The fairest drink on earth: a cup of free trade coffee

Jo Christie-Smith has questioned what non-"Fair Trade" coffee is if we don't have free trade. In doing so, she raises the whole question of “Fair” and free trade, and invites me to (finally!) write about one of my bugbears.

Ultimately, “Fair Trade” coffee is a misnomer, because it is no different in trade terms form any other coffee. The terms of trade are identical. The difference is that the wholesaler/distributor has chosen to pay above the market price for the product. This is not really “Fair Trade” but (depending upon one’s perspective) a form of charitable subsidy or a misguided means of convincing farmers to keep producing coffee when their labour would be more usefully turned to some other product. I think a more honest title would be “Generously paid for” coffee, or perhaps “We left a tip” coffee.

Note that this would not be the case if “Fair Trade” became a matter of policy, as the Trade Justice Movement would like. Then it would be either a subsidy or a tariff, depending how it was applied, and would be very different from freely traded coffee.

When provided by government, subsidies take money off taxpayers to pay producers to ignore the price signals in the market, which are telling them that they would be better off producing something else. If the price is artificially inflated (be it by a “Fair Trade” label or by a government tariff), it is consumers rather than taxpayers who are being… well… taxed.

Coffee is an excellent example of what causes this and the effect it has. The reason that the price farmers receive for coffee is so low is not (as anti-globalisation movements would have us believe) because nasty Western firms are bullying the farmers into accepting lower payments. It is because there is overproduction of coffee in the world – a coffee glut, basically. What is needed is less production, which would be achieved by letting marginal producers respond to the low prices by swapping to produce something else. Subsidies (voluntary or mandatory) disrupt the price signals farmers receive, so they keep producing, the glut continues, and the problem is perpetuated. Meanwhile, those not getting artificially inflated rates are left even poorer as the overproduction continues and even escalates.

The arguments being used by the Trade Justice Movement and others are basically the same as those used by domestic protectionists. They seek to get a better deal for the producer at the expense of the consumer. In the process, they actually harm the producer as well, because producers are discouraged from progressing to produce more lucrative products. Instead, they are encouraged to stay in a business that is reliant upon subsidy. If the subsidy is ever withdrawn, they are suddenly without a livelihood. They become subsidy addicts, supplicants at the doors of government or charities. On top of this, all of society suffers as well, because wealth is diverted from hard-working people to pay valuable workers to produce things that are not needed (in this case, too much coffee) when they could be producing more useful products and so enriching everyone.

My chosen solution is to stop the “Fair Trade” nonsense and encourage the Third World’s farmers to produce all the things that inefficient First World farmers are currently producing, but won’t be producing once we take away their subsidies and tariff protection.

It’s a great system.

It’s called “Free Trade”.

Latest lunatic Tory idea: The return of the Permit Raj

Is there no act of idiocy to which David Cameron will not ascribe in his attempt to woo votes? The latest suggestion from the Conservative’s Working Group on Responsible Business is to impose quotas for producing fatty or sugary foods and alcohol in an attempt to tackle obesity and binge drinking.

If it is true – and so far it is only part of a consultation document – it is a sign of how far the Conservatives have moved from the economic liberalism they briefly espoused under Margaret Thatcher.

Quotas for anything are a disaster. They are aspects of the planned economies that so blighted the lives of billions during the last century. In the first place they are based on the idea that government knows better than individuals how much of a commodity is needed, and that overproduction is wasteful. Liberals understand that overproduction reduces prices, which in turn discourages further production until an equilibrium is found between how much consumers want (and are prepared to pay for) something and how much producers want to make. A quota system assumes that too much is being made, which in turn assumes that too much is being consumed, because consumers are allocating their resources (spending their money) “on the wrong things”.

In other words, Mr. Cameron and his apparatchiks are suggesting that because we are too keen on fatty food and booze, the best solution is to reduce supply through handing out a limited number of production licences.

As well as being obviously illiberal (who is Mr. Cameron, or indeed his 643 colleagues, to decide how much I or any of us want or ought to have of a commodity?) it is painfully stupid. Anybody with an A Level in Economics (that’s a lot of people other than me, then!) knows that quotas are an inefficient and harmful means of reducing supply. A far more effective method and one that distorts economic exchange far less is a tariff or tax system. Rather than reduce the quantity produced by government fiat, the government adds a tax, thus raising the cost and so reducing demand. This is cheaper to administer, raises revenue for government, harms business less than arbitrary quota systems (which might see a firm suddenly lose its quota and so lose its business) and allows individuals to continue to allocate their resources as they see fit.

