Thursday, July 18, 2013

I, Chicken

“I was really shocked when I bought my first ever whole chicken tonight. Five bucks? For a whole chicken? KFC charges five bucks for one breast and one wing. How can a farmer breed, hatch, raise, feed, house, butcher, package, and ship a chicken for five bucks? Blows my mind.”

This was a very insightful observation made by a friend of mine. The subject of economics in a lot of ways is just a collection of stories consisting of observations and insights like this. This particular insight speaks directly to the concepts of comparative advantage from Ricardo and specialization and trade from Adam Smith- read more about these economists at the Library of Economics and Liberty.

Because of the principle of comparative advantage,  you choose to buy the chicken from the retailer at $5 as opposed to raising it yourself or even sourcing it locally at a much greater cost in terms of money, time, and perhaps the environment.  Because of the principle of comparative advantage we often don’t raise most of our own food or make our own cars or many of our own clothes or even source most of these things locally either. The concept of comparative advantage and the associated gains from specialization and trade lead to an increase in the size of the ‘economic pie’ which can be used to make everyone better off. 

Getting a chicken at your local retailer for $5 is also a testament to the market’s ability to solve the the fundamental problem of economics, the knowledge problem. This is a problem that exists because the necessary information for allocating scarce resources does not exist in concentrated or integrated form, but is incomplete and dispersed among individuals. Through markets, prices bring all of this incomplete and dispersed information together in a coordinated manner, producing a ‘spontaneous order’ as described by economist F.A. Hayek.

 We get $5 chicken because a spontaneous order comprised of specialized farmers, feed and nutrition specialists, veterinarians, pharmaceutical companies, breeders, packers, processors, supply chain managers, and retailers all cooperate to bring healthy, sustainable, and affordable food to your table. Modern food supply chains, made possible by companies such as Cargill, ADM, and retailers like Wal-Mart, have not only allowed us to get foods cheaper than we can produce ourselves or source locally, but may have also helped to reduce our impact on the environment.  

Another way to think about the knowledge problem and the concept of a spontaneous order in relation to $5 chickens is to admit that no single person really knows how to make a chicken any more than a pencil, as illustrated so perfectly by Leonard E. Read in his famous essay ‘I, Pencil.’ Milton Friedman does a good job summarizing the essay in 2 minutes in the following You-Tube video: 


It is also important to recognize that $5 chicken owes a great debt to entrepreneurial driven technological change and economic growth, and this is truly mind blowing. As economist Robert Lucas said “once you start thinking about growth it's hard to think about anything else.”

Think, “I’Chicken.”