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14 November 2018November 14, 2018

The Miracle of Supermarkets – The Perspective of the Austrian School of Economics

Research Paper explaining how, by transmitting knowledge throughout the food supply chain, middlemen contribute to better and more varied food, while lowering costs for consumers

The Miracle of Supermarkets – The Perspective of the Austrian School of Economics

Although we take supermarkets for granted, our access to such a quantity and variety of food products on demand and at any time of year is absolutely remarkable. This “miracle” is all the more impressive given that it is the result of spontaneous and voluntary collaboration between millions of people, most of whom will never meet. This paper will examine the historical evolution and the current operation of supermarkets and the numerous intermediaries that supply them, using the analytical framework of the Austrian School of Economics.

Media release: Canada does not need a food policy

The study's graphs
 

Related Content

Canadian food policy - Let supermarkets keep innovating (www.iedm.org, November 14, 2018)

Pas besoin d’une politique alimentaire au Canada: laissons l'innovation se poursuivre (Huffington Post Québec, November 14, 2018)
   

 

Research Paper prepared by Pierre Desrochers and Kevin Brookes, respectively Associate Professor at the University of Toronto Mississauga’s Department of Geography and Associate Researcher at the MEI, and Public Policy Analyst at the MEI.

Highlights

Although we take supermarkets for granted, our access to such a quantity and variety of food products on demand and at any time of year is absolutely remarkable. This “miracle” is all the more impressive given that it is the result of spontaneous and voluntary collaboration between millions of people, most of whom will never meet. This paper will examine the historical evolution and the current operation of supermarkets and the numerous intermediaries that supply them, using the analytical framework of the Austrian School of Economics.

Chapter 1 – The Austrian View of Markets as Transmitters of Knowledge

  • The most famous and lasting contribution made by members of the Austrian School is their nearly century-old contention that a decentralized market process will always spontaneously outperform the diktats of central planners in terms of delivering improved standards of living.
  • The Austrian economist Ludwig von Mises argued that the main flaw of central planning was the absence of a price system, which makes it impossible for central planners to choose between different combinations of inputs to produce in the most efficient manner.
  • Friedrich Hayek argued that no single decision-maker could ever gather and make use of knowledge which is inherently dispersed, contextual, and ever-changing. The greater size and complexity of a modern economy, far from requiring centralized bureaucratic planning, is rather an argument against centralized decision-making.
  • Prices provide a signal that communicates information about the relative scarcity or availability of goods and services (including the price of labour) deemed desirable by society.
  • Through their activities with both potential buyers and sellers, middlemen identify unrecognized opportunities for mutual gain and contribute to the discovery processes of market economies.
  • In short, the middleman adds value by buying at a certain price and reselling at an uncertain price, and marketing products to meet consumer demand.
  • The computation of quantitative data by a central planner cannot replace the process of prices, profits, and losses in a free market. Human action is not constant and cannot be predicted based on quantitative data from the past, and centralized bureaucratic planning cannot overcome this key pitfall.
  • The development of computers, online communication and transactions, and the increased importance of information in our modern economy have actually made Austrian insights into knowledge and decentralized planning more relevant than ever.

Chapter 2 – The Evolution of Supermarkets and the Role of Intermediaries in the Food Supply Chain

