Tuesday, 26 April 2011

Third Rejoinder to Eerlijke Handel on Fair Trade or Free Trade

This is part of an ongoing debate between myself and Eerlijke Handel which started with my post Fair Trade or Free Trade: An Economic Analysis.  This post is a direct response to this post by Eerlijke.

Eerlijke, this reply is in three parts. The first part is about things that I thought we had already agreed upon, but which your latest post appears to call back into question, so I am attempting to understand more what your position is to try to find common ground. The second part is a brief response to your three direct questions. The third part is where I try to move the discussion forward.

1 a) I thought we had agreed that direct charities are more efficient than Fairtrade at getting money into the hands of poor people. You previously said:

I agree that consumers cutting back on their donations to Oxfam (and not donating to another charity, all else equal) is not a good thing for poor people
But now you say:
The conclusion you reach is:
“Fairtrade products will tend to lower the overall amount of charity that is delivered, all other things (i.e. the total amount of charity) being equal.”
You base this conclusion on “research” that says that 70%-95% of charity money reaches the desired recipients.

There must be very few if no companies that can make 70%-95% of their returns end up with poor people.
Your critique rests wholly on the claim that just 10% reaches the recipient. …

I hope that your claim rests on more “research” or a more extensive study by Harford.
So are you now questioning the magnitude of these figures? Are you claiming that the Fairtrade recipient receives a higher percentage than the Oxfam recipient? (The source for my 70-95% claim, by the way, is a quick survey of large charities on charitynavigator.org). Please make your case if so, because I would like to hear it.

b) Also, I thought we had reached agreement that voluntary trades are never extortion or slavery, because both sides consent and are exchanging because they expect to benefit. Yet you now say:
The Laborers and/or their children could be subject to the following demand: you work longer for less pay, or we will take away your job. (And I am not yet talking about exposure to physically dangerous situations, toxic materials, sleep deprivation, other unwanted situations, etc.) The Laborer sees that people who do not have a job starve to death and has no choice but to comply with all requirements. Whether or not you define this as coercion, does not matter, it happened, happens and has been reported as slavery, extortion, prostitution, forced labor, etc.
Of course, the employer could just walk away, so he is literally saving the laborer from starving to death by offering him a job at all, and yet you call him an extorter and a slave-master?!! I don’t even know why you brought this up again.

I thought we had agreed that coercion is very easily definable – it is where only one party to the trade consents, i.e. it is where there is a threat of violence involved – so we can leave coercion, slavery, etc, out of the discussion. We are only talking about the kinds of trade where both parties consent to the trade, i.e. free trades.

The unequal bargaining position of the two parties (one party without options and the other with many options) and The Company doing all to keep costs down to the absolute minimum, will tend to make this trade end on the very right side of the spectrum.
I don’t know what you mean by “very right side of the spectrum”, but this unequal bargaining position idea is a red herring. The market routinely solves or reduces problems relating to unequal bargaining power: for example, the forming of trade associations. This has no bearing on the Fairtrade argument at all. What I would say is that if “The Company” is able to bargain for itself a “great deal” and get very low cost labor, this would simply signal to other companies that they can get cheap labor too by just outbidding the first company. And so wages would be bid up through competition, and soon laborers will have plenty of options available to them and any issues with unequal bargaining power simply dissolve. If anything, it is more risky to make the producers dependent on Fairtrade income, as you propose, than to simply let this market process take place.

I do not even have to mention that the donation money (because it is not linked to trade) can be taken away at will, without warning, further damaging the already unequal position of The Laborer.
Why do you “not even have to mention” this? You have mentioned it, and your point is invalid. Fairtrade can give no firmer guarantees than any other purchaser, or any charity for that matter. There are no absolute guarantees in this world. What if consumers stop demanding Fairtrade? What if consumers stop demanding coffee or chocolate entirely? Then the farmers are screwed whether or not they have a “guarantee” from Fairtrade. Again, there is nothing special about Fairtrade here, and to assume otherwise is to violate ceteris paribus.

Fairtrade STRUCTURALLY improves the (negotiation) position of the people with whom it is working. Calling on its suppliers to take matters into their own hands, to earn their way out of poverty, by stimulating entrepreneurship, by having them take ownership of their situation and be responsible for their destiny, making investment decisions first then building capacity that moves more of the “value added” towards them and by helping them to rely on Trade, rather than (arbitrary and incidental) Aid.
It is free trade in general that does all these good things, and the free market process works most effectively when consumers buy without regard to the conditions under which the products they buy have been produced. Fairtrade directs investment away from the neediest areas and towards less-needy areas, as I argued in my original post. If you want to argue against this, please address my argument about the changed incentives for entrepreneurs, as outlined in that original post.


2. I just want to respond to your questions quickly, and then I will try to move the discussion forward.
4. Your “opinion, using the definitions” or Science?
The following opinions I think are very important with respect to your critique:
1. “SO in my opinion, using these definitions, such a person buying Fairtrade products IS making a charitable donation with part of the money he pays.”[Capitals yours, not mine].

As an economist, scientist or educator it should be easy for you to backup or check the validity of an Opinion.

Why do we have to rely on “Opinion” for such an important issue in your critique?
Do you have research whether people buying Fairtrade products really see this as a donation?
A simple questionnaire might lead to significant results about what consumers say they think when they act and why?
You’ve again misunderstood the whole point of my critique I think. Note my words “such a person”, by which I was referring to a person buying Fairtrade because he thinks it is an effective means of helping poor people. If you can show me that absolutely no-one buys Fairtrade thinking “hmm… I’ll buy this Fairtrade chocolate bar so that I can help poor people, rather than this non-Fairtrade chocolate bar” then my argument is not wrong, but merely irrelevant. The starting point for my whole critique is the common perception (and I believe it is common; I know a few people who hold this view) that buying Fairtrade is an effective means of helping poor people. As you noticed early on, without this starting point, my whole argument is no different to an argument against celebrity-branded products, for example. It would be a relatively pointless criticism of people’s values or ends. But my starting point here makes my criticism much more important and different in kind: I am NOT criticising people’s ends but people’s choices of means to satisfy their end of helping poor people.

