Don’t follow the money

by Russ Roberts on February 25, 2011

in Trade, Uncategorized

One of the arguments of the buy local movement is that buying local “keeps the money in the community.” This seems like a good idea but it’s a red herring that misleads.

Suppose my neighbor Bob starts a car company. He manages to create a car that is of the same quality as the Honda Accord using lots of talented local workers. The car costs $1 million. Should I buy a Honda Accord or a Bob? If I buy the Accord, the money leaves the community. Wouldn’t it be better for the community if I bought the Bob? Better for Bob, yes. Worse for me. So my natural inclination is to buy the Accord. I will have a lot more money to buy other things. Yes, some of those things will be local, so it is tempting to say that even buying non-local is good for the community because eventually I’ll spend some of the savings here. But suppose I spend NONE of the savings locally. I just buy the best products and services I can find, the products and services that provide the best value. Suppose none of those are local. Am I being selfish? Don’t I care about my community?

Before I try to answer that question, let’s try another thought experiment. Instead of making a million dollar car that is as good as the Honda Accord, Bob’s million dollar car actually doesn’t work. But should I buy it anyway because it “keeps the money in the community?” Or because it keeps the jobs in the community? It will do both of those things. But these are unproductive jobs. Clearly if we buy non-working goods from each other, we keep the jobs and money in the community but we have very little to eat. We are very poor.

The way to prosperity is to find ways to serve others by producing something you value enough to pay the price I charge. If I serve you poorly either by making a lousy product or one that is more expensive than the alternatives, but ask you to buy from me anyway, that is charity. That may be a nice thing to do. I may choose to do it because I care about you. But don’t pretend that it creates wealth when I am getting less value for my money than I could get elsewhere. It doesn’t. What it does is put my purchasing power in your pocket.

But shouldn’t we support and help each other by buying local? Maybe. But don’t pretend it creates material prosperity. It reduces material prosperity unless I get equal or greater value from purchasing local compared to the alternatives. But in that case, buying local comes naturally and you don’t need to exhort anyone to do it.

When my neighbor asks me to buy his product because he is local, he is asking me to forego benefits. If we all choose to do so and if everyone outside of our community does the same–they only buy locally in their communities–we restrict the range of people we can buy from and sell to. We reduce the range of people we can cooperate with implicitly via specialization. That makes us poorer.

Another way to see it is when I refuse to buy local as an overriding principle, I am telling you, my neighbor, that I expect you to compete with others outside of our community in providing me goods and services of value. But because other outside of our community are willing to trade outside of their communities as well, you will have more people who demand your goods and services. The trick is finding the activity that provides value. The alternative is limiting the choices of others so that particular activities that you would like to do may still be of value, anyway. That is not the road to prosperity. That is the road to poverty.

We have tried buy local before. It is called the Middle Ages.

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