“The Invisible Helping Hand”
Feeding America (formerly known as America’s Second Harvest) is a non-profit organization that receives food donations from farmers, manufacturers, and retailers and distributes them to food banks around the nation. As this excerpt from Tim Sullivan and Ray Fisman’s book, The Inner Lives of Markets, tells it, this system was working pretty well but wasn’t as efficient as it could be, resulting in food being wasted and people going hungry.
Food banks might provide feedback on their likes and dislikes, but at its core, the Second Harvest allocation still resembled 1960s-era Chinese central planning (which, free-market economists will note, helped to cause the Great Famine of 1959-61). Second Harvest’s management felt that it was falling short in its efforts to get food banks the donations they most needed. Prendergast gives the example of sending potatoes, unbidden, to a foodbank in Idaho that already had warehouses full. Or delivering milk to a bank that didn’t have the refrigeration capacity to store it and so would end up throwing it away. In fact, Second Harvest would sometimes turn down food donations from giant food companies because they weren’t sure where to send it. Second Harvest was also, at the time, treating different kinds of food as the same — a pound of broccoli was the same as a pound of cereal was the same as a pound of potato chips. When it comes to feeding the poor and hungry, however, not all foodstuffs are of equal value.
So Feeding America asked University of Chicago economist Canice Prendergast to design a market for the donated food, hoping that would make things run more efficiently. After listening to concerns raised by the food banks, particularly from the smaller ones who didn’t want to get out-muscled in the market by the larger banks, they came up with an economy where food banks were given shares to bid on the food they wanted each day.
Crucially, the market was overseen by a “central banker”, so that certain market dynamics didn’t result in a disruption of the ultimate goal of getting the most food to the people that needed it.
Food bank presidents, the market designers discovered, were hoarders of shares. To keep the market from dipping into a deflationary spiral, Prendergast needed to pump extra shares into the market to encourage bidding. There was also the ebb and flow of goods into it to consider. Some days, Kraft might dump half a dozen container — loads of mac and cheese into circulation; other days there’d be none. If everyone used their points to bid on mac and cheese, the prices of, say, potato chips and broccoli would plummet, not because broccoli was suddenly worth less, but because of a temporary surge in the supply of more desirable donations. So extra shares would need to be put into circulation to prop up prices — lest Arnold see last week’s lower price of potato chips and bid too timidly on them, misinterpreting short-run price declines as permanent ones. Similarly, in a dry spell of donations, shares would be withdrawn from the market: Since there was so little to bid on, there would be a run-up in prices unless the number of shares also declined.
As a result of their implementation of an economy, a couple of benefits emerged. First, Feeding America learned which foods were most sought after by banks (i.e. those for which the bidding was highest) and were able to be more aggressive in seeking out donors for them. Second, the amount of total food donations doubled, with about 25% of the increase directly attributable to the market:
As Prendergast reports in an academic paper summarizing the Second Harvest market experiment, the annual supply of food donations increased by 50 million to 100 million pounds as a result. Twelve million pounds can be traced directly to the market itself, in the form of excess donations that flush food banks placed into the market in exchange for shares. That’s 12 million pounds of food that would otherwise have been wasted.
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