Friday, 2 September 2011

Rent-Seeking in the Dungeon

Rent-seeking is one of the most interesting and useful insights of modern economics. I got to thinking about it in relation to DnD mainly thanks to the comments on posts arising here, here, and here. While it is an appalling exercise in banalifying systematization in many respects, I also find it quite fun and illuminating.

My thesis for you today is that DnD adventurers are, in fact, engaged in a grand campaign of glorified rent-seeking.

Rent-seeking, according to the wikipedia definition, is "the expenditure of resources attempting to enrich oneself by increasing one's share of a fixed amount of wealth rather than trying to create wealth. Since resources are expended but no new wealth is created, the net effect of rent-seeking is to reduce the sum of social wealth".

The classic example of rent-seeking in the modern age is corporations expending vast amounts of resources lobbying the government for special regulations that will hamper their competitors. While resources are consumed in this process, and ultimately the corporation itself will benefit if the special regulation it seeks becomes law, the net result for society is negative: no new wealth has been created for society and only one firm benefits.

For me, a more interesting and controversial example is so-called "fair trade coffee". Here, third world coffee farmers expend resources competing against each other for a limited number of contracts with fair trade coffee companies, with ultimately negative results for third world societies: no new wealth is created by all the competitive rent-seeking behaviour, and only a small number of farmers benefit.

The simplest way of explaining rent-seeking is to imagine that you, I, and Person X are offered the opportunity to get £100 (the rent). In competing against each other and lobbying for the £100, I spend £90 worth of resources, you spend £95 worth, and Person X spends £99 worth. Person X gets the £100 and has profited by £1, but no new wealth has been created through the expenditure of £284 worth of resources. Effectively, we as a 'society' are worse off by £184. We would have been better off each investing our respective amounts in profit-seeking behaviour, for instance in research and development of new role playing games.

So you probably see where I'm going with this. Imagine a dungeon containing approximately 10,000 gps. This is a fixed, finite amount of wealth. Adventurers come from miles around to try to get bit of it. They spend money, time and other resources equipping themselves, researching spells, gathering information, competing with each other, and all the other things that adventurers do, in order to get their hands on some of this wealth; every resource they use must therefore be deducted from the 10,000 gps once it is (eventually) entirely removed from the dungeon and redistributed elsewhere, in terms of its social benefit. This includes the time these adventurers spend, and their own lives. A productive farmer may, over the course of his lifetime, generate 1000 gps' worth of resources if engaged in profit-seeking behaviour. The same man, engaged not in farming but in adventuring, is therefore a net loss to society of 1000 gps' worth of resources if he ends up getting killed by kobolds in a dungeon at 1st level. It therefore only takes 11 such fellows to die in pursuit of a 10,000 gp treasure horde for it to represent a pure loss to the economy - simply on those terms.

Therefore, the net gain to society of stealing 10,000 gps from a dungeon is not 10,000 gps; rather, it is 10,000 gps minus all the resources spent competing in order to acquire it, which might ultimately be negative. So, while it is rational for individual adventurers to attempt to earn money in this way, it can end up as a pure waste of resources for the economy in general.

Adventurers are rent-seekers, and bad for society. This doesn't matter, though, because as we should all know by now adventurers should generally be rogues who don't give much of a hoot about society. This is one of the strongest arguments I know of for playing a character of chaotic alignment.


  1. "The simplest way of explaining rent-seeking is to imagine that you, I, and Person X are offered the opportunity to get £100 (the rent) - whoever bids the most money gets that amount. I bid £90, you bid £95, and Person X bids £99. Person X gets the £100 and has profited by £1, but no new wealth has been created through the expenditure of £284."

    While I find the whole exercise of examining D&D in such a fashion tiresome, I did read it through the above paragraph. The total amount bid might be $284, but $185 is left available for wealth creation or other expenditures as desired by the owners of the capital (in this case the two who lost the bid).

