Free Market Food Banks

by on November 3, 2015 at 7:27 am in Economics, Education, Food and Drink | Permalink

Feeding America, the third largest non-profit in the United States, distributes billions of pounds of food every year. Most of the food comes from large firms like Kraft, ConAgra and Walmart that have a surplus of some item and scarce warehouse space. Feeding America coordinates the supply of surplus food with the demand from food banks across the U.S..

Allocating food is not an easy problem. How do you decide who gets what while taking into account local needs, local tastes, what foods the bank has already, what abilities the banks have to store food on a particular day, transportation costs and so forth. Alex Teytelboym writing at The Week points out:

…Before 2005, Feeding America allocated food centrally, and according to its rather subjective perception of what food banks needed. Headquarters would call up the food banks in a priority order and offer them a truckload of food. Bizarrely, all food was treated more or less equally, irrespective of its nutritional content. A pound of chicken was the same as a pound of french fries. If the food bank accepted the load, it paid the transportation costs and had the truck sent to them. If the food bank refused, Feeding America would judge this food bank as having lower need and push it down the priority list. Unsurprisingly, food banks went out of their way to avoid refusing food loads — even if they were already stocked with that particular food.

This Soviet-style system was hugely inefficient. Some urban food banks had great access to local food donations and often ended up with a surplus of food. A lot of food rotted in places where it was not needed, while many shelves in other food banks stood empty. Feeding America simply knew too little about what their food banks needed on a given day.

In 2005, however, a group of Chicago academics, including economists, worked with Feeding America to redesign the system using market principles. Today Feeding America no longer sends trucks of potatoes to food banks in Idaho and a pound of chicken is no longer treated the same as a pound of french fries. Instead food banks bid on food deliveries and the market discovers the internal market-prices that clear the system. The auction system even allows negative prices so that food banks can be “paid” to pick up food that is not highly desired–this helps Feeding America keep both its donors and donees happy.

Food banks are not bidding in dollars, however, but in a new, internal currency called shares.

Every day, each food bank is allocated a pot of fiat currency called “shares.” Food banks in areas with bigger populations and more poverty receive larger numbers of shares. Twice a day, they can use their shares to bid online on any of the 30 to 40 truckloads of food that were donated directly to Feeding America. The winners of the auction pay for the truckloads with their shares. Then, all the shares spent on a particular day are reallocated back to food banks at midnight. That means that food banks that did not spend their shares on a particular day would end up with more shares and thus a greater ability to bid the next day. In this way, the system has built-in fairness: If a large food bank could afford to spend a fortune on a truck of frozen chicken, its shares would show up on the balance of smaller food banks the next day. Moreover, neighboring food banks can now team up to bid jointly to reduce their transport costs.

Initially, there was plenty of resistance. As one food bank director told Canice Prendergast, an economist advising Feeding America, “I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.” But the Chicago economists managed to design a market that worked even for participants who did not believe in it. Within half a year of the auction system being introduced, 97 percent of food banks won at least one load, and the amount of food allocated from Feeding America’s headquarters rose by over 35 percent, to the delight of volunteers and donors.

Teytelboym’s very good, short account is working off a longer, more detailed paper by Canice Prendergast, The Allocation of Food to Food Banks.

Canice’s paper would be a great teaching tool in an intermediate or graduate micro economics class. Pair it with Hayek’s The Use of Knowledge in Society. Under the earlier centralized system, Feeding America didn’t know when a food bank was out of refrigerator space or which food banks had hot dogs but wanted hot dog buns and which the reverse–under the market system this information, which Hayek called “knowledge of the particular circumstances of time and place” is used and as a result less food is wasted and the food is used to satisfy more urgent needs.

The Feeding America auction system is also the best illustration that I know of the second fundamental theorem of welfare economics.

Even monetary economics comes into play. Feeding America created a new currency and thus had to deal with the problem of the aggregate money supply. How should the supply of shares be determined so that relative prices were free to change but the price level would remain relatively stable? How could the baby-sitting co-op problem be avoided? Scott Sumner will be disappointed to learn that they choose pound targeting rather than nominal-pound targeting but some of the key issues of monetary economics are present even in this simple economy.

1 rayward November 3, 2015 at 7:38 am

But isn’t this system “socialist”: each food bank is allocated “shares” according to need (i.e., population). If it works so well, why not allocate “money” according to need?

2 Igna November 3, 2015 at 8:29 am

In “true” socialist regimes, there was a sincere attempt to get rid of prices. In the Soviet Union, although they had currency, resources were allocated by fiat, without prices, by a centralized committees. Thus, true socialists do not like prices on an ideological level, and they even refuse to acknowledge their utility. It is almost like a religious thing.

