Fair trade and inefficient do-gooding: what’s good about it?

Here’s an extract from a book on fair trade that I had occasion to look up. In what circumstances is fair trade a good thing? If we dig into our pockets to buy something at a higher price than necessary in order to engage in ‘fair trade’, then we know a few things.

  • The sacrifice we made paying a higher price could have purchased more good for the beneficiaries if we’d given them our money – usually a whole lot more. In other words in terms of helping it’s inefficient – often hugely so. Often the exchange rate back to the people one is putatively helping is less than 25 cents to the intended beneficiaries for every $1 we invest.
  • Even without this diluting, if people are producing a product for a price that’s inflated against world prices, they’re entering a new kind of dependency – on us. Perhaps they’d be better off adjusting to the unfair price and (hopefully) producing something else which has a less ‘unfair’ price. Presumably in many cases the there’s nothing much else the producers can produce, but this is a hard thing to know.

In any event, I’ve always been hugely ambivalent about fair trade, but it’s a subset of what might be called ‘inefficient do-gooding’.  The same issue turns up in a different guise in environmental policy where we reduce waste to landfill and increase kerbside recycling. Usually this reduces greenhouse gas emissions (though sometimes even that isn’t true), but we could do a lot more environmental good, if that’s what we want to do, by just spending the money on the environment directly – say with a stand of carbon sequestering trees, rather than spending the money on kerbside recycling.

On the other hand there is an argument that a lot of human do-gooding is not focused on utilitarian efficiency. Kristina Keneally supports the still-birth foundation because she has been touched by still birth. It’s arguably not the most ‘efficient’ use of her time in terms of alleviating human suffering, but it’s something she wants to do. By the same token maybe people don’t want to make an ‘efficient’ contribution to the environment, they want instead, (maddeningly as far as I’m concerned) to reduce their carbon footprint. So what – O Troppodillians – can we say about this?

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James in Perth
James in Perth
9 years ago

Nick
This is an interesting topic. But I don’t agree with your approach, or at least in some cirsumstances I don’t. The answer to the question about what is efficient environmental action depends strongly on the problem you are framing and therefore the scope of the system you are considering. For you to argue that waste reduction measures may be less efficient than other options for environmental action, you are implicitly narrowing the scope of problem you are framing to the options for action you are comparing. Your approach makes sense when you are determing the most efficient action for a specific narrow set of tasks. But if one accepts that the ecological footprint of Australians is too large to be sustainable in the long run, (given current global trends), and that we need to reduce our total footprint. Then just buying your way out of every aspect of that footprint is not feasible.
The motiviation and rationale that you are missing in people taking actions relates to this broader framing of the policy problem.
Cheers
James

Antonios
9 years ago

I’ve always assumed “fair trade” was just a way for cafes to price discriminate, i.e. charge an extra $1 for fair trade coffee, pocket the extra 90 cents and pass on the extra 10 cents to the fair trade people.

But it’s remarkable the extent to which people, and I include myself in this, do things because they want to personally feel a sense of doing something that seemingly impacts directly on a worthy cause.

Generally speaking, it’s better for someone who’s a talented engineer to excel in engineering and produce, for instance, mobile phones that open up communication channels for people throughout the world. Nevertheless, the talented engineer will probably feel a greater sense of self satisfaction if they become a rather average social worker than excel in engineering despite the latter having the greater impact.

Bill Posters
Bill Posters
9 years ago

The sacrifice we made paying a higher price could have purchased more good for the beneficiaries if we’d given them our money – usually a whole lot more.

Except that we haven’t given them the money, we’ve bought a product. What is the product? It is sloppy thinking to say it is the same as the non-fair trade product. It contains a whole bunch of other things in addition to the coffee, in exactly the same way that Coca-Cola is more than just fizzy flavoured water.

Patrick
Patrick
9 years ago

It is sloppy thinking to say it is the same as the non-fair trade product.

Quite right, there are usually better alternatives. I am kind-of-convinced by fair trade as a voluntary international taxation funding a welfare-to-work program, but I am not sure that it fulfills that better than just plain old free trade might.

So I usually don’t buy it.

Framing the debate the way you have here is akin to the forced savings debate on rent v mortgage: in practice, there, almost no-one has the same financial discipline as a renter that they have as a debtor.

