Losses from opportunity costs are real losses, they make us poorer than we need to beAt which point someone is going to suggest that we just get more farmers to grow more sugar cane. But the farmers also make a loss growing the cane. It costs Tk20,000 to grow an acre of it and they’ll get paid Tk60,000 – that’s a loss. No, really, that’s a loss and to explain that we need to know about opportunity costs. There’s a great game that can be played called “The Two Things About Everything.” The art is to boil down some complex area of knowledge into just the two things we need to know about it. Civil Engineering becomes “mud. And there is always mud.” Boxing is “hit. don’t get hit.” Economics is “incentives matter. Opportunity costs.” If you can get your mind around those two points then you’ll be doing better than all too many professional economists. The first is obvious, people react to what they’ll get from doing or not doing something. The second is rather more subtle and it’s something that economists really do insist upon. The cost of doing something is whatever you give up to do that thing. The cost of making love to your mistress is not making love to your wife that afternoon, not unless your lifestyle is very much more exciting than that of most of us. Being slightly more serious one of the costs of going into business making mobile phones is not being able to use the capital, the buildings, the land, to make cars. We’ve had to give up our ambitions to be Henry Ford in order to be one of the Ambani brothers (preferably the one making money). There are always opportunity costs because we can always be doing something else other than what we actually are doing. The cost of whatever it is is whatever it is we give up to do it. At which point the farmers making a loss when growing sugar cane makes sense. Bangladesh is blessed with up to three growing seasons a year, sugar takes a full 12 months to be ready to harvest. Thus that acre which earns Tk40,000 under cane can in fact make Tk80,000 profit under a triple crop mix. The loss to the farmers of growing cane is that Tk40,000 profit they give up by not triple cropping. To complete the example of the jargon, the opportunity cost of sugar cane growing is that Tk40,000 per acre of lost profit. Yes, it does indeed sound arcane, it even is arcane, but economists adamantly insist that we just have to think about the world this way. Losses from opportunity costs are real losses, they make us poorer than we need to be. The way to avoid such opportunity costs is that great remedy for all economic ills – trade. As David Ricardo’s idea of comparative advantage points out, we should do what we’re best at. Or in the way I like to explain it, we should do what we’re least bad at, the reason I say it that way being that we do all grasp that there’s something we’re least bad at. But this is really just the same statement as we should do whatever it is that has the least opportunity costs. That mistress might only be available this afternoon while wifey’s at home all week. Or if we can make more profit triple cropping then we should do that instead of growing cane for sugar. Trade comes in where we sell off to the foreigners those more expensive farm products creating that greater profit, some of which we use to buy the sugar from those poor unfortunates who only get that one growing season a year. That Bangladesh’s sugar mills are all making a loss is put down to their having high fixed costs and not the volume of production running through them to offset them. But we don’t want Bangladeshi farmers growing more cane to be processed because, in proper economic terms, they make a loss from doing so rather than triple cropping. The answer to this is just to close down that industry altogether, do what we’ve that comparative advantage in and use the extra money we’ve earned to buy sugar from the global market. It is an odd idea, yes, but also a true one, we can become richer by not doing things. Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
On July 18, this newspaper pointed out that Bangladesh should just stop trying to produce sugar and instead go and buy it on the international market. That’s not quite the way it was said of course, but it is indeed what was meant – or possibly not even meant but that is the lesson we should take from it.
The first level of problem is that all of the government owned sugar mills, the places that process the sugar cane, lose money. The sugar sells for Tk60 per kg and their production prices are anything from Tk150 to Tk300 or so per kg. This is also making us all poorer as the taxpayer has to cover these losses.
The essential problem is that all the mills have fixed costs – it does cost something to have a building with machines in it and those costs happen right around the year. There isn’t enough sugar cane being produced for the mills to run at full pelt for long enough to cover those costs.