  2. You're correct - the use of the word "bid" is totally misleading. I should have framed it in terms of resource expenditure. I'll edit it.

  3. Interesting. I like to annoy Starbucks employees by asking for non-fair trade coffee. When they ask me why, or scowl or whatever, I just tell them it tastes better.

  4. As it pertains to the game, I see your point. More broadly, though, I question the broad negative impact of rent-seeking. Don't the $90, $95, and $99 simply change hands? While they didn't actively generate wealth for their original owbers, their new owners may engage in wealth-creating opportunities. I think its clear that the 2 losing bidders have gained no benefit and the winner a limited benefit, but society as a whole isn't necessarily at a loss. That $284 didn't fall into a black hole, afterall. Is there some nuance I'm missing?

  5. There are lots of good reasons not to drink fair trade coffee. The fact that it encourages rent-seeking isn't the only problem with it - it also "gentrifies" coffee farming, making it more lucrative and attractive for people who would be better off trying to educate themselves and escape from farming entirely.

    In the Western world our economic development went hand in hand with a move away from large scale employment in agriculture. That we expect people in poor countries not to go through the same process is hypocritical and damaging. Fair trade coffee tends to make agriculture attractive in the short term and thus hinders poor countries' economic development.

    However, try explaining this to a Starbucks "barista" and you're usually on to a loser.

  6. James C: There is certainly no net gain for society whatsoever - resources have just changed hands. While it's true that this does not necessarily make it a loss, in actual fact it always works out that way, because the reality is never as simplistic as one person giving £100 to person A, while recieving £284 from persons A, B and C. In fact that expenditure of £284 worth of resources usually represents time, labour costs, transaction costs, and so on, rather than wealth transfers, and those are pure losses to the economy.

    An illustration: I'm a translator. I earn approximately £150 a day translating. If I spend a day lobbying the government to introduce some sort of regulation to restrict the number of translators who can gain employment, I have 'spent' £150 worth of time. That is a pure loss to the economy because it's not going anywhere or doing anything. Do you see what I mean?

  7. Are you sure that the rent-seeking argument applies in the new opportunities 'gold rush' situation that is dungeoneering?

    Society might lose the lifetime earnings of the farmer who cashes out to become an adventurer. But the D&D world is Hobbesian in a way the real world never was. Yon dirt farmer might have died in an orc raid or manticore snacking frenzy sometime in the future. Might as well up sticks and risk it all for a big score as risk it all for a pile of turnips taxed at 50%...

    The ex-farmer isn't an isolated individual; he's likely to be part of a mass movement of people and resources which, over the long term, is likely to enrich his society by expanding the market for goods and labour.

    Sure, a gold rush isn't a sustainable boom. But smart men can use it to prime the pumps for long term investment and lasting improvements.

    Q: Where was the *real* money made in the 1849 gold rush?
    A: mining equipment and Frisco real estate.

    Conquistadors and suchlike ambitious younger sons going off to seek their fortune in El Dorado or The Mysterious Orient/Darkest Africa are the human 'seed money' investment that eventually returns the (vast, long-term) profits of the Spanish and British empires.

  8. Sort of. I certainly don't relish being in the posiiton of defending lobbyists. But I still don't see the $150 as a total loss. What will you spend the $150 you earn upon? Labor costs aren't a total loss whatever the labor is, at worse it seems to me that you break even or lose only a little in transaction. I confess I'm no expert, though.

    For instance, I'm being paid right now to debate this point. My employer is losing some productivity but the salary I have earned will be spent this weekend, going directly back into society. Maybe for some non-fair trade coffee or a nice non-organic dinner out with the family. This helps to pay for the barrista's wages and provides a nice tip for our waiter.

    They're paying rent that a landlord will collect and spend. Maybe they're saving to buy a car or will purchase a new sweater. My salary, wasted as the time was that earned it, also buys the food and coffee for the next consumer once it leaves my hands and finds its way into the restaraunt owner's and then into the food producers'. The only person really losing out here is my poor, poor multi-national corporate boss.