It would be an interesting experiment if Nestle (or one of its posher sub-brands so as to appeal to fair-trade latte sippers) sold ‘charity coffee’ in parallel with its regular brands, and the charity coffee cost an extra $25c per 125g which was directly donated to capacity-building charities in the areas Nestle bought its coffee from.

David Walker
David Walker
9 years ago

Fair trade is a sort of Bastiat’s Playground. Even if you assume that the subsidy can be delivered at low cost to impoverished Third World producers, the story is only just beginning. The second- and third-round effects of actions are often unclear but may be significant. Which is not to say that fair trade is always no good – just that it’s complicated.

One way to think of “fair trade” is as a brand, like the Coke product which tastes broadly the same as generics selling for two-thirds the price. To achieve its aim, “fair trade” mechanisms must take the premium their brand creates and get a decent sum into the hands of farmers. That’s perfectly conceivable. Take the example of coffee. Given how little of the price of a cup of coffee is actually represented by the price of the raw beans, it seems quite achievable even if quite a lot of the money is being lost in management costs.

Then the knock-on effects begin.

A large-scale success for a “fair trade” scheme could well have the effect of pulling more people into coffee production. This, of course, would lower the market price to some extent – leaving worse off all the coffee producers not receiving a “fair trade” subsidy.

Here’s another story, to some extent incommensurate with the one above. When coffee production gets subsidised by “fair trade” payments, we might expect that more land will be pulled into coffee production. Some of that land may have previously been wild, in which case there is an environmental cost. Or the land newly deployed to coffee production may previously have been used for other foodstuffs, in which case the supply of those other foodstuffs will drop and their prices will increase. If those foodstuffs are mostly produced in the First World, some of the original “fair trade” subsidy will end up in the hands of corporate farmers in places like Australia and the US.

On the other hand, the extent to which any of this actually happens will depend on a bunch of specific local circumstances. What are the true elasticities? Does “fair trade” create a new market, with new supply and demand curves? And so on. This is why development economists do research and build models. But the answers aren’t obvious.

My underlying reactions to “fair trade” are twofold.

My first reaction is that there is no such thing as a “fair price”, so that “fair trade” is a slightly dishonest slogan. Rwandan family farmers receiving the “fair trade” premium are still poor compared to most of us in Australia, and that seems unfair. Rwandan family farmers receiving today’s world pricse are far better off than their predecessors of 2002, but that doesn’t mean the world somehow got fairer over the past decade. “Fair trade” doesn’t make a qualitative difference to any of this, despite what the brand name itself implies. A more honest title would be “extra money for small African farmers coffee”. That sounds pretty good to me. But I suspect it lacks the marketing power of the term “fair”.

My second reaction is that the fair trade ideal is underpinned by a lack of ambition to make a difference to the lives of the global poor. All the evidence of the past 30 years suggests that fair trade matters a lot less than getting bigger societal issues right, in Rwanda and elsewhere. Fair trade might raise the average income of poor Rwandans by 1 per cent. Free trade combined with good governance and education and decent infrastructure could raise their incomes by 100 per cent, or 1000 per cent. That’s the story of East Asia over the past 50 years, and of Botswana and Chile and parts of Eastern Europe and several other places too. It ought to be the story of a lot more places.

And it’s that which we ought to focus on, rather than kidding ourselves that our choice of morning coffee blend is a defining moral decision.

Tim Macknay
Tim Macknay
9 years ago

I think your last point is a significant one. Not being an economist, I’m not sure whether or not utilitarianism is a core assumption of a lot of economic thinking, although it does sometimes seems that way.

The thing is, whatever its status may or may not be in economics, utilitarianism is not self-evident or obviously true, but is one of several competing meta-ethical theories, each of which has flaws and limitations as a description of, or prescription for, human moral decision-making.

So an analysis that starts with the assumption that do-gooder behaviour needs to conform with utilitarian principles in order to be rational is missing something – namely the justification for that assumption.

A fair trade coffee purchaser may simply not want their own coffee consumption to have enabled someone’s exploitation (as they see it), and not be particularly concerned with macro-type issues. Such a stance would be perfectly consistent with various deontological or virtue-based ethical theories, none of which are obviously less rational than utilitarianism.