So my criticism only applies to the extent that people view Fairtrade as a means to helping the poor. If you view Fairtrade products as an end in and of itself, then my critique simply does not apply to you. But you have made it clear that you DO see Fairtrade as an effective means for helping the poor, so my critique does apply to you, at least. I hope this makes sense.

5. Your economic reasoning sounds like an accountant counting certain costs, rather than an entrepreneur seeking uncertain profits
Hmm… perhaps you have got this impression because I use the Austrian economic method of ceteris paribus. I am looking at costs because the nature of Fairtrade is that it increases production costs; the producers get paid more. I am keeping everything else constant, which is the standard mode of analysis for economics (at least Austrian economics, that is). I don’t see how anything you’ve written below this heading addresses what I’ve said, and I do not see a question there.

6. What is the definition of “Standard of living”?
There is nothing controversial about my definition of standard of living. It is subjectively determined by each person, of course. As a formal statement, we can say people act to increase their standard of living relative to what it would have been had they not acted, or made a different choice. Taking choices away from people necessarily lowers their standard of living.
You make it sound as if The Rich Consumer in the West is giving something up. Doing something to lower their “Standard of living”, whatever that may be.
They are necessarily giving something up. This is a logical necessity. See below.


3. You did not respond to any part of the scenario I presented involving SimpleChoc and FairChoc, which was unfortunate because if we focus on that, perhaps we can move the discussion forward and not get bogged down in definitions. So let me re-state the point of that whole scenario and ask you a more direct question…

However we want to label certain kinds of trades, I think we can agree on one thing: all possible ways for me to spend my income compete with all other possible ways. If I want to spend my money on one thing, it means I cannot spend that same money elsewhere. Agreed?

To make this really simple, as a Fairtrade advocate, I would like you to try and convince me personally to start buying Fairtrade chocolate. In my local store, there is a Fairtrade chocolate bar and it is slightly more expensive than a non-Fairtrade brand. I have tried the Fairtrade bar and it tastes the same to me. So because the non-Fairtrade brand is slightly cheaper, I always buy that.

So you think I should buy Fairtrade chocolate? Then my question to you is: where will I find the money to pay for it? Logically I must spend less elsewhere if I am to start buying Fairtrade chocolate. Do you agree? Perhaps you can make a suggestion for where I might reduce my spending, and we can go from there…


Sunday, 17 April 2011

Second Rejoinder to Eerlijke Handel on Fair Trade and Free Trade

This post is a response to Eerlijke Handel’s posts here and here, which are part of an ongoing debate about my original post Fair Trade or Free Trade: An Economic Analysis.  Eerlijke’s words are indented and in italics and my responses follow them.

I understand you value definitions.
Yes. Clear and mutually understood definitions are essential for constructive debates. I’m sure you agree.

One important distinction you are failing to make is between Fairtrade (the organization) and fair trade (the concept). You seem to use the terms interchangeably and this makes it unclear what you are saying.

Using your definition: Fairtrade is voluntary, and therefore free trade.

The organization Fairtrade is certainly one that engages only in voluntary, free trade. But I think what you meant to say was “fair trade” (the concept).

The concept fair trade is, as I explained in my original post, an arbitrary label used by a third-party about certain trades. Here it is in diagram form:

[Some people might refer to coerced trades as unfair as well (hence the dashed line), but we may disregard that in this debate. We can leave coerced trades out of our discussion from now on, because neither of us is talking about using coercion.]

So for our purposes, yes, fair trade and unfair trade are both arbitrary labels used by third-parties about certain free trades.

Since you managed to single out Fairtrade from free trade, your statetement rests on two assumptions:
1. Your introduction of the concept “charitable donation”, and
Ad 1:
A donation is a gift, something that is given to a charity, especially a sum of money. It differs from a trade by lack of reciprocal action.
Fairtrade is not a donation, it is an exchange, a way of doing business.
Fairtrade is a form of free trade. Unless you prove that I am coerced to (pay for and) buy fair trade products.
I accept your definition of a gift as characterized by the lack of reciprocal action. A charitable donation is just a kind of gift, namely a sum of money given away with the intention that that money reaches a specific recipient in need of assistance (in this case a poor person overseas) chosen by the gift-giver / donator.

In diagram form:

Note that gifts are a form of trade. The distinction between reciprocated actions and gifts is actually quite blurry. If I buy a round of drinks at a pub, it is a gift for sure, but then I kind of expect the people I’m buying for to buy me a drink in future, so is it really a gift? If I give my wife a present, I at least expect her to say thanks. There is certainly a grey area here, but the distinction is still meaningful. The important thing is that the term trade transcends this distinction, referring to all interpersonal exchanges, including gifts.

Fairtrade is an organization that markets itself on the basis that it is an effective way of helping poor people, namely third-world producers. I believe that many people when they buy Fairtrade products do so because they believe that buying Fairtrade products actually is an effective way of helping poor people and alleviating poverty. This belief is the “target” of my critique, as it were. It is the idea that Fairtrade is an effective way of alleviating poverty that I am criticizing; I am arguing that there are more effective means of doing this.

So in my opinion, using these definitions, such a person buying Fairtrade products IS making a charitable donation with part of the money he pays. He is paying extra because he believes the extra will reach or benefit in some way a chosen needy recipient: a poor third-world producer.