    Likewise, the gold an adventuring party spend spends in town on ale, new swords and 10' poles goes back into society and is more they could or would have spent as farmers. The 10,000 gp they pull out of the lost ruin could be seen as recovering society's sunk costs. Society lost on on a lifetime of their farming, but there was some gain. Who else is going to pull that 10K gp out and spend it on wine?

    Not everybody can be a producer, no? Some must simply consume and money earned not in productive work still gets spent and may become productive at some point, yes?

  9. Recovering 10,000 GP from the dungeon doesn't count as redistributing society's current resources... it adds 10,000 GP to society's resources, just as much as mining 10,000 worth of gold would (at least, under the reasonable assumption that a forgotten treasure chest guarded by a grey ooze doesn't count as part of the kingdom's economy). Ergo, it's not rent-seeking, even if society as a whole would be better off if the adventurers became farmers. Failure to maximize your social utility isn't the same thing as trying to extract a greater share of total wealth through gaming the rules.

  10. James C: But I still don't see the $150 as a total loss. What will you spend the $150 you earn upon?

    The point is that I'm not earning that £150 if I spend all day lobbying rather than working, so that's £150 less to get spent on non-fair trade coffee. Hence it's a pure waste.

    Admittedly, thanks to my lobbying efforts, I might ultimately succeed in getting a bigger piece of the pie of translation jobs for myself, in the future. But that hasn't increased the size of the pie - it has only increased the size of my slice of the pie. Meanwhile I've spent a lot of resources increasing the size of my slice of the pie: a waste, because the total amount of pie in society has not increased.

    Likewise, the gold an adventuring party spend spends in town on ale, new swords and 10' poles goes back into society and is more they could or would have spent as farmers. The 10,000 gp they pull out of the lost ruin could be seen as recovering society's sunk costs. Society lost on on a lifetime of their farming, but there was some gain. Who else is going to pull that 10K gp out and spend it on wine?

    Yes, the 10,000 gps they pull out of the ruin recovers some of society's sunk costs. But if those costs outweigh 10,000 gps, it's ultimately a net loss.

    Imagine 20 adventurers die in the process of recovering that 10,000 gps. And imagine for the sake of argument that, as farmers, they could have produced 1000 gps of resources over their lifetime. Society has wasted 20,000 gps of resources, effectively, in order to gain 10,000 gps. The 10,000 gained only offsets half of the amount spent. So ultimately, things would have been better if nobody had bothered trying to get the 10,000 gps.

  11. Joshua: You know what? You're right.

    However, the conclusion is the same: whether you view adventurers as rent-seekers or just people failing to maximise their social utility, they're not generally being as helpful as they might be.

  12. Regardless if it's rent-seeking, you could see various land-owning lords realize they're losing tenants to the adventuring lifestyle, and this loss of useful income to the ruling class results in the creation of windfall taxes and similar penalties to gold salvaged from dungeons. (If the DM needs any additional reason to drain the coffers...)

  13. The point is that I'm not earning that £150 if I spend all day lobbying rather than working, so that's £150 less to get spent on non-fair trade coffee. Hence it's a pure waste.

    I understand now and agree.

    Yes, the 10,000 gps they pull out of the ruin recovers some of society's sunk costs. But if those costs outweigh 10,000 gps, it's ultimately a net loss.

    I also see this now. Your scenario assumes that the farmers would otherwise live a full, productive life and that adventuring would not ultimately prove to be more productive, though. Assuming this, and its not an unreasonable position, you are correct.

    It's an interesting if tangential line of thinking. Thanks for the distraction on a slow Friday afternoon.

  14. "it also "gentrifies" coffee farming, making it more lucrative and attractive for people who would be better off trying to educate themselves and escape from farming entirely."

