Saturday, November 24, 2012

"Buy local" doesn't make economic sense

Today is "Small Business Saturday," which apparently is a day on which we are supposed to buy stuff from business establishments that are owned by people who reside "in our community." I have no problem with setting aside a day to applaud small business and entrepreneurship--a very worthwhile and commendable activity. But whatever "warm fuzzy" consequences this may have for shoppers, it doesn't carry a lot of economic logic. A few points:

  • A common argument is that buying locally keeps the money in the community, and this is somehow a good thing. Russ Roberts dispatches with this one here; basically, if we buy things locally simply because they are local and not because they make sense in terms of cost and quality, we are impoverishing ourselves and, ultimately, each other.
  • The "keep money local" argument is also a little silly because it relies on an arbitrary definition of "local." Local means close to me. If it's good to keep money close to me, why should I stop at the level of my town? Why not keep money in my neighborhood and only buy stuff from people who live on my street? But even that isn't as close-to-self as I can get. See where this is going? The logic behind "buy local" leads to the demand that we only buy stuff from people who live in our house. Or our bedroom. That's stupid. We don't enrich ourselves by "keeping money local." 
  • Rather, we enrich ourselves through trade--exchanging our own resources (which includes the product of our comparative advantage) for the resources of others at a price that makes sense to both buyer and seller (reflecting the costs of production and the benefits of consumption). Russ Roberts nails the trade concept here.
  • Buying local solely to buy local is inefficient and, therefore, wastes resources. This is bad for the environment and bad for the economy in general (that's right--your environmentally conscious friends who want you to be a locavore are probably harming the environment). Steve Landsburg explains this here.
  • Finally, there is a less-common argument about supporting small businesses that relies on old research about who creates jobs. Basically, there is a political conventional wisdom holding that small businesses are the most important business category for job creation; some people might see this as a reason to support small businesses. Better research has shown that this conventional wisdom is bogus.
If you get warm fuzzy feelings from shopping local, do it. Otherwise, stick to making consumption decisions according to the net value you get from the product you're buying. That will often mean buying local; when it doesn't, you can still feel good about encouraging non-wasteful use of resources.

Addendum: Discussion with some other people prompted me to add a caveat about costly information. It's possible that some local firms would provide better consumer value than chains (for example, in industries where economies of scale aren't substantial) but suffer from the fact that information is costly: brand recognition dominates when determining whether local firms are good. See here for evidence that this may matter. For these reasons, initiatives like "Small Business Saturday" may be worthwhile. In this respect, the catch phrase should be changed from "buy local" to "check Yelp first."