Fair-trade coffee: not worth a hill of beans

Fair-trade coffee is everywhere. Starbucks and Dunkin' Donuts – even Wal-Mart – proudly feature beans they bought at a higher, "fair" price that pays growers a living wage. You get good coffee. Farmers get out of poverty. Corporations get goodwill. Everyone wins, right?

Actually, fair trade is a bad deal. The intention is noble enough, but the impact on human lives is tragic. Instead of lifting exploited farmers out of debt and poverty, fair trade tends to diminish their prospects and hurt overall economic development.

The problem with fair trade is the problem with just about every so-called progressive economic policy: it ignores the laws of supply and demand.

Say you live in Colombia. You know demand for Colombian coffee is high. Should you become a coffee farmer? You might, if other coffee farmers were making a profit. If they weren't, you'd conclude there are too many farmers already and pursue a more promising line of work.

That's one critical function of prices and profits: They steer all of us – from the poorest farmer to the richest CEO – to pursue the most productive use of our energy. And that's what makes fair-trade coffee so misguided.

If there were just 10 small coffee growers worldwide, the price per pound of beans would be astronomical, and many people would rush to become coffee farmers. The current market price is "low" by comparison because there are already so many growers competing. By paying more than the market price for coffee – the authentically fair price – fair traders send a signal to people in developing countries to join an already overcrowded field.

In doing so, they artificially lure them away from perusing better-paying jobs that would enrich the diversity of a developing country's economy. A caffeinated price means more growers, more land destruction, more dependency on a single cash crop. It's a subsidy that undercuts the very sustainability fair traders want to promote.

Yet fair traders evidently believe that growers who cannot make a profit at the market price ought to be helped to stay in business anyway.

Advising struggling coffee farmers simply to abandon their trade and find another way to make a living may seem flippant and heartless. Yet continuing to operate a money-losing business in the absence of a scheme that could reverse its fortunes merely makes one's financial predicament worse. People who persist in a money-losing occupation are free to do so – but they're not entitled to be supported in that obstinacy by the rest of society.

In a free society and a free market, all capable adults must pull their own weight. Why should coffee growers be exempt?

That doesn't mean we lack sympathy for the real hardships that growers would face if they abandon the one occupation they know well for the uncertain promise that they can do better elsewhere. But what's more compassionate? Using your funds and energy to help them learn a new, more viable trade – or using it to support fair trade, thus postponing the harsh day of reckoning?

Fair traders want to see all coffee become fair-trade coffee, to ensure that all growers enjoy the benefits of a higher price. It's a hopeless cause, because it violates the laws of economics. As price rises, demand drops. So if fair traders succeeded in achieving a universally higher price of coffee, consumers would drink less of the beverage and the current glut of coffee farmers would be exacerbated.

The belief that any group with power – government officials, economic experts, or social activists – can establish a price that's "fairer" or "more just" than the actual market price is a fallacy that bedeviled communism for decades and it's bedeviling the fair-trade movement today.

The good news? There are some genuinely promising alternatives to fair trade that support development. One way is to persuade consumers to purchase "shade-grown" coffee. Such farming is far friendlier to the environment. And consumers who buy shade-grown coffee at a higher price than that of coffee grown on a monocultural plantation are not attempting to supplant the market process with their own, arbitrary judgments about what various goods "ought" to cost, but are acting through that process to express their preference for a healthier, more vital environment.

We should remain keenly aware there is no "silver bullet" with which to slay the beast named Third World Poverty. Today, coffee growers must contend with abundant competitors, market distortions from government subsidies and other favoritism, and the legacy of colonialism and theft. That situation is certainly deplorable.

But consumer action isn't a promising way to rectify those inequities. How can a coffee shopper be expected to keep track of just which producers are getting just what advantages due to government policies, and correctly calculate just what price he should pay to offset the effects of those state-granted privileges? The only sensible approach is to fight against the unfair policies directly, while letting the free market steer peasants to the most productive opportunities.

If those who seek a fairer society come to recognize that moving toward genuinely free markets will advance, and not hinder, their goals, then their efforts will achieve much better results, to the benefit of everyone.

• Gene Callahan, an adjunct scholar at The Foundation for Economic Education and at the Ludwig von Mises Institute, is the author of "Economics for Real People." This essay has been adapted from a longer version in the March issue of "The Freeman."