    Is farming that bad?!

  15. Using the rectified economic model of ACKS, a peasant family is going to produce ~15 gp/month of "social value" per month, which comes to a little over 5000 gp for a 30-year productive life (i.e. not counting periods of dependency).

    That's about the capital of a 3rd level wizard, who can earn every month (and by construction, produce) about what the peasant family can produce in a year (using the 1:33 magic ratio). That's a pretty big gain in productivity. If 1-in-10 potential adventurers survives to come to that level of productivity (on average), social value should be on net greater, and that's discounting the family/individual aggregation.

    Needless to say, the marginal adventurer would be the one least likely to be able to improve their productivity. The biggest gains are from the infra-marginal adventurers that generate extreme levels of wealth and put them to very productive uses (building and guarding castles that secure the wilderness, building temples that teach the young, heal the sick, and guard the dead, or changing the world by magic, etc.).

  16. John: Well, no, but nor is it great. I don't want to denigrate farming, because some people love that lifestyle, but having large portions of the population engaged in agriculture tends to be an indicator of a weak economy. And farming in the developing world is very different to how it is in the West. It is backbreaking work that goes on all day, every day. Farmers in the third world don't get to go to school, don't get to earn much money, and don't get to do anything other than work. It's not good to keep people in that sort of situation just because we want to feel good about drinking coffee that we think is "fairly" traded.

    Joshua: How is the number of 3rd-level magic users calculated?

  17. If you assume that monsters are predatory upon the local populace. Isn't the slaying of monsters a public good? What value is derived to the community at large if a dragon (that could decimate a kingdom) is slain? Further, if it's lost hoard is returned to the kingdom isn't that good as well? (I suppose it could cause inflation...)

  18. Derived from gold-for-xp, the capital model, and the charts, something like 1-in-100 people are 3rd level, with productivity varying about 25% across classes (due to their capital being assumed to be a constant proportion of their accumulated experience, but with some variation since different classes need different amounts experience to reach a given level).

    So, speaking of those that get there by adventuring, you'd need about 1-in-10 trying and 1-in-10 of those making it, or 2-in-100 trying and half of those making it, etc.

  19. Jim --

    Well, what does it cost to get someone to kill a dragon? The proximate answer is a dragon's hoard's value. Given that, if the hoard wasn't there, you'd have to come up with the same value as a reward to induce someone to to the deed.

    To the extent that the hoard is just money, and the society does not have some badly mismanaged monetary regime that hampers trade by failing to satisfy the demand for money, when the hoard is spent it displaces other spending, just like putting up a reward, but by slightly different mechanism.

    If it becomes capital for an entrepreneur, it could have a larger impact, but the the displacement still applies -- it would have to be someone with an entrepreneurial edge over the marginal investor to have a marginal effect, or cause some income to be diverted from consumption to investment.

    I think.

  20. I just want to point out that the traditional going rate for killing a dragon is half the kingdom and the princess' hand in marriage, see e.g. Pratchett 1989.

  21. What if we assume entirely altruistic motives on the part of a high level paladin? If he kills a dragon and saves the kingdom, having sworn a vow of chastity refuses the princess and reward, would that be a net positive for humanity?

    Of course, now we are straying into a territory where I suppose economics gets a little wonky.

    Magical/Divine assistance in the actions of a person...


  22. Are you regurgitating an argument you picked up elsewhere? Fairtrade farmers aren't engaging in rent seeking, and can't- because their product isn't restrict able. And the idea that it traps people in agriculture is the same economically illiterate nonsense used to attack manufacturing jobs in third world countries - there's no "should be getting jobs in" beyond what the market enforces via price signals. If farmers make more money selling coffee than working in call centres then that's what they should be doing, regardless of whether you think their increased profitability is based on "real" value. If they can convince people to pay more for it, it's real. You may as well say that Laphroaig are rent seekers because you can't tell them from tesco's basic.