  • The work of intermediaries eventually made possible the development of a remarkable retail institution, the supermarket, which is just the final link in a long chain of intermediaries that connect commodity producers and final consumers.
  • A supermarket can be thought of as a node of intermediaries who coordinate the demands of final consumers and the potential supplies of producers and manufacturers in Canada and abroad.
  • The history of food retail in North America over the past two centuries has been one of an ongoing discovery process which led middlemen to come up with ways of reducing transaction costs and acting as conveyers of knowledge so that products would be sold in locations ever more remote from where they were produced.
  • The main development in the second part of the 20th century was the emergence of the supermarket format in cities and suburban areas. These stores and their attendant distribution infrastructure benefitted from the development of ever more sophisticated information processing technologies.
  • When new products are involved, food brokers often act as representatives for food producers because of their superior knowledge of specific segments and people involved in the distribution and retail market.
  • Our modern food supply chain would be unmanageable if every shipment had to be examined in order to assess its value and safety for consumption. Brands and grade names are only two of the numerous innovations developed to create and transmit bits of information that have become essential for handling food products.
  • The story of food retail in Canada over the past century and a half mirrors to a large extent that of the United States, with American chains opening up stores in Canada and Canadian stores copying the latest American innovations.
  • One recent trend in food retailing has been online shopping. According to estimates from researchers and consultants in the retail sector, online food sales by Canadian retailers amount to about 2% of total food sales.
  • E-commerce has recently taken a new turn with the automatization and the computerization of orders. Instead of employees preparing orders for customers, new automated systems use robots to find and fetch items for employees, which saves a lot of time and reduces the amount of food waste.
  • The fact that Amazon recently bought Whole Foods also indicates that the trend toward shopping for food online is likely to continue growing.

Chapter 3 – Turning Back the Clock: Would We Be Better Off with Shorter Supply Chains?

  • Calls to eliminate seemingly useless intermediaries and transportation through the promotion of increased local food production for nearby consumers are nothing new.
  • Many Canadian food activists have called for various kinds of government interventions, be it the support of co-ops in the retail sector or national planning to deliver greater local food production, as a means of raising farmers’ income while fighting alleged increased corporate control.
  • The analyses and forecasts of past critics, from predictions of rising food prices to declining competition in retail, have been proven wrong time and time again.
  • One way or another, the work done by intermediaries in the food business is simply indispensable, as small producers trying to set up an alternative model quickly realize.
  • Another model favoured by activists to shorten supply chains, minimize the role of intermediaries, and bring food producers and consumers closer together is that of urban agriculture.
  • Montreal-based Lufa Farms, a rooftop greenhouse and distribution agent, is widely hailed as one of Canada’s most innovative and successful urban food producers, yet the cost of groceries remains a challenge for Lufa’s model.
  • While Lufa is hailed as a model of green urban agricultural practices, a closer analysis suggests that the real value of the business is in its wholesaling division, as its rooftop greenhouse production model is not scalable, and the environmental footprint of its logistics system might negate any advantage gained from closer proximity to consumers.
  • The Lufa business model caters to middle and upper-middle class consumers, and gives no indication of ever being able to address the needs of households with lesser means.
  • The question of food production and retailing is of particular interest, since Canada’s federal government recently tasked its Department of Agriculture and Agri-Food to develop a “Food Policy for Canada” through an extensive process of consultation.
  • The fact that significant progress in the production and delivery of ever more affordable and diverse food was achieved in the absence of a government-led food strategy doesn’t seem to carry much weight with participants to this process.
  • The way forward must not be built around nostalgia for geographical proximity, but around ever more innovative practices, as developments in information technology have made centralized approaches obsolete.
  • This is especially true for economic activities such as food distribution and retailing in which market solutions are provided on a daily basis to address the changing tastes of consumers and deal with the complexity of long supply chains.

Introduction

Even though we visit supermarkets all the time, most of us know very little about how they work, and we take for granted the abundance of products found there. How-ever, seen from a broader historical perspective, our access to such a quantity and variety of food products on demand and at any time of year is absolutely remarkable.

Since their appearance in the 20th century, supermarkets have made enormous progress, which allows us today to access thousands of products from the four corners of the world, at ever more affordable prices. This “miracle” is all the more impressive given that it occurs spontaneously: No authority directs the process by which these products travel to us. It is the result of spontaneous and voluntary collaboration between thousands, even millions of people, most of whom will never meet: from pickers, ranchers, and farmers to truck drivers, train conductors, and ship captains, not to mention buyers, wholesalers, shelf stockers, managers, and others, all the way to the cashier.

How can we explain the miracle of supermarkets that we enjoy daily? And what is the best economic system to encourage innovation and progress in the food distribution sector?