But let’s not let labels get in the way of the ideas we are discussing. I’ll come to a concrete example in a moment.
2. Fairtrade products will tend to lower the overall amount of charity that is delivered, all other things (i.e. the total amount of charity) being equal.
This is a conclusion, not an assumption. It is a conclusion based on economic logic and empirical evidence (according to the research cited in my original post, 75-90% of direct charity money reaches the desired recipients, while only 10% of Fairtrade extra money reaches the desired recipients).

You basically split the world in three parts: (1) Free trade, (2) Fairtrade and (3) Donations and then lump the latter two together. But according to the definition: Fairtrade (voluntary and reciprocal) should be put under Free trade.

If I view the world through your model:

Free Trade + Donations = Spending Power.

If we introduce a third component, we can either make it a part of Free Trade or a part of Donations.
Where you put it matters everything!
By definition Fairtrade should be put under Free Trade.
If Fairtrade competes with other forms of Free Trade, Donations stay the same (all else equal off course).

If that is the case: Free Trade should be split into: unfair trade + Fairtrade.

Free Trade= unfair trade + Fairtrade
I know you don’t like the wording, but something must give.
Then unfair trade must become less, the more people buy Fairtrade

So my argument runs as follows:
By definition Fairtrade is part of Free Trade, and the logical argument says that unfair trade must become less, the more people buy Fairtrade.
I’m afraid none of this makes sense to me. I hope you can see why from my definitions and diagrams above.

With respect to the definition “unfair” versus “fair”, I come back to the discussion we had about branding. The intent of the consumers is to buy something that they perceive to have more value than they pay for. The consumer perceives value for whatever (individual) reason. Generally a complex set of needs on which whole studies have been written.
Whatever consumers value, we are not the judge of that. Our opinion is, I quote: “arbitrary and subjective … it differs from person to person, place to place, and time to time”. Consumers weigh their individual (subjective) needs when making a purchase decision.
Every consumer can be their own judge about what they call “unfair” or “fair”.
I agree with all this. Note that what I am criticizing is not people’s choice of ends, but their choice of means.

It will be clear that I hope they choose for “fair”. Why?
Because I think that Fairtrade through long term commitment does help producers to make longer term decisions, that they would otherwise be unable to make. Simply by allowing them to see future revenues and accordingly make (capital) investments. The only way to climb the ladder, out of poverty towards wealth.
"Long-term commitment”? There is nothing in terms of “commitment” that Fairtrade can offer that other firms cannot. My original post explained how capital investment reaches the poorest people and communities more effectively when consumers make decisions without regard to the conditions under which laborers have worked to produce the goods. Nothing you have said challenges this economic conclusion.

My quick question to you in the comments of your post was an attempt to bring things back to a basic concrete example. I found your answer very interesting, and realized I had been taking some things for granted in my explanation.

"Eerlijke, do you agree that if someone switches to buying Fairtrade products, they have to pay more for them; and that if they cut back on their payments to Oxfam charity to be able to afford Fairtrade products, then less money overall will be delivered to poor people [due to the inefficiency of Fairtrade money reaching the poorest people, relative to Oxfam money]?"

Graham, good question. My answer is somewhat long, but I hope it answers your question.

I wonder: "pay more than what"? From where does your consumer switch?
Do they switch to Fairtrade from an identical unbranded product? Or do they switch from another branded product? It matters.

The consumer does not necessarily pay more. You must agree with me that there are many chocolate bars much more expensive than Fairtrade chocolate. They demand a premium because of the perceived brand value.
The consumer does necessarily pay more for Fairtrade products, than for equivalent products, assuming Fairtrade certification makes any difference at all to production processes. Let me explain this in some detail…

Consider two chocolate bars: SimpleChoc and FairChoc. In economics, we keep things constant to isolate individual effects (this is called the principle of ceteris paribus), so let us assume that these two chocolate bars taste, smell and look identical and are the same in every way except one: FairChoc has been produced according to the standards laid out by the Fairtrade organization.

All firms seek to minimize costs. The SimpleChoc Company does everything it can to keep all its costs down to the absolute minimum. But FairChoc, in response to a consumer fad for “fair trade” products, has chosen to incur extra costs by bringing its production facilities up to the standard required to get Fairtrade certified. In every other way, the production processes of the two firms are identical. (Otherwise we violate ceteris paribus). This one difference we have supposed necessarily makes FairChoc more costly to produce, because SimpleChoc by definition has found the least costly way of producing, so if Fairtrade certification makes any difference at all, it must increase production costs. Competition impels prices towards costs, ever-tending to eliminate economic profit, so it follows that FairChoc is necessarily more expensive than SimpleChoc.

The Fairtrade organization asserts that SimpleChoc treats its workers “unfairly”, using some arbitrary criteria for “fairness”. They try to convince consumers to buy FairChoc instead of SimpleChoc, on the basis that by doing so they will be helping to alleviate poverty. Since FairChoc is more expensive than SimpleChoc, this necessarily involves asking consumers to cut back on the amount they spend somewhere else.

Now let us consider some examples of where these cut backs may come from.

1. Adam buys SimpleChoc and decides to switch to FairChoc. To pay for this he will cut back his monthly donation to Oxfam. So here the Fairtrade advocates’ message to Adam amounts to “(1) stop helping the beneficiaries of Oxfam and (2) instead help the beneficiaries of Fairtrade”. I am glad we agree this would be counterproductive in terms of helping poor people.

2. Ben buys SimpleChoc and decides to switch to FairChoc. To pay for this he will cut back his spending on ice cream. So here the Fairtrade advocates’ message to Ben amounts to “(1) give up ice cream and (2) instead buy Fairtrade products to help the poor”.

