The Green Nature of Markets or The Problem with Environmental Fads and Dogma

A couple of friends of mine were buying a futon when the saleswoman came up and said, "What you need to know about these is that they don't use any wood from the rain forest." One of my friends replied, "That doesn't matter. We're economists, all we care about is the price." My other friend said that the saleswoman just guppied for a minute before stammering, "Well...I guess that's a point of view."

Yes, it is a point of view and an extremely good one. This is because prices are the mechanism by which we get signals from the market about the relative costs and values of things. When one thing is cheaper than another, we know that either less resources were used to produce it or that it is less valued by other consumers. In the case of two identical products (say two futons), we can more or less ignore the second possibility and focus on the first. Therefore, when purchasing products, buying things that are lower priced will generally result in buying things that took less resources to produce.

In 2010, Stephen Budiansky offered what he called Math Lessons for Locavores.

But the local food movement now threatens to devolve into another one of those self-indulgent — and self-defeating — do-gooder dogmas. Arbitrary rules, without any real scientific basis, are repeated as gospel by “locavores,” celebrity chefs and mainstream environmental organizations. Words like “sustainability” and “food-miles” are thrown around without any clear understanding of the larger picture of energy and land use.

The result has been all kinds of absurdities. For instance, it is sinful in New York City to buy a tomato grown in a California field because of the energy spent to truck it across the country; it is virtuous to buy one grown in a lavishly heated greenhouse in, say, the Hudson Valley.

Budiansky goes on to look at the claims made by "locavores" about the energy that is wasted on shipping food over great distances and generally debunks them. Among other things he notes that it only takes one tablespoon of diesel fuel to move 1 pound of produce 3,000 miles by rail (which is totally credible since railroads get 476 ton/miles to the gallon). He also notes that transportation only accounts for 14% of the energy used in food production. In contrast, home preparation and storage account for 32%, so consumers are the real energy hogs.

As interesting as this all may be, focusing on energy alone ignores all the other resources that go into food production. As Budiansky puts it:

The best way to make the most of these truly precious resources of land, favorable climates and human labor is to grow lettuce, oranges, wheat, peppers, bananas, whatever, in the places where they grow best and with the most efficient technologies — and then pay the relatively tiny energy cost to get them to market, as we do with every other commodity in the economy. Sometimes that means growing vegetables in your backyard. Sometimes that means buying vegetables grown in California or Costa Rica.

Gee, wouldn't it be nice if we had some sort of system that made sure that things were produced in the most favorable locations, using the most efficient technologies and that took differing costs of transportation into account.

Excuse my sarcasm but this is exactly what markets do. If someone can find a way to make it cheaper enough somewhere else that it pays to ship the product of log distances, then they make a killing on it and consumers get lower priced produce.

In North Carolina, we have lots of hog and poultry farms be cause the climate here is very conducive to that type of operation (and not conducive to other things). These farms consume far more corn feed than North Carolina  produces. They only exist because the railroads found a way to inexpensively ship corn from the midwest. The key innovation there was the Big John covered hopper and the use of unit trains that carry only one commodity from point A to B. This allowed the growth of large meat packing firms like Smithfield which became the largest pork producer in the world. A lot of people in NC are totally ignorant of this railroad connection, even if they are aware if the size of the hog and poultry industry

But that's okay, we don't need to know all that because most of the relevant information is aggregated into the price. As Landsburg points out in reference to Budiansky's article: 

The key economic point is that in practice, there is one and only one way to account for all those costs (or at least most of them) and that is to look at the price of each tomato, which largely reflects the opportunity costs of the land, the workers, the farm equipment, the resources that produce that farm equipment, and much more that matters very much but that you and I probably won’t think of on our own. 

To be sure, markets aren't perfect, especially where externalities are concerned. But we need to realize that they are inherently "green" in the sense that they incentivize efficiency which is the essence of conservation. However, this efficiency only works when  people follow the incentives. Where consumers are concerned, this means buying things that are lower priced. If a locally grown tomato sell for less, by all means buy it. But if it costs more than one from California, it probably means that more resources were used to produce the local one, and you should buy the one from California if you care about conserving resources.

Of course, there is the possibility that the local farmer is just as efficient as the California one, but knows that a lot of people irrationally (as I have argued above) value local produce and will pay a higher price. Power to the farmer that can do this but his customers are playing the role of the Greater Fool in the farmer's plans.

On a personal note...

My wife and I have four chickens that I keep in my yard and this is supposedly sustainable agriculture. We get 3 eggs a day which are very tasty, so they are worth twice as much to me as the eggs I can buy in the supermarket. Therefore, I would put there value at $4/dozen which comes out to $30 of eggs per month.. Against that I have the cost of feed and other supplies which run about $20/month. This means I get $10 of value each month. However, I spent $1,500 building the coup and purchasing the chickens and other sundries. So I won't break even until 150 months or 12.5 years have passed. Of course, by then I will have needed to acquire several more generations of chickens and the coup will need maintenance, pushing the break even date farther into the future.

Of course, I haven't mentioned the labor involved in all this. My wife spends about 4 hours a month tending the chickens. Even at minimum wage (which dramatically undervalues her time), that's $29 of labor costs. So we are actually losing $19/month before I even begin to calculate my labor for building the coup (another $300 because that took me a while).

My point is that there is nothing sustainable about any of this. Our piddly little operation burns up far more resources than it produces. Sure the eggs taste better, but we end up giving half of them away because we just don't need 21 eggs a week.

In contrast, the professionals make a profit selling eggs for less than $2/dozen. They are the ones who are conserving resources and sustainably producing eggs and poultry, not us. We have some pet chickens we love and my wife especially enjoys tending them. Keeping chickens is entirely a leisure activity which puts it in the category of consumption not production. The eggs are simply a by product that lowers its overall cost (perhaps making it sustainable consumption). That's the only way our chicken endeavor makes any sense to me. (Actually, it is something my wife really likes and that's all I need to know.)