    Fair trade *certification* now, that's an example of potential rent seeking, and I suspect that's what whoever started the moron's whisper that led you here was getting at. But it wouldn't lead to farmers staying in an unprofitable industry, because the certification issuers would absorb all the extra income as rent. Which, of course, wouldn't be possible if there wasn't a legitimate demand for fair trade products.

  23. Verdancy: But it wouldn't lead to farmers staying in an unprofitable industry

    This is the key point. No, it wouldn't lead to farmers staying in an unprofitable industry, and I never said it would. In fact, I believe I made it clear that it makes coffee farming more profitable for some (assuming that the extra income isn't absorbed at some stage between consumer and producer, which actually in reality it largely is).

    But what are the consequences of making farming more profitable for some? It's not just rent-seeking. We're also talking about overproduction problems (because demand for coffee is not inelastic). This is going off on a slight tangent, mainly because you raised the point yourself, but price signals are key. To have accurate price signals, there needs to be free trade, yes? Not price floors, which is what the fair trade movement attempts (effectively) to introduce. Price floors that are above the market price make the fair trade farmers produce more coffee. Because demand for coffee is not elastic, you then get an oversupply and a large fall in the market price, which causes incredible damage to all the poor sods who are engaged in coffee farming but weren't lucky enough to get fair trade certification.

    So, while you're semi-correct when you say that fair trade "wouldn't lead to farmers staying in an unprofitable industry" it almost has that effect, because it makes coffee farming an attractive proposition for the lucky few while building fragilities into the system for the rest. Do you see what I mean?

    In any case, the point I was trying to make about keeping people in agriculture is, broadly, this: the goal of most people engaged in the fair trade movement is to help poor producers in developing countries. It's a laudable goal, but you have to question the value of something which makes agriculture a more attractive proposition than other routes to development which may be available. We know that strong, stable economies with high levels of growth tend to be diverse and tend not to be based on agriculture alone - in particular, they tend not to be based on the production of one agricultural product. In artificially creating conditions in which everybody in the Guatemalan countryside wants to be a coffee farmer, are fair trade advocates really helping Guatemala?

    What the world economy needs is freer trade and an end to subsidies, particularly agricultural ones. The energy spent on promoting fair trade would be put to better use agitating for that.

  24. D'oh. Where I wrote "demand for coffee is not inelastic" I should of course have written "demand for coffee is not elastic" or "demand for coffee is inelastic"; take your pick. It was 9am on a Saturday.

  25. Going back to the beginning.

    Lobby efforts for a day only equate a loss of $150 or wherever pound / dollar value your day is worth if you would normally be working during those hours and now (due to lobbying or whatnot) are not.

    Assuming 8hrs lobbying in your off (or unemployed) time equals a full day's value of work is bs. If I write, or game, or volunteer during my off time that time has no intrinsic monetary value.

  26. Tenkar: That's just an illustration to demonstrate how man-hours equal resources. Nobody is talking about what anybody does in their off time.

    If a company engages in lobbying it is spending resources (man hours being one thing) but not creating wealth - just attempting to increase its own share of the wealth.

    To elaborate on that example, let's say Company X pays somebody £150 a day to lobby for it. This might make sense for Company X, because through lobbying it might gain some benefit. But it does not increase societal wealth; that £150 per day would be better off being spent on profit-seeking activities which would actually generate wealth.

  27. Wouldn't monster treasure most likely be ill-gotten gains? Stolen from the productive economy by force, like taxes?
    If adventurers expended their own money on actions which end up returning a greater amount of monster loot to the economy, society is still better off by the amount of the difference.
    If the adventurers hadn't acted, that wealth would have remained outside of the economy. If monster loot is the same as taxation, the actions of the adventurers amount to a rebate.

