Sunday, 7 June 2009

Oh dear, its now Buy Australian

A posting at the Homepaddock blog lead me to this very strange article, by one Martin Feil, in The Age: 'Buy Australian' and free market theory are not in conflict. Feil writes,

Buy American, Buy Australian or Buy Any Nation campaigns work on the basis of a simple, first principle concept. Consumers do not know the country of origin of the products they are buying. The first principle of a Buy My Country's products campaign is to tell the consumer at the retail outlet where the produce or consumer products come from.

A free market economist would say that this is part of the preconditions of perfect consumer knowledge, which is one of the assumptions of the dominance of free markets. A rational consumer acting in their own interest with perfect market knowledge will make consumption decisions that, when aggregated, create economic decisions superior to any decision that could be made by an intervening government

The assumption of perfect information is one of assumptions made for a perfectly competitive market. In free markets consumers have complete knowledge of the conditions of the market. In particular they know the quality and price of the good they are buying.

Now note another assumption of the very same model: product homogeneity. The industry is defined as a group of firms producing a homogeneous product. The technical characteristics of the product as well as the services associated with its sale and delivery are identical. There is no way in which a buyer could differentiate among the products of different firms. If the product were differentiated the firm would have some discretion in setting its price. This is ruled out in perfect competition. What matters here is that you don't know what firm is making the good and, of course, you don't know what country the good is made in-which is what Mr Feil wants.

Also note that imperfect information can result in product differentiation. If all firms produce the same (undifferentiated) product but consumers, wrongly, think they are different, then the products are differentiated. Also if the products really are different but consumers don't know this, then there is no product differentiation.

Thus if Mr Feil's is arguing that better information will move as towards a more efficient, more perfectly competitive like outcome, then he has to give up on product differentiation.

But what Martin Feil wants is not perfect competition, because he wishes to differentiate goods by the country they are made in. He is an economic xenophobic. But the reasons for rejecting such mercantilist like arguments are well known and go back as least as far as Adam Smith. In short, free trade makes consumers better off. They get cheaper, better quality goods and services.

If people really do value the information about where goods are made then why is this information not already available? Someone could make a killing by just putting "made in Australia" stickers on Australian products. Or by opening stores which sell only Australian made products.

But why stop at "Buy Australian"? Why not "Buy New South Wales" campaigns? Or even "Buy Sydney" campaigns? If you accept the logic at the level of Buy Australian then you also have to accept the logic at the level of Buy New South Wales and Buy Sydney. Is Mr Feil really willing to go this far? And if not, why not?

To go to the extreme let us assume that Mr Feil gets his wish and Australians only buy local goods and services, that is, imports are zero. But if imports are zero then exports are also zero since, roughly, imports have to equal exports so that the balance of payments is zero. Is Australia really going to be better off in this case?

So I'm not really sure what Mr Feil's argument is, other than he wants Australians to make themselves worst off by buying (local) goods they otherwise won't buy.


homepaddock said...

Like you I was confused by his reasoning. He seems to be confusing the case for country of origin labelling with the one for buying local.

There is a demand for COOL, and some producers and retailers use it as a marketing tool. But giving consumers information on where what they buy comes from isn't the same as trying to persuade them to buy local - and you correctly point out the flaws in that strategy.

djp said...

I actually wonder why anyone who is anti free trade buys anything at all. If you take the logic to its conclusion you gotta make everything yourself

Anonymous said...

South Australia is already promoting buying South Australian.

There's a television add with two pies and a kid is trying to chose between the pies that look the same.. and the narrator is asking which one is better for you.. and of course the South Australian pie is!

It's all to do with jobs and the local economy and what not. Seems pretty straight forward to me.