The goal of this paper is to answer these questions by examining the historical evolution and the current operation of supermarkets and the numerous intermediaries that supply them. Our analytical framework is the Austrian School of Economics, which holds that the market must be seen as an entrepreneurial process of trial and error that, over time, coordinates the actions of those who participate in exchanges by making the best use of their specific knowledge.

The food distribution and retailing sector has undergone profound changes in recent years, whether in terms of the growing concentration of certain activities, automation, the development of local agriculture, or online shopping. These issues are particularly relevant in Can-ada, where the federal government recently launched a consultation process on the adoption of a “Canadian food policy.” As we suggest in this paper, however, history and economic theory teach us that the desire to regulate this sector through political interventions that run counter to the results of market processes can only reduce the range of products offered and raise their prices.

The first chapter presents a summary of the main teachings of the Austrian School of Economics that help to understand the development of supermarkets, in particular the role of decentralized markets in communicating relevant information and encouraging innovative behaviour among the different actors involved in the process.(1) By returning to the economic calculation debate that took place from the 1920s to the 1940s, we will show that it is not desirable, or even possible, to centrally manage a complex economy. A market order is better able to coordinate complex societies in which each economic actor possesses just a fraction of all available knowledge. We will emphasize among other things the role of intermediaries in transmitting these bits of information along the supply chain.

The second chapter presents a chronology of the development of supermarkets in North America that illustrates how, thanks notably to the services of intermediaries and to technological advances of all kinds, food has become more and more accessible and varied, and of higher quality.

Despite this remarkable progress, numerous voices have for decades denounced the uncertainty produced by the market, or the lack of value added by intermediaries in the supply chain. The Canadian government recently echoed these claims by organizing a broad consultation on the matter. The third chapter therefore shows, using concrete examples, the inevitable problems that result from eliminating intermediaries and market discipline.

Austrian economic analysis has never been more relevant, now that new technologies allow information to circulate more easily. The lessons of the past, which this analysis allows us to understand, are very valuable in the elaboration of current public policies. As we shall see, the most important of these lessons is that decentralized market processes are still the best way to move forward and continue to improve the distribution of food.

Note

1. For a general presentation of the analyses of the Austrian School of Economics on the issue of entrepreneurship, see Peter J. Boettke and Mathieu Bédard, How to Foster Entrepreneurship in Canada: The Teachings of the Austrian School of Economics, MEI, Research Paper, September 2017.
 

The graphs (Click to enlarge)

Research Paper prepared by Pierre Desrochers and Kevin Brookes, respectively Associate Professor at the University of Toronto Mississauga’s Department of Geography and Associate Researcher at the MEI, and Public Policy Analyst at the MEI.

Highlights

Although we take supermarkets for granted, our access to such a quantity and variety of food products on demand and at any time of year is absolutely remarkable. This “miracle” is all the more impressive given that it is the result of spontaneous and voluntary collaboration between millions of people, most of whom will never meet. This paper will examine the historical evolution and the current operation of supermarkets and the numerous intermediaries that supply them, using the analytical framework of the Austrian School of Economics.

Chapter 1 – The Austrian View of Markets as Transmitters of Knowledge

  • The most famous and lasting contribution made by members of the Austrian School is their nearly century-old contention that a decentralized market process will always spontaneously outperform the diktats of central planners in terms of delivering improved standards of living.
  • The Austrian economist Ludwig von Mises argued that the main flaw of central planning was the absence of a price system, which makes it impossible for central planners to choose between different combinations of inputs to produce in the most efficient manner.
  • Friedrich Hayek argued that no single decision-maker could ever gather and make use of knowledge which is inherently dispersed, contextual, and ever-changing. The greater size and complexity of a modern economy, far from requiring centralized bureaucratic planning, is rather an argument against centralized decision-making.
  • Prices provide a signal that communicates information about the relative scarcity or availability of goods and services (including the price of labour) deemed desirable by society.
  • Through their activities with both potential buyers and sellers, middlemen identify unrecognized opportunities for mutual gain and contribute to the discovery processes of market economies.
  • In short, the middleman adds value by buying at a certain price and reselling at an uncertain price, and marketing products to meet consumer demand.
  • The computation of quantitative data by a central planner cannot replace the process of prices, profits, and losses in a free market. Human action is not constant and cannot be predicted based on quantitative data from the past, and centralized bureaucratic planning cannot overcome this key pitfall.
  • The development of computers, online communication and transactions, and the increased importance of information in our modern economy have actually made Austrian insights into knowledge and decentralized planning more relevant than ever.