  28. @Noisms: Sorry for being snippy before I was also writing a bit late. Anyway to my mind the description of fair trade as introducing a price floor is inaccurate, since fairtrade products compete on the market with feudal/agribusiness sourced products. Would you say that wine snobbery distorts price signals and leads to poor french farmers overinvesting in vineyards, when they should be building yoga schools?

    Now granted the premium on well regarded wines is long established and reliable, while fairtrade is a trend that might go out of favour and leave coffee farmers in the lurch. But the same applies to acai berries and american microbreweries and so on, these sorts of trends are perfectly normal market behavior.

    Anyway the main point is that the two talking points- free trade leads to rent seeking, and free trade leads to overinvestment in farms- are incompatible. The fairtrade label - or other indicators of ethical sourcing - are worth a certain value, the premium consumers are willing to pay on top of what they'd pay for an equivalent product of unknown sourcing. Either this premium is sucked up by rent seeking certification agencies or it reaches the producers and they increase supply. You can't have both!

  29. Sorry that's not quite right, you could have rent seeking if there's a limited number of fair trade licenses available, and it wouldn't necessarily be the certification bodies looking for kickbacks. But unless that's the case, it's just the farmers producing a more valuable product, and increasing supply to keep up with the resultant increase in demand. No different to michelin stars or what have you.

  30. I think only a limited number of licenses or certifications are available.

    But in any case I don't agree that it's a case of the farmers just increasing supply to meet demand. As I said, demand for coffee is not very elastic. I think with fair trade coffee the price signals are incorrect: basically, those farmers with fair trade certification will increase their production because the price paid for their coffee is higher, but that high price does not reflect an increase in demand in real terms - it's an inflated price above the actual market price for coffee. It's artificial. People are not buying more coffee, only paying above the odds for it. So their increased supply will by necessity be an oversupply, rather than a natural way of meeting increased demand (which is illusory).

  31. I say, this is brilliant! I should love to run a game dealing with the long term ramifications of this process!


  32. Noisms, I think your argument here rests on the rather dubious foundation of assuming that monsters are people too.

    Adventuring is a form of mining because the gold the adventurers get isn't available to society. It's under the control of evil monsters. In this sense their treasure hoard is exactly like a mine, and the PCs are miners.

    If the goblins who own the 10000 Gp (<- let's just assume it's 4th edition over here) were spending it at the local market then you'd be right. But they aren't. They're spending it on ... well, nothing, if you believe most rumours about the little blighters. So when you kill them and take their stuff, you're adding 10,000 gps to society's wealth.

  33. faustusnotes: We sort of dealt with this in previous comments, but it all depends on whether you want a fantastical dungeon or a trading one.

  34. Fascinating criticism of fair trade, I have a strong suspicion that it is wrong however:

    Firstly, if seeking a fair trade certification is rent seeking, so is most marketing; the existing market is finite, so marketing to existing customers means throwing cash into taking that pie.

    In that context fair trade is just a marketing tool, but with the following differences:
    The costs don't escelate, it's a nice bundled piece of market segmentation; "meet these quality standards and you will be able to get a better price". So it's not a money hole, unless new levels of certification start to come out.
    And because it's certification not a brand, you have to actually change your working procedures to support it.
    So we can look at the money spent on those changes (which are a far greater proportion of costs than certification fees) to see if anything good is coming from them.

    If you look them up, a lot of what they are required to do focus on increasing the long run sustainability of their businesses, the safety of those that work for them etc. Personally to me, the gaurantee that people are not in danger of death through negligence in the making of products I consume is worth a bit of money! It enhances the product to me.

    Even if it is true that fair trade will make farming a more stable and lucrative job, I don't think you should assume from there that it would lead to a lack of development:

    Farmers working at above subsistence wages can afford to do things like sending their children to schools. Now that is certainly a different approach to our own pattern of development, where education for broad sections of the population took hundreds of years to take off, after a long stretch of industrialised and dangerous child labour. I'm not sure I'd stop them doing that because our ancestors didn't. :P

    As I see it farming is always going to be less attractive than other jobs for young educated people, and getting farmers to the point where they have an actual disposable income means they could themselves start to support these non-farming jobs.

