Perhaps there is something to be learned about the markets from the price of avocados?
It’s been a long time since I posted, not since February. However, if you are a follower of this site, I hope you have appreciated the guest posts.
This post was born from a walk through the fruit and vegetable aisles of the supermarket. Don’t get me wrong, we actually went shopping, it wasn’t just to find inspiration for this post. Economists can find inspiration in mundane things.
Avocados were 80 cents each, or 3 for $4. That might not be remarkable, but rewind 5 years and they were more like $2-$3 each. Now it was cheaper to have avocado on toast than tomato. Big woop, sure, but something must have changed, and it turns out there’s a excess supply, which lowers prices. Good for consumers, not necessarily for avocado growers.
You also need to understand a bit of the culture around avocados. In 2017, Australian Tim Gurner notoriously advised millennials to stop eating avocado on toast at ‘$22 each’ to save money to buy a house. Historically, in New Zealand, avocados have been an affordable luxury. So the statement had some impact. The statement certainly wouldn’t have had the same impact if Tim Gurner had been talking about tomato toast, which should be cheaper now.
Admittedly, I don’t fully understand the context in which Tim Gurner made that statement, but it has become something of a cultural lexicon.
It’s ironic that in the years since then the price of avocados has more than halved, becoming much more affordable as a standard part of our diets, while house prices have continued to rise. Millennials can afford more avocado on toast than in 2017, but much less at home.
Sustained capacity growth is a prerequisite for lower prices and broader access to goods and services, all else being equal.
The key learning in this article regarding capacity growth stated above is very simple, but not always understood or applied.
Granted my avocado example is a bit over the top. It’s avocado season, which means avocados are cheaper. Also yesterday it was 4 for $5 which is a bit of an increase. But there is some truth in it.
The supply of avocados has been increasing in recent years both in New Zealand and Australia. He amount of land used for horticultural purposes (including avocados) has grown considerably. This increase creates higher volume and translates to more avocados in stores.
Economics 101 tells us that as supply increases, prices fall. This is not always true, but it is a useful starting point for further consideration.
Capacity development is a useful starting point for policy to do “more of a good thing”
Our collective experience and the new riches of the avocado are a case study in how wellness can be improved. Imagine the government decided to subsidize avocados to the tune of $1 billion in 2017. Putting money in the pockets of working families to buy more avocados.
Would we expect the total price of avocado (including the subsidy) to fall? Probably not, in fact, it is likely to increase as the demand for avocados increases. Intuitively, it is the new offering, developed over several years, that has improved the affordability of avocado, without throwing money at the problem.
Creamy green fruit aside, it’s amazing how often policymakers throw money at problems without regard to notions of supply and capacity development, and then are surprised when they have nothing to show for it. . Two recent examples that stand out:
- The 2019 Labor government’s $1.9 billion spending on mental health services: Labor proposed additional investment in mental health services. Effectively throwing money at a system that has limited flexible capacity in the short term. Who was going to provide these $1.9 billion in services? behold and behold, Huringa Teaa 2022 report on mental health service levels found no increase in access to services over 5 years.
- The 2017 Labor government KiwiBuild programme: kiwibuild promised an additional 100,000 houses over 10 years. 5 years later, there are about 1,300, with the target scrapped in September 2019. Were there ever numerous builders sitting idle to develop these 100,000 homes? It also became clear in recent months that raising interest rates (which controls demand for housing by raising mortgage rates) was also necessary to help make housing more affordable.
These examples are easy targets, but this is really intuitive. Markets change slowly at first and require more capacity, which could mean technology, to get more production. It would have been more sensible to develop a policy to build capacity first for possible inputs, for example more labor or materials. This is more reasonable, but it is also a prerequisite for a net increase in output anyway.
Markets can work magic, but not without the right spells. Hello great day!
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