Outsourcing Food

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In a recent
PBS show on China, the narrator said that only 7% of China’s land
is arable. So, every acre is used to grow food. This means that
China is a large-scale version of Japan in agriculture.

Next, the
narrator reported that farm output is low. Chinese farms average
one acre. This means that land prices are high. In such situations,
complementary factor prices are low — specifically, labor.
The price of land is bid very high, leaving less for bidding up
the price of labor. What does get bid up is the price of substitutes.
If land prices are high in region A, it will pay to clear the
swamp in region B. Up goes the price of swamp-draining equipment.

Under such
conditions, the move of rural people to cities is inevitable,
assuming there is a market for the output of urban labor. Wages
are higher in cities, because worker productivity is not based
so heavily on land. This is why skyscrapers are everywhere in
Shanghai. This is why apartment houses are common in cities. They
aren’t in the country.

Cities with
millions of people are now developing all over China. This was
not equally true in the past because worker output was low in
cities under Communism. But with the freeing of markets, capital
is flowing back into China, especially from Taiwan. Capital inside
the country is flowing to high-output urban workers. This is increasing
the price of labor. So, the move from the countryside to cities
is a flood. There has been nothing comparable to this in human
history. The closest that any nation has come is India. But arable
land is more abundant in India. The economic pressure to leave
the farm is not equally great.

China imports
food, just as Japan does. China will import a lot more food as
labor output increases in cities. People want to eat better. Imports
of food will allow this.

It is clear
what is happening: China is outsourcing its food production. Not
all of it, surely. Chinese farmers still feed themselves and their
families. But they cannot feed the masses that are moving to the
cities. Agricultural productivity in China is too low.

Agricultural
output in Canada, the United States, and Australia is so high
that there is plenty of surplus production. The Chinese see this
and are taking advantage of it. They are even developing a taste
for wheat. It’s called "Big Mac." Nobody is going to
starve in the West as a result of Chinese imports of food.

We hear no
warnings from American politicians that this is bad for China.
It is surely not bad for American farmers. Outsourcing food production
is eminently sensible for China, all people seem to agree —
at least media pundits and Congressmen agree, which in their view
constitutes all people.

This leads
me to a consideration of outsourcing in general. What is sensible
for Chinese, who want to eat better and cheaper, is also sensible
for members of any economic group who want to increase their consumption
but cannot do so based on existing production inside those invisible
lines called national borders. They should outsource whatever
they do not produce efficiently. This is clear with respect to
food, but it is equally true conceptually in other areas of the
world economy.

China is
outsourcing food production. America is outsourcing textile production.
Meanwhile, Japan is outsourcing soybean production. America is
outsourcing Toyota production.

Is this the
end of prosperity for America? Imagine the following news reports:

(DES MOINES,
IOWA) — Jeremiah V. Jones, a farmer living in nearby Elkhart,
thinks it will be a very good year. "The weather has been
excellent. We ought to get a good crop." This fall he planted
Toyotas. "We rotate the crops, of course. In fall, we plant
Toyotas. In spring, it’s Nissans. In summer, we usually plant
Isuzus, mostly for ground cover. It works out well most years,
although a drought three summers ago wiped out half our Isuzus."

When asked
about models and colors, he says he’s betting on red winter
Toyotas. "Pretty hardy crop. Withstands cold weather better
than the metallic blue variety. Good crop for Iowa. ‘Course,
if anything comes of this global warming business, we may have
to switch. No signs of it yet, though."

(NAGOYA,
JAPAN) -Toshiro Uda, director of the Tanaka Soybean Works, is
guardedly optimistic about prospects for soybean sales this
year. "Demand remains high. But why not? This is Japan,
after all. Our main concern is with supply. The whole industry
has been adding plant capacity. The new robots have really streamlined
production."

Mr. Uda
pointed with obvious pride to the main floor of his spotlessly
clean factory. Only three men were visible, sitting in front
of computer screens, monitoring every aspect of the soybean
production process, from the "just in time" deliveries
at the front end of the factory to the robot-controlled packaging
as the newly canned beans headed to the docking area. "Nothing
else like it in the industry," he said.

WHO
BUYS WHAT?

These two
news reports sound like something out of a bizarre science fiction
short story about some future era where nanotechnology —
manufacturing at the molecular level — has become a reality.
Economically, however, both reports are the essence of a modern
economy. Sometimes it takes a little surrealism to make economics
clear to people.

The farmer
in Iowa who plants soybeans or any other crop aimed at the market
has no intention of personally eating his crop — certainly
not soybeans. In the United States, soybeans are eaten mostly
by household pets and certain health food devotees. Most of the
soybean crop is exported, and a significant portion winds up in
Japan.

The goal
of farmer Jones is not to consume soybeans. He plans to buy something
else. He wants money. He will sell the crop to the highest bidder,
but agricultural crops being what they are, a uniform price will
confront all soybean farmers, adjusted for transportation costs
and other minor differences. In the bidding war, the Japanese
importers of soybeans usually win. They buy the lion’s share of
the crop. Soybean oil is used for many products. Fido and kitty
get most of whatever remains. Although I find it difficult to
imagine, I suppose the rest goes into soybean burgers.

Similarly,
the goal of Mr. Uda is not to drive a fleet of Toyotas. He plans
to buy something else. He wants money. He will sell the Toyotas
to the highest bidder, but car sales being what they are, a lot
of non-price competition exists: models, colors, and features.
In the bidding war, the Americans will buy, if not the lion’s
share, then at least a good-sized black bear’s share.

