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I heard the story again just a few days ago. You know the basic plotline: Poor coffee growers in Third World countries get paid $1 per bag of coffee, which Starbucks then turns around and sells for $10 a pound. The story always concludes with a discussion about the evil firms involved and how markets result in people at the top getting rich and people at the bottom getting ripped off. But, in the end, this story can only survive due to ignorance of how markets work.

Let me be clear: Concern for others – and in particular for those most vulnerable and most in need – is good. Charity and justice demand that we act to help others when we can, and that we never participate in activities that harm them. The question here is not whether we should have concern for coffee growers but whether the common analysis of the problem is correct and whether fair-trade coffee is the best solution to the problem.

First, let's pinpoint the problem. Is it that the difference between what farmers get at the beginning and Starbucks receives at the end is so great? That the farmers aren't paid enough? Or that farmers are starving when Starbucks is making a profit?

A couple examples will illustrate the difficulty with the first question. A six-pack of beer, for example, uses perhaps five to eight ounces of barley (i.e., a few cents worth), and may sell for $3 to $9. That beats Starbucks. Or take wedding cakes. While an inexpensive one might cost a few hundred dollars, you could easily pay thousands for a cake by a master chef whose wheat (flour) cost $10. If Starbucks is evil for the vast difference between what growers get paid and what Starbucks receives for its coffee, these other cases are worse.

Difference between input price and output price doesn't inherently imply injustice, and the example of the cake case captures this best. The value doesn't come from the ingredients, but from the skill that went into the cake. The experience of the baker and the unusual talents of the brewer comprise the vast majority of the value added to the original grains. In fact, this is typical of most products today: The material portion of their costs is small. Thus the question is not the difference between what different parties to the production get paid, but rather who adds value, how much, and where.

What of the argument that those coffee farmers are starving when Starbucks is making a profit? If the cause of the starvation is that the farmers get paid little while the final seller gets paid a lot, shouldn't we be concerned about the beer and cake cases, too? If “charity begins at home,” perhaps we should start “fair-trade cakes,” or “fair-trade beer.” While there has been some concern over the loss of small family farms, I have yet to see much in the way of programs which encourage us to pay more to farmers for our wheat, as has been organized for coffee. Why not?

We know that U.S. farmers aren't starving. If conditions get too bad, they can take another job. I don't mean to make light of anyone struggling to hold a farm together, but rather to note that the difference in lifestyle between American and Third World growers points to the more fundamental source of the problem: low productivity in the countries in which farmers live. The real problem is that in a market with low entry barriers (like agriculture), how much people earn depends upon how society-wide productivity affects the quality of outside opportunities. In the United States, farmers' standard of living is higher because if the difference between how they can live farming and how they can live with another occupation grows too great, they will pursue other options.

In fact, in this type of low-entry barrier market, a program like fair trade coffee can't effectively raise the well-being of Third World coffee growers by paying them more. Doing so would raise the returns to coffee production relative to other activities and would induce more farmers to produce coffee. This would expand the supply until the price farmers receive dropped back to the subsistence level. The only way to prevent that from happening is to prevent farmers around the world from entering the market or producing more, or to limit who receives fair-trade prices. These tactics, by arbitrarily selecting beneficiaries, really would be unjust.

As for Starbucks' profits, consider bakers. They may have huge input to output price gaps, but we tend not to think of bakers as future Rockefellers because competition has squeezed down profits to the point at which producing cakes provides opportunities roughly equivalent to those in other lines of business. Similarly, Starbucks, like any other entrepreneur, will only be in its position for so long. Starbucks' profits give it resources to invest in more stores, but they also attract competitors. Others can copy that model and are already doing so. Eventually competition will reduce the difference between what Starbucks pays and receives for its coffee and erode the high profits.

Meanwhile, the expansion in coffee demand, partially spurred by the development of better coffees such as Starbucks, will translate into greater amounts of coffee consumed and produced. This will ultimately support more farmers around the world, and may transfer more funds into those countries than would have been the case in any “fair-exchange” system. These funds will gradually improve productivity in those countries, and do so far more effectively and fairly than any fair-trade program ever could.

John Larrivee is assistant professor of economics at Mount St. Mary's University in Emmitsburg, Maryland.