3. Now consider LuxuryChoc, a high-quality brand of chocolate which is more expensive to produce than SimpleChoc. For simplicity, suppose LuxuryChoc is priced the same as FairChoc. Charlie buys LuxuryChoc and decides to switch to FairChoc. Since they are priced the same, the Fairtrade advocates’ message to Charlie amounts to “(1) give up high quality chocolate and (2) instead buy Fairtrade products to help the poor”.

In both Ben and Charlie’s case, you are asking them to lower their standard of living in order to help poor people. This is all well and good. But the question then arises: if Ben and Charlie have agreed to lower their standard of living, why not encourage them to give their saving to a direct charity, which is more efficient than Fairtrade? Ben should keep buying SimpleChoc, and if he wants to cut back his spending on ice cream, he should give his saving to Oxfam. If Charlie agrees to buy a lower quality chocolate, he should buy SimpleChoc, and give the money saved to Oxfam. This will be more effective for helping poor people.

4. Now consider TigerChoc. This chocolate is the same quality as SimpleChoc and FairChoc. It is produced using the same low cost methods as SimpleChoc, but the difference is that this chocolate is endorsed by Tiger Woods. Now obviously Tiger’s payment will mean TigerChoc has higher costs of production than SimpleChoc, so it will be priced higher. Again for simplicity, suppose TigerChoc is priced the same as FairChoc. Daniel buys TigerChoc and decides to switch to FairChoc. Since they are priced the same, the Fairtrade advocates’ message to Daniel is “(1) stop buying celebrity-branded products and (2) instead buy Fairtrade products to help the poor”.

Here you could argue that Daniel’s standard of living is not being lowered. But this would, strictly-speaking, be incorrect, because value is all subjective and revealed through action. Daniel must value the Tiger brand name (for some reason) so in fact it is lowering his standard of living if he gives this up. It is in essence no different from the Charlie case, except that Charlie’s decision to buy LuxuryChoc was based on “taste” and Daniel’s decision to buy TigerChoc was based on “coolness”. If Daniel agrees to give up this “coolness”, that is all well and good. But then he should buy not FairChoc but SimpleChoc instead and give the saved money to Oxfam. This will be more effective for helping poor people.

In short, Fairtrade certification imposes costs on producers, and therefore, ceteris paribus, Fairtrade products have a higher price than equivalent non-Fairtrade products. For a consumer to start buying Fairtrade products, he must cut back either on his direct charity donations (we agree this is bad), or by reducing his standard of living (whether this means cutting back on ice cream, eating lower quality chocolate, or giving up the coolness of celebrity-branded products, etc).

So given that you reject cutting back on charitable donations to pay for Fairtrade, you must recognize that you are asking people to reduce their standard of living in some way in order to help poor people. There’s nothing wrong with this, and in fact I support it. People should be more charitable in my opinion, and I would especially like it if people stopped valuing celebrity-branded products so much.

But this first part of the Fairtrade advocates’ message has nothing to do with Fairtrade per se. It is about persuading people to spend more money in general on helping poor people rather than spending it on themselves. I wholly support efforts to persuade people to be more generous.

The second part of the message is to take the money saved by reducing your standard of living and use it to buy Fairtrade products to help the poor. It is this part that I object to. Why not give the money saved to Oxfam? If you have successfully persuaded someone to reduce their standard of living in order to help poor people, then the money saved would in all cases be better spent by giving it directly to charity. When helping poor people is the desired end, there is simply no good argument for anyone to buy Fairtrade products as a means to achieving this, rather than donating to a charity that directly helps the poor.

Wednesday, 6 April 2011

Rejoinder to Eerlijke Handel on Fair Trade or Free Trade

This is a rejoinder to Eerlijke Handel's response to my post Fair Trade or Free Trade: An Economic Analysis.


Thank you for your thoughtful questions.  Following your style, your questions are in italics and my responses are beneath them.

What is your definition of coerced?

It is where one party does not consent voluntarily; the trade only takes place because of a threat of violence. For example, if I say “I’ll give you $10 for your tie... take it your leave it” and you agree to these terms, then it is a voluntary trade. If I say “I’ll give you $10 for your tie... or else I will stab you” then it is not a voluntary trade. You might hand over the tie, but only because of the threat of violence, so it is a coerced trade.

Is taking away the only option, the right to food (the only energy input that gives us more time and options) coercion?

There is no “right to food”, per se. Everyone has the right to be free from being coerced by others. This is called the Non-Aggression Principle (NAP) which is the basis of libertarianism. If one person literally has a “right to food” this would mean that someone else has a duty to provide him with food, and this would be a violation of the NAP: coercion against the person providing food. No matter how important food is, no one has the right to initiate coercion to get it.

What is the difference with slavery?

Slavery is a relationship between two individuals, characterized by one individual (the slave-master) continually initiating coercive trades with another individual (the slave). The most common example of a master-slave relationship is that between governments and taxpayers. People only pay taxes because the government threatens them with prison if they don’t pay, so it is clearly a coercive exchange.

Do you believe that an unequal position of power (options) might lead to misuse of power and abuse?

I am a libertarian and hence I oppose all initiations of coercion, especially those that are continual, i.e. master-slave relationships. This means I oppose all taxation and all government regulations, price controls, prohibitions, etc. Abuse of power is what governments and privileged firms do.  If no one is allowed to initiate coercion, no one has any real "power" over anyone else; everyone is only allowed to trade on a voluntary basis.  All governmental actions are abuse of power, because that power is illegitimate.

And how does this differ from your position on monopolies?

