Outsourcing Food

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.

Copyright © 2004 LewRockwell.com

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