Friday, November 12, 2010

Our Egg Dilemma Tells America's Economic Story

I am an economist.  The faculty of an American college tested me and gave me a certificate saying so.  At no time during the testing period did I see a man behind the curtain.

The one (and only) thing that I learned from my studies is that economics is all about expectations.  I realized this early on in Principles of Economics when I learned about the marginal utility of goods and services.  The textbook taught us about the marginal utility of buggy whips—a teamster places a high value on one buggy whip, less value on a second, spare buggy whip, and even less value on a third buggy whip. 

This makes perfect sense.  If you have to reach for the third buggy whip, then the horse is either foaming at the nostrils or already dead.

What explanation were you expecting?

Adam Smith introduced the theory of capitalism and its invisible hand to shape the marketplace.  Smith was spot on for his day.  But in retrospect, people believed in and practiced laissez-faire economics every day.  For example: the nation had progressed far enough from farm life to town life so that the butter and egg man drove through the neighborhoods weekly.  No longer did every household need its own milk cow and chickens to enjoy buttered toast and scrambled eggs for breakfast.

As there was no regulation of food commerce to speak of, Adam Smith’s economic theory was more of an observation of common practices put into words.  His theory continued to be relevant through the Nineteenth Century because housewives knew what butter and eggs were supposed to look and taste like.  This was Adam Smith’s free commerce at its greatest—the knowledgeable consumer dealt directly with the competent supplier/seller.

When the Twentieth Century arrived, a new economic model came into practice.  Grocery stores began buying butter and eggs and then, re-selling them.  The store owner now decided the quality of butter and eggs as the consumer was removed from that part of the transaction.  And, with his well-practiced thumb on the scale, the grocer could churn ten pounds of butter into twelve.

This brought on the beginning of top-down regulation of the marketplace.  With it came the need of a new economic theory.  John Maynard Keynes put his observations of common practices into words which eventually became his “General Theory” in1936.  Keynes moved the debate from Adam Smith’s microeconomic practices to the then-maturing macroeconomic practices.

In the days when Adam Smith prevailed, a housewife dealt face-to-face with the egg producer on a weekly basis.  Further, the housewife had either raised chickens herself or knew enough about eggs to know if the egg producer was selling fresh eggs. 

Now we are at the end of Keynesian theory; huge companies inspected by huge government agencies produce most of America’s eggs which are, in turn, sold by huge grocery chains.  This year, one of those producers recalled nearly 400 million tainted eggs with hardly an apology to the public.  This egg recall represents top-down macroeconomic theory nearing its zenith.

American consumers are so ignorant about eggs that the Food and Drug Administration included the following paragraph in its egg recall notice: “What does the product look like?”  That paragraph only tells the consumer the various brand names printed on the recalled egg cartons.

Regarding egg sales, Adam Smith’s theory no longer works because the consumer is unqualified to bargain with the seller.  The egg seller is too small to supply a large customer like McDonalds.

In Keynes’ scenario, eggs are mass-produced to the point that eggs are no longer eggs, at least not in the taste sense.  The next step will be irradiation to solve the annoyance of expensive recalls.

At some point during the past 200 years, we had the system down pat.  Residential and commercial consumers expected fresh, germ-free eggs, and the marketplace delivered them.  But we couldn’t stop there, could we?  No, we allowed thousands of family-owned poultry farms to be priced out of business by a handful of mega-producers.  We foolishly thought that government food inspectors would guarantee the previous high level of quality.  But that never happened.

When Americans expect (read demand) fresh eggs again, then the marketplace will deliver them.  A dozen eggs will cost more, but the improved taste and nutritional value will offset that price increase. 

If Americans can re-learn how to do eggs, then they will have determined the right blend of Adam Smith and John Maynard Keynes.  If we cannot do eggs, then forget about solving the big problems.

Economics is all about expectations.  How do you want your eggs?