I got a minor in Economics in college. I found the study of price theory especially fascinating. Yeah, I was a wild and crazy guy in college, right? I didn’t do much with that knowledge otherwise. I’ve got fifteen hours of classes under my belt, whatever that’s worth. Today I’m merely an armchair economist.
Yet from time to time something around me triggers flashbacks to my price theory days. It happened recently when I started seeing all this “Fair Trade” stuff everywhere. Coffee, tea, chocolate, trinkets… anything! My first inclination was to think about the coffee that isn’t labeled as fair trade. Does that make a normal cup of coffee “unfair” trade? Hardly. Two parties agreed to engage in a transaction. A farmer traded coffee beans to a coffee broker for cash. Both sides engaged in the transaction on there own and both received something of value in return. Were that not to be the case, I’d argue the transaction wouldn’t have taken place at all. Thus it is, by my definition, a fair trade.
But this isn’t “fair” in the eyes of many well-meaning folks today. You see, a cup of premium coffee costs a pretty penny these days. Yet the farmers growing the stuff account for mere pennies of the final price. That’s gotta be unfair, right?
Not really. Coffee is grown all over the world. There is a lot of the stuff. But that doesn’t matter. Welcome to the Fair Trade movement. We all know the idea… those of us in the affluent burbs pay a little more for coffee with the hopes that some of the money goes towards paying the farmers a little extra. It is a pleasant thought. Who doesn’t want to help someone in the developing world, right? It is well meaning, kind, generous… and downright harmful in the long run.
Remember back to that Econ 101 class from college? You know, the one you slept through. I was the nerdy kid staying after class to talk to the professor. Anyway, you remember supply and demand, right? Sure, easy stuff. Remember price floors and ceilings? The Fair Trade movement seeks to create an artificial price floor on products. They try to influence a market by bringing the price up to a point higher than normal. What will result is farmers attempting to produce more. This will eventually result in an oversupply of coffee. Farmers will ultimately have to dump product on the market or let it rot. This will hurt all farmers, particularly those not participating in the fair trade movement.
So is the fair trade movement a noble idea? Sure. Perhaps it will make you feel better drinking the coffee. But in the long run, fair trade initiatives can create oversupply and hurt farmers. It is a lesson in Econ 101… don’t meddle in markets! Hope you enjoy the coffee.