Why Buying Local Doesn’t Work

Update: I allowed this to be published prior to my knowledge that Mr. Hartwell was unfit to practice journalism – he fails to fact check and he’s bad at his job. I do not disavow any specific aspect of what has been written below, but what follows would not be published by me today.

By Michael Hartwell

Pseudoscience comes from many angles. Woo is woo, but the major forms skeptics encounter are in biology, medicine and physics – “hard” sciences. Economics is an ugly cousin to these disciplines. It’s imprecise, it overlaps with politics and there are major disagreements among the experts.

Still, economic pseudoscience exists. The particular economic woo I’m writing about here is called “local purchasing” or localism. You have probably witnessed a campaign to “buy local” by purchasing goods and services from businesses with headquarters in your area. This is said to “keep the money in the community.” Next, the local business owner spends the money at another local store, creating a “multiplier effect.” The chef buys from the farmer, who buys from the shoemaker, who buys from the mechanic, etc.

By restricting sales within the community, we are told, this closed-loop system will generate jobs and wealth within the community. The money leaves the community, however, if we buy from outsiders and wealth and jobs are lost.

This sounds reasonable to the general public, but it is pure pseudoscience. The closest skeptical comparison is the scheme to create energy by burning hydrogen from seawater. The flaw was that advocates kept track of the energy coming out of the system, but ignored all the energy that went in to separate the hydrogen. Burning salt water creates a net energy loss, while local purchasing preferences impoverishes a community.

What economists know

Localism is really a rehash of an outdated economic view called mercantalism, where entire nations thought restricting trade would create wealth. They thought nations would become rich by increasing their exports and decreasing their imports. Goods and services would leave the nation, and gold and silver would come in.

Adam Smith disproved mercantalism with his book The Wealth of Nations in 1776, arguing that wealth is not in gold and silver, but in goods and resources. Money is just a proxy for resources. By specializing in the production of some goods and trading for others, people can take advantage of economies of scale and end up wealthier than the nations that tried to be self-sufficient. A Smithian nation would become very good at making Item X and trade some surplus for Item Y from a neighbor, while a mercantilist nation would do a mediocre job of producing Item X and Item Y and trade some of it away for shiny pieces of metal.

Building onto Smith’s work, David Ricardo introduced comparative advantage with his 1817 book Principles of Political Economy and Taxation. Comparative Advantage is counter-intuitive, rarely understood by the public and undeniably true. It is the idea that entities should concentrate not on the tasks that they are the most skilled at, but the tasks that require their most valuable skills in comparison with other entities.

For example, say John Lennon and Neil Diamond are on a camping trip and want to listen to some music while sitting around a warm fire. One person needs to play the guitar while the other constantly tends the fire. Let’s assume Neil Diamond is a talented musician, but the worst fire-stoker in history and would let the flames go out, while John Lennon is internationally recognized as the most talented musician and fire-stoker of the century. Who should do which task?

The optional choice is to have John stoke the fire while Neil plays the guitar. Even though John is better at both, he benefits from having Neil around to play the guitar while he works on the fire. In essence, they are specializing in tasks and trading with each other. So with Smith’s strategy of dividing tasks and trading, and Ricardo’s addition of assigning entities to the tasks where their skills are needed the most, international trade has emerged as a critical tool in creating wealth and improving the standard of living for the general public.

The “multiplier effect” that localists and other mercantilists cite is a real concept, but more inevitable than they realize. Economic Journalist Frédéric Bastiat famously criticized this sort of scheme in his 1850 essay Ce qu’on voit et ce qu’on ne voit pas (That Which is Seen and That Which is Unseen) with a parable about breaking windows.
A boy throws a stone through the window of a local bakery and a crowd of people gather around, displeased at the vandalism. One person tries to find a silver lining and suggests the ruffian is actually a social benefactor, as the baker will now have to hire the local glazier for a new window. The glazier will have more money to buy from the cobbler. Everyone is happy and believes the local economy has been stimulated.

Sound familiar yet?

But no one bothered to ask the baker what he thinks. They forgot to look at the other half of the equation – where the money for the glazier is coming from. It turns out the baker had been saving up his money to buy a new suit from the tailor, but now has to buy another window. The tailor could have spent that money at the cobbler, and so on and so forth. The community is now a little bit poorer as the baker has one less suit then he otherwise would have.

As Adam Smith showed, wealth is in resources and destruction doesn’t create resources – it destroys them. Bastiat went on to say that burning the city of Paris down to the cobblestones would create jobs in reconstruction, but destroy wealth.

