• 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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