Price supports? Really?

I dearly love NPR. Its coverage of global news, national and local elections, and its thought-provoking interviews with everyday folks are just some of the reasons I’m proud to support my local stations. But when it comes to issues of economic policy, many of the syndicated shows’ hosts, to say nothing of their guests, seem to lack any knowledge of the subject whatsoever. Take, for example, this story on New England’s dairy farms that I heard today. The theme of the piece appears to be the following: the local food movement, while an entertaining pastime for local yuppies, masks the dreadful reality that New England’s dairy farms are disappearing. Milk prices are too low for dairy farmers to support themselves. To compound the problem, suburban homeowners, while a fan of the concept of dairy farms, aren’t willing to make the sacrifices necessary to support their existence. (You can listen to the piece yourself if you want more details; I think that was a pretty fair summary.) In the piece, the filmmaker, Dr. Sarah Gardner, Associate Director for the Center for Environmental Studies at Williams College, suggests that perhaps greater milk price supports are one way to ensure that small dairy farms remain solvent.

None of the following questions were considered in the entire piece:

  1. Why is it necessarily bad that dairy farms go out of business?
  2. Why is it that milk prices should be set by any agency in particular? Would it not be easier to understand how milk is priced if no one entity is pricing it with an arcane formula?
  3. As a corollary to the last question, if the milk pricing scheme is already complicated, why would it be a good idea to introduce more price regulation on the state level where none currently exists? (This was proposed as part of a method to redress the problem; Dr. Gardner notes that some New England states, such as Vermont and New Hampshire, do not have state-level price supports.)
  4. If the current price setting scheme is not “fair” to New England milk producers, then what, exactly, would be fair? Would a price scheme fair to New England farmers be fair to producers in the Midwest? To dairy farmers in other areas of the nation?

Dr. Gardner does, however, question the motives of society at large. “Why, as a society, don’t we value dairy enough?” she queries. Adam Smith asked the same question regarding diamonds and water: why, when water is so clearly more important for human survival, does it cost so much less per unit than a diamond? The answer lies in the definition of the price of a good: price is equal to marginal revenue, \(p = \frac{dR}{dq}\). Since there are so many fewer diamonds, they cost more per unit. This is trivial introductory microeconomics; no competent economist would claim that, as a society, we don’t value milk in the aggregate “enough” (whatever that means). Rather, we are lucky enough to live in an era of technological progress that allows us to produce far more milk on the same amount of land than would have been possible 50 or 100 years ago. Milk is cheaper because society has become quite literally better off as a whole; lower prices for a good mean that good is less scarce. To wish higher milk prices is to, simultaneously, wish that society become poorer—that there be more deadweight economic loss—and to express the view that dairy farmers are somehow more important than the rest of society to the degree that they should be made better off at the rest of society’s expense.

This is not to wish ill on dairy farmers; personally speaking, I have fond memories of visiting dairy farms in rural New England and working on small farms during summers growing up; and economically speaking, dairy farming must be done by someone, somewhere, if the demand for milk, cheese, and other delicious dairy derivatives is to be met. Like many economic scenarios, this is not a zero-sum situation. If the cost of producing milk in New England is too high for farmers to remain solvent with their current business model, perhaps they should consider one of these sensible alternatives that does not distort the emergent market price system:

  • Leave the dairy industry and pursue other occupations
  • Re-brand their farm as local (much as the “local food” movement has been doing with such success) by downsizing and marketing to a different subset of consumers
  • Enter into a cooperative organization with other local farms; that is, horizontally integrate
  • Enter into a contractual agreement with other local landowners, distributors, and restaurants to vertically integrate
  • Petition a nonprofit organization to take ownership of some or all of their land to preserve its rural character and the small town New England way of life
  • Enter into a contractual agreement with developers in which houses are built close to the dairy farm, attracting people who value traditional farming methods, in return for a cut of the profit from the sale of the houses

There are, of course, many more possibilities. In short, I wish we could have more constructive conversations about these sorts of things, instead of returning to the economic fallacies of price supports and normative judgment of consumers. I, too, would lament the vanishing of the entirety of New England’s dairy farms. But there are ways to preserve these treasures without trashing the price system that has allowed for the technological innovation that makes our society as well-off as it is today.

Written on October 9, 2016