Buying Local

One topic that pops up now and then is the idea that it’s a good thing to buy locally-made products. The most common iteration is that it’s good for Americans to buy US-made products, but it’s an idea that persists in most countries and certainly beyond the FP community. I thought it would be interesting to explore this idea, to try and understand, and figure out if it is actually a good thing. 

Some pen retailers and brands use this language from time to time and I started by asking a couple why they did. The responses came back that it was something customers were interested in, so why not use it in the marketing? Makes sense!  

Next, I wanted to understand why it was important to the customers. I searched around online, found a few old posts on reddit and FPN, and chased up the commenters to find out why they had placed some emphasis on locality. The commenters came back with a few different reasons — a sign of quality, sentimentality, etc — but they all said something to the effect that it was good for the economy. This is an interesting claim (and, admittedly, what I expected to hear). 

I can understand the causal mechanism that they see at work: buying a product made in their home country means that the manufacturer becomes slightly busier and, as these individual purchases add up, need to hire more staff (or give overtime to their current staff). That additional income means those people have more money to spend at local retailers, who themselves need to hire more staff, and so the whole economy grows. This is what we would call a multiplier effect: when someone spends and it flows through the economy, triggering additional spending and compounding the benefits. So an extra $1 might create $2 or $3 worth of economic activity. 

From a US perspective, maybe you’re thinking of Edison or Franklin-Christoph: as more people buy from them, they end up making more pens, hiring more staff, growing their business and the local economy, as well as the national economy. If the buyer chose an imported product, that additional employment and economic growth would happen in another country. At best, it’s a missed opportunity for the domestic economy to grow a little larger and a little stronger. 

With this kind of model of how the economy works, it makes sense to me why people would prefer to buy local. Even if they aren’t the best quality, or necessarily the best deal, buying local makes a contribution towards the local economy instead of someone else’s. One purchase might not make a big difference, but lots of local purchases add up, helping to build local jobs and businesses. 

Taking it a step further, you might even start to see buying local as an act of patriotism: making a little bit of sacrifice (by buying a product that is perhaps slightly inferior or more expensive) so you can support your local economy. It might even spur someone to start encouraging others to do likewise, agitating for businesses and politicians to do the same.

It all fits together in a nice, logical way. The only problem is that it’s completely wrong. The conclusions — that consumers, businesses, and governments should buy locally — follow logically from the premisses, but those premisses are flawed. They are based on an incomplete understanding of how the economy works. 

The problem is the assumption that spending more with one business leads to more employment. That’s not necessarily the case, for two reasons: first, businesses don’t necessarily link their production (and employment) decisions to sales, and second, the total amount of employment is determined elsewhere. We’ll discuss each of these in detail. 

Most people have an idea that businesses want to sell as much as possible, an idea that’s reinforced by a lot of what we see and hear. The reality is that, by and large, price is constant for businesses — if they sell a hundred units or a thousand, they’re getting the same revenue per unit. And if the market is competitive, they might not have much control over where they can price. So most businesses decide to focus on the one thing they can control: their costs. 

Costs vary with the amount of production. You’ve probably heard of economies of scale, where your average cost gets smaller as you produce more and more units. This works because most manufacturing involves large, fixed costs — leasing a space, buying equipment and machinery, employee salaries — that are averaged out over everything you make. The more you make, the more you can spread out those costs and get your average down. 

At some point though, you max out the fixed factors and need to start adding more into the mix. Maybe you need to start paying employees overtime, maybe you need to start buying more equipment, maybe you need to start renting a storage space so you can keep more materials nearby. Whatever the reason, average costs start going up again: this is what we call diseconomies of scale and they are just as important as the economies are. 

For a business without any control over price, they want to be in that sweet spot where costs are minimised. In the jargon, it’s called the minimum efficient scale — and that’s the point at which profit is maximised. And so the rest of the business operations are built around that point, ensuring that volume of product can be sold (and is sold), and ensuring that costs are managed around that point. Produce much more or much less, and costs start going up — and profit starts going down. 

But this contradicts our model, which assumed businesses would produce more and employ more staff if sales increased. If a business is determined to stick to its efficient scale, your decision to buy locally won’t lead to an expansion in production or any additional employment. It would just lead to some redistribution: you buy the pen instead of someone else. That person ends up buying something different. None of this reduces unemployment or grows the local economy. 

A firm would behave differently if there was a huge change in how many pens people were willing to sell, but their employment decisions don’t have much effect on the total number of jobs, nationwide. That is because the overall level of employment is determined elsewhere — it is a part of monetary policy, which is typically handled by a reserve bank (e.g. the Federal Reserve, Bank of England, etc.) on behalf of a country’s government. 