The only coherent definition of monopoly is the definition used by economists of the Austrian School, which is: a grant of legal privilege from a government to an individual or firm to be the sole producer of a certain good or service. If a firm has a monopoly, that means the government will initiate coercion on it’s behalf against any other firm that emerges to compete with it. My opposition to initiations of coercion implies that I am opposed to all monopolies, using this Austrian definition.

Do you share my view that a free trade between equal parties is fair, a trade between two parties where one has no other options cannot be called free, nor fair?

Not exactly. Trade with no underlying threat of violence is free by definition, regardless of how “equal” the two parties are, in terms of bargaining power. Whether any given trade is fair is an arbitrary and subjective opinion of a third-party. A trade being free implies that the parties to the trade think it is fair, because it does not make sense to say that a person would voluntarily agree to an exchange he thought was unfair.

If one party has “no other options” because there is an underlying threat of violence, then it is clearly not free or fair. Like if I say “work in my factory… or else I’ll kill you” that’s not free or fair. But if I say “work in my factory… if you want”, even if you will die (maybe from starvation) if you don’t make the trade, then it is both free and fair, because it’s voluntary, and is actually a life-saving trade. And if I decide to close my factory, that is up to me, and not unfair. It is unfortunate for my employees, but I am not treating them unfairly. What would be unfair is if someone threatened me with violence to coerce me into keeping my factory open. But in general, I see no use for the terms fair and unfair when discussing trades; the most important distinction here is between free (voluntary) and unfree (coerced).

In what way is the premium different from the premium that a branded product carries over an identical unbranded product? Do you characterize branding as a charitable donation to the owner of the brand?

Great question. You are right that the economic effects of buying Fairtrade products are similar to the economic effects of paying extra for a product because Tiger Woods promotes it. If one shoe costs $30 and an otherwise identical shoe which Tiger has endorsed costs $50, then yes, the $20 difference could be considered charity. At least, the economic effects would be the same; we would all better off if everyone bought the cheaper shoe rather than paying extra for the brand.

However, I would not call that charity. The person buying the $50 shoes does not do so because they want to make a donation to Tiger. If someone argued that I should buy Tiger Woods’ brand of shoes because it will help Tiger, I would point out that I could help Tiger more by buying the cheaper shoes and directly sending $20 to him. So in essence it’s the same thing, but the intent of the consumer is different. People generally buy expensive shoes because they think they’re “cool”, but people generally buy Fairtrade because they think by doing so they are helping poor people.

I hope the above answers the rest of your questions about branding as well. Just to be clear: I am not suggesting using violence (like a government law) to prevent Fairtrade from operating or people from buying whatever they want. I am merely pointing out that it doesn’t achieve the goal of helping poor people in the way that people think it does when they decide to buy Fairtrade.

Does free trade compete with fair trade and donations?... Why do you only single out one part of the whole as being equal?

This is a technique often used in economics (actually all science). To analyze the effects of something, we keep everything else constant then just consider what the differences are in the effects. Suppose someone earns $500 a month, spends $300 on consumption (living costs), saves $150 a month, and donates $50 per month to Oxfam. Now suppose this person becomes convinced that buying Fairtrade products is a good idea because it helps poor people. The extra cost of buying Fairtrade products is $30 a month, say. This person must decide how they are going to pay for this. They could either: 1) decrease their savings by $30, 2) decrease their consumption by $30, or 3) decrease their Oxfam donation by $30 (or some combination of these).

If he goes with (3), the total amount of charity has not changed, but it is now being delivered less efficiently, because Oxfam is more efficient than Fairtrade. If he goes with either (1) or (2) then he has decided to change other preferences: either his savings rate, or his standard of living. In economics, we keep these things constant because we are trying to isolate the effects of deciding to buy Fairtrade products. If Fairtrade advocates are able to persuade someone to save less, or decrease their standard of living, so that they give more to charity, then all well and good. But then if they’ve made that decision, why not give that extra charity money to Oxfam or some other direct charity?

Do the Ethiopians suffer if Nike produces in Mexico?

Yes, if Nike decided to build their factory in Mexico instead of Ethiopia. If Nike has to pay the same wages in both countries because consumers want Fairtrade certified goods, the incentive to invest in Ethiopia is removed. On the other hand, if consumers bought without consideration for factory workers’ wages, Nike would be more attracted to Ethiopia, because it will be able to employ Ethiopians cheaper than it can employ Mexicans. Thus the virtuous effect of competition will direct investment into Ethiopia, raise wage rates, and bring them out of poverty.

"Landowners and capitalists benefit more than workers in most cases." Can you explain why this is?

This is actually a result of the particular limitations of the Fairtrade organization. While many of the requirements for Fairtrade certification are strictly enforced, minimum pay for workers is often not enforced, and in these cases the landowners benefit more than the workers. To read more about this, see Colleen Berndt: Is Fair Trade in Coffee Production Fair and Useful?

Note that I have since removed this paragraph from my post, because it is quite out of place: it is the only ill-effect I mention that is due to the particular limitaions of Fairtrade, rather than general principle of Fair Trade.

The theory is sound, but do you know how much of our trade is really free

Yes: not much of it unfortunately! Theft, robbery, fraud, etc are widespread. The biggest perpetrators are not common criminals or even organized gangs like the mafia: the biggest gang of thieves is the government.

do you know about our cotton and ethanol industries.

A little. Those industries are heavily intervened with by governments, with regulations, subsidies, quotas, etc. Shame that they are not free.

Do you know how NASA and the military is funded, do you know about the business spin-offs from that?

By taxation. And the military-space-industrial complex is an abomination, full of corruption, as industries run by governments tend to be. Naturally I support the voluntary funding of security and space exploration firms.

What is your view on “wealth begets wealth” and first-mover-advantage?

