AdamSmithWorks Teaching Resources
Did you participate in the frenzy of Black Friday? How about Cyber Monday? The Washington Post reports that many of us did:
“A record 189.6 million Americans joined in the five-day Thanksgiving weekend shopping frenzy, the National Retail Federation said Tuesday. The figure amounted to a 14 percent jump compared to last year. About 48 million people only shopped in brick-and-mortar stores, while 66 million shopped only online and 77 million bought in stores and online.”
As holiday shopping continues in this month of heightened retail activity, how many of us are striving to “buy local”, perhaps participating in Small Business Saturday? After all, doesn’t this effort support our local small businesses while reducing the environmental impact of transporting goods? Does buying local food, crafts, and/or clothing positively or negatively impact our greater social welfare? There is much to think about in evaluating the costs and benefits of our shopping choices in addition to our individual tastes and preferences for the goods and services we choose to buy.
One consideration lies in the basis of what constitutes the mutual gains from trade. This law of comparative advantage is attributed to David Ricardo, who built on Adam Smith’s insights into why trade leads to economic growth and the increased wealth of nations. It explains why the relative cost between two trading partners (regions, states, or countries) is what determines the gains from trade. California farmers’ ability to produce avocados at a lower relative cost than farmers in Maine, and Maine’s factory workers ability to produce 90% of U.S. toothpicks (yep, it’s true!) at a lower relative cost than can California, is one of the many examples of why folks in Maine and California benefit from the exchanges of free trade.
When geographic regions such as local communities, states, and even countries specialize in the production of goods and services based on comparative advantage, resources are used efficiently. When the efficiencies of resource allocation and comparative advantage are ignored in favor of supporting local producers regardless of relative production costs, the gains from trade are diminished or lost.
What would Adam Smith say?
In Theory of Moral Sentiments, Smith eloquently describes sympathy, which encompasses our desire to share our sentiments with others, to be loved and to feel worthy of being loved. Our ordinary interactions with others are essential to our moral development and serve us in both our personal and market interactions. Further, Smith suggests our moral conduct benefits society at large. Polite market interactions with the local brewer, baker, and tailor conjure images of what was likely Smith’s world in 17th century Scotland. Certainly,
But Smith also wrote about the gains from trade as manufactured goods from the city reached the rural lands outside of the city, and the agriculture from the rural land was brought to market in the city. He further described the specialization and gains from trade in his famous example of the fine wines of France that could not be rivaled in Scotland even with great effort. Consumers gain from trade in terms of price, quantity, quality and choice.
It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry. WN Book IV, Chapter 2
So what's the "right" course of action? Build social capital in our individual communities by shopping local, or make sure we buy our beef, beer, and bread from the foreign producer with the comparative advantage? You don't think we're going to just give you the answer, right?!?!?