Farmers feeling the squeeze of marketplace realities

Bookmark and Share Economics & Deregulation, Ideas & Liberty and Food | Chris Berg
The Drum 8th February, 2012

We are a pessimistic bunch. Apparently no-one will win out of the supermarket price wars.

The farmers will lose: Nick Xenophon claimed that "short-term gain will be followed by long-term pain for farmers - and, ultimately, consumers." Bob Katter said the price of cheap food will be "the broken backs of our farmers."

Consumers will lose: Supermarkets are "businesses, not benevolent institutions," warned the self-styled consumer group Choice last week, "we may see longer-term impacts that work against consumers' interests." A writer in the Courier Mail claimed that "we should not be delighting in the promise of lower prices", in a column titled "We'll pay for this price war".

Even the supermarkets will lose: market analysts were sternly telling the business pages that "'persistent acute food deflation posed a risk to this financial year's margins."

One news story even initially reported "supermarket giants have been given the green light to continue with aggressive discounting, with worse to come". Yes, that's right: "worse to come".

If you ever needed a demonstration that producers have a lock on the public debate, look no further.

Declining prices and aggressive competition is an absolute, unbridled, unvarnished good for consumers, yet we only seem to hear how much discounting could hurt.

Sure, supermarkets should be able to defend themselves.

But our apparent sympathy for producer interests over consumer interests has - and has had - some terribly unfortunate consequences.

One analyst described to RN's PM program what he imagined was the consequences of price competition:

The very consumers that they're selling their products at lower prices to are employees of the companies that are going broke because they're not making enough money selling to Coles and Woolies.

In other words, a vicious cycle of cheap goods where we all end in poverty.

That is a complete fantasy. If buying more for less led to economic collapse, we'd have no economy to speak of anymore.

An alternative theory is that consumers are bringing enormous competitive pressure on supermarkets to reduce the price of grocery staples, which the supermarkets respond to by trimming administrative fat, reducing margins, and getting better deals out of suppliers.

You know, a competitive market working in exactly the way a competitive market should.

It's exactly the sort of aggressive pricing dynamism that we want from the marketplace.

But producers don't like that sort of dynamism and competition. Satisfying consumers is stressful - it's a never-ending process of innovation, refinement and creative destruction. Markets are uncomfortable and uncertain. And competition is destabilising for established firms.

No wonder farmers don't like the pressure being applied from the retail end.

But why should we give their complaints such credence?

Adam Smith wrote in his Wealth of Nations,

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.

We work so we can eat. We labour so we can relax. We don't consume in order to produce, we produce in order to consume.

Smith continued to say that this "maxim is so perfectly self-evident, that it would be absurd to attempt to prove it." Apparently it is not.

Protectionism is based on the belief that producer interests are more important than consumer interests. Australia was the richest country in the world at Federation. Ninety years of protectionism later, we had dropped to 15th.

When Australia embarked on economic liberalisation, it was a reorientation of the economy towards consumption.

But we did not similarly reorientate our political culture. The howling of rent-seekers after such an unambiguously pro-consumer price cut has been deafening, and reported uncritically.

There's an important reason why producer interests dominate the public and legislative debate. Only producers have enough incentive to lobby in their interests.

The benefits of producer-favouring regulations are concentrated. Producers who believe they can get a commercial advantage out of regulatory protection have an enormous incentive to lobby for new laws. Farmers feeling squeezed by the demands of the supermarkets email their local MP and call sympathetic journalists.

There is no equivalent dynamic on the consumer end. Who would spend days, or weeks, or months, of their life defending ever-so-slightly lower prices? The benefits of cheap goods are dispersed across all consumers.

When Adam Smith was writing in the 1770s, his targets were the mercantilist states of his day. In the 18th century, governments had created cartels and monopolies in order to dampen "troublesome competition" and deliver political favours.

But troublesome competition is what has made us in the 21st century wealthier than at any other time in history.

Yes, consumers always demand that producers make things better and cheaper. And not all firms can meet those demands. This is exactly how the system should work.

This article originally appeared on The Drum on 8/2/12 and can be accessed at http://www.abc.net.au/unleashed/3816172.html