Chapter 2 – The Evolution of Supermarkets and the Role of Intermediaries in the Food Supply Chain

  • The work of intermediaries eventually made possible the development of a remarkable retail institution, the supermarket, which is just the final link in a long chain of intermediaries that connect commodity producers and final consumers.
  • A supermarket can be thought of as a node of intermediaries who coordinate the demands of final consumers and the potential supplies of producers and manufacturers in Canada and abroad.
  • The history of food retail in North America over the past two centuries has been one of an ongoing discovery process which led middlemen to come up with ways of reducing transaction costs and acting as conveyers of knowledge so that products would be sold in locations ever more remote from where they were produced.
  • The main development in the second part of the 20th century was the emergence of the supermarket format in cities and suburban areas. These stores and their attendant distribution infrastructure benefitted from the development of ever more sophisticated information processing technologies.
  • When new products are involved, food brokers often act as representatives for food producers because of their superior knowledge of specific segments and people involved in the distribution and retail market.
  • Our modern food supply chain would be unmanageable if every shipment had to be examined in order to assess its value and safety for consumption. Brands and grade names are only two of the numerous innovations developed to create and transmit bits of information that have become essential for handling food products.
  • The story of food retail in Canada over the past century and a half mirrors to a large extent that of the United States, with American chains opening up stores in Canada and Canadian stores copying the latest American innovations.
  • One recent trend in food retailing has been online shopping. According to estimates from researchers and consultants in the retail sector, online food sales by Canadian retailers amount to about 2% of total food sales.
  • E-commerce has recently taken a new turn with the automatization and the computerization of orders. Instead of employees preparing orders for customers, new automated systems use robots to find and fetch items for employees, which saves a lot of time and reduces the amount of food waste.
  • The fact that Amazon recently bought Whole Foods also indicates that the trend toward shopping for food online is likely to continue growing.

Chapter 3 – Turning Back the Clock: Would We Be Better Off with Shorter Supply Chains?

  • Calls to eliminate seemingly useless intermediaries and transportation through the promotion of increased local food production for nearby consumers are nothing new.
  • Many Canadian food activists have called for various kinds of government interventions, be it the support of co-ops in the retail sector or national planning to deliver greater local food production, as a means of raising farmers’ income while fighting alleged increased corporate control.
  • The analyses and forecasts of past critics, from predictions of rising food prices to declining competition in retail, have been proven wrong time and time again.
  • One way or another, the work done by intermediaries in the food business is simply indispensable, as small producers trying to set up an alternative model quickly realize.
  • Another model favoured by activists to shorten supply chains, minimize the role of intermediaries, and bring food producers and consumers closer together is that of urban agriculture.
  • Montreal-based Lufa Farms, a rooftop greenhouse and distribution agent, is widely hailed as one of Canada’s most innovative and successful urban food producers, yet the cost of groceries remains a challenge for Lufa’s model.
  • While Lufa is hailed as a model of green urban agricultural practices, a closer analysis suggests that the real value of the business is in its wholesaling division, as its rooftop greenhouse production model is not scalable, and the environmental footprint of its logistics system might negate any advantage gained from closer proximity to consumers.
  • The Lufa business model caters to middle and upper-middle class consumers, and gives no indication of ever being able to address the needs of households with lesser means.
  • The question of food production and retailing is of particular interest, since Canada’s federal government recently tasked its Department of Agriculture and Agri-Food to develop a “Food Policy for Canada” through an extensive process of consultation.
  • The fact that significant progress in the production and delivery of ever more affordable and diverse food was achieved in the absence of a government-led food strategy doesn’t seem to carry much weight with participants to this process.
  • The way forward must not be built around nostalgia for geographical proximity, but around ever more innovative practices, as developments in information technology have made centralized approaches obsolete.
  • This is especially true for economic activities such as food distribution and retailing in which market solutions are provided on a daily basis to address the changing tastes of consumers and deal with the complexity of long supply chains.

