In “Jonesin‘ for a Soda,” high school student Max Raskin shows how agricultural subsidies lead to unintended consequences in the soft drink market:
When a government guarantees profits to those large corporations with powerful lobbies, the market loses its natural regulating mechanism. Instead of weeding out the most inefficient companies, the state subverts the consumer and keeps these companies propped up with corporate welfare. This is particularly true with respect to the agricultural industry.
In the absence of tariffs, importation quotas, and subsidies, the natural tendency of the market would be to produce cheap foreign sugar, which soda manufacturers would then import to sweeten their product. Domestic farmers are naturally opposed to this system because they cannot compete with more efficient foreign firms. So, instead of competing for the dollar votes of the millions of individuals who form the free market, these large corporations have the power to lobby a select group of politicians to confer them with special privilege. When a businessman tries to secure his profits not through free competition, but through state privilege, he is not acting as a market entrepreneur, but rather as a political, rent-seeking one.
Corporate sugar daddy – ADM:
In this case, the political entrepreneur was Archer Daniels Midland, a company that lobbied Congress to pass draconian quotas on sugar importation. But why would ADM, a corn producer, want to artificially raise the price of foreign sugar? A basic lesson of economics is this: when the price of a good is raised, all other things being equal, people cut back on their consumption, and (depending on the elasticity of demand) they look for substitutes.
High fructose corn syrup, which is made from cornstarch, which ADM grows, is such a substitute.
Venal politicians gave ADM what it wanted when Congress passed the restrictions in 1982. So now, in addition to manipulating the country’s tariffs, the Office of the United States Trade Representative sets limits by country on the tonnage of sugar that can be imported annually.
John Barnes of the New Republic writes, “In 1979 the entire corn sweetener industry produced just 1.7 million metric tons. Since the imposition of the sugar quota, industry production has soared to 5.5 million metric tons, more than 80 percent of it accounted for by ADM.”
Furthermore, as James Bovard, policy analyst at the Cato Institute notes, “At least 43 percent of ADM’s annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM’s corn sweetener operation costs consumers $10.”
The mega soft drink companies also benefit:
While the public has been forced to suffer inferior product, large corporations reap the benefits. The ubiquitous use of high fructose corn syrup did not freely come about on the market, but was rather a product of the protectionist schemes of the federal government.
Under a system of tariffs, subsidies, and restrictions, we get companies like Coke and Pepsi producing collectivist drinks for the masses. There is nothing exciting about these products because there is nothing exciting about the system that produces them. Interventionism is restrictive; it confines the innovative human mind, while the laissez–faire economy unleashes it.
Yet against all odds, the remnants of a market economy still find ways to innovate and satisfy the consumer:
The story could end here, as it usually would, with the populace swindled because of the state, but thankfully it doesn’t. In spite of the morass of anti-market policies, companies like Jones Soda have sought to satisfy a consumer demand for potable, domestic soda.
In January of 2007, the company switched from high fructose corn syrup to cane sugar. Though it cost the company over one million dollars to alter its machinery, CEO Peter van Stolk defended the new sweetening agent, “because it tastes better and they [consumers] feel better about it because it’s pure; it’s sugar. They know what it is.”
Though there has been a controversy over a link between high fructose corn syrup and obesity, van Stolk is a CEO who has little interest in babysitting his clients. Instead, his rationale for the switch was simple: he saw that his customers had been demanding a change in the product, so to make more money, he gave them what they wanted. The company’s entire product is now made with natural cane sugar, and they have managed to limit the rise in price to a modest five percent.
Jones Soda is the kind of company that would arise if the state would divorce itself from the economy. Unlike the mega-corporations Coke and Pepsi, Jones caters to the individualist spirit of America. Along with continually changing the photographs on its labels, Jones soda allows customers to individualize their own twelve packs with whatever picture or message they choose. Similarly, with over sixty-four flavors, including Caramel Cream and Lemon Drop Dead, Jones embodies the personal nature of free enterprise.
- The ability of market entrepreneurs to continually overcome adversity is inspiring.
- ADM remains on our blacklist as a blatant political entrepreneur.
- Hats off to Jones Soda, though the stock is not cheap at 40x estimated ’08 earnings, and the company is tiny at $30 million in annual revenue vs. $26 billion for Coca Cola.
- Other unintended consequence of government intervention in the free market: high fructose corn syrup’s contribution to the obesity epidemic in this country.
- Max, if you’re looking for a job in the investment business after graduating from college, let us know.