Enter the woo-promoters and misguided social activists

But not everyone has read Smith, Ricardo or Bastiat. Modern mercantilists claim the nation will be wealthier if we buy domestic products, subsidize domestic companies, oppose immigrant labor and thwart the outsourcing of jobs. It’s the same bag of bones; only instead of trading away goods and services for precious metals they accept green pieces of paper.

Economist David Henderson coined the phrase “Do-It-Yourself Economics,” which are “firmly held intuitive economic ideas and beliefs which owe little or nothing to textbooks, treatises or the evidence of economic history.”

It’s not that localists and other mercantilists have new insights that have overturned some dusty old ideas, it’s that they never read them and aren’t aware they exist. As Paul Krugman wrote in his 1996 Pop Internationalism, a wonderful book on economic woo:

“…We learn that the authors on my reading list do not base their disdain for academic economics on a superior or more subtle understanding. Rather, their views are startlingly crude and uniformed… [the view] is dominated by entirely ignorant men, who have managed to convince themselves and everyone else who matters that they have deep insights, but are in fact unaware of the most basic principles of and facts about the world economy.”
The point of jobs are not to keep people busy, they are to produce things of value. However, pseduoeconomic schemes often focus on creating useless jobs instead of producing things. Milton Friedman once mocked a purposely-inefficient job-creation program that made workers dig with shovels instead of backhoes by suggesting they be given spoons instead.

Imagine two castaways stuck on a deserted island. The first night they agree one will gather firewood while the other scrounges for food. However, 50 feet into the brush the food-gatherer discovers a third castaway with a ten-year supply of non-perishable food he’s eager to share. What reaction do you suppose the castaway who was attempting to gather food would have?

Would you expect him to be upset and saddened?

No? But remember, he just lost his job. A “foreigner” is attempting to flood his little economy with cheap food. Of course, he would be happy to have it, as letting someone else provide food frees him up to work on other tasks, such as building a shelter or making a rescue-signal. The same lesson applies to the division of labor in advanced societies. Letting someone else grow our food frees us up to work on other things, like entertainment or medical technology. It doesn’t matter what side of the community border they do it on.

Taking localism claims seriously

Now that I’ve described how economists see wealth, money and jobs, let’s look back at the economic claims of the basic “buy local” movement.

The claim is that by purchasing things entirely from within the community, money will stay in the community and the community will become wealthier.

So that means that the community will turn resources into goods using jack-of-all-trade production, instead of specializing. Therefore, more resources will be used to create fewer goods. These goods will then be traded within the community. The focus is to “buy local” but not to “sell local” so occasionally goods will be sold outside the community and more green pieces of paper will come in. However, no new goods will be allowed into the community – they must be made locally, so the volume of green pieces of paper will increase.

Localism concentrates on what the merchants take in, but it forgets to factor in what consumers pay out. Higher production costs mean local goods will cost more to buy, so the purchasing power of these green pieces of paper will decrease. In addition, with resources leaving the community and more green pieces of paper coming in, the ratio of resources to currency will change. This is essentially inflation, and merchants will demand more money as goods become scarce while they are awash in currency. Even in their perfect dream economy, dollar bills may stay in the community, but wealth will not increase, as wealth means having more goods and resources.

Buying local means higher prices, fewer choices, longer work hours and a lower standard of living. It claims that using inefficient production will increase the amount of goods and resources. By slowing down, we’ll go faster. Resources will be conjured from thin air. It is pseudoscience, pure and simply.

Localists are classic pseudoscientists

We all understand that creationists know next to nothing about biology. They do not study biology. Normally, we shouldn’t fault a person for that, but these people have a great interest in biology. We know this because they speak about biology all the time. They do not make sophisticated criticisms based on intimate knowledge of the subject, but instead make “common sense” observations on a crude version of biology.

Localist activists are the same way. Clearly, they have a deep interest in economics. They talk at length about the multiplier effect, supply and demand and growth. They don’t know anything about comparative advantage, economies of scale, creative destruction or trade. Apparently, their interest in economics isn’t strong enough to get them to actually study economics.

They want the veneer of science, so they cite what they refer to as studies – non-peer-reviewed amateur reports they claim show financial benefits. All of these so-called studies come from two sources. The transparently-named “Institute for Local Self Reliance” and a small firm called “Civic Economics,” which as far as I can tell is two guys in Austin Texas with a pocket calculator.

In a 2008 Buy Local debate at the University of Vermont, localist Bill McKibben used a classic “Gish Gallop” tactic against economist Russ Roberts, demanding he respond to a list of bogus claims too long to address in the time allotted.

And like conspiracy theorists, localism is a hydra with many heads. Decapitating the economic claims causes believers to shift to claims about the environment, national security or aesthetics. This is the critical response I expect to receive, even though Brian Dunning has already done a great job of exploding the environmental claims.