Your Teacher Said What?!

by Joe Kernen

  Worst of all, fair trade discourages any sort of innovation, even the sort that results in the kind of expensive coffee that is (to really devoted coffee drinkers) actually worth a higher price. Fair trade sets a minimum of $1.26 a pound for green (i.e., unroasted) coffee beans, which is a lot more than the market price for ordinary coffee but a lot less than the $1.60 or more paid for high-quality beans. What this means is that consumers who have bought into the fair-trade propaganda are not only buying inferior coffee but are also refusing to buy coffee that puts even more of their money into the hands of coffee producers. The answer isn’t reducing their exposure to free markets: As William Easterly of NYU’s Development Research Institute—not exactly a hotbed of conservative thought—writes, “the parts of the world that are still poor are suffering from too little capitalism.”

  It’s not very hard to figure out why Colombia is a better place to grow coffee than, say, Kansas. Though seventy different countries are home to coffee farms and plantations, all of them are located in a pretty narrow geographic band, from about twenty-three degrees north to maybe twenty-five degrees south—Havana to São Paulo—which is the only place the coffee berries can grow. Since most of the world’s coffee drinkers are located outside the coffee belt, the countries within it enjoy a commercial advantage that explains why millions of their farmers are able make their livings growing and, less frequently, roasting and exporting coffee beans.

  This kind of advantage is what economists call an absolute advantage , and it applies to all sorts of things that are found not just in supermarkets but also in your average ten-year-old’s closet.

  “Blake?”

  “Yes, Daddy?”

  “Go up to your bedroom and pick out ten of your shirts, then bring them down here.”

  Here’s the list of countries in which Blake’s assortment of T-shirts, button-downs, and turtlenecks were manufactured: China, Vietnam, Indonesia, Pakistan, China (again), India, Bangladesh, Costa Rica, India (again), and Mexico.

  “Why do think so many of your shirts were made in these countries?”

  “Because they’re good at making them?”

  They sure are. The United States imports more than $100 billion worth of clothes every year, and despite our clothing bills, only a small fraction of it ends up in one Kernen closet or another. The reason that so much of it comes from developing countries is, as Blake guessed, that they’re good at it. Their absolute advantage isn’t, however, that Honduran or Chinese or Bangladeshi clothing factories are better or more up to date than those in the United States but that they are a lot cheaper to run. The wages paid to workers in those countries are so much lower that it is almost impossible for Americans to compete (which is a subject for another book). It’s no great trick to show Blake that the reason her tie-dyed V-neck only cost $4.99 to buy is that it’s just plain cheaper to make it in Vietnam than in North Carolina—though it can confuse the average member of Congress.

  However, a whole lot of other things we import from other countries can be made even more inexpensively here, which really confuses a lot of members of Congress. The reason we buy so many gazillion gallons of imported soft drinks is not that Mexican bottling plants are more efficient than those in the United States; in fact, those bottling plants south of the Rio Grande are making the same Pepsi-Cola, using the same sort of factories, as those in the United States. The reason is the counterintuitive concept known as comparative advantage.

  The idea of comparative advantage is centuries old, dating back to (at least) 1817, when an economist named David Ricardo33 used it to explain why, even though both wine and cloth were cheaper to make in Portugal than in Britain, Britain imported only wine from Portugal. Cloth, you see, was only a little cheaper to make in Portugal, while wine was much cheaper. It made sense for the Portuguese to specialize in the area where they had the biggest edge—the largest comparative advantage—and make wine, while buying cloth from British factories.

  Inspired by reading about Ricardo, I decided to explain to Blake why the United States imports so much stuff from overseas that we are perfectly capable of making at home. Out came the pencils and paper, while Blake managed to choke down her groans.

  “Have you ever heard the expression ‘You can’t compare apples and oranges’?”

  “Yup.”

  “Well, we’re going to do just that. Let’s imagine two different farms—”

  “Where are they?”

  “Doesn’t matter.”

  “I mean, are they in different states, or different countries?

  “Okay. Let’s say that they’re in different countries. One is in the USA, and the other’s in—”

  “South Africa.”

  (I should point out that the World Cup was going on while this particular exercise was under way.)

  “Okay. South Africa. Now let’s say that the United States farm can harvest four hundred apples a month and two hundred oranges, while the South African farm can harvest two hundred apples and fifty oranges.”

  “Okay.”

  “Let’s make a chart.”

  “Now, which can grow the most oranges in a month?”

  “The U.S., of course.”

  “But the U.S. can also make the most apples, right?

  “Right.”

  “So what’s the most apples and oranges we can get out of these two farms?”

  “Well, six hundred apples and two hundred fifty oranges?”

  “Okay. Now how about this: The farmers can decide to plant more of one kind of tree than another, but if the South African farmer decides to shift from apples to oranges, he’s going to lose four apples for every orange he grows. On the other hand, the American farmer only loses two apples for every orange he grows. Advantage U.S., right?”

  “He could grow more oranges.”

  “But the South African farmer has the same advantage in apples. If he stops growing oranges completely, he’s going to get four apples for each orange he gives up. So by giving up his fifty oranges, he gets . . . ?”