Introduction

Even though we visit supermarkets all the time, most of us know very little about how they work, and we take for granted the abundance of products found there. How-ever, seen from a broader historical perspective, our access to such a quantity and variety of food products on demand and at any time of year is absolutely remarkable.

Since their appearance in the 20th century, supermarkets have made enormous progress, which allows us today to access thousands of products from the four corners of the world, at ever more affordable prices. This “miracle” is all the more impressive given that it occurs spontaneously: No authority directs the process by which these products travel to us. It is the result of spontaneous and voluntary collaboration between thousands, even millions of people, most of whom will never meet: from pickers, ranchers, and farmers to truck drivers, train conductors, and ship captains, not to mention buyers, wholesalers, shelf stockers, managers, and others, all the way to the cashier.

How can we explain the miracle of supermarkets that we enjoy daily? And what is the best economic system to encourage innovation and progress in the food distribution sector?

The goal of this paper is to answer these questions by examining the historical evolution and the current operation of supermarkets and the numerous intermediaries that supply them. Our analytical framework is the Austrian School of Economics, which holds that the market must be seen as an entrepreneurial process of trial and error that, over time, coordinates the actions of those who participate in exchanges by making the best use of their specific knowledge.

The food distribution and retailing sector has undergone profound changes in recent years, whether in terms of the growing concentration of certain activities, automation, the development of local agriculture, or online shopping. These issues are particularly relevant in Can-ada, where the federal government recently launched a consultation process on the adoption of a “Canadian food policy.” As we suggest in this paper, however, history and economic theory teach us that the desire to regulate this sector through political interventions that run counter to the results of market processes can only reduce the range of products offered and raise their prices.

The first chapter presents a summary of the main teachings of the Austrian School of Economics that help to understand the development of supermarkets, in particular the role of decentralized markets in communicating relevant information and encouraging innovative behaviour among the different actors involved in the process.(1) By returning to the economic calculation debate that took place from the 1920s to the 1940s, we will show that it is not desirable, or even possible, to centrally manage a complex economy. A market order is better able to coordinate complex societies in which each economic actor possesses just a fraction of all available knowledge. We will emphasize among other things the role of intermediaries in transmitting these bits of information along the supply chain.

The second chapter presents a chronology of the development of supermarkets in North America that illustrates how, thanks notably to the services of intermediaries and to technological advances of all kinds, food has become more and more accessible and varied, and of higher quality.

Despite this remarkable progress, numerous voices have for decades denounced the uncertainty produced by the market, or the lack of value added by intermediaries in the supply chain. The Canadian government recently echoed these claims by organizing a broad consultation on the matter. The third chapter therefore shows, using concrete examples, the inevitable problems that result from eliminating intermediaries and market discipline.

Austrian economic analysis has never been more relevant, now that new technologies allow information to circulate more easily. The lessons of the past, which this analysis allows us to understand, are very valuable in the elaboration of current public policies. As we shall see, the most important of these lessons is that decentralized market processes are still the best way to move forward and continue to improve the distribution of food.

Note

1. For a general presentation of the analyses of the Austrian School of Economics on the issue of entrepreneurship, see Peter J. Boettke and Mathieu Bédard, How to Foster Entrepreneurship in Canada: The Teachings of the Austrian School of Economics, MEI, Research Paper, September 2017.

Read the Research Paper in PDF format


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