There’s a balance the policy has to strike between inflation and the level of employment. If there’s too many jobs being created, you might run the risk of inflation getting beyond a tolerable level, so the reserve will put up interest rates. That reduces how much investment is being made and how many new jobs are being created — and hopefully gets inflation down again. Alternatively, if employment and inflation are a bit low, the reserve might reduce interest rates in an attempt to get people investing and creating new jobs. (In a nutshell, this is what QE is all about.)

Let’s imagine a particular country, where everyone suddenly decides they want to own some fountain pens made domestically, it would be a boom for the local industry. Lots of new businesses would be started, lots of FP jobs created in manufacturing, retail, and servicing — but we wouldn’t really expect it to have much effect on the overall level of employment. Most of those new jobs would be filled by workers moving over from other industries. If it did start increasing total employment, the reserve might look at putting up interest rates — preventing employment from rising too much, and hopefully preventing a surge in inflation. 

So starting new businesses and hiring new staff doesn’t really create ‘new’ jobs like you might expect. It’s really just a redistribution, where workers move from one job to another — probably into a job that’s more secure, better paid, or gives them greater satisfaction. (Few people quit to move to a worse job.)

Our model said that more people buying locally-made would drive up the number of jobs, and lead to economic growth. But if businesses aren’t really making employment decisions based on sales, and the employment rate is determined elsewhere, then our purchase decisions aren’t going to have much effect on the number of jobs. 

I don’t blame anyone for having this understanding of how the economy works. It’s a really common view, partly because it’s so intuitive: most people can see the connections, they get the logic, and it fits with their understanding of how business and the economy works. It just makes sense. And, unless you have a handle on monetary policy or production decisions, it’s not obvious that the model has some problems. 

But it’s also a common view because it’s reinforced by business and politicians — people who generally understand the flaws of the argument but choose to exploit the ignorance of others for their own, self-serving reasons. When you hear a politician grandstanding about how many jobs they’ve created, it’s not really true: as we’ve seen, the employment rate is largely determined by monetary policy. Maybe what they mean is that they’ve moved jobs from somewhere else to their city or region. Perhaps one group of locals is better off, because they have jobs, but it means workers in other cities and regions are now unemployed. It’s not obvious that society or the economy is necessarily any better off. But, of course, a politician wouldn’t get many as cheers if they said they had just relocated jobs.

As for businesses, I don’t mind when they have ‘Made in …’ branding on packaging or marketing, as it’s mostly harmless — some people have a sentimental preference for buying product made locally and it’s useful information for those buyers. But I do mind when a business (or union) goes further than that, and pretends that there’s a link between buying a particular product and jobs — or tries to guilt customers into choosing the local option. At best, it’s disingenuous. 

Personally, I sometimes find these claims to be a bit revealing: it means they know their product is inferior or more expensive (or both) and they’re a bit desperate in trying to find a justification for sticking around. Playing the locally-made card triggers an emotional reaction from people who are proud of their country, and can put pressure on them to buying the worse product. (You can see why Samuel Johnson thought patriotism was the last refuge of a scoundrel!) It’s no coincidence that brands which make the patriotic appeal are often the ones struggling to compete, the ones who don’t have other ideas for how to make their products better or cheaper. 

These two groups, politicians and businesses, often come together in an unholy alliance to forge political campaigns to put pressure on customers. One example is ‘Made in the USA’ which claims that buying American creates jobs, grows the economy, conserves resources, and even supports democracy and human rights. The last points might be true if you’re choosing between products made in the US or North Korea, but otherwise it’s a load of nonsense — exactly the sort of thing that I consider to be deceptive marketing. (A general rule is that whenever you see politicians, business, and unions agreeing on something, you can be sure it’s the consumer who is getting screwed.)

Ultimately, I think that when buying an FP — or any other product, for that matter — the primary consideration should be value for money. What am I getting and what am I giving up to get it? If there’s a cheaper pen of equal quality, or a better pen at the same price, then you should go buy it. Even if it’s made overseas. Don’t be guilted into thinking that you’re supporting the economy by buying locally, and make a choice that doesn’t given you the most value for money. If you really feel bad, buy the better value product (to support the business that can do the job better) and send a donation to the local business’ shareholders. 

Of course, there are perfectly legitimate reasons for buying local. Sometimes it’s the best product or the best price. Sometimes there’s a sentimental attachment to a brand or a retailer. Sometimes it’s just faster. In those cases, you should absolutely buy local. No question. But just don’t do it because you think it’ll be good for the economy. 

UPDATE

Some emails and comments have come in, asking if this post was aimed at Brad Dowdy (of Nock Co). The answer is no: not at all. As far as I know, Nock do use the 'Made in the USA' tag on some of their branding but I haven't seen them use the kinds of emotional appeals that I talked about in this post. My read on Nock is that they use this branding because it is useful information with some customers and because they are proud of what they have built. 

The Nock products don't appeal to me personally -- I only really carry one or two pens at a time, and the notebooks don't suit my enormous, wet nibs -- but they are obviously good products at competitive prices. They don't need to make emotional appeals to customers because the products speak for themselves.