An interesting take on this is Francis Spufford’s novel “Red Plenty” (http://redplenty.com/Red_Plenty/Front_page.html) where it is shown how the Soviet Union operated from an economic-social perspective. For a westerner, it is unbelievable to realize how truly foreign such cultures were.

3 Brett November 3, 2015 at 11:27 am

That was a great book.

4 Arjun November 3, 2015 at 11:41 am

I don’t think its accurate to say that “true socialists” do not like prices on the ideological level; while this is true for many socialists, there are too many differences and disagreements between socialists to say who is the “true socialist”. For example, the book Markets Not Capitalism: Individualist Anarchism Against Bosses, Inequality, Corporate Power, and Structural argues for a form of liberterian/anarchist socialism centered in markets.

5 Dave Smith November 3, 2015 at 9:30 am

Because in this system you don’t have a work disincentive problem.

6 Rahul November 3, 2015 at 9:35 am

+1

That’s the thought I had too: Reallocating shares spent equally at midnight has an automatic leveling effect, doesn’t it?

7 Alain November 3, 2015 at 10:29 am

You had the answer in the post directly above yours and yet you still posted +1?

8 Rafael November 3, 2015 at 12:22 pm

The difference is that this is a system where production is almost exclusively exogenous. The amount of food is a random variable that is not affected by the actions of those within the economy. Thus, the only thing that matters within that economy is efficient distribution. Within the real world production does matter and thus it would not make sense to allocate money according to need because it would discourage production and reduce the general stock of goods, making everyone worse off.

9 marris November 3, 2015 at 5:24 pm

+2

10 David Gonzalez November 4, 2015 at 11:43 am

Exact same thought I had when I read the post. There is no production piece of the economy. As far as the players are concerned, food ‘magically’ shows up every day to be allocated by auction.

11 Daniel Barkalow November 4, 2015 at 7:47 pm

You’re assuming that what producers in the economy receive is something that reduces their perceived need. A system could, instead, say that successful producers get something that increases their perceived ability, while unsuccessful producers are told to find something else to do; either way, the people working for producers have needs based on their demographics and are allocated “need” credits independent of how much their employer produces.

If you’re not assuming that there’s a single “money” value, rather than multiple incommensurate values that apply to different situations and cannot be exchanged, they can be allocated based on different criteria and avoid the collapse that comes from penalizing successful production.

12 prior_approval November 3, 2015 at 7:44 am

‘Most of the food comes from large firms like Kraft, ConAgra and Walmart that have a surplus of some item and scarce warehouse space’

A cynical person would note that for large firms like Kraft, ConAgra and Walmart, tax breaks are the major motivator regarding their version of being charitable (followed somewhat distantly by good PR for their actions).

Which fits perfectly into public choice economics, of course.

13 Ignacio November 3, 2015 at 8:33 am

I actually wonder if the tax breaks are sufficiently large to motivate a company to produce surpluses. I tend to think that they are large enough to warrant the effort to coordinate with food banks and such to donate the extra food. I believe that the IRS would be “doing it wrong” if the incentives are large enough to encourage extra food production. Does anyone have data on this?

14 Rahul November 3, 2015 at 9:40 am

So even with a gazillion inventory management papers published over the last decades are the stocking algorithms so bad that we have enough rotting food to run the third largest charity in USA?

Alternatively, someone needs to build more warehouses or more aggressive export divisions.

15 JWatts November 3, 2015 at 10:44 am

“…so bad that we have enough rotting food to run the third largest charity in USA?..”

It’s not “rotting food”, it’s the Sell by Date. Those are often aggressive, because the manufacturer has an incentive to push the product to the customer as fast as possible to increase sales and to ensure the customer gets a “fresh” product.

16 Harun November 3, 2015 at 11:09 am

“someone”

But not you, of course.

17 KWebb November 3, 2015 at 2:49 pm

“So even with a gazillion inventory management papers published over the last decades are the stocking algorithms so bad that we have enough rotting food to run the third largest charity in USA?”

The inventory management algorithms are only as good as the demand forecasting algorithms and management’s tolerance for stock outs.

18 Mitch Berkson November 3, 2015 at 8:35 am

That they like having more money due to tax breaks doesn’t seem more cynical than liking having more money as a result of not buying more warehouses.

19 Cliff November 3, 2015 at 9:52 am

A cynical person would note that for individuals, tax breaks are the major motivating factor regarding their version of being charitable (followed somewhat distantly by signaling how charitable they are to their social group and the psychic benefit of feeling like they are a good person)

20 Gochujang November 3, 2015 at 9:56 am

That’s funny! We are told Republicans give more, and you tell us it is because they want to avoid tax more. Liberals, being happier with tax, do not. Makes a strange kind of sense.

21 Harun November 3, 2015 at 11:10 am

Liberals are not happier with taxes.