The only ways for an individual to get rich are 1) to produce something of value to sell, or 2) to steal using threats of violence. So in a free market - where (2) is not allowed - the only way to gain wealth is to add value and by doing so, enrich others as well as yourself. The advantages of being a “first-mover” incentivize and reward innovation, alertness and risk-taking. But as soon as competitors emerge, the only way to keep the wealth coming in is to continue to innovate and be more efficient than your competitors. So wealth doesn’t beget wealth: successful entrepreneurship begets wealth.

Does fair competition require a level playing field?

It only requires government to get out of the way.

How do you deal with option-poor-people?

Give them more options: remove governmental restrictions, and donate to direct charities that help poor people to help themselves. Certainly don’t take options away from them.

Which one would you give more priority: aiming our arrows at lowering our (coerced) trade protection or at attacking (voluntary) fair trade?

Definitely the first one! Almost every other post on my blog is "firing arrows" at coercive trades. Just on this one issue of Fair Trade I felt the need to point out a common misconception.

I hope this addresses all your points. I skipped over some questions because I would largely be repeating myself. If I have missed anything substantial, let me know. Thank you for your questions.

Tuesday, 5 April 2011

Fair Trade or Free Trade: An Economic Analysis

1. Introduction

Ending poverty worldwide is a noble goal. This work discusses the means by which we can achieve this goal. I show that buying Fairtrade certified products is not an efficient way of achieving this goal and that buying Fairtrade products may be doing more harm than good. I argue that directly donating to aid organizations is a more effective means of getting charity into the hands of those who need it most: the world’s very poorest people.  I will further show that the most effective way to achieve the goal of ending or alleviating poverty is through simple free trade, with consumers buying what they want without regard to the spurious notion of “fair trade”.

2. Free Trade vs. Coerced Trade

There is a clear distinction between a trade (i.e. an interpersonal exchange) that is made by two consenting parties, and a trade that involves the coercion by one party of another. The former is a voluntary trade; both individuals freely choose to make the trade, because they expect to benefit from it. The latter is a coerced trade; one party does not consent, because they do not expect to benefit from it, but they are coerced into making the trade anyway by the use or threats of violence.

The vast majority of trades are voluntary. Coerced trades include theft, fraud, robbery, assault, slavery, rape and murder. Taxation, regulation, prohibition, conscription and war are examples of coerced trades conducted by governments. A free market is a market where all trades are voluntary, i.e. there are no coerced trades.

3. Fair Trade vs. Unfair Trade

The Fair Trade Movement makes a distinction between two types of free trade, which they call “fair” trade and “unfair” trade. A typical example of an “unfair” trade is a poor third-world worker being paid a very low wage and working long hours in an unsafe factory environment. It is clear that, unlike the distinction between voluntary and coercive, the distinction between fair and unfair is completely arbitrary and subjective. It is a third-party opinion about a trade that is nothing to do with them. What is considered “fair”, a “decent” or “living” wage, “reasonable” working hours and safety conditions, differs from person to person, place to place, and time to time.

The poor third-world worker is voluntarily employed; this is a free trade. Therefore he must prefer being employed over his other options. If the worker had a more preferred option available to him, he would simply choose that option instead. If he was prevented from choosing his preferred option of being employed at a factory producing shoes, say, he would obviously be made worse off. The most extreme example would be a worker in the most severe situation of poverty, where he has “has no other option”: either he works in the shoe factory, or he starves to death. Here it is clear that preventing him from working in the factory would be tantamount to condemning him to starvation.

A trade may be considered “unfair” by well-meaning Westerners, but that the trade is free (i.e. uncoerced) is proof that both parties to the trade expect to benefit from it, and consider it their preferred option. The parties to any given free trade, who are the only individuals of importance, by definition do not consider it to be “unfair”.

4. Means of Preventing “Unfair Trade”: 1. Coercion

The Fair Trade Movement is part of the more general “Trade Justice” philosophy, which has overt political ambitions. The goals of the movement are to hamper the free market economy using various kinds of government legislation, including:
  • Isolationist policies; tariffs and other trade barriers.
  • Global regulation and management of trade and production, including standards on working conditions and wage rates.
  • Trading agreements (cartels, such as the defunct International Coffee Agreement) that will set national export quotas for global commodities.
Harriet Lamb, Director of the Fairtrade Foundation, stated in 2008 that “Fairtrade also plays a more practical role in building a broad-based movement for change… Fairtrade is an easy way in… It helps give our governments a mandate to take the big, bold steps needed to change world trade rules.”[1]

The economists of the Austrian School have shown how the effects of government intervention on the market economy can only cause impoverishment.[2]

5. Means of Preventing “Unfair Trade”: 2. Persuasion

Not all Fair Trade advocates support the use of government to end what they consider to be “unfair” trades. They wish to appeal to individual consumers to change their spending habits, from buying cheaper brands of products to buying more expensive products that have been certified as being produced only through “fair” trades.

The largest certification agency within the Fair Trade Movement is the Fairtrade Foundation, formed in 1992 by a coalition of charities, including Christian Aid and Oxfam. The Fairtrade certification mark is licensed to appear on products that are judged to have met certain standards in the treatment of producers, derived from the Fair Trade philosophy, including requiring them to form cooperatives and also offering a fixed lowest price for their goods.

The idea is to persuade people to value the Fairtrade mark sufficiently so that they choose to spend a little extra for a product identical to a cheaper product which lacks the Fairtrade mark. The extra money is supposedly worth it for the satisfaction of knowing that no worker in the production line of that product has been treated “unfairly”. The consumer buys the Fairtrade product believing that their extra money paid is going to the poor workers who produced that product: a little bit of charity on top of the normal wage rate for the worker. For example, suppose a particular coffee costs £4, and an otherwise identical product that has been certified by Fairtrade is £5. The £1 difference is the charitable donation the consumer is making.

