasses] than non-local food systems."8 Minimizing the use of natural resources entails producing food in the least-cost location, which will not typically be local.
But energy use is a red herring. The goal of most people is not to minimize the use of energy, but rather to enjoy life, given our wealth and the prices we face. As Harvard economist Robert Dorfman put it in a letter written to Science in 1977, "Energy is indeed a scarce and valuable resource, but it is only one of many, and there is a good deal more to life than British thermal units."9
The most common counter-critique to this argument is that cheap, non-local food is a mirage because the prices for energy and transportation are "too low." That is, according to this argument, the market price fails to reflect externalities in the production and transportation of "industrialized," non-local food. We have already pointed out that production of non-local food may consume less energy than local food production. Even if it doesn't, recall that gasoline is already taxed; federal and state taxes together average about $0.40/gallon.
Would locavores really be satisfied with the outcomes that would result even if prices perfectly accounted for externalities? It can be hard for concerned locavores to accept the idea that people's free choices in markets produce a wiser allocation of resources, but clear thinking requires a bit of humility.
But surely, say the locavores, local food is fresher—at least when it's available. Yes, it may be. But then people can—and do—make tradeoffs between the higher cost of buying local against the higher freshness. Moreover, freshness need not equate to localness. The best Midwestern seafood restaurants have fresh menu items flown in daily, and any of us can have a live Maine lobster delivered to our door tomorrow with the click of the mouse.
But shouldn't government subsidize local food out of a sense of social justice, so that poorer people can eat fresher foods, too? It is absurd to presume that poorer people's greatest need is the freshness of locally-grown food. If someone cares about the plight of the poor, as we do, shouldn't we want them to be able to stretch their food dollars as far as possible?
Author Michael Pollan argues that the government should require that school lunches include a portion of food grown within 100 miles of the school. In an interview on Bill Moyer's television show on PBS, 10 Pollan stated:
And let's require that a certain percentage of that school lunch fund in every school district has to be spent within 100 miles to revive local agriculture, to create more jobs on farms, to, you know, rural redevelopment. You will achieve a great many goals through doing that. You will have a healthier population of kids who will perform better in the afternoon after that lunch. You will have, you know, the shot in the arm to local economies through helping local agriculture. And you will, you know, teach this generation habits that will last a lifetime about eating.
So, at least we can be comforted by knowing that our children will eat healthier food at school. Or will they? If improving nutrition is the objective, why not seek more-nutritious food regardless of where it is grown? Requiring schools to provide better nutrition and local food is a double whammy. Given a fixed lunchroom budget, there is a tradeoff between providing a larger quantity of more-nutritious non-local foods and a smaller quantity of more-nutritious local foods. Because a "buy local" policy adds a constraint, such a policy can only decrease the level of nutrition obtainable for a fixed budget, particularly because it is simply impossible to grow numerous healthy foods at certain times of the year and in certain locations. If children in North Dakota are to eat pineapple, they must look south. And we don't mean South Dakota.
The decision to buy local foods is a shopping decision, not a moral one. If you can find tasty local food at a price you are willing to pay, then go for it. But it doesn't make sense to cajole others into making the same choice you do, and it especially doesn't make sense to force others to do so. There is a romanticism about buying local food, but the reality is that local-food policies destroy wealth and institutionalize prejudices for one human over another based on such arbitrary criteria as the location of their farm. Local-food advocates imagine the movement providing a host of non-economic benefits, promoting a sense of community and "belonging." But buying local food limits one's community to only those we can physically see and imparts trust to only those whom we personally know. However, a shopper involved in the global food chain is part of a much larger community—one that requires a great deal more trust than one is required to muster at the farmers' market. If we want to foster the civic virtues of trust, trustworthiness, and community, the local-food movement is a move in the wrong direction—it is little more than nativism.
The local-food movement enjoys broad, fervent support, and politicians have hopped on the bandwagon, but that only makes it all the more important to eschew political correctness and critically evaluate the consequences of local-food policies. Economists are a diverse bunch, but we have a few core principles, two of which are that there is a balance of payments and that there are gains from trade. These universal principles are as timeless as the law of gravity. If politicians and activists proposed to suspend belief in gravity, physicists would not cower. They would resolutely defend reality. So should we.
Paul Krugman, "Ricardo's Difficult Idea." Available at http://web.mit.edu/krugman/www/ricardo.htm, accessed on December 16, 2010.
King, Robert P (Guest Editor). 2010. Choices. Special Issue on Local Foods. 25(1).
Clancy, K. and K. Ruhf. 2010. "Is Local Enough? Some Arguments For Regional Food Systems." Choices. 25(1).
Extension Online News. "N.C. Cooperative Extension Partners With 10% Campaign To Promote Local Foods." Accessed September 3, 2010 at http://chathamchatlist.com/highlights/2010/08/22/nc-cooperative-extension-partners-10-campaign-promote-local-foods/.
The Washington Post. February 11, 2009. "Tom Vilsack, The New Face Of Agriculture." Accessed September 3, 2010 at http://www.washingtonpost.com/wp-dyn/content/story/2009/02/10/ST2009021002624.html.
Specter, Michael. 2009. Denialism. The Penguin Press: New York, NY. Hylton, Susan. January 25, 2009. "Panel to discuss benefits of consuming local foods." Tulsa World. Section A, Page 16. The Economist. February 13, 2010. "Green Communities: Kicking Carbon." Page 61.
Engelhaupt, E. (2008). "Do Food Miles Matter?" Environmental Science and Technology 42:3482.
Edwards Jones, G., L. Mila` i Canals, N. Hounsome, M. Truninger, G. Koerber, B. Hounsome,P. Cross, E.H. York, A. Hospido, K. Plassmann, I.M. Harris, R.T. Edwards, G.A.S. Day, A.D. Tomos, S.J. Cowell and D.L. Jones (2008). "Testing the Assertion That 'Local Food is Best': The Challenges of an Evidence Based Approach." Trends in Food Science and Technology. 19:265-274.
Dorfman, R. 1977. "Social Cost." Science. 196:940.
Bill Moyers Journal. November 28, 2008. Interview with Michael Pollan. Accessed September 2, 2010 at http://www.pbs.org/moyers/journal/11282008/transcript1.html.