They just use this as their excuse “I gave at the IRS.”

I don’t blame them – I feel the same way.

22 Cliff November 3, 2015 at 11:55 am

I am merely pointing out p_a’s false dichotomy. I couldn’t care less about political labels.

23 Costas Tsalikidis November 3, 2015 at 12:25 pm

Once you eliminate tithing, conservatives and liberals make charitable donations at equal rates.

As churches are primarily social clubs, “donating” to build and maintain big shiny megachurches that the donor will use every week really stretches the definition of charity.

24 Bill Kilgore November 3, 2015 at 12:43 pm

The Catholic Church- which is merely one religious group in the US- provides about 1/6 of all hospital services in the US and about 25% of all medical services world wide.

Excluding church donations form charitable giving is reasonable only if you want to announce that you are desperate to ignore the obvious. I understand that you are embarrassed that those evil church-going haters are more charitable than you and your “deeply concerned” pals- but such is reality. You need to learn to deal with it.

25 Jesus C. November 3, 2015 at 1:06 pm

Well they need to make up for their bad karma somehow… so many molested children, people murdered in the name of the faith, treatment of women, etc. I hope Islam learn from them as well 😉

26 So Much For Subtlety November 3, 2015 at 1:21 pm

Jesus C. November 3, 2015 at 1:06 pm

Well they need to make up for their bad karma somehow… so many molested children, people murdered in the name of the faith, treatment of women, etc. I hope Islam learn from them as well

What bad karma? Children are less likely to be molested in the Catholic education system than in the state-run one. More people were murdered about every day and a half during the Pol Pot years – supported by every Leftist intellectual in the West – than in all the years of the Inquisition put together. And women are better off under Christianity than any other system known to mankind.

The world would be a better place if Muslims, and Leftists, learned from them.

27 Urso November 3, 2015 at 1:46 pm

A better version of this argument would be not to count donations to ballets, art museums, and all other sorts of charities that exist primarily so that rich people can go to fancy galas.

28 Costas Tsalikidis November 3, 2015 at 6:35 pm

Catholic hospitals are not even close to free for the vast majority of patients. My wife works for one.

Urso, you are right those should not count as charities either.

29 Jesus C. aka the Greatest American November 4, 2015 at 5:20 am

Just because Pol Pot did something worst, ot that Islam is just retarded, doesnt undermine the fact that Catholic Church has a lot of bad karma… Throughout history they were almost always a force against human progress. Almost always they were the church of satan, always defending their power/status quo. And btw women are not better under christianity… Christianity always treated women like shit or at best as 2nd rate persons.

30 Jeff R. November 3, 2015 at 12:12 pm

Not sure about this. How big a share of overall deductions and credits are charitable donations, for either individuals or business tax filers? My guess is they’re fairly small compared to things like manufacturing credits (particularly for someone like Kraft or ConAgra).

31 Harun November 3, 2015 at 11:07 am

If these companies had to throw away the food, it would still be a cost on their books, and thus tax deductible.

Maybe there is some tax advantage somewhere, but corporations are also run by human beings who don’t really like to see food go to waste.

Also, there may actually be more costs to shipping out the donated goods than just destruction of unwanted inventory that might go against the bottom line. Say, the shipping department having to coordinate things, etc.

32 Dan Weber November 3, 2015 at 11:14 am

You are overthinking this:

https://www.youtube.com/watch?v=XEL65gywwHQ

33 Harun November 3, 2015 at 2:20 pm

That was awesome.

34 JWatts November 3, 2015 at 3:14 pm

Agreed, that’s an awesome clip.

35 The Original D November 3, 2015 at 2:37 pm

It costs them money to have food rotting in a warehouse, regardless of tax benefits. If nothing else they have to dispose of it. Better to have a truck come take it away than pay a truck to take it way.

36 Formerly_MM November 3, 2015 at 8:05 am

Why wouldn’t you want to send truckloads of potatoes to Iowa? It’s not like they grow many potatoes there. Now if you were sending the potatoes to Idaho, that would actually be an example of inefficiency.

37 Alex Tabarrok November 3, 2015 at 8:13 am

Typo, corrected! thx.

38 Ray Lopez November 3, 2015 at 9:26 am

Gag me with a spoon, another unctuous AlexT story about helping the poor with free food. Obligatory reference to Chicago school economist and Nobelian George Stigler here, who in 1939 developed the cheapest menu to meet the Fed. gov’t minimum daily requirements for calories and health (it was about 10 cents a day, inflation adjusted I bet it’s still under $1 a day).

