"Fair Trade" is pointless

Fair Trade sounds like a good idea. By fixing the market, farmers in underdeveloped countries get a "fair" price instead of a lower free market price.

A report by the Adam Smith Institute sets out, not altogether successfully, to explode the myth. But the main points it makes are conclusions that follow automatically from any economic analysis that looks at the overall picture. They flesh out concerns about Fair Trade that I have had for a long time.

Fair trade schemes create little sanctuaries where people are better off than those around, who do not benefit from those schemes. Where demand for produce is limited, the result is that those outside the fair trade schemes are liable to be worse off than they would otherwise be. Fair trade could never be a scheme of universal applicability whereby people could be lifted out of chronic poverty. It would not make poverty history.

Worse still, higher prices are inevitably claimed by landowners in the form of higher rents. Where the farmer is the landowner, the result of the scheme is to enhance the landowner's imputed rental income, not his wages. Where the farmer is not the landowner, his rent will go up. Fair trade does nothing for the landless. It is unfortunate that it takes a so-called right-wing think tank to point out this unpalatable fact. Fair trade is no more than a marketing device to help middle class people in first world countries assuage their feelings of guilt.

So what is necessary? Land reform. And the right sort of land reform. This is not the same thing as land distribution, which in some situations can make matters worse. The important thing is what happens to the economic rent of land. The economic rent must be collected and used as public revenue for the benefit of the people at large. If it is not, then those who have land will accumulate wealth and the landless will become poorer and poorer, certainly in relative terms and often in absolute measure also.

In the wake of that division of the community into landowners and landless comes a secondary division into those who have surplus money and those who do not. This creates the situation in which a host of other evils will flourish such as moneylending at high interest rates and the associated cycles of booms and busts.

As long as the economic rent of land is collected, then whether land is left in the hands of large holders or distributed amongst smaller farmers is a matter that is best decided according to local circumstances. If there is no longer any particular privilege associated with land ownership, then the evils of moneylending that follow in train are averted.

One would not expect the Adam Smith Institute to advocate taking the rental value of land into public ownership, though Adam Smith himself proposed precisely this. But if, and only if, this is done, free trade become fair trade, workers receive the full fruits of their labour and feel-good schemes become irrelevant.

Fair Trade, like the Jubilee Campaign and Making Poverty History, serve only to divert attention and energy away from the underlying issues.