I know that many people who share some combination of my politics, interest in seeing the food system reshaped, and economics differ with me in one important area: the role of government regulation. I am a supporter of government regulation that is targeted to a specific goal, well-designed, and enforced. And through my training as an economist, I also believe in markets. That said, I don’t believe the free market supports anything other than profit making by businesses (and in many cases, that is sufficient). However, if we value other attributes of food – such as those attributes embedded in the fair trade certification and those that make up organic food – we need to ask whether the free market will provide “enough” of the products, and whether they will have the correct level of the desired attributes. Unlike many economists, I feel that social goals such as the support of small farms warrant government regulation.
The soon-to happen shift by Fairtrade USA away from the fair trade movement’s commitment to small farms demonstates why voluntary, unregulated labels do not work for an extended period of time, particularly when adhering to the standards is costly. Sooner or later, one firm or certifier will find a reason to increase their profits by loosening up the standards (and consequently reducing their costs). Consumers are not likely to catch on, and how can they? Our food comes with so many labels that even highly informed consumers inadvertently buy products that are not quite what they seem; thus it is unlikely that consumer response will be large enough to have a lasting impact on prices.
In economic jargon, opportunism prevails, sooner or later. The Nobel prize winning economist, Oliver Williamson, states in his classic book that people are “self-interest seeking with guile.” Thus we should not be surprised by the Fairtrade USA stance.
When labels are unregulated, the opportunistic firm largely escapes punishment. The only potent punishment would be consumer backlash, but how likely is it that consumers can learn of the transgression and avoid the product both now and in the future? In contrast, labels that are regulated (such as the organic food label) face built in enforcement mechanisms. The organic regulation may not be perfect, and enforcement is challenging. That said, I believe government regulation of attributes that the market fails to provide trumps (1) letting the market provide these characteristics and (2) the reliance on voluntary standards.