Perhaps someone learned about the market from the price of avocados?
I haven’t posted in a while, it’s February. However, if you are a follower of this site, I hope you appreciate my guest post.
This post was born from a wander through the fruit and vegetable aisle of the supermarket. Don’t get me wrong – we actually went shopping – not just looking for inspiration for this post. Economists can find inspiration in ordinary things.
Avocados were going for 80 cents each, or 3 for $4. It may be unremarkable, but go back 5 years and they are more like $2-$3 each. Now it’s cheaper to have avocado on toast than tomato. Big woop, sure, but something has to change, and it turns out there glut in supply, reducing prices. Good for consumers, not necessarily good for avocado growers.
You should also know a little about the culture surrounding avocados. In 2017, Aussie Tim Gurner was famous advised millennials to stop eating avocado on toast at ‘$22 a pop’ to save money to buy a house. Historically, avocados in New Zealand have been an affordable luxury. So that statement has an impact. That statement certainly wouldn’t have the same impact if Tim Gurner were talking about tomatoes on toast – which are now cheaper.
Really, I don’t know the context in which Tim Gurner is doing it – but it has become a cultural lexicon.
It’s ironic in the year since the price of avocados has more than halved, becoming more affordable as a standard part of our diet, while house prices continue to explode. Millennials may have more avocado on toast than they did in 2017, but fewer homes.
Continued capacity growth is a prerequisite for lower prices and greater access to goods and services, all things being equal
The main learning in this article about capacity growth mentioned above is super simple, but not always understood and applied.
Of course my avocado sample was a bit tight. It’s avocado season which means avocados are cheaper. Also yesterday they were 4 for $5, which is a bit of an increase. But there is some truth.
The supply of avocados is already lean up in the new year both in New Zealand and Australia. At amount of land used for horticultural purposes (including avocados) have been plentiful. This increase creates a larger volume and translates into more avocados in the store.
Economics 101 tells us that when supply rises, prices fall. This is not necessarily true but is a useful starting point for further consideration.
Capacity development is a useful starting point for policies aimed at “better”
The collective experience and wealth of the newly discovered avocado is a case study in how well-being can improve. Imagine, the Government decided to subsidize avocados to the tune of $1 billion in 2017. Put money in the pockets of hard-working families to buy more avocados.
Do we expect total avocado prices (including subsidies) to decrease? Probably not, in fact, it will increase as demand for avocados increases. Intuition is a new resource, developed over the course of several years that increases the affordability of avocados, not spending money on problems.
Fruit green cream aside, it is surprising how often policymakers throw money at problems without regard to the notion of resources and capacity building, and then surprised when they have nothing to show. Two new examples appear:
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The 2019 Labor Government spent $1.9 billion on mental health services: Labor is proposing additional investment in mental health services. Spending money effectively on a system that has limited flexible capacity in the short term. Who will provide this $1.9 billion service? Here it is, Change2022 report on rates of mental health services, found no increase in access to services over 5 years.
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The Labor government’s KiwiBuild program 2017: KiwiBuild promised an additional 100,000 homes over 10 years. 5 years later, there are about 1,300, with the target to be canceled in Sept 2019. Are there many unemployed builders to develop these 100,000 houses? It has also been seen in recent months that rising interest rates (which control housing demand by raising mortgage rates) are also needed to make housing more affordable.
This example is an easy target, but this stuff is really intuitive. The market moves slowly at first and requires more capacity, which may mean technology, to produce more. It would be wiser to develop policies to build capacity first for potential inputs such as more labor or materials. This is more than sufficient, but it is also a prerequisite for increasing the net output anyway.
Markets can work magic, but not without the right spell. Avo big day!
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