In fact however, you could argue that dumping mountains of butter and lakes of wine in poor places like Africa or Mississippi would actually retard the development of supplying food locally, not that it matters since growing food is difficult and most poor people are lazy (given their environment, it doesn’t pay to build since somebody else will likely steal it). Also the Malthusian argument developed by G. Clark about “the worse the poor are treated, the better, since they won’t reproduce as much” can also be stated, though it’s probably not true since in the age of the machines all of us will be made redundant and considered “poor” by intelligent robot standards… so bring on the free cheese!

Bonus gossip: my chicken business is flying! But my margins are thin. Like Amazon.com I want market share first and profits later, which flies in the face of Filipino (and Greek) thinking. Quick anecdote: I asked a hotel owner in Greece why he doesn’t cut prices in the off-season, to attract more business. He said if he did, his profits would be less since the little business he gets would pay even less. I’m sure there’s some ‘elasticity of demand’ argument you could make to justify this thinking, but it’s pretty erroneous in general but very common in business in developing countries.

39 JWatts November 3, 2015 at 10:47 am

“Gag me with a spoon, another unctuous AlexT story about helping the poor with free food. ”

No one’s forcing you to read it. And certainly no one is forcing you to post a reply.

40 omg November 3, 2015 at 11:13 am

like, totally. whatevs.

41 Otto Maddox November 3, 2015 at 11:33 am

Another “Ray” of sunshine, I suppose?

42 Ray Lopez November 3, 2015 at 11:47 am

@OM – I give you, not “omg” (the extra g is for whiz), the intelligence to understand irony. You probably understood the double entendre of greasy spoon and unctuous, on a food theme, no?

Irony. That’s what you have to do for yourself–ironing–when you have no woman in the house and need to dress formal. Here in the tropics going formal–I kid you not–is usually wearing long pants, and, if you want to wear the equivalent of a tux, you wear a “barong” made of coconut fibre (needs no ironing, nor irony, to wear)

43 The Original D November 3, 2015 at 2:39 pm

I have no idea what you are trying to say.

At least Alex makes an actual argument instead of saying “you could argue [something something incoherent].”

44 anon November 3, 2015 at 3:18 pm

Poor Americans need to learn to grow their own food? I feel like I’m reading a Letter To The Editor from 1815.

45 The Anti-Gnostic November 3, 2015 at 9:33 am

Reminder: we have eliminated poverty in the US.

46 Gochujang November 3, 2015 at 9:58 am

Per the other story, at least in part via suicide.

47 The Anti-Gnostic November 3, 2015 at 10:04 am

Starvation, exposure are different problems from depression.

48 Gochujang November 3, 2015 at 10:20 am

Surely your experience is not that limited.

It is sad and ironic that the High School educated white males cited in that article hate the socialism, but then kill themselves without the socialism.

Also sad and ironic that the Mexicans they often deride manage to kill themselves half as often. Perhaps they are doing something right.

49 Cliff November 3, 2015 at 11:57 am

Lots of bias to unpack there

50 Derpy von Derpenstein November 3, 2015 at 12:46 pm

Exactly, if those dumb white males were more socialist in outlook- like the Scandinavian countries- all the suicides would go away- just like in the Scandinavian countries.

Sincerely,

Derpy von Derpenestein

51 Gochujang November 3, 2015 at 3:14 pm

You need a latitude (and winter sunshine) adjustment for northern countries. Alaska has 21 per 100,000 which is not coincidentally the same as Iceland.

More generally though, a “people should just take care themselves” attitude may indeed be paired with despair that one may not, in fact, take care of one’s self.

52 Jesus C. aka the Greatest American November 3, 2015 at 1:10 pm

No we didn’t … Maybe you live somewhere in Northern Europe and you think there is no poverty in US 🙂

53 Cliff November 3, 2015 at 1:56 pm

Maybe we live in the U.S. and we are literate

54 Jesus C. aka the Greatest American November 4, 2015 at 5:16 am

Loool… the evidence is so obvious, that there is even no need to explain…. It is OBVIOUS there is a lot of poverty in US…. If you don’t want to see it, then it is you problem. Of course this is not the same poverty as in India or South Sudan, but c’ mon there is surely poverty. You only need to get out of your appartment to see it…

55 The Anti-Gnostic November 5, 2015 at 8:23 am

Inequality is not a concern beyond the need to maintain social stability. Inequality is the natural state of the biosphere. I get out of my house plenty of times, in all sorts of socio-economic strata; the poor in the US actually have sufficient calories, leisure time and shelter to produce more poor people.

56 Rahul November 3, 2015 at 9:37 am

Since the counterfactual was a pre-2005 situation isn’t this less about “market design” & more about just better penetration & adoption of IT systems over the last decade?

If many local food banks didn’t have internet access pre-2005 all this is moot. OTOH, had you had good connectivity & IT even a centralized allocation algorithm would have worked almost as