Economics and the Locavore’s Dilemma: Comparative advantage, relative advantage and local food

In Agriculture, Food by Lenore NewmanLeave a Comment

A number of people have asked me to write further about Pierre Desrocher’s “Locavore’s Dilemma”, particularly with respect to the economics of local food. In particular I’ve been asked about comparative advantage, which is a key point of Dr. Desrocher’s argument. Can’t this principle be disproven? Surely it doesn’t work in the real world? Well, the truth is comparative advantage is both powerful and complex, and so ignoring it isn’t an option. The question, then, is why does local food exist at all in a capitalist system? What follows is an argument I’ve been working on that involves a two-fold answer:  relative advantage and diminishing marginal utility. But before we get to that, comparative advantage needs closer inspection.

Ricardo’s theory of comparative advantage states that a country or region should focus on producing the product that it can produce most efficiently given inputs of capital and labour, and then trade for everything else. If this is done, even if one country has an absolute advantage and can produce everything more cheaply and with less labour, every country will win by trading. This is just simple math, and being math it has stood up to a lot of critique. However, Ricardo did make a couple of assumptions worth mentioning. First, he assumes trade is effortless, ie. cost of trade is minimal. Second, he assumed labour is stationary. Otherwise everyone would move to the country with the highest wages. Third, he assumed capital was stationary, otherwise industrialists would move their factories to the places with the lowest wages. At least two of these impact our discussion of local food.

Richardo’s theory can be critiqued in a number of ways: firstly, capital is unfortunately quite mobile, so in a world of trade most production moves to the places with the cheapest labour and lax environmental standards. This can cause problems in the food sector with respect to labour standards, pesticides, environmental impacts, and such, as global corporations based in the developed world farm in the developing world. This is not my main argument, but adds an interesting facet which I will explore further below. Secondly, trade isn’t always cost free and effortless when it comes to food, as we will see below.

There is one other critique of Ricardo’s theory that is worth mentioning even though I’m not going to use it further here: it assumes the market can absorb an unlimited amount of a product. The problem with this is that on occasion countries have ruthlessly specialized into crops such as coffee and bananas, and produced enough to crash the market, often because price signals arrive and then one plants a crop that takes several years to a decade to mature. The book “Uncommon Grounds” by Mark Pendergrast does a great job of outlining the rise of coffee culture, and highlights why in some cases a country shouldn’t focus exclusively on one product; there is a law of diminishing returns at work at the upper end.  The economic law of diminishing returns has proven resilient over the years, and suggests there is a maximum workable farm size, and a maximum level of production for almost everything.

My main argument, however,  is to explain why a diversity of products will thrive in a marketplace when various regulations and subsidies are removed, even when the upfront cost is higher. I call this the microbrewery effect, in honor of the renaissance in beer making in Canada. Though the most efficient way to approach beer is to produce it all in the region with comparative advantage, when we lived in a regulatory environment that favoured a few big producers the public’s consumption of beer slowly fell year over year. We were faced with efficient beer, and we weren’t so keen on it.  When restrictions on beer-making were removed, the market went in the opposite direction, leading to a flourishing of microbreweries, and a rise in total beer consumption. Why? What about the less efficient, more expensive beer made it more appealing?

To put this into economic terms, microbreweries enjoyed what is called a relative advantage, which in innovation theory is a property that influences a consumer to chose one product over another. Advertisers often stress relative advantages over that nasty old “Brand X”. Microbrewery beer had several relative advantages, including taste, and a more sophisticated image.  However, it also offered something else: diversity.

In economics the human desire for diversity can be represented by the law of diminishing marginal utility. For example, I love red velvet cupcakes, and will pay four dollars for one. I don’t really want two, but I might buy two if the second one is half price. I wouldn’t buy a third, as eating the third would be a disutility; I would feel sick. Applying this to the beer argument, even if in general I like to stick to one type of beer, over time I will be willing to pay more for something different, purely because it is different. A world with one beer is boring, and people look for other options. Being different can be a relative advantage.

Now let’s consider the relative advantages of local food, and yes, I will return to comparative advantage. Ricardo assumed trade was effortless, but travel has a big impact on food. To travel food must be bred to suffer the harsh realities of the road, will suffer a loss of critical moisture and sugars, or must be treated or processed. So in effect travel for food might not have a large energy cost or be very expensive, but it costs in terms of flavour and nutrient content.

1. Thus local food’s main relative advantage is that it tastes better. This varies by crop, of course, berries being an extreme example; one study found 90% of the sample group won’t eat berries out of season. Dr. Desrocher and other critics do acknowledge this, but I feel they underestimate what a strong factor this is. We will pay extra as we are willing to trade our income for the experience of tastiness. If this wasn’t true, everyone would just eat the cheapest, blandest food possible. It would be like living in university residence, forever.