Taken as
an individual, farmer Jones may or may not buy a Toyota or feed
his household pets soybeans. Mr. Uda may or may not eat more soybeans
or buy a new Toyota this year. But taken as nations, a lot of
Joneses will buy Toyotas, and a lot of Udas will buy soybeans.

The economic
question is: What is the least expensive way for the Joneses to
buy their Toyotas, and for the Udas to buy their soybeans?

GETTING
THE MONEY TO BUY

To
buy a Toyota produced in Japan, Mr. Jones will need some Japanese
yen. To buy some soybeans, Mr. Uda will need some dollars. But
neither Mr. Jones nor Mr. Uda normally handles the currency of
the other nation. So, intermediaries in both countries (or maybe
in a third country) intervene to make it possible for both Jones
and Uda to buy what they want. They sell dollars to the Japanese
importer who wants to import soybeans. They sell dollars for yen.
They sell yen to the American importer who wants a shipment of
Toyotas. They sell yen for dollars. Back and forth, back and forth:
the currency traders are always in search of a lower price for
the currency they plan to buy next. The importers then sell their
newly imported products to buyers in their respective nations

How do the
soybean farmers get the dollars to pay the importers of Toyotas?
They grow soybeans. How do the Toyota manufacturers get the yen
to buy the soybeans? They manufacture Toyotas. So far, so good.

The Iowa
farmer is uniquely equipped to grow soybeans. He has a tremendous
advantage here. The Japanese manufacturer is not uniquely equipped
to manufacture Toyotas. Land costs in Japan are high: too high
for growing soybeans — low value per square foot — but
not too high for manufacturing Toyotas. It would be a lot more
expensive for the Iowa farmer to shift production to Japan than
it would be for the Toyota manufacturer to build a Toyota factory
in Iowa.

The economic
reality is this: the soybeans will move from Iowa to Japan for
as long as the high bidders for soybeans are in Japan. Meanwhile,
Toyotas will move from Nagoya to America for as long as the higher
bidders are in America and the overall costs of production plus
export remain lower in Nagoya.

GIVING
A GOOD ACCOUNT

I would rather
drive a Toyota than eat soybeans. There are Japanese who would
rather dine on soybeans — presumably a great deal of soybeans
— than drive a Toyota. As always, there is no accounting
for taste. There is, however, accounting for cost of production.

Accountants
on both sides of the Pacific Ocean are fluent in a strange and
arcane language: double-entry bookkeeping. The discovery and development
of double-entry accounting was one of the greatest discoveries
of all time. It allows specialists in accounting to inform a producer
regarding the success or failure of his efforts. The market provides
the numbers: income vs. expenditures. The accountants inform the
producers: "keep up the good work" vs. "shut the
whole thing down until you figure out a cheaper way." When
the producers listen to their accountants, an amazing thing happens:
soybeans get grown in Iowa, and Toyotas get built in Nagoya.

Well, maybe
this is not so amazing. But explaining to people how this happens
is more difficult than you might imagine. People really do not
understand the whole process. This is why politicians can frequently
persuade voters to erect barriers to imports. Politicians rarely
campaign on a platform of "Let’s pay more for the things
we enjoy!" but they often campaign on a platform of "unfair
competition." They get elected, too.

THE
ECONOMIST’S DISADVANTAGE

Economists
have discovered a way for drivers and diners to fulfill their
respective desires with the least expenditure of money. It is
called free trade. Each producer specializes in what he does best,
that is, does with the least expenditure of scarce economic resources.
Each consumer is therefore able to take advantage of the cost-effective
production methods of the least wasteful producers. The trouble
is, economists have not always been as successful in explaining
this as the politicians have been in persuading voters to go along
with tariff increases and import quotas. It is not easy to persuade
voters in either country that Iowa farmers are really growing
Toyotas, while Nagoya workers are really producing soybeans. It
is not easy for most voters to grasp the fact that the laws of
physics and biology are different from the laws of economics:
specifically, the law of comparative advantage.

The politician
looks at the short run. "Look at all the jobs that these
imports are destroying." The economist looks at the long
run: "Look at all the choices each individual can make."
Voters see unemployed workers or read about them. They have a
lot more trouble relating their increased number of affordable
choices to the decrease of restraints on trade. People frequently
vote in terms of short-run issues, especially visible ones. So,
the politician has long enjoyed an advantage over the economist
in persuading people to support restraints on trade. It takes
a very good economist to make the case for long-term personal
advantage for many consumers vs. short-term advantages of reduced
competition for specific unemployed workers. Adam Smith was a
very good economist; he made a persuasive case. But not many people
read Adam Smith these days.

Not being
Adam Smith, I have taken a shorter path to economic understanding:
a bit of surrealism to make my point. So, I recommend that the
next time you test drive a Toyota, think about that Iowa farmer
and how hard he works to make your test drive economically possible.
But remember: you are skipping the joys of eating several soybean
burgers in order to make your test drive possible.

CONCLUSION

Yes, there
is a lot of outsourcing going on. There is no doubt that this
will continue until Japan can get its soybean production up, and
America can get its Toyota knock-offs to run as well as Toyotas
do.

The point
is, we are all part of the problem. As consumers, we keep telling
retailers, loud and clear, that we love bargains. We put our money
where our mouths are. And when I say "we," I mean all
people, great and small.

Even Arabs
want a Jewish brother-in-law deal.

April
28, 2004

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
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