I partly agree with James in Perth’s comment regarding your discussion of kerbside recycling. It may be that your point is just not well expressed, but the conflation of kerbside recycling with greenhouse gas emissions seems to be a bit of a non-sequitir. GHG emissions reduction is somewhat incidental to kerbside recycling (although they can coincide to some extent), which is primarily concerned with the reduction of waste and demand for virgin resources, and while tree planting may be the cheapest form of GHG abatement, it’s far from clear that it’s the most effective. You are correct though, that very few people take a critical look at whether programs like kerbside recycling are effective at achieving their intended goals, and many such programs may be less effective than possible alternatives, or even completely ineffective.

Paul Frijters
Paul Frijters
9 years ago

Hi Nick,

fair trade is a fascinatingly complex issue.

At worst, its a complete con-trick that makes Western corporations rich by tapping into uneducated feel-good consumers whilst merely stimulating inefficient allocations of resources in other countries, looking them into future poverty.

At best, its a cheap way of affecting the balance of power within poorer countries from the hands of the few to a larger group of stake-holders which in turn might stimulate the development of better political systems that in turn affect real development.

The unknowns in this debate is what actual affect the free trade labels have on the ground; what free-trade farmers do in terms of politics and investments; and what the knock-on effects are of having a set of Westeners with vested interests coming regularly to poor countries to see what is happening on the ground. It is really the balance of these latter effects that one should judge3 the potential benefits of fair trade on. To look at it just in terms of inefficient allocation of resources is a 1st year econ reaction. Its the hi9dden goal of trying to affect a societal transformation in poor countries by particular means that is the real question and that leads to follow-up questions about how political systems evolve.

derrida derider
derrida derider
9 years ago

But if one accepts that … we need to reduce our total footprint … [t]hen just buying your way out of every aspect of that footprint is not feasible.

– James@1

Nicholas, being very polite, says he’s not sure if he agrees with this. I, being much less polite, am damned sure I don’t agree – I think it is a recipe for disaster.

If we can’t buy our way out with efficient mechanisms then we sure as hell can’t do so with inefficient ones, whose effect is mainly just to give ourselves a warm inner glow rather than to actually address the problems. We risk being like those Victorians who felt that joining societies for evangelising the natives was sufficient to morally cleanse them of the benefits they got from imperial exploitation of those natives.

meika
9 years ago

yes. what David Walker said, it is a ‘fairer’ comparison to compare fair trade with premium products rather than charities, “Why do people buy any premium product rather than acting rationallly and invest the money saved on commodity products into Apple shares ten years ago?”

This is the real question.

derrida derider
derrida derider
9 years ago

Slightly OT, but Nicholas makes a good point about “creating jobs”. Another term for “producing the same economic output with more jobs” is “reducing labour productivity and hence living standards” or “humans working more for no gain”.

Of course that can often be worth doing in pursuit of other goals, such as environmental sustainability or even perhaps a better distribution of those living standards, but it is not a Good Thing in itself. “Creating jobs” is generally a cost that needs to be weighed against other benefits.

Tim Macknay
Tim Macknay
9 years ago

Nicholas, thanks for your reply. I’m sorry the word ‘deontological’ came across as fancy – I genuinely didn’t think it was that obscure. Deontological ethical theories are those that say that The Good entails complying with set rules of conduct; some well-known examples are the Judaeo-Christian Ten Commandments, the so-called Golden Rule, and the Kantian categorical imperative (i.e. always treat people as ends in themselves, not just as means). Deontological theories don’t regard consequences as morally relevant – just conduct. Virute-based ethical theories are those that say The Good entails the possession and/or development of particular character traits – say generosity, justice, wisdom, and so forth.

I’m not really sure why you think I elided the questions. As I pointed out, somebody using a deontological or virtue-based ethical theory who purchased a fair trade product might not only “feel” more virtuous than if they had purchased a non-fair trade coffee product, but be more virtuous (in terms of that meta-ethical theory). Of course, they would not be more virtuous in utilitarian terms if their ‘fair trade’ purchase did not objectively reduce the amount of unhappiness experienced by coffee growers. But that’s in utilitarian terms.

