The price plunge has put the state’s $2 billion-a-year dairy industry on the brink of collapse.

via Low milk prices hit farmers hard: Rutland Herald Online.

This statement reveals two important observations about the prevailing perspective among today’s so-called “educated class”.  First, it demonstrates an ignorance of basic economic principals and second, it reveals a bias (whether intentional or not) towards planned economies. Ignorance of the basic facts of economics by academics, reporters, or other elitists does not change the reality that we all must live by those facts.  Prices reflect those economic realities. Planned economic systems are many and varied, but a proclivity toward a planned economy is precisely what is implied when Mr. Curran lumps all of the individual dairy farmers into one conglomerate “dairy industry.” While the dairy producers may be thought of as an “industry” they are not all equal.  Nor will they all “collapse” as a result of low prices in the market.

Basic Principals of Economics

Here is economics defined by Lionel Robbins (via Thomas Sowell in Basic Economics):

Economics is the study of the use of scarce resources which have alternative uses.

Without delving too deeply into the concept of scarce resources or alternative uses, it is important to recognize that there is a finite amount of resources at any given time and that each resource has more than one use.  This is reality, not opinion.  Using the example of dairy, there are a certain amount of dairy cows on the face of the earth and their milk can be used to produce milk, cheese, yogurt, cottage cheese, and cream to name just a few. 

Prices are an integral part of how the economy works.  They determine how much of a resource gets used where.  If the price is plunging in the dairy market, it is revealing something about the use of dairy in the market.  There could be any number of factors that have caused the price of milk dropping from $19 per 100 LBS to $11 per 100 LBS over the last year (meanwhile, the cost of production is approximately $17 per 100 LBS).  All of them would indicate that changes need to be made and that is what is hard for people to come to terms with.

One potential cause for the decline in the price being paid to dairy farmers is that the market is saturated with their product.  If the supply of dairy products has outpaced the demand, then the prices will fall in order to achieve a balance between supply and demand.  This will result in any number of possibilities:

  • Dairy farmers will go out of business, either because they were operating inefficiently or they do not have the assets to weather a bear market.  This will reduce supply and eventually supply and demand will intersect again to make dairy farming profitable.
  • Dairy farmers become more efficient in their operations to accommodate the drop in prices.  This makes the next “upswing” in the prices a potential boon for those who have found efficiency in their operation.
  • The market expands to include a broader population of consumers because the price of the dairy product is now more affordable.  The expansion of the market will potentially increase demand for the product causing prices to go back up.
  • A third party intervenes and solves a problem for the dairy farmer but causes problems for the consumer in the form of higher product prices (or higher taxes).   This only serves to exacerbate the problem and put off more authentic solutions into the future (this is what has happened in the U.S. and continues to happen now).

The price of dairy milk has dropped in today’s market for some reason, or reasons, and now it is more important for the dairy farmers to find out what that reason is and find solutions to the problems it presents without artificially altering the prices in the form of subsidies or guaranteed loans. (In fact, you could argue that a well-functioning press with hard working journalists may help to uncover some of the reasons for the price decline. Instead we get hyperventilation about how an entire industry is on the “brink of collapse”.)

An example of how third-party (or government) interference with prices could be having an effect on the dairy farmers is found in this sentence (from the same article):

Already, he’s had to let go three farmhands and lean more on his wife and three of their four young daughters to help milk cows, clean stalls, nurse calves and balance the books.

Where are price controls in this paragraph?  Easy, wages.  The federal government has, since 1938 enforced minimum wage laws and some states started as early as 1912 with their own minimum wage laws.  What effect does the minimum wage law have on dairy farmers?  If they want to hire people to help them operate their farm, then they must comply with the minimum wage law.  Complying with this law is a cost that has to be factored into the profitability of the dairy farmer’s bottom line.  A simplified illustration – none of this takes into consideration complicated rules and regulations that come with hiring people to work (e.g. payroll taxes, insurance, etc.):

  • A farmer needs 80 hours of work done at his farm above what he can do himself. Vermont minimum wage is set at $8.06/hour. This will cost him $644.80/week.
  • The farmer has a budget of $500/week for labor. If he exceeds that amount he will reduce his profit margin (the reason he farms in the first place) or he may have to eliminate his profit margin altogether just to keep the farm running.
  • A solution (with minimum wage laws) – the farmer hires someone to complete $500 worth of the work and he makes up the difference by putting in extra hours of his own time. He stays in the budget to maintain profitability but it has cost him his time doing something else.
  • A solution (without minimum wage laws) – the farmer hires workers at $6.25/hour and gets all of the work done while maintaining profitability and having money for investment in the farm (making it more efficient, improving quality, etc.).

