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Economic Sense

RSS By: Matt Bogard, AgWeb.com

Matt's primary interest is in the biotech industry and ag policy.

Supply, Demand, Steak, and Freedom

May 17, 2009
Lots of people are critical of modern( a.k.a. 'industrial', 'science-based' etc)  agriculture because they feel that it consumes vast amounts of resources and is harmful to the environment compared to more the antiquated and less productive methods of the past. They often fall prey to the 'eat a steak, starve an African' fallacy. It is not just because they fail to understand the science of agriculture, but it is also a lack of understanding of economics that leads them to hold such strong opinions.

One of the most fundamental tools or concepts from economics that would help clear this up is the concept of supply and demand. Many may have heard these terms in a high school economics class, in the news, or maybe in a college course.
(Click here for  supply/demand diagram)

Unfortunately, many come to believe that it is just a 'catch phrase' or a hypothetical technique for determining the hypothetical price of a good. Without a proper understanding of supply and demand, many people fail to see that these concepts provide the fundamental framework and principles upon which a free society is based.

For example, when you choose to consume steak, you choose to do so because it provides certain benefits to you. It provides nutrition and a consuming experience, and the benefit that you get as a FREE individual exercising your FREEDOM to CHOOSE beef. You pay a price that is at least equal to the value of the benefits you get from freely choosing to consume steak. These marginal benefits can be represented in essence by a downward sloping demand curve.

On the other side of the coin, in order to produce the steak, feed, labor, fossil fuels, and water among other scarce resources had to be used. These 'marginal' costs are reflected in the supply curve. These costs are reflected in the price the producers ( from pasture to plate)  receive for the beef they have produced.

In a FREE society, the price you pay for the steak balances the benefits you get from consuming the steak with the cost imposed on society to produce that steak. In this way, prices play a very important role in social coordination. As a result, individuals acting in their own self interest produce a 'spontaneous order' that benefits society as a whole. In a FREE society, with every choice we make, the price system ensures that we consider the impact our choices may have on others. In other words, in a FREE society you can have your steak and eat it too, without developing Orthorexia ( see this link to a great post by Mr. Steve Cornett on AgWeb and an update here) .

However, in order for this to work, people must be FREE to CHOOSE. This freedom must not be impeded by overzealous environmental regulations or excessive taxation. We've witnessed this first hand with regard to the auto industry and the housing and financial crisis.  I fear that we will see a more direct impact in agriculture if the discussions we are hearing about climate change legislation result in more restricted freedoms on the farm and the dinner plate.

Matt Bogard, Economic Sense

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COMMENTS (2 Comments)

Matt Bogard
Good points- I tend to agree on the issues of government intervention. Once government starts to take from one person and give to another, or to regulate one person to benefit another, it creates incentives for everyone to lobby for more intervention. Our founders somehow could foresee this and they provided the solution, limiting government to only those functions specifically enumerated in the constitution. Of course, this doesn't work when you have a judiciary and politicains that believe that it is a 'living' document.
10:10 AM May 22nd
Vines & Cattle
Good points on freedom and choice, I couldn't agree more. On the other hand, it is a fallacy that steak requires anything more than a little bit of management, water, and sunshine. In the past year I've met some enterprising folks who are getting quite wealthy raising and marketing grassfed beef. NAIS, ag subsidies, and environmental regulations, all represent impediments to choice. Is the grassfed beef producer well served when his tax dollars are used to keep feedlot inputs cheap via corn subsidies? Or why should he be required to enroll in NAIS when his beef will never see a feedlot or a commercial abattoir?
10:16 PM May 17th

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