Got milk? – Yes, plenty thanks

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There is something about the countryside. Perhaps it is its beauty; perhaps it is its seemingly ancient and unchanging way of life. Whatever the reason, the countryside and the agricultural sector has the ability to send otherwise reliable economic compasses haywire.

The Telegraph illustrated this last week when it threw its weight behind the burgeoning campaign to get a ‘fair’ milk price for dairy farmers.

This language ought to set people’s teeth on edge. What is a ‘fair’ price? Whenever one person is willing to sell a good or service at a given price and another is willing to buy it at that same price the exchange will take place. Both parties might prefer some other situation; the seller might prefer a higher price and the buyer a lower one. Doubtless both would consider their respective preferred situations ‘fairer’.

But that is the beauty of an exchange economy. It reconciles differing, subjective ideas of ‘fairness’ (of which there are as many as there are economic agents multiplied by the number of transactions they undertake) to arrive at a mean of what society deems ‘fair’.

Food is an essential for life. Thus its price elasticity is low, meaning that when its price increases people do not curtail their consumption, they just pay more. The alternative is starvation. Unless they can’t pay more, then they will curtail consumption.

Increases in food prices hit those on lower incomes hardest. They will pay a disproportionate share of the ‘fair’ price. Well-heeled Telegraph hacks might want to ponder that before pontificating.

Campaigns for ‘fair’ prices are simply attempts by some sectional interest group to use either the bully pulpit or legislation to assert its particular notion of ‘fairness’ over the market derived societal mean.

The Telegraph isn’t alone in being lured into a thicket of economic nonsense. In the Guardian dairy farmers, Helen and David Banham, told us that “The typical day for us starts at 5am and finishes at any time after 7pm, seven days a week, 52 weeks a year, Christmas Day, New Year’s Day; days when you don’t feel like getting out of bed and wished you could have a day off sick; irrespective of the weather, from -15C to 30C, rain, snow or sun”

Interesting enough but from an economic perspective completely irrelevant. The value of a good or service to society is not a function of the amount of effort expended on its production. That was the lesson of the Marginalist revolution in economics led by Carl Menger, William Stanley Jevons, and Leon Walras.

The marginalists showed that value was not derived objectively from the labour expended in production, as classical economists liked Adam Smith and Karl Marx had believed (examples to the contrary were too numerous to name), but was a subjective property assigned by individuals.

As sometime economist Bishop Whatley put it, “Pearls are not valuable because men dive for them; men dive for them because they are valuable.” If we want to judge the ‘fairness’ of a price the effort expended by Mr and Mrs Banham is neither here nor there.

But it would be harsh on the classical economists to tar them with the same brush of economic ignorance as the ‘fair’ price people. Smith understood that one of the vital sources of The Wealth of Nations was increasing productivity, the amount of output we can produce with a given amount of inputs; think of his famous pin factory.

As Matt Ridley recorded in The Rational Optimist

“A half-gallon of milk cost the average American ten minutes of work in 1970, but only seven minutes in 1997. A three-minute phone call from New York to Los Angeles cost ninety hours of work at the average wage in 1910; today it costs less than two minutes. A kilowatt-hour of electricity cost an hour of work in 1900 and five minutes today”

This is caused by increasing productivity, producing more with as much or the same with less. Increasing productivity, making things cheaper, allows us to buy things we couldn’t before. It is what increasing wealth is all about.

236 years later this seems to have been lost on the ‘fair’ price people. As Tim Worstall explained in the Telegraph, between 2000 and 2010 the milk yield, the amount of milk produced per cow, increased by 22 percent, an increase in productivity.

If demand for milk is unchanged then obviously, as Worstall points out, the answer to the Telegraph’s question – “Does Britain need dairy farmers?” – is: fewer than we have now.

The productive factors freed up can go into producing something else. It might be something that doesn’t exist yet, but aren’t we better off than our ancestors now that increased agricultural productivity means that we can produce many times the amount of food with a fraction of the workers so that we can eat well and have people producing TVs, fridges, planes…?

Under market capitalism prices are the signals which direct resources toward more productive ends. Despite what the Guardian thinks, farmers are not entitled to a profit. Profits must be earned by taking inputs and adding value such that society judges your outputs to be worth more than your inputs.

If society thinks your outputs are worth less than your inputs – you are destroying value in other words – you will incur a loss. As Worstall puts it, society is telling you to stop so that the resources you are using can be utilised by someone else who will add value to them.

Joseph Schumpeter called these “gales of creative destruction”. Next time right wingers argue that we shield dairy farmers from these, replace ‘dairy farmers’ with ‘coal miners’ and ask why they argued for leaving them to face their full force.

True, HE Bates never wrote a novel romanticising coal mining, but economic logic is economic logic. We can’t embrace it when it affects left wing union members and reject it when it affects Tory voting rural dwellers. That really wouldn’t be fair.

This article originally appeared at The Commentator

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