Friday, February 25, 2011

Can buying local lead to inflation?

Russ Roberts blogs over at the Café about buying local in “Don’t follow the money.”  In his post, Russ talks about why buying local can be loco, especially if you’re spending more to essentially get less.  Makes sense to me.  

A reader then posts a comment linking buying local to inflation.  It’s an interesting comment, and while in theory it could happen, I’m skeptical.  So, I’ll throw it out there and perhaps we can get Prof J to leave a few comments.

Here’s the quote from Michael:

“Since local production omits economies of scale, production will be lower and less goods and services will be produced. Goods will be sold outside the community, but only green pieces of paper will come in - not other goods. The amount of money inside the community will increase while the goods and resources they represent will diminish - therefore, inflation. Prices will continue to rise from this localized inflation.”

1 comment:

  1. Michael appears to be saying that only one community will buy locally, but expect to sell their goods to other communities. I don't see how this would result in no economies of scale. I can only see how households will be limited in their choices of consumption. This doesn't seem like an accurate presentation of what a successful "buy local" campaign would deliver.

    Nevertheless, if one only bought locally, but sold globally, then I would expect we'd see the relative price of goods in the local community increase. But, as I say, the framework needed for this result seems implausible.