  “Two hundred more apples. Four hundred in all.”

  “And now the American farmer can grow all the oranges he wants.”

  Time for a new chart:

  The result is forty more apples and thirty more oranges, all for the same amount of work on the same amount of land. American oranges can be traded for South African apples, and everyone is better off, even though the most efficient apple farm isn’t growing the most apples.

  This is why free trade is so important and why the idea of local sufficiency in food is such a dangerous idea. And when I say “dangerous,” I don’t mean just to everyone’s wallet.

  Around the world, 850 million people are undernourished. Not obese, undernourished. A lot of Progressives—the sort that are reflexively against any sort of technological or commercial progress—argue that this is because of a lot of unjust exploitation by big agricultural businesses who have bid up the price for food. They are (surprise!) wrong. Almost all of the people in the world who are just one harvest away from famine couldn’t care less about the world market price for corn or rice or soybeans. All of them, by definition, have some comparative advantage, but without any ability to trade whatever is produced by that advantage, they are doomed to chronic poverty and malnutrition.

  But at least they’re organic (poor farmers can’t afford either fertilizer or pesticides, so their food is as organic as anything Michael Pollan eats), local (more than 70 percent of African rural households live more than a thirty-minute walk from the nearest all-weather road), and very, very slow.

  CHAPTER 9

  September 2010: Look for the Union Label: You’re Paying for It

  In September 2010, the Kernens go out on the town—and start thinking about labor unions.

  Though we live less than an hour away from America’s theater capital, Penelope and I don’t get to see many Broadway shows, mostly because of the early-to-bed-early-to-rise demands of Squawk Box’s schedule. However, after the t
enth time my friend Barry Habib insisted that the Kernens needed to spend an evening at the theater, I couldn’t say no. The evening in question was a Saturday-night performance of Rock of Ages, a “ jukebox musical” with songs from 1980s bands like Journey, Twisted Sister, and Bon Jovi—and Barry knew something about the show because he was the musical’s lead producer.

  And we had a great time. There’s a reason that the show was nominated for five Tony Awards, after all. And why it’s been that rarest of things: a hit Broadway musical.

  You’d think, in fact, that with full houses, a national touring company, and plans for a movie, all would be sunny in Barry’s world. Mostly, you’d be right; he’s an optimistic guy. But he does notice some pretty dark clouds on the horizon.

  “It’s simple,” Barry says. “We’re working for our own unions instead of our audiences.”

  It’s not a problem getting Barry talking about the unions that dominate every aspect of a Broadway production, from the electricians who operate every light switch to the actors themselves. And his talk isn’t exactly positive.

  This isn’t because Barry is reflexively antiunion: He’s even a member of the Screen Actors Guild himself. But his real instincts are those of an entrepreneur, which isn’t surprising, because he’s been starting up businesses—successful businesses—since he was in his twenties, in everything from manufacturing and selling electronics to packaging mortgages. Like most successful businessmen, Barry is all about growing the business—or as he put it to me, “Okay, we have a success. How can it be more successful? How can we generate more ticket sales?”

  The question was a rhetorical one, but he had a pretty good answer: Since the most loyal and motivated buyers of his product—tickets to Rock of Ages—were the people who had already seen the show at least once, Barry figured that he could capitalize on that—and the best time to capture the attention of those buyers was when they were already at the show and having the same kind of fun that Penelope and I had when we saw it.

  So, Barry thought, let’s make them an offer: Anyone who agreed to purchase tickets for a subsequent performance of the show on the same day they had just seen it could do so at a discount. So far, so good, but doing it at the ticket office would require—because of the standard union agreement—paying overtime to the ticket-sales staff. Instead, Barry wanted to make the offer during intermission; and since the show features a digital screen behind the stage, why not advertise the deal there?

  Why not? Because putting anything on that digital screen—a single word, even—required the attention of a union member and cost $600.

  Or try this one: The Brooks Atkinson Theatre, where Rock of Ages was packing them in—it’s since moved three blocks away, to the Helen Hayes Theatre—is, like a lot of Broadway theaters, old. The walls and pillars that have been holding up the roof since it was built in 1926 aren’t as well situated as you might like, and as a result, a few dozen of the house’s thousand-plus seats—those on the extreme right and left—have obstructed views of part of the stage.

  On Broadway, you can’t let anything go to waste, so those seats were for sale, but at half price. Barry, who was understandably eager to maximize the show’s profitability, had an idea: Install two fiftyinch flat-screen monitors on either side of the stage and have two high-definition cameras send a closed-circuit signal to fill in those portions of the stage invisible to those seated in the obstructed seats. They get a better experience; the show gets to sell the tickets at full price. Everyone wins.

  Except . . .

  Here’s how Barry explained it to me.

  “How much do you think it would cost to buy two top-end fiftyinch monitors and high-def cameras?”

  “I don’t know . . . ten thousand dollars?”

  “And to install them?”

  “Another five thousand?”

  The cost to add the monitors and cameras was, in fact, $120,000. The reason is that twenty-six different dues-paying union members were required.

