Progress vs regulated prices

By Tim Worstall | 22 March 2005

As we in the UK have recently finished Fair Trade Fortnight perhaps this might be a good time to look at the entire issue, rather than simply emote. Taking coffee as the example, it is said that the grower gets about 5 pence from each £2 cup, or 2.5%. This may seem unfair. But the real unfairness is not that the raw material has a low price, but that the European Union 'protects' itself against processed, packaged end products.

The majority of the value in coffee is not in the raw material of coffee beans, but in roasting, processing, and packaging. In the case of a £2 cup from Starbucks et al, most of the value is in providing a convenient environment that people want to hang out in. (We don't pay £2 a cup when we drink coffee at home.)

The longer term goals of those behind the Fair Trade movement are worrying. Take this proposal from Oxfam:

Producer and consumer country governments would establish mechanisms to correct the imbalance in supply and demand to ensure reasonable prices to producers. Farmers would be adequately represented in such schemes.

They are advocating a revival of the International Coffee Council scheme, one that failed back in 1989, a sort of OPEC for coffee. Commodity Boards of this type have never worked well for long for the very fact of the higher prices they ensure to producers brings forth further producers, until they inevitably go bankrupt as a result of the stabilization programs they have to undertake. I'm not sure if droll is a strong enough word for those who advocate a course of action which has not only failed in general, but in this specific market previously.

Yet even given all this, the true danger is in the mindset behind such plans, that there is some good, or moral, price for an item other than what it will fetch in a free market. If such plans are made for coffee, then undoubtedly they will be made for bananas, sugar, coconuts, cocoa, for the other comestibles being eyed up by the Fair Traders, and that way madness lies. Not just the idea of an endless sea of international busybodies deciding upon the proper price for an item, but the very thought that agricultural prices should fall no further, that those who farm now should carry on doing so.

Peasant farmers have been going out of business since the invention of mechanised agriculture, food prices have been falling since Neolithic times, the two together being the very things that make progress possible. I am unconvinced, taking a quick peek at the world around me, that we have an excess of such progress just yet.