Tea is an important part of life. I am an Englishman, and I would be betraying my entire culture if I didn't agree with that. But to say that being able to consume tea is important is not the same statement as trying to insist that certain tea plantations are important.
After all, as Adam Smith himself pointed out, “the sole purpose of all production is consumption.” As long as there is tea that we can brew up, the survival of a specific tea producer is of no matter.
Even the survival of an entire sector of tea production in one country doesn't matter. It's the being able to consume that matters, nor where produced nor who by.
This is the correct starting point for a consideration of this: “A revolving fund at a 6% interest rate to tackle the financing crisis in the tea sector.”
The inflation rate, at 8%, is higher than this 6%. The base rate at the central bank is near one and a half times that 6% at 9.5%. Commercial bank loans are at 12% and up.
So, the insistence here is that tea plantations should, effectively, be gifted free money.
Yes, obviously, the hope is that they'll pay it back, the money itself. But if they've not got to pay for the use of the money -- pay a real interest rate -- then that is the same statement as they get to use the money for free.
That's not a good idea.
The useful description of economics is that it's the study of the allocation of scarce resources. Resources are things like land, labor, and capital. We need to allocate them as best we can so as to make ourselves, collectively, as rich as we can. This means allocating those resources efficiently.
For there are always alternative uses of those resources. We could use the land of tea plantations for tea. We could put goats on it or solar panels. We could just go and stare at the awesome majesty of the mountains.
Whichever of those uses produces the greatest value to us consumers is the most efficient use of those mountain slopes.
We are gaining the greatest increase in the enjoyment of our lives by the use of those mountains to produce the greater value we can enjoy.
This is also obviously true of labor, of capital, and so on. We want to use our limited supplies of everything to produce the greatest amount that we can consume.
So, if the tea plantations cannot even pay us for the use of our money -- an interest rate below the inflation rate really is free money to a business, a loss to the rest of us -- then at least some of those tea plantations should no longer be in business.
They are not adding value, they are consuming more resources than they produce in value. They are a net loss to our society.
This is true of anything and everything in our society. Those things that are, nominally, businesses must produce more value than it costs to run them.
Otherwise they are all making us poorer -- the resources they consume are greater than the value of production, and yes, this really does mean they are making us all, in aggregate, poorer.
For we could devote those resources to things which add value, not subtract it.
If tea plantations can only survive by getting free money from the rest of us, then tea plantations should go bankrupt instead. Or at least some of them should, which will reduce the amount of tea produced. We'll all have to pay more for our tea, and that's the way the surviving ones will profit.
This is, of course, true of every other form of production in our economy. If it requires subsidy, then that's the grand clue that that form of production should not exist. Or, at least, less of it should.
I agree that it's a fairly harsh point to make, but things that lose money really should close down.
It's also fairly harsh to use tea plantations as the example, but, as at the top, I'm an Englishman. Tea is important; we really should get this right.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.