Thursday, March 4, 2010

Textbook nonsense about "Fair Trade"

One of the purposes of this Economics Anti-Textbook blog is to examine some of the bad features of current economics textbooks by looking at specific examples. Recently, a dismayed colleague pointed out to me the nonsense about Fair Trade products that is in the most recent Canadian edition of the widely-used McConnell & Brue text. (I don't have the American original, but I assume that the content is unchanged; the Canadian co-author, my former colleague, Tom Barbiero, likely had little leeway in altering such content.)
  As we note in The Economics Anti-Textbook, any discussion of Fair Trade products is rare indeed, but the way it's done here is very instructive. The general argument is that those who buy Fair Trade products have their hearts in the right place, but that what they're doing is futile and may even be counter-productive. The approach fits perfectly the rhetorical devices used in conservative attacks on progressive policies, as identified by the distinguished economist Albert O. Hirschman in his 1991 book The Rhetoric of Reaction.
  Let's see how they do it.
  First, McConnell and Brue (M&B) write: "Because workers in many low-income countries are highly immobile, have few employment options, and are not unionized, the large dominant sellers can supposedly keep an undeservedly large portion of the proceeds from added exports for themselves ... while simultaneously denying a fair share to their workers (by keeping wages low). To counter this purported problem ..." and later "the purported benefits of fair trade..." (my italics). The use of 'supposedly' and 'purported' makes it clear that they don't believe fair trade has any real merit. Note that if the situation they describe is accurate, economic theory would predict that employers (or buyers, more generally) would have a lot of monopsony power, a topic they discuss elsewhere in the book. So what's wrong? Are workers really mobile? Are there really not large dominant buyers of coffee beans? They don't say.
  Second, M&B make claims about what the professional consensus is about Fair Trade. They write: "most economists question the overall effectiveness of the fair-trade approach..." and "the consensus among economists is that fair-trade purchasing ... simply shifts demand within low-wage countries (or among them). It does not increase the average pay of the workers within a particular low-wage nation." "Some economists say that other action ... might benefit the low-income nations more effectively than fair-trade purchasing."
  There is not a single reference anywhere to the professional literature -- the vast body of writing in academic journals and books by which economists communicate with each other. Their claims about "most economists" or "the consensus among economists" is entirely unsupported. The line "some economists say" is a classic way for the authors to voice their own opinions. (This sad display -- which would get an 'F' in an undergraduate essay -- is actually typical of how the texts ignore the literature which they are supposed to be reflecting. Compare with any introductory psychology text, for example.)
  Third, and worst of all, is M&B's misleading description of what Fair Trade is about. (For the facts, see the website of Fairtrade Labelling Organizations International: People may care not only about the physical characteristics of the products they buy, but also about how the product was produced. As a glance at Fair Trade standards confirms, it's about promoting economic democracy by buying from producer co-operatives and about promoting the rights of hired labour by ensuring that the goods are produced by workers who have "access to collective bargaining processes and freedom of association of the workforce, condition of employment exceeding legal minimum requirements, adequate occupational safety and health conditions and sufficient facilities for the workforce to manage the Fairtrade Premium."
  By providing people with believable information about how the product was produced, the Fair Trade labelling organizations are improving the efficiency of markets. Why? Because with that believable information, a consumer could now buy a product which she would not have otherwise had the opportunity of buying. To use the language of the texts: a mutually-advantageous trade can now take place that would otherwise not have taken place. I get a bag of coffee beans produced in a way that I approve of and for which I am willing to pay a premium; the producers get a better and more stable price.
  Yet M& B write (attributing the following nonsense to "some economists"): "price and wage setting by advocacy groups is based on highly subjective views of fairness that may be at odd with economic realities. Distortions of market prices and wages invite inefficiency and unintended consequences. (Recall our discussion of government price floors in Chapter 3.)" This, to be polite, is drivel.