The quintessential example of the quota system is the Permit Raj or Licence Raj that afflicted India between 1947 and 1990. India’s government was so enthralled by the Soviet Union that they attempted to plan their economy. The Indian State Planning Commission would issue licences for any and all production; without a licence, production of something as mundane as steel was illegal. The result was rampant corruption, as these precious licences were worth a fortune: with supply limited, prices rise, so licensed production of a commodity is even more profitable. In a real sense, quota systems issue licences not just to produce fatty food or steel, but to print money. They also distorted the economy, because Indian manufacturers were not able to use the price signals in the market to respond to consumers needs. Between socialism and corruption, the Indian economy shrank, poverty worsened and people starved.

The Conservative’s quota system would subject to the same problems. The issuing of licences to produce fatty, sugary or alcoholic products would encourage corruption and harm British industry. British consumers (that’s all 60 million of us) would suffer as prices for goods we clearly want would rise. It is one of the most crass examples of interventionist economics in some times. Friedrich Hayek was right to opine that the Conservatives are only fair-weather “auxiliaries” of liberty whose real interventionist instincts will always come through.

What is particularly surprising is that even if they want to impose it, I cannot see how they can. The free movement of goods throughout the EU prevents them from placing quotas on European food entering the UK, so the upshot would not be rising prices and reduced consumption but simply a transfer of supply from the UK to Europe. This whole proposal smacks of one that has not been thought through.

This is very disturbing. There is nothing wrong with politicians seeking to improve public health, though that does not justify their dictating to individuals how they live. However, one would hope that they would utilise intellect and experience in perusing our interests. Indeed, that is rather the point of representative democracy: we cannot all be experts in everything, and where public policy is concerned most of us cannot be experts in very much as we have real jobs to do. Thus we look to our leaders to exercise their knowledge and utilise the time that we free up by paying them to be full-time politicians to pursue our interests.

Sadly, it seems the Conservatives have not been using their time wisely. Instead, they have reverted to type: tell people how to live their lives and damn the consequences!

EXCLUSIVE: Mervyn DID draft a letter to Gordon!

It's amazing what one finds in the rubbish bins behind Threadneedle Street!

Obviously the person who drafted this letter realised they didn't quite need it after all:


Dear Gordon,

As you may have noticed, inflation appears to be spiralling out of control. The consumer price index (CPI) is now at its highest since 1995, while the retail price index (RPI) is at its highest since 1991. I imagine it must be pretty embarrassing, presiding over an economic record worse than that of the Major administration, which Labour have been criticised so vocally over the past decade.

I feel duty bound to provide an explanation for this rising inflationary tide. I attribute it to a number of key factors, none of which are beyond the wit of man to cure.

1. House prices

House prices have spiralled over the past decade. This has a direct impact on RPI and has also facilitated unprecedented levels of equity withdrawal, fuelling consumer price rises.

House price rises are largely to do with property speculation. While interest rates can curb house prices to a degree, they are a blunt tool in that they also affect other lending and borrowing. High interest rates would, for example, reduce investment. One means of curbing property speculation without harming investment would be to introduce land value taxation, which economists recognise is among the least distortionary form of taxation. Sadly, the Government has shown no willingness to investigate this option.

2. Public spending

A grotesque rise in public spending over the past five years has increased inflation. A particularly egregious example has been overly-generous public sector pay rises that bear no relation to productivity gains.

3. Public borrowing

The Pre-Budget Report forecasts net debt at the end of March 2007 of £503.9 billion. This budgetary imprudence has injected massive liquidity into the public sector and the economy more widely. Effectively, more money is chasing the same number of goods.

4. Taxes

In the pre-budget report the Government added 1.5p/litre to petrol duty. This has been the major factor in the 2p rise in the cost of a litre of petrol, which in turn accounts for two-thirds of the rise in CPI last month.

5. Trade barriers

Cheap imports of goods from emerging Asian manufacturers has applied downward pressure on prices, particularly in clothing and electrical goods. Sadly, the Government and the European Commission (led by Trade Commissioner Peter Peter Mandelson) have imposed additional and ongoing quotas on Chinese textile imports. This is in breach of our commitments under the World Trade Organisation. The result is that customers have been forced to purchase more expensive European products, pushing up retail prices.

6. Immigration

The low inflation enjoyed by the UK over the past two years has been in part due to immigration. As my colleague, David, pointed out a couple of weeks ago, the availability of highly skilled Eastern European workers has kept wage demands within sensible limits. Sadly, the Government has decided not to take advantage of another wave of immigration from Romania and Bulgaria, instead imposing a daft and distortionary quota system. This has removed a further buffer against inflation.

As you will see from the above factors, there is a clear single cause of inflation. Sadly, it is beyond my authority to do anything about it. I think it’s over to you, old chap.

I remain your humble servant,

Mervyn.