2. Local food has often found to be more nutritious. Nutrients decay during travel, but more importantly local farmers have the luxury of growing varieties with higher nutritional content and better taste as travel isn’t their main concern. Local food is also often free of preservatives and such, and though such things are tested for immediate effect, many people are concerned about the long term impact of highly processed foods. I’m writing up a paper that will summarise this literature, but it seems clear nutrition is a concern. People are increasingly worried about health, and so for the moment we are willing to pay more for food that has more nutrients, and less additives.

3. People have claimed local food is less energy intensive. Given this is now under question, I’ve been reviewing energetic studies, and it seems this varies widely, and compared to other stages in the chain it can be a major or minor effect, and local food doesn’t always come out on top. this needs further study, but it is clear some people are buying local food for this reason. But be warned, locavores, the numbers might not favour this. I’m willing to say that currently, Dr. Desrocher’s is largely correct, and energy for transit isn’t a major concern.

4. Which doesn’t mean having our farms close by isn’t of benefit. Local food is seen as having better labour and environmental practices, and is seen as more transparent. This avoids that problem with the mobile capital I mentioned earlier, and some people are willing to pay more for local food for ethical and environmental reasons, just as they are willing to pay more for fair trade products. We can, if we want, actually check out the farms. I will admit I buy my eggs from a guy I know because I know he treats his free range chickens well, and I have personally seen the ugly side of industrial egg production, and it matches any of the horrors presented about Victorian England’s local food production in Desrocher’s book. Except it is happening now. Rational actors are willing to buy peace of mind by shopping locally.

5. Lastly, but perhaps critically, it provides diversity. Local food can provide diverse varieties and flavours more easily than a food system maximized for cost. Diversity adds resilience to the system, and provides for small scale innovation to deal with climate change and other crop challenges. And, of course, diversity sells.

This argument explains why local food can thrive in a capitalist system in which rational actors make rational choices. This counters some, but not all, of Dr. Desrocher’s argument for a more deeply global food chain. And here the extreme locavores might not be too happy either. For my claim is that under a trade regime free of subsidies, distortions, and such, the amount of local food available will grow as it enjoys several relative advantages, and provides diversity in the marketplace. However, this also means a completely local food system is not my preference, and would only be possible through legislation, just as a completely global food system is only possible through legislation. I can think of times and reasons we might want to do that, but it wouldn’t be a move based on economic principles, it would be political, and it wouldn’t provide the most interesting food system. However the same goes for the economic hand-holding governments have done to create the industrial food system. As food production is full of challenges from weather and international markets, it is no wonder the large players have lobbied to protect their investment.  Fortunately, I expect that we will continue to see local food expand as long as its relative advantages hold. Meanwhile I will likely keep shopping at farmer’s markets, grabbing exotics from Whole Foods, haunting Granville Island, and yes, occasionally eating a box of frozen pizza from Costco.

There is a way to frame such a system in which relative advantage is taken into account to suggest what percentage of local food versus imports is optimal. Stay tuned.

Comments

  1. Heather Kitching

    Lenore, your blog is captivating. Thanks for all the informative posts!

  2. Pierre Desrochers

    Hi again. Well, in order not to be labeled a blind follower of neoclassical economics, I should mention that I have a theoretical paper in which I argue that mainstream economists’ case on behalf of regional specialization is fatally flawed… Not that the math is wrong, but rather that it should apply only to individuals, not to cities, regions, nations or any large group of people. Unfortunately, my debunking of the standard comparative advantage demonstration has failed to generate much interest… “The Division of Labor Needs Not Imply Regional Specialization” (with Samuli Leppälä), Journal of Economic Behavior and Organization, vol. 74, nos. 1-2 (May 2010), pp. 137-147.

  3. Lenore Newman

    I know how you feel. I once wrote a critique of “Limits to Growth” with Dr. Ann Dale and the silence was deafening.
    I’ll take a look at your argument when I have some time.

  4. Mitch W.

    I must say up front that i am not an economist by training. I’m an electrical engineer. So, my apologies to all if i fail to see the major distinctions between relative, absolute and comparative advantages. I would think they could be unified into one, “advantage”, equation.

    Be that as it may be:

    1) I agree too that local very often means better taste, especially for fruits and that this is the main advantage of local food. I don’t believe that all foods exhibit this property, especially grains and foods that simply can’t be grown in the locale. However, this advantage only lasts for a few weeks at most for any one food. After that, the locally grown and canned heirloom tomato is going to taste and nourish the same as the Californian canned heirloom tomato. I will give you this, those Argentian blueberries are terrible!

    2) “Local food has often found to be more nutritious.” And the corollary is that non-local food is often found to be just as or more nutritious. I also believe that it would be more correct that some foods lose nutritional value with time, rather than travel. To do a thought experiment, if you had a Star Trek transporter that preserves every subatomic relation, the food would simply show up in milliseconds, even 12,000 miles away, in exactly the same condition it left.

    And, are you sure the local farmer is not concerned about some travel? After all, when delivering his goods to the various local markets, he may still rack up a couple of hundred miles on roads of varying conditions before he completes his deliveries. How would the packaging of his wares differ to protect them from 200 miles as compared to 2000 ?

