– July 22, 2019
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I got to tour the Samuel Adams Brewery in Boston recently. It was a fantastic tour of a surprisingly small facility – it reminded me less of the Budweiser brewery tour from my graduate school days in St. Louis and more of the Schlafly brewery tour from… my graduate school days in St. Louis. Producing even a simple and ancient good (like beer) in a modern economy is mind-blowingly complex.

I know very little about beer. I know it was historically important, and I know that it gets its alcoholic content from yeast eating sugar and pooping out alcohol. I may not even be describing that correctly. The more I study economics and liberal political economy, the more I’m impressed with the importance of decentralized knowledge — specifically knowledge of “the particular circumstances of time and place” — and the feedback markets provide. Here are a few comments on some things I learned on the tour.

First, there are only two types of beer: lager and ale. I didn’t know that and don’t remember which yeasts do what, so I won’t try to recount it. Apparently, though, every beer product out there comes from one of only two kinds of yeast. It’s quite a variety within two categories.

Second, hops absorb what’s in the soil in which it grows, so the broad category of “hops” has a lot of manifestations. Samuel Adams doesn’t use hops from Boston, the tour guide said, because they taste like student debt. Ha ha. They have to be very particular about their hops — which come from Germany — in order to maintain uniform quality. Note who is in charge here. In a competitive market, the consumer calls the tune. In this case, the message the brewers are getting is “Be very particular about the hops you use.”

Third, the original Samuel Adams beers were made using Boston tap water — but Samuel Adams is also brewed in Cincinnati and Pennsylvania’s Lehigh Valley. To maintain the product’s consistency, they send samples from Boston to the Cincinnati and Lehigh Valley breweries and then modify the water in those locations so that it matches the Boston water as closely as they can get it. At first glance, it seems like water is water — but in order to maintain a uniform quality standard, Samuel Adams has taken what looks like a pretty extreme step. It is a step that, in their estimation, their customers demand.

Most interestingly, I learned during the beginning of the tour that barley is roasted to different grades for different beers and that barley is also the main ingredient in Grape-Nuts. Here’s a fine example of the problem markets solve that states really can’t. Should we use barley to make beer, or should we use it to make Grape-Nuts? How will we know we have succeeded in a world where we don’t know one another’s preferences or dispositions? The market test of profit-and-loss provides people with reliable feedback. If the financial return to barley used to make beer is higher than the financial return to barley used to make Grape-Nuts, beer wins. If the financial return to barley used to make Grape-Nuts is higher than the financial return to barley used to make beer, then Grape-Nuts wins.

The profit motive drives us to the “right” allocation of barley between Grape-Nuts and different kinds of beer. If Grape-Nuts are inordinately profitable, Grape-Nut production will expand and beer production will contract. If beer is inordinately profitable, beer production will expand and Grape-Nut production will contract. The process stops when the return on the marginal grain of barley is the same in either use. In the real world, of course, there are all sorts of complicating factors — regulatory barriers to entry are one important example — that slow the process or that prevent it from working at all, but this is part of the essential logic of competition. 

The profit motive drives people to get resources into the hands of those who will make the best use of them, where “best” is defined with reference to people’s willingness to pay with the dollars they earn by the sweat of their brow. We may disapprove of people’s choices and think they should eat more Grape-Nuts and drink less beer, but I’m not prepared to privilege the beliefs of mere observers who pay no meaningful price for being wrong over the revealed preferences of the people with the strongest incentives to choose wisely.

A government could, undoubtedly, make beer. But the right beer with the right flavor profiles for a world of nearly infinite variety of tastes — not all of them consistent? For that, you need a market.

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Art Carden

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Art Carden is a Senior Fellow at the American Institute for Economic Research. He is also an Associate Professor of Economics at Samford University in Birmingham, Alabama.

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