It seems to me that, while you may not be a ‘marauding’ utilitarian, you clearly are one, and your last comment implicitly assumes utilitarianism. NTTAWWT, of course. Certainly, on the assumption that the aim of fair trade purchasing is a general increase in prices for developing country producers, it is a strategy of doubtful effectiveness. But you can’t just assume that utilitarianism is the correct moral position. You need to justify it.

I feel I should point out that I’m not necessarily disagreeing with you that the alleged benefits of fair trade purchasing are questionable, just that you’ve made an unexamined assumption about the underlying ethical theory.

On kerbside recycling, I’m not particularly defending that, either. I just thought it was an odd example, and your comparing it with to the purchase of GHG offsets was a non-sequitur. Unlike GHG offsets (or fair trade purchsing), kerbside recycling generally isn’t a matter of consumer choice, but is established by government fiat, so it’s not really a matter of individuals deciding whether to spend their money on kerbside recycling or some other, more cost effective, form of environmental mitigation. They are usually forced to participate (or not participate) in kerbside recycling depending upon the waste management policy in their local muncipality. So it’s not a particularly well thought out example, IMHO.

Tim Macknay
Tim Macknay
9 years ago

Thanks for the clarification, Nicholas. I agree that utilitarian, or consequentialist, thinking is necessary in policy making.

Tim Macknay
Tim Macknay
9 years ago

I think it’s twee to say things like “Well I don’t really care about how much good I’m doing poor coffee farmers, it’s just my personal aesthetics/ethics that I’m addressing by spending 20 cents more on my coffee to get one cent to some poor coffee farmers.” You’re posing as someone who cares about the farmers and cares about the issue, but then the action you’re taking in response to those things seems actually to be a self-indulgence.

If everyone did that, we wouldn’t get very far with our problems – oh wait – that’s Kant, not utilitarianism :)

My only quibble is that I doubt what you’ve depicted above is a fair generalisation of the attitudes of fair trade coffee purchasers. It’s more of a caricature. It might be true of some, of course, but not necessairly all.

It also smuggles in utilitarianism by assuming that a non-consequentialist position entails ‘not really caring about how much good one is doing poor coffee farmers’ and by conflating ethics with aesthetics. Now it’s you who is eliding the question. ;)

Tim Macknay
Tim Macknay
9 years ago

Aside from the meta-ethical issue, about which I admit I’m being a little argumentative, I agree with Paul Frijter’s comment more generally on the topic of fair trade. I think Paul’s comment also applies to development charities in general – their effectiveness, or otherwise, is dependent on a lot of complex factors concerning what’s going on in the recipient countries or regions.

It also seems to me that inefficient do-gooderism is more often found alongside the efficient variety than as an alternative. In my experience, the people I know who are inclined to buy fair trade products are more likely, rather than less, to donate to charities like Oxfam and so forth, than the people who are not so inclined. Not that this necessarily ameliorates the inefficiency of the inefficient part of their do-gooding, of course, but it’s interesting to note. Oxfam itself, the charity mentioned in the Nichols-Opal quote above, also promotes a range of fair trade products and engages in fair trade projects alongside its more conventional development work.

It might be argued, I suppose, that adopting a combination of different do-gooding strategies with various levels of efficiency is a hedge against the uncertainty of outcomes that Paul aludes to. Not that I’ve heard this argument being made, mind you, and I think it more likely that most fair trade purchasers just uncritically assume that their purchase is better for coffee growers than a more conventional purchase, and don’t really consider how marginal that improvement might be.

Tim Macknay
Tim Macknay
9 years ago

It seems to be that in contrasting virtue ethics with utilitarian ethics you’re just getting off scott free on the question of how much good is done by different alternatives. If I can spend 20 cents and get 18 cents to poor people, or spend it getting one cent to poor people, I reckon that’s a serious issue. I’m trying to grapple with it. I’m not trying to elide it.

I can’t really distinguish the burden of your message from asserting “to each his own”. Of course I don’t want to interfere with someone if they want to buy or market or set up a business selling fair trade coffee. I do want to say that I think they could be doing more good doing something else. That’s why I wrote the post, and I can’t see how you’ve addressed it.

Nicholas, my last remark that you’d elided the question was unnecessarily snarky, and not intended to be taken seriously. I agree that it’s a serious issue.