The Myth of a Planned Economy

Of course, examining price controls regarding labor brings up the issue of a “livable wage” and “social justice”. Efforts to legislate a so-called livable wage have taken place in Vermont and around the nation and it leads directly to a planned economy whether or not that is what motivates people to advocate for the livable wage. The idea of a planned economy is that someone (or group of people) can direct all of the mechanisms for an economy to work properly, efficiently, and to everyone’s satisfaction. A more ridiculous thought has ne’er been uttered, except that countless people believe (either genuinely or by extension of listening to those who advocate for it) that a planned economy is not only possible but would result in a sort of ideal living (e.g. Utopia or Heaven-on-Earth).

Inherent in the argument for a livable wage is the so-called issue of “social justice” which would argue that without minimum wage laws employers would be taking advantage of their employees by the (presumably low) wages that they would pay. But this isn’t about one person trying to harm another person either directly or indirectly. This is about two individuals with different needs that have to be met. The farmer needs laborers and the laborer needs a job. In this case, the farmer needs is only willing (or able) to pay a certain amount to hire a laborer. If a laborer doesn’t want to work for $6.25/hour, then he won’t have a job with that farmer. It may sound dispassionate, but that is the nature of how prices work to efficiently allocate resources that have alternative resources (in this case, labor) whether we choose to ignore that reality or not.

Sentiments abound, but they also compound in the case of our dairy industry example. Sympathy for the laborer pushed his wage too high (in the form of minimum wage laws) making the dairy farmer’s job of adjusting to price fluctuations difficult or impossible. What now? Enter the planned economy.

This article from the Rutland Herald highlights the short term government “solution” is to temporarily raise the prices paid by the Department of Agriculture for milk and cheddar cheese (what about the yogurt and cottage cheese?). Price controls, or in this case adjustments, do nothing but tamper with the economics involved with producing dairy products with the idea that somehow, third-party planners can make better decisions for the dairy farmers and their industry.

Senator Leahy:

… This is the fastest and most direct short-term step that’s available to stop the bleeding.

Government dairy purchases are part of the overall safety net, but in this case we also want these purchases to be a catalyst to help stabilize the downward spiral in milk prices.

Senator Sanders:

This is a good start but much more needs to be done if Vermont dairy farmers are going to receive a fair price for their product.

My office continues to look at all available options to raise milk prices for family-based dairy farms, including expanding the MILC program and investigating monopolistic practices in the dairy industry.

Vermont’s Senators parrot the planned-economy line of thinking: only the government (planners) can solve this problem. Both Leahy and Sanders argue that more needs to be done to “stabilize” and protect the Vermont dairy farmers. Sanders is even going to go after Dean Foods for alleged monopolistic practices. The irony here is that they just finished securing a governmental price fix for milk and cheddar cheese while pursuing a private company for doing the same thing. What we have (in all likelihood) is two different groups of planners, one government and the other private, vying for the ability to be the planning authority in matters of dairy production.

Free Markets = Free People

That there is bias in the reporting agencies and academia is not a news flash. That politicians and large companies seek to have as much power and influence as possible is also not much of a surprise. What is ignored is the right of free people to make decisions freely. Regulation to the economy from the government is costly and restricts liberty. Criminal acts in the market place cause disruptions to the market that are injurious and can lead to more regulations. That both the government official and the criminal seek to undermine our liberty makes them strange bedfellows but an unavoidable fact of life. Only free markets will produce free people. Of course, free people have to produce in order to have a market. I suppose that makes them dependent on one another.