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© 2007 Daniel J. McLaughlin
How Fair Is Fair Trade
Fair trade is a policy of paying a fair price, usually above market prices, to producers in poor countries. The implication of the term is that prices in normal trade are unfair. Calls for fair trade are typically based on compassion and concern for the welfare of the poor. The idea is that, if poor people are given a fair chance, they will be able to make it on their own and prosper.
Compassion and concern are good, except when they get in the way of clear thinking and understanding of the real issues involved. It is assumed that large commercial buyers are able to command a low price to producers by virtue of their market power. With prices kept artificially low, it would seem that the profits of the commodity purchasers come at the expense of the poor farmers. They are kept poor by the greed of the merchants.
In the real world, when prices are low, it is an indication that either there is too much supply or that coercive forces are preventing the market from adjusting upward. The only way for coercive forces to exist is for government to apply it’s own force or fail in its role of protecting individuals from the force of others. Even in the case of the large, powerful purchasers, as long as all parties are free to enter or not enter a selling arrangement, there can be no coercion. As long as all parties are free to choose, there can be no such thing as a fair price or an unfair price. There is only an agreed upon price.
In the absence of coercion, for a given demand, the price of a good or service will fall with an increase in supply. A low price is merely a signal that too much is being produced to be absorbed by the market at higher prices. This may lead to a situation where the price is lower than the cost to produce for the least efficient producers. Those least efficient producers will continually lose money. They should quit production and find other employment where they can be more productive and earn a better living. As their production is removed, the supply will decrease and the price will rise for the remaining producers to reflect a new equilibrium with demand. Ultimately, that equilibrium will be at a price that can support remaining participants in the market.
Given that low price is a signal to stop producing so much, it can be readily seen what the effect of a “fair price” will be when it is set above the market level. The higher price will encourage even more production. This can only serve to aggravate the original problem of over supply.
This scenario has been played out many times in history, all with the same consequences. The Agricultural Adjustment Act of 1933 used the force of law to achieve the same goal desired by “fair trade” supporters, to raise prices for farmers, because they were having a hard time. The higher prices helped American farmers but had the perverse effect of fostering still greater overproduction, which created more downward price pressure and even more severe government manipulation. It also contributed to deepening and prolonging the depression and punishing the rest of society, including millions of starving unemployed workers.
Low profitability of farmers indicates that there are too many inefficient farmers. They are inefficient because they lack capital equipment and, instead, rely significantly on manual labor.
The core problems for countries mired in poverty are political. Property rights are typically weak. Governments discourage investment in capital by confiscatory taxes on reported incomes and appropriation of private property. Many people participate in the informal economy, or the black market, so they stay below the radar of government. They don’t invest in modern capital and procedures because they know that their gains will likely be taken from them.
The only long term solution to the plight of the poor in developing countries is for their governments to recognize and protect private property and individual rights. Without that, there will never be progress. Those who advocate “fair trade” would help the poor far more effectively by spending their time and resources advocating “fair government”. With property rights, free markets, and protection from violence, there would be much less poverty and much more opportunity for people to choose occupations that are profitable to them.
Fair government is a prerequisite to fair trade.
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Daniel Mclaughlin
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