The Myth of Buy Local
February 18th 2010 17:02
We constantly encounter advertisements and political rhetoric telling us to "Buy Local!" or "Buy American!" How can people still seriously believe this kind of anti-trade thinking disguised by patriotism?
Let us assume that there are two brands of toothpaste: Local and Foreign. Local is a highly expensive, low-quality product, while Foreign is a cheap, high-quality product. You would prefer to buy Foreign, but your mayor would prefer you buy Local, so he bans Foreign. He claims that it will increase the welfare of the community. How is that so? He is forcing you to accept an inferior product AND have less money to spend on other goods. Therefore, he has reduced the welfare of the consumers in that community.
How about producers? Sure, the owner of Local will enjoy having extra business (and the owner of Foreign will not enjoy losing business, but who cares about foreigners, right?), but some people will find the prices/quality of Local to be far too undesirable. As a result, there will be citizens that will choose to simply forgo toothpaste altogether, even though buying Foreign toothpaste would have increased their satisfaction, without lowering anyone elses (since they were not going to buy Local). This loss of transactions is known in economics as a Deadweight Loss.
If we assume the most radical Buy Local policy imaginable, it would consist in not allowing anyone to purchase goods outside of the community. What if there are only 500 people in your community? This would mean that with these 500 people, the community would need to produce every good imaginable. That simply is not possible, and if it were, it is not at all desirable. As I wrote about here the larger the market you have, the more able a community is able to take advantage of specialization and trade. By restricting the market to 500 people (or another number significantly smaller than the world population), you are choosing to forgo the tremendous welfare-improving benefits of trade. I have a picture in my head of what such a community would eventually come to look like. Have you ever heard of sub-Saharan Africa? Remember Russ Roberts statement, "Self-sufficiency is the road to poverty."
But how will the local community thrive if people are allowed to buy from anyone anywhere in the world? Presumably, the members of the local community are good at something. They should find what they have a Comparative Advantage in and do that. Then they can sell these goods to people living in the community and abroad. Allowing foreign trade will also put pressure on local businesses to offer higher quality and lower prices. Shielding local businesses from outside competition will foster an atmosphere of stagnation and neglect of the customers. How would forcing citizens to buy from terrible local businesses be a blessing to the community?
While those who support Buy Local do not mention this, it would seem rather bizarre if they wanted others to follow their advice. Otherwise, they must be attempting to persuade those outside their community to NOT buy their goods. That seems like a business model that is doomed to fail.
Buy Local campaigns, and Buy American laws, come down to just another form of protection meant to harm the consumers and help the domestic producers. Of course, there certainly are sometimes benefits from buying local, but sometimes there are benefits from buying foreign. Ultimately, the consumer should be able to decide on his own which products he would like to purchase. When governments and businesses start making choices for us, we lose.
Follow me on Twitter: @AGoldenDoor
Let us assume that there are two brands of toothpaste: Local and Foreign. Local is a highly expensive, low-quality product, while Foreign is a cheap, high-quality product. You would prefer to buy Foreign, but your mayor would prefer you buy Local, so he bans Foreign. He claims that it will increase the welfare of the community. How is that so? He is forcing you to accept an inferior product AND have less money to spend on other goods. Therefore, he has reduced the welfare of the consumers in that community.
How about producers? Sure, the owner of Local will enjoy having extra business (and the owner of Foreign will not enjoy losing business, but who cares about foreigners, right?), but some people will find the prices/quality of Local to be far too undesirable. As a result, there will be citizens that will choose to simply forgo toothpaste altogether, even though buying Foreign toothpaste would have increased their satisfaction, without lowering anyone elses (since they were not going to buy Local). This loss of transactions is known in economics as a Deadweight Loss.
If we assume the most radical Buy Local policy imaginable, it would consist in not allowing anyone to purchase goods outside of the community. What if there are only 500 people in your community? This would mean that with these 500 people, the community would need to produce every good imaginable. That simply is not possible, and if it were, it is not at all desirable. As I wrote about here the larger the market you have, the more able a community is able to take advantage of specialization and trade. By restricting the market to 500 people (or another number significantly smaller than the world population), you are choosing to forgo the tremendous welfare-improving benefits of trade. I have a picture in my head of what such a community would eventually come to look like. Have you ever heard of sub-Saharan Africa? Remember Russ Roberts statement, "Self-sufficiency is the road to poverty."
But how will the local community thrive if people are allowed to buy from anyone anywhere in the world? Presumably, the members of the local community are good at something. They should find what they have a Comparative Advantage in and do that. Then they can sell these goods to people living in the community and abroad. Allowing foreign trade will also put pressure on local businesses to offer higher quality and lower prices. Shielding local businesses from outside competition will foster an atmosphere of stagnation and neglect of the customers. How would forcing citizens to buy from terrible local businesses be a blessing to the community?
While those who support Buy Local do not mention this, it would seem rather bizarre if they wanted others to follow their advice. Otherwise, they must be attempting to persuade those outside their community to NOT buy their goods. That seems like a business model that is doomed to fail.
Buy Local campaigns, and Buy American laws, come down to just another form of protection meant to harm the consumers and help the domestic producers. Of course, there certainly are sometimes benefits from buying local, but sometimes there are benefits from buying foreign. Ultimately, the consumer should be able to decide on his own which products he would like to purchase. When governments and businesses start making choices for us, we lose.
Follow me on Twitter: @AGoldenDoor
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Comment by Anonymous
"Let us assume that there are two brands of toothpaste: Local and Foreign. Local is a highly expensive, low-quality product, while Foreign is a cheap, high-quality product. "
The foreign product is generally of MUCH lower quality.
You are ignorant. By buying locally you put money back into the local economy. Local retailers generally buy from other local stores. Big businesses and foreign businesses generally move into a town and bring less jobs, and destroy the sense of community.
They also generally get tax break incentives to move into a town, and then who ends up paying those taxes? YOU! Do your research before you open your mouth.
Comment by Dr. Liberty
Borderless World
Political Craft
MLB Analyst
First off, your comment completely misses the point of the part you quote. I was specifically speaking of the case in which a foreign product was of better quality. In that case, Buy Local policies would force a person to settle for an inferior product.
Second, if foreign products are so undesirable, then why do so many people buy them? Are Honda, Samsung, Sony, etc. really inferior products?
I don't think I am as ignorant as you claim me to be. You really must explain what is so great about "putting money back into the local economy." Prosperity comes not from the amount of money a community has, but rather from the value of the goods possessed by the members of the community. Self-sufficiency is the road to poverty.
Foreign businesses actually come in and bring more and/or better jobs, while providing better products/services than the incumbent company they replaced (in general).
I am against tax breaks for companies to come into town, so we can agree on that one.
By the way, I certainly hope that you read past the second paragraph of the post.