cherrypieShould we always take the side of the individual consumer?

That’s the question Rod Dreher asks in a recent post on “Amazon and the Cost of Consumerism.” It’s a good question, one that people have been asking for centuries. The best answer that has been provided—as is usually the case when it comes to economic questions—was provided by the nineteenth-century French journalist Frédéric Bastiat.

Bastiat argues, rather brilliantly, that,

consumption is the great end and purpose of political economy; that good and evil, morality and immorality, harmony and discord, everything finds its meaning in the consumer, for he represents mankind.

He summarizes his argument as follows:

There is a fundamental antagonism between the seller and the buyer.

The former wants the goods on the market to be scarce, in short supply, and expensive.

The latter wants them abundant, in plentiful supply, and cheap.

Our laws, which should at least be neutral, take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance.

They operate, if not intentionally, at least logically, on the assumption that a nation is rich when it is lacking in everything.

Bastiat uses this as the basis of his argument that the interests of the consumer, rather than the producer, align more closely with the interests of mankind (see addendum below for more on this reasoning). Producers want scarcity since it increases their profits. If they can’t produce scarcity in the market, they’ll seek out government protections that create artificial scarcity (which is why those who are pro-business are rarely pro-market).

Book publishers don’t like the fact that Amazon is reducing the scarcity of their product, because it lowers the cost. But what is the result from the consumer side? The lower prices allow consumers to consume more books than they otherwise would be able to afford.

For example, last week I was able to buy 40 new e-books for $1.99 a piece. The store I bought them from noted that I had “saved” $570 dollars, but that’s not exactly true. If the books hadn’t been available at a deep discount I wouldn’t have “saved” anything since I would not have been able to afford to buy them all.

You could say there had already been an “abundance” of books, since they were already available published, and thus available. But by making them cheaper, more people were able to afford them, thus increasing the total amount of satisfaction in the world (even among the authors and book publishers themselves, who are now able to get books cheaper too).

Of course this makes sense when the consumer/producer are in the same country. What about when the producer is a foreign country, one that subsidizes its products for export? Dreher gives the example of a furniture maker struggling to stay alive in the face of Chinese competition, and adds:

The cost of all this cheap Chinese furniture includes closed American factories, dying American towns, and hundreds of thousands of good American jobs. The thing is, the Chinese did not operate under fair trade rules. You can’t say, “Well, that’s the free market.” What free market? Chinese manufacturers operating with government subsidies designed to destroy the US furniture industry?

That’s one way to look at the situation. Another would be to wish China would provide even more government subsidies for other products since they are benefitting American consumers even more than Chinese producers. As one economist said, “Do you like free stuff? Then you should like low cost stuff since it’s close to free.” Cheap quality imports are (overall) a blessing to our nation, not a curse we should try to prevent.

And that is the hear of the problem with viewing the “problem” primarily from the point of the producer, rather than the consumer. This isn’t new, of course, and the same concerns were raised in Bastiat’s day. As Bastiat says,

Do we not hear it said every day: “Foreigners are going to flood us with their products”? Thus, people fear abundance.

How is fearing a flood of cheap Chinese imports a fear of abundance? Let’s look at a simplified example to show why “abundance” subsidized by foolish foreign governments makes our citizens better off.

Imagine that a nice lady named Martha sells cherry pies for a dollar a slice in her hometown of Lake Charles, Louisiana. Martha makes excellent pies and so people gladly pay her asking price. But then one day a salesman from Orange, Texas offers to sell the townsfolk cherry pies for 10 cents a pie. Not only are the pies as good as Martha’s, they may even be better. Compared to the price you could pay for a whole pie baked by Martha ($4 = 4 slices at $1 each), these pies are essentially free.

Martha protests to her city government and asks them to investigate. City officials travel to Orange and discover that the local government there is heavily subsidizing the local baker, a woman named Mary. While Mary’s cost of making a pie is almost the same as it is for Martha, the government pays a lot of her costs (she’s related to the mayor) so that she can “flood the market” of Lake Charles with cheap pastry.

What should the Lake Charles officials do? Should they ban the subsidized pies coming in from Texas?

No, they shouldn’t — at least not unless they want to punish their own citizens.

Look closely and you’ll see what is really happening: The people of Orange, Texas are paying so that the people of Lake Charles can have cheap (almost free) cherry pie. In essence, the citizens of Orange aren’t just subsidizing Mary, they’re subsidizing the pie-eaters of Lake Charles. Why would we want to stop such unintended generosity?

But what about Martha, you ask? Isn’t she being harmed since she can’t compete against Mary? Well, yes she is and it’s certainly unfortunate. But that doesn’t mean we should make everyone else in Lake Charles worse off just to provide economic protection for Martha.

Martha likes baking pies, but she isn’t doing it for charity. She is able to charge for them because her baking skills were used to fill a previously unmet demand for the pie-loving citizens of Lake Charles. Initially, it was a mutually beneficial arrangement for everyone. Martha could earn a living selling pies and pie-eaters could (whenever they had an extra $1) consume a slice of their preferred pastry.