    3) I’m finally glad to see a, “steak”, be put through the heart of this part of the argument. My first exposure to the locally grown movement (as “locavore”, hadn’t entered into the lexicon yet) was at an environmental education conference at which i was volunteering. I was approached by a Canadian attendant who struck up a conversation with me about just how far the average apple travels (i think he mentioned 1500 miles). He was arguing at the time about it’s environmental impact just from this traveling. Being an engineer, i instinctively then asked, “Yes, it traveled an average of 1500 miles, but how much energy did it take?”. He answered by repeating just how far it traveled and, therefore, it was using up energy and causing pollution. “Yes, but how much energy?”, i again asked. After several attempts, i never did get a straight answer from him.

    4) Any benefit that the local farm can do can also be duplicated at the non-local farm. The Californian vegetable grower can also go organic and pay living wages. I believe many do. We enjoy ourselves organic Californian strawberries in the fall and winter and they do taste better than their conventional counterparts and are pretty good in their own right.

    As far as anyone being able to check out the farm, i think that may not be so practical. One, if people did get into the habit of making regular visits, the interfering traffic would quickly be banned by the farmer. We would all be too much in the way! Two, it could lead to dangerous situations, especially with large grazing animals and the poor farmer and his staff would be constantly giving tours. Better to have a strong system of trained inspectors.

    5) I don’t know if you can claim local gives you diversity over global. I’m old enough to remember when eating in season was a fact of life and we didn’t think too highly of it either.
    Today’s supermarkets have just so much more all year round than in the old days. Even the dedicated green grocers have green year round.

    As for resiliency, yes i do agree one’s own locality should also be a source of food. It adds to the multiple regions upon which to draw upon in case some fail. We only have to look at the likes of Texas to see the wisdom of having a global food system that automatically shunts food to regions where the local harvests have failed.

    As for farms having to be small to be more resilient, environmentally friendly, etc, i’ll leave you with this thought experiment:

    Consider 4 farms that are just small enough to meet the criteria set forth by advocates of small farms. They all practice the best and most ethical techniques in organic farming. Consider further that all 4 border each other and only separated by a wire fence. Since they are separate farms, they all have duplicate sets of equipment, such as tractors, composters, barns, etc.

    One day, the four farmers named, Moe, Larry, Curly and Gorbi just happen to close to their common corner and strike up a conversation. Since all their farms are on the small side, they all agree they don’t fully utilize their equipment and have to buy supplies in small, expensive quantities. One of the farmers suddenly grins and says to the one of the other farmers, “Gorbi, tear down this fence!” The other two immediately see where this is going and agree. They tear down that fence, merge their workforces, purchases and equipment and sell half the equipment they have as it is no longer needed.

    Now, that they are, in practice, one farm almost 4 times larger than what is considered small, do their organic and ethical practices suddenly stop working ?

    1. apopheniabrown

      Good points. It’s true that the local foods have a narrow season, but to me that is part of the fun, but also a good reason not to go entirely local. As for your second point, an often underestimated element is that
      the varieties grown for long distance travel are significantly less nutritious than some of the older less durable varieties. This even goes for staple crops; for example wheat has about half of the food value now. And yes, a
      transporter would solve all of our problems. (And eliminate the need to get gouged by airlines!) I should add I have nothing against big farms that do things well. I do, however, think we need a space for small farms as young farmers need a place to start out and we get some very innovative growers that way. Some big farmers maintain a sense of innovation, but small lot agriculture does have an important role to play. And often they do form cooperatives to share equipment, which still isn’t a big farm, as they are sharing expenses and risks that a big farmer is taking on alone. Let’s just say I think there is a good reason for a diversity of farm sizes and a role for trade between regions. Personally I enjoy the odd mango in winter, flown up tree ripened from the Southern hemisphere.

      1. Stan Combs

        “wheat has about half of the food value now” – Evidence, please, or this is just another unsubstantiated wishful thinking statement by the local food movement.

        1. apopheniabrown

          A fair point. As you likely can tell from reading the blog I’m not a locavore, but do support a mixed agricultural system. The best academic paper on nutrient decline in wheat is “Relationship between yield and mineral nutrient concentrations in historical and modern spring wheat cultivars” by KM Murphy, PG Reeves, SS Jones – Euphytica, 2008
          but I will stand corrected that overall we could say nutrients have dropped by half (though that figure is often tossed around). However Murphy et al. break it into individual nutrients, and find some very worrying trends in my opinion, as they basically show one has to consume more calories to get the same nutrients, which isn’t exactly progress. Not to say I’m against increasing yield per acre, just that there is a need to track nutrient content at the same time.

  5. Geoffroy Ménard

    I’m an agricultural economist working in the organic and local food sector. It’s refreshing to read well articulated, reasonable views such as this. I definitely should check out more of this blog. Cheers

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