6. Fairtrade as Charity

For any charitable donation, two important considerations are:
  1. Who is the desired recipient? And
  2. How much of the donation gets to the desired recipient?
To begin with the second question, out of a £1 Fairtrade charitable donation, only 10p reaches the intended recipients – the producers – with 90% going to retailers.[3] This contrasts with most direct charities such as Oxfam and the Red Cross, where between 70% and 95% of their donation income reaches the intended recipients.[4] So Fairtrade is a very inefficient method for delivering charity.

The Fairtrade Foundation competes with all other charities for donations, so increased demand for Fairtrade products will tend to lower the overall amount of charity that is delivered, all other things (i.e. the total amount of charity) being equal.

With regard to the first question, while Fairtrade benefits producers who sell Fairtrade certified products, it does so at a high cost to producers who are not Fairtrade certified. As an example, 25% of Fairtrade coffee comes from Mexico, which has 51 Fairtrade certified producers. Ethiopia has only 4 Fairtrade certified producers, despite 80% of the population working in agriculture, earning an average of $700/yr, compared to 18% of the Mexican population working in agriculture on an average wage of $9,000/yr.[5] The desperately poor Ethiopians suffer due to Fairtrade, with the benefits going to relatively wealthier Mexicans. Fairtrade charity does not reach the poorest producers. It benefits the few relatively wealthy producers who meet Fairtrade standards, at the expense of the many less-wealthy producers who do not.

In short, Fairtrade is charity that is delivered inefficiently and does not reach the poorest members of society. This can be contrasted with direct forms of charity, which deliver a higher proportion of the donation, and specifically deliver it to the desired recipients: the poorest members of society.

One final argument made in favour of Fairtrade is that if people did not buy Fairtrade products, they would not give the money saved to a direct charity, but would spend it on themselves instead. With Fairtrade, giving to charity is easy. So even though Fairtrade charity is inefficient and misdirected, it still increases the total amount of charity, and this can only be a good thing.

However, this is a generalization beyond merely an argument for Fairtrade products. Clearly if the consumer decreases their direct charitable donations in order to switch to Fairtrade products, the total amount of charity delivered decreases due to the inefficiency of Fairtrade, and this is contrary to the goal of the Fairtrade advocate. For this argument to apply, the Fairtrade advocate must convince consumers to increase their total charitable donations, in which case one wonders why they would not just advocate for a direct charity, which is more efficient.

With regard to Fairtrade being “easy” charity, such that it might induce higher total donations, it is equally easy for direct charities to make deals with consumer brands such that part of the price of the product is delivered to charity. This already happens extensively: charitable donations by businesses and corporations take this form – corporate donations may be the easiest form of charity of all from the consumers’ point of view – and it is common to see products advertised by companies promising to deliver a small part of the price paid, or a portion of their profits, to charity.

7. Free Trade as a Poverty Alleviator

Free trade is the most effective poverty reduction strategy the world has ever seen. The free market process is a wealth-generating engine: no government intervention into the market can add to prosperity, wealth, growth or development. This free market process was recognized by early economist Adam Smith as almost miraculous: he called it the “invisible hand” which guides free individuals towards maximising the prosperity of other individuals, purely by pursuing their own self-interest.[7]

Ludwig von Mises and other economists of the Austrian School have carefully elaborated how the market process works.[8] The “invisible hand” is nothing more than free market prices, which guide the actions of entrepreneurs seeking profits.[9] Entrepreneurs respond to the information in prices by rearranging the structure of production (the uses of land, labor and capital) in such a way that resources are used in a way that maximises the desires of consumers. Profits and losses serve as vital signals to entrepreneurs, informing them of where more resources are required, and where resources are being wasted, and also providing as an incentive for them to make the required adjustments to the structure of production.[10]

The market process works as follows:
  1. Prices are determined by supply and demand; the market price is the price that allocates the available supply to where it is most demanded.
  2. If there is an increase in demand (or a decrease in supply) for a product, the market price will increase; businesses raise prices, otherwise they will have a shortage of the product.
  3. The increase in price results in increased profits to the business.
  4. In response to the increased profits, existing producers shift more resources toward production of that product, and newcomers are attracted into that line of production.
  5. In this way, supply increases in response to a greater need for the product.
Conversely, if demand for a product falls (or supply increases), entrepreneurs are impelled by competition to lower their prices. The decreased profits or losses result in entrepreneurs shifting resources away from their current use and towards producing something in greater demand.

Prices constantly adjust to changing supply and demand conditions, and ever-alert entrepreneurs stand ready to shift resources so that they are being used in the most productive way possible. The entrepreneurs do this purely out of self-interest, and are highly motivated to do so. Competition impels excellence, as entrepreneurs failing to use resources efficiently for satisfying consumer demand lose out to their competitors and become bankrupt; the market process ensures that resources get into the hands of the most capable entrepreneurs: those satisfying consumers the best.

Any use of coercion is sure to hamper the market process, because prices are disrupted and the profit and loss signals no longer reflect what consumers really want.[11] Entrepreneurs are misled into making malinvestments of resources from the point of view of consumers; resources are wasted.[12]

Wealth comes from productivity; the efficient use of resources. The average American is richer than the average African, because the American is more productive. The average 21st century American is richer than the average 19th century American because the modern American is more productive. This is not because modern Americans work harder than Africans or their ancestors, but because they have more capital goods available – more machines and better technology – which enables them to be more productive, to engage in greater diversification and specialization, and therefore to reap greater benefits from the division of labor and knowledge.[13]

A lack of wealth – poverty – therefore, is caused by a lack of productivity, so the only means of alleviating poverty is to increase productivity through capital investment. Free trade is the most effective means conceivable of increasing productivity, and hence alleviating poverty.

