Engel's Law: or why not to garden

Engel’s Law: or why not to garden

Such good land surrounds Fresno, California that it rivals the Fertile Crescent in the fecundity race. Yet if you drive through you will notice that the city is sprawling all over the place and they keep putting up the big grey box mega-stores and surrounding them with farming land. If you can’t figure out why prime farmland keeps getting paved over to provide parking for Food 4 Less stores, consider Engel’s Law. In the 19th Century, a German economist named Ernst Engel (not the communist), observed that as a farmer’s neighbors get richer, the prices they will pay for his produce drops. This came as a surprise to many, but it is so consistently true that decision makers have taken it as true ever since.

Here is one way to think about how it works. Everyone has heard about supply and demand and how it determines prices, but how does it work on food? For our purposes, forget about supply. Food is important enough that countries do a fairly good job of guaranteeing a steady supply of food. Demand is the important factor here.1

People usually oversimplify demand by saying “it’s how much you want something – if you want it more, you’ll pay more.” Well, fine – but how do you measure desire? In fact, it’s simple. A good way to measure demand is to look at what percent of a person’s income goes to a particular product or type of product. If I spend 20% of my income on antique He-Man action figures and you only spend 5% of your income on antique He-Man action figures, then I demand them more than you. Four times more. In this way, you really can quantify it.

Carry that on a step. I might like action figures enough to keep spending 20% of my income on them, even as my income grows. That is, I might just buy more when I have more money. This is not true for food, and that’s the key to Engel’s Law. You can only eat so much. If you eat three meals a day when you are making $20,000/year, you probably won’t eat many more meals or all that much more food when you are making $40,000/year. So, the percentage you spend on food drops as your income grows, which means your demand for food is dropping.

It works the same across whole economies. If a country’s productivity increases faster than its population, then it has more money and fewer mouths to feed. That means the demand for food is falling. When demand falls against a steady supply (farmers tend to want to keep farming), prices drop. It works every time. That’s Engel’s law.

Over time, the U.S. economy has continually grown a little faster than population growth, suggesting consistent increases in worker productivity. Farmers have been forced to produce more with less, or lose money. As their ability to do so diminishes (there’s only so many ears of corn you can squeeze out of an acre), it has made less and less sense (in purely financial terms) to use land for farming rather than something else. Thus - all that concrete.