    That's a scrappy argument obviously, the basic thing I'm going for is that economic diversification doesn't just have to happen via sweatshops in slums, it can also happen via technological intensification of farming, particularly focused on information and infrastructure technology, as well as people putting their premiums into cooperative research and development, and better healthcare.

  35. Josh, first, marketing is not really rent-seeking because there is no "rent"; that is, there is no "prize" being awarded by a higher authority. Marketing is just a way of trying to expand the number of people who buy a particular product, which is not analogous to farmers spending resources on trying to get fair trade accreditation from a fair trade authority.

    Second, your development model seems to be focused on the seen rather than the unseen. As I've said, fair trade is indisputably good for some (farmers, or, I suspect, middlemen), but it is bad for most: in creating a price floor for a certain type of coffee, it creates an oversupply, which harms the non-fair trade farmers (who may simply be in the unfortunate position of not being able to afford to get accreditation).

    Third, the surest path to development is free trade in everything, everywhere; free trade by definition is fair, and is an area in which poor societies can use their comparative advantages. Distorting the coffee market seems like a very odd way of going about achieving development, which leads me to believe that that isn't really the goal; it's just a clever marketing tool. Which of course is what it is.

  36. If the 10K of GP is in the "dungeon," then this loot isn't doing the "society" much good. It does not compound interest. Presumably, its owner is lost.

    Perversely, adventurers seeking this treasure will frequent local merchants for gear. That move the economy forward (reducing equipment stocks and requiring merchant reordering, spurring production).

    Adventuring doesn't sound like rent-seeking at all.

    Rent seeking comes at level 9.

  37. IA! You're making me think of the video game Civilization more than D&D!

    However, I do agree that thinking about the economic goals of "monsters" can help propel adventures. Some of the TSR Gazetteers touched on this, I think.

    In real life, economics drives most human behavior. But I would not want to get into a Marxist critique here. ;-)

    I am ever so slowly working on a module in which the main villain is survivor of humanoid purge done in the Keep on the Borderlands.

    Blowback can be hard.

  38. Meh, my freind has been studying development and tells me otherwise, she's much more in the "import substitution"/"reverse engineer foreign tech and bootstrap" camp. I've heard enough rants on the historical failure of the washington consensus to be cautious agreeing with you!

    I don't think the economics of fair trade are working out as you'd expect though; the supply of coffee or other fair trade goods is not increasing in responce to this premium, rather the price difference is funding the spread of the "ethical premium" itself:

    If what I've read is correct, in a pretty weird situation, people who produce coffee are currently spending to increase the spread of the certification to new producers. In other words they are paying to reduce their own uniqueness relative to their competitors, by increasing their certification fees on the assumption that that will be spent on expanding certification capacity.

    I wish I could find you the links!

    The majority of that "ethical premium" is either getting absorbed in paying for it's implementation, or in getting other people certified!

    It'll be interesting to see how that changes over time, as it appears at the moment that the certification group are in a growth phase, focusing on moving other existing products over to fair trade, and into their certification system.

    The really interesting thing is that because the "brand" is based on real changes, in future if the certification group do start trying to rip people off, then another certification group would be able to form certifying the same information!

    Until then I'd say this is an unconventional example of an increase in supply of a premium product feature, in response to demand, across multiple products.

  39. Josh: Well, the Washington Consensus has never been implemented, really. It's just a set of ideals.

    But on the other hand I do think there's a problem with imposing liberalisation on societies with no culture of civil liberties, enforcement of contractual obligations, freedom of information, etc. etc. Those things take time to evolve, and without them you can't really have a free market.

    On fair trade... So maybe what it boils down to is that fair trade coffee is actually a different product to regular coffee, serving a different market?