But now that the Texas pies are available, everyone in Lake Charles (including to some degree, Martha, assuming she too likes pie) are better off than they were before. In fact, if you stop the imported pies from Texas you benefit Martha at the expense of all the other citizens of Lake Charles. You are doing to the citizens of Lake Charles what the Mary and Orange, Texas are doing to Martha.

What is overlooked in the focus on Mary and Martha (the producers) is the people who now benefit from the cheaper pies (the consumers). Consider Tom and Nancy, the parents of 9 children. Because of their low-income, they were only able to afford to buy a single slice of Martha’s pie for one of their children on the kid’s birthday (while the other kids looked on enviously). Now, though, with a single dollar bill Tom and Nancy are able to buy enough of Mary’s (subsidized) pies so that they and all of the kids can enjoy a slice together (thanks largely to the people of Orange, Texas who are paying the true cost of the pie).

For Tom, Nancy, and other pie eaters, pie is a utility, a good that satisfies a human desire. From Martha’s perspective, though, the pie is merely a value, a way to make money. The desires of the consumer should therefore determine what the producer produces.

Of course that puts the onus on the consumer to desire the right things. Or as Bastiat says,

Religion understood this perfectly when it severely admonished the rich man—the great consumer—in regard to his tremendous responsibility. From a different point of view and in different language political economy arrives at the same conclusion. It affirms that we cannot prevent supplying what is demanded; that the product for the producer is merely a value, a kind of currency, which no more represents evil than good, whereas in the mind of the consumer it is utility, an enjoyment that is either moral or immoral; that, therefore, it behooves the one who voices the desire and makes the demand to accept the consequences, whether beneficial or disastrous, and to answer before the justice of God, as before the opinion of mankind, for the good or evil end to which he has directed the labor of his fellow men.

The solution to the pie problem, I suspect Bastiat would say, is not to make everyone else suffer so that a single producer can benefit. The solution would be  for Mary to start using her skills to fill some currently unmet need of consumers. Now that the pie market is covered, Mary could start making cakes. Then we could have an abundance of cherry pie and the option of chocolate cake too.

And you don’t have to be an economist to know that a world with more pie and more cake is a world where everyone is better off.

Addendum:

1. “Man produces in order to consume. He is at once both producer and consumer.”— There are not separate classes of people, one group that only produces goods and services and one group that only consumes them. We all belong to both groups at the same time. When we say that we are benefiting consumers over producers we are essentially saying that we are benefitting one aspect of ourselves over another aspect.

2. “The consumer becomes richer in proportion as he buys everything more cheaply; he buys things more cheaply in proportion as they are abundant; hence, abundance enriches him; and this argument, extended to all consumers, would lead to the theory of abundance! ” [emphasis in original] – If the average salary in a country is $2 a day and the cost of daily bread is $2, the worker will be exceedingly poor since they can only consume their wages. But what would happen if, because of competition or innovation, the price of daily bread dropped to 50 cents? Would we say that the government should step in to raise the price to protect the unfortunate bakers? No, at least we shouldn’t. We should be grateful that the average works has become richer since he can not consume more (and that is — see #1 — the reason he works).

3. “As sellers, we are interested in high prices, and, consequently, in scarcity; as buyers, we are interested in low prices, or, what amounts to the same thing, in an abundance of goods. We cannot, then, base our argument on one or the other of these two aspects of self-interest without determining beforehand which of the two coincides with and is identifiable with the general and permanent interest of the human race.” [emphasis in original] — As we saw in #2, lowering of prices makes an abundance of goods available since we have more money to spend on other items. But that lowering of prices also affects the producer. Whose side should we take? Bastiat will argue that we should take the side that does the most benefit for the human race.

4. Producers want two things: “that the supply [of their goods or services] be very limited, and the demand very extensive; in still other terms: limited competition, and unlimited market.” The consumer wants two very different things: “That the supply of the product he wants be extensive, and the demand limited [since it will be available for a lower cost].” To know which side we should favor (the side that most benefits mankind) we have to “discover what would happen if the secret desires of men were fulfilled.” Bastiat provides several examples to show that the interest of the producer are necessarily “anti-social” since they want to benefit themselves at the expense of society. “It follows that, if the secret wishes of each producer were realized, the world would speedily retrogress toward barbarism.”

5. “If we now turn to consider the immediate self-interest of the consumer, we shall find that it is in perfect harmony with the general interest, i.e., with what the well-being of mankind requires.”

6. “Men’s desires as consumers are the ones that are in harmony with the public interest, and it cannot be otherwise.”

Economics in Christian Perspective: Theory, Policy and Life Choices

Economics in Christian Perspective: Theory, Policy and Life Choices

There is considerable debate in the public square these days about a number of issues that have significant economic components. Globalization, environmental protection, and aiding the poor are just a few. Decisions we make in our personal lives are influenced by our assumptions about economic realities as well. So how might mainstream economics connect with Christian values and principles?

$16.00