Sunday, October 28, 2012

This Saturday I had the honor of speaking at the New Hampshire Skepticamp, which is a small skeptical conference where the attendees give the talks. My topic was the economic claims of the "Buy Local" movement and I'm currently working on getting a video of my talk online.

I never give talks by reading off a script on stage. I do write a script to rehease and organize my speech. When it comes time for the talk, I have a list of bulletpoints to stay on track and I always keep a physical copy of the speech at the podium in case my mind goes blank, but I've never had to use it.

My rehearsal script is available after the link:

In 2007 a group of 20 artisans banded together to create a man's suit using materials harvested and processed within 100 miles. After 500 hours of labor this was the result.

I've been writing about the economic claims of the "Buy Local" movement for the last four years and show you why these claims are pure woo.

This is going to be like cutting the head off a hydra. As we know, cutting the head off a hydra allows two new ones to take its place. Just as we see when confronting conspiracy theorists and astrologers, localists will attempt to change the subject to claims about the environment , safety and security, social responsibility or aesthetic values.

Localist economic claims can be traced back to one of two organizations that produce activist "studies" that claim to show wealth creation from this method. They are the transparently-named activist organization "The institute for Local Self Reliance,” and “Civic Economics,” which as far as I can tell is two guys in Austin Texas with a pocket calculator.

My brief talk will focus on the "local multiplier effect," which is a psedoeconomic growth model presented by "Buy Local" advocates. The idea is that if consumers in a community shift their purchases to vendors that are also inside the community, those vendors will have more money that will also be spent within the community. The wealth of the community will be contained and avoid escaping to other places. Localists are willing to pay higher prices under the assumption that it will be more than made up for with economic growth. This assumption is both false and ancient

This idea is just a rehash of a ancient disproven idea called mercantilism that was refuted by Adam Smith, the founder of modern economics. Under mercantalism, entire nations tried to maximize exports, minimize imports and build up reserves of precious metals. Like many pseduoscientific ideas, local purchasing preferences do not build upon the existing economic framework, but ignore it because its advocates do not understand it and that's why they are able to accidentally recreate disproven models like mercantalism.

The biggest program with this model is that it ignores half of the equation. The focus is always on what the merchants take in, but it ignores what the customers pay out.

Another big assumptions the mercantialists made is that precious metals and gems are wealth, but it was Adam Smith who argued that real wealth is in resources, the goods and services one can command. Money is just a proxy for resources.

In 1776 Adam Smith showed in his book The Wealth of Nations that trade can increase wealth by allowing people to specialize and become more efficient.

Imagine if you and a neighbor each want to eat a hamburger and a tuna fish sandwich every day. You could prepare one of each for yourself and let your neighbor do the same, but this would require two grills to be fired up and cleaned for the hamburger. Two can openers would need to be purchased and put away, along with two bowls to mix the mayonnaise into the tuna.

What if instead you made two hamburgers and your neighbor made two tuna sandwiches and you traded. You would see a reduction in the tools needed and the cleanup. Efficiency would increase. That's why specialization is important.

In 1817 David Ricardo revealed his revolutionary idea of comparative advantage. I don't have time to explain this notoriously difficult idea in depth so I will simply sum it up as trading with people allows you to concentrate on your most productive tasks while they handle less important tasks for you. Once again, efficiency is increased.

This is why self-reliant societies usually exist on the verge of subsistence.

Jobs are not a benefit in and of themselves, and being more efficient means certain types of jobs are eliminated. This frees up workers to concentrate on other tasks. If you don't force all the workers in a community to grow food to keep everyone from starving, you are able to let some workers focus on other needs like arts, entertainment and scientific research.

But the localist model creates jobs by being purposely inefficient. Instead of buying a mass-produced cutting board, you might by a handmade cutting board from a local craftsman and pay twice as much. That creates busywork, but it doesn't increase the amount of goods produced. That ties up the members of the community with busywork when they could become software engineers, cancer researchers or airplane manufacturers.

When you limit who you will buy from, you will on average pay higher prices. When you limit the size of production, you will sacrifice economies of scale and be less productive. If your community is trying to be self-reliant, it will ultimately be poorer.

So back to the multiplier effect as promoted by localists. Let's test this model with a hypothetical community that is entirely self-reliant.

The claim is that by purchasing things entirely from within the community, money will stay in the community and the community will become wealthier. So that means that the community will turn resources into goods using jack-of-all-trade production, instead of specializing. Therefore, more resources will be used to create fewer goods. These goods will then be traded within the community. The focus is to “buy local” but not to “sell local” and occasionally goods will be sold outside the community while more green pieces of paper will come in.

However, no new goods will be allowed into the community – they must be made locally, so the volume of green pieces of paper will increase. Localism concentrates on what the merchants take in, but it forgets to factor in what consumers pay out. Higher production costs mean local goods will cost more to buy, so the purchasing power of these green pieces of paper will decrease. In addition, with resources leaving the community and more green pieces of paper coming in, the ratio of resources to currency will change.
 This is essentially inflation, and merchants will demand more money as goods become scarce while they are awash in currency. Even in their perfect dream economy, dollar bills may stay in the community, but wealth will not increase, as wealth means having more goods and resources.

This community would be poorer in every sense of the world.

The "Buy Local" movement is best understood as an advertising scheme for local merchants that uses false promises and guilt to win over customers.

I'm going to share a quotation from Paul Krugman from his 1996 Pop Internationalism, a wonderful book on economic woo. He was writing about modern day protectionists, but every word of it applies to localists.

“…We learn that the authors on my reading list do not base their disdain for academic economics on a superior or more subtle understanding. Rather, their views are startlingly crude and uniformed… [the view] is dominated by entirely ignorant men, who have managed to convince themselves and everyone else who matters that they have deep insights, but are in fact unaware of the most basic principles of and facts about the world economy.”

Today I am wearing a globally-produced suit and the entire ensemble can be purchased for less than $300. If you paid every worker for the 100 mile suit I showed at the beginning a mere $10 hourly wage, the labor cost alone would be $5,000 and each worker would have to set aside a quarter of their income to buy the outfit, and it looks like it was made from a burlap sack and pressed dryer lint. Which world would you rather live in?

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