8. The Effect of Fairtrade on the Market Process

Having outlined how the market process works, we are now in a position to examine the effects of buying Fairtrade products. How does this affect prices, the signals that coordinate efficient production? Do the poorest members of society benefit from the way entrepreneurs will arrange the structure of production as a result of high sales of Fairtrade products?

Let us suppose that a firm or entrepreneur is looking to build a new shoe factory, say, and he is considering where to build it: country A or country B. Country A is very poor, and the entrepreneur estimates that he will be able to find people in country A that will accept employment in his factory for a wage of just $1 per day. Country B is less poor, and because of this, the people have better alternative employment options available to them, so the entrepreneur estimates that he will have to pay a wage of $4 per day to entice people in country B to work in his factory. So, all other things being equal, an entrepreneur keen to maximise his profits by keeping his costs down will choose to build his shoe factory in country A.

Now let us suppose that consumers are convinced of the benefits of buying Fairtrade goods. The shoe producer recognizes that he will not be able to sell shoes profitably unless he gets a Fairtrade certificate. And suppose that in order to get that certificate he will have to pay “fair” wages of $5 per day to his employees.[14] Now, which country will he build his factory in? All other things being equal, there is no particular reason for him to invest in the poorer country; his wage costs will be the same wherever. Furthermore, the poorer country may have inferior security or infrastructure or less educated workers compared to the less-poor country. So with wage-costs being equal, the entrepreneur will build his shoe factory in the less-poor country.

With consumers unconcerned by whether workers have been paid a “fair” wage, investment is directed towards the very poorest areas, rather than areas that are less poor. When well-intentioned consumers buy Fairtrade products thinking they are helping to alleviate poverty, they are unwittingly doing the opposite: they are inhibiting the process that alleviates poverty.

When one shoe company starts making strong profits by paying people in country A just $1 per day, other companies will be attracted to the area to compete with them. Another shoe company might open a factory nearby and offer $2 per day, enticing workers to his factory instead. In this way, the wage rates of the workers are bid up through competition. The poverty of the workers is reduced. Compare this to the case when consumers demand Fairtrade products. The profit-seeking entrepreneurs have no incentive to invest in the very poorest countries, because they must pay workers there as much as workers anywhere else. So there is no incentive for investment in the area and the very poor people must stick with their current occupations, which are worth less than $1 per day to them. The poverty of the workers endures.

The alleviation of poverty requires capital investment in poverty-stricken areas, to increase the productivity of the workers. As a result of the trend for Fairtrade products, poverty is greater than it would otherwise have been, because capital investment has been directed away from the most poverty-stricken areas, while without the fetish for Fairtrade products, capital investment would have been directed toward them.

9. Conclusion

Free trade is the greatest possible means of alleviating and eliminating poverty. The free market process does this best when consumers seek the best price they can get for the goods they buy, without any concern about the wage rates of workers that produced those goods. Buying Fairtrade goods inhibits the process which alleviates poverty.

To buy Fairtrade goods is to donate to charity, but charity delivered in this way is highly inefficient and does not actually reach the very poorest workers, who are presumably the intended recipients.

Some members of the Fair Trade Movement seek to use coercion by governments as a means to prevent their highly subjective and arbitrary notion of what constitutes “unfair trade” from taking place. They seek to prevent poor people from working jobs they have chosen voluntarily, failing to realise that this will leave them worse off and condemn them to their tragic situation of poverty.


[1] Harriet Lamb, Director of Fairtrade Foundation (2008), quoted in Marc Sidwell Unfair Trade (2008).
[2] See Henry Hazlitt Economics in One Lesson (1946) or Murray Rothbard’s Power and Market (1970).
[3] 'Voting with your Trolley', The Economist, 7th Dec 2006.
[4] According to charitynavigator.org, which monitors American charities, Oxfam (80.1%), Unicef (91.8%), American Cancer Society (72.8%), Save The Children (91.7%), American Red Cross (91.8%), World Vision (86.7%), etc, all spend the majority of their donation income on charitable programs.
[5] Marc Sidwell Unfair Trade (2008).
[6] Most economists agree that minimum price controls cause surpluses, so minimum wage legislation cause surplus labour, i.e. permanent unemployment, which harms the poorest members of society. For a clear explanation of how government manipulation of prices inhibits prosperity, see Henry Hazlitt’s Economics in One Lesson (1946).
[7] Adam Smith The Wealth of Nations (1776).
[8] Ludwig von Mises Human Action (1949) and Murray Rothbard Man, Economy and State (1962).
[9] For an illustration of the importance of coordination of economic activity, see Leonard Read I, Pencil (1958).
[10] For a brief examination of how profits and losses serve as signals for coordination, see Ludwig von Mises Profit and Loss (1952). For a critique of an economy lacking profit and loss signals, see Ludwig von Mises Socialism (1922).
[11] See Murray Rothbard Power and Market (1970).
[12] For example, a minimum price control causes a perpetual surplus of the product, regulations and prohibitions causes increase costs of production, a sales tax causes artificially high prices of all affected goods, bailouts prevent misallocated resources from being freed up to be put to better uses or by more capable hands, monetary inflation causes the interest rate to be distorted resulting in boom-bust cycles, wars and military spending cause resources to be used to produce tanks, bombers, mortars and missiles rather than goods more demanded by consumers, and so on.
[13] For example, in modern America advanced agricultural machinery makes each farmer more productive and this frees up workers for producing other goods. In modern America, only a very small proportion of the population are is employed in agriculture, relative to Africa or 19th century America.
[14] These values are purely illustrative. I have also simplified in that there are many other stipulations required to get a Fairtrade certificate; these will add to the effects described.