  The real cost, though, of these union work rules isn’t just the money. It’s that a smart businessman like Barry Habib isn’t very likely to invest in another show, despite the success of Rock of Ages. Like anyone in business, Barry likes to think that talent and hard work are the keys to succeeding, but in his judgment, Broadway’s unions have made the theater into a crap game—one with loaded dice.

  I tried to explain this to Blake.

  “Blake, do you remember when we had our new television installed?”

  “Sure.”

  “How many people did the job?”

  “Two, I think.”

  “What if I told you that installing a TV just like this one in a New York theater needs twenty-six people?”

  “Is New York better?

  “No, Blake. The folks in New Jersey are just as good at their jobs as the ones in New York. But working in New York is like hiring a really good plumber not just to fix the faucet but also to turn it on whenever you want a drink.”

  “No one would do that. It’s stupid.”

  Well, yes. But most stupid things started out sounding pretty sensible; once upon a time, that electrical job at the Brooks Atkinson Theatre wasn’t something you could buy off the shelf at Best Buy. And there are still a lot of skills needed from a plumber, or an electrician, or a carpenter, and their respective unions make a lot of noise advertising that the only way you can guarantee those skills is by hiring someone with a union card. Whether this is true or not—you can get an earful from both sides of the debate—this argument is what makes them just the latest version of the original “unions” of artisans: guilds.

  Trying to answer Blake’s questions forced me to do a little digging into the history of guilds and unions. And what I’ve learned is that though organizations like guilds have been around (probably) as long as people have been specializing in skills, it was during the Middle Ages that they really got going and established the triangular organization that survives to this day among artisans like carpenters and electricians: apprentice, journeyman (who tended to “ journey” from workshop to workshop), and master.

  The Industrial Revolution was a funeral for traditional guilds.

  The father of the free market, Adam Smith, hated them, largely because of their habit of adding costs to the economy,34 but those costs were probably affordable where the value of consistent performance outweighed the costs of the guild labor. So long as you could count on a guild-woven tapestry or guild-built cabinet to be superior to one from an unknown artisan, you were willing to pay a premium to a member of the guild, both for his skill and for his access to the techniques kept secret by the guild. With industrialization, the cost of keeping such techniques private started to look like a pretty bad bargain. The Netherlands abolished guilds in 1784. France followed suit in 1791—though French guilds transformed themselves into “mutual aid societies” after 1815 and survive to this day, paralyzing the entire country every few months with national strikes. The same transformation happened in the United States, which had the same apprentice-journeyman-master guilds as Britain until the middle of the nineteenth century, when they turned into craft unions, essentially guilds without the secret passwords and initiations.

  The value of craft unions to their members is obvious: higher pay. Their value to the people who buy their services is the seal of approval that a union card gives to its holder. And given the costs of fixing mistakes made by a plumber or an electrician who doesn’t know what’s what, I’m usually happy to pay extra for that union card myself. It’s the same reason that I kind of like the idea that Blake and Scott’s pediatrician has “MD” after her name. It’s libertarian gospel to criticize all unions, but true craft unions are, at worst, a pretty small problem.

  Most union members, however, aren’t members of craft unions, the ones that organize members “horizontally”—all of the welders at fifty different machine shops, for example.

  Even Barry Habib’s electricians, though they are unquestionably skilled
technicians, are members of an “industrial” union: the International Alliance of Theatrical Stage Employees, Moving Picture Technicians, Artists and Allied Crafts of the United States, Its Territories and Canada, or IATSE. It’s with industrial unions, organizing the workforces of entire companies and even industries, that unions start to have some real impact on free markets. And the impact isn’t positive.

  There used to be some real conflict—baseball-bat-and-brassknuckles kind of conflict—between craft and industrial unions. The umbrella organization for America’s craft unions, the original American Federation of Labor, insisted that the key thing laborers had in common was what they did; its competitor, the Congress of Industrial Organizations, thought that what mattered was where they worked. As huge factories replaced small workshops, this made industrial unions, like the United Auto Workers, a lot more successful, because they were willing to represent the unskilled workers who made up an ever larger part of the workforce in those factories.

  With this, the economic value of unions to the buyers of their services—the guarantee of some level of training and skill—pretty much vanished. But in return, the economic value to the members themselves grew dramatically. The leverage of a few hundred carpenters or shoemakers was insignificant compared to that of a hundred thousand miners or auto workers, and each member benefited accordingly.

  It’s no accident that the ascent of industrial unionism, like Keynesianism, the New Deal, and other triumphs of the Progressive agenda, occurred during the Great Depression. Union membership, which would grow until it covered nearly a third of the entire U.S. workforce by the 1950s, was yet another expression of the idea that no matter what the Constitution said about the matter, people weren’t free at all. They were actually subject to such large forces outside their own control that they couldn’t take care of themselves, which meant that someone else needed to take care of them. Given the economic hardships of the day, it’s hard not to be sympathetic to the desire of any worker to do whatever looked like it might improve the chances of not just keeping a job but also ensuring that employers paid the highest possible wages. It makes emotional (if not economic) sense to fight back against the large employers who were the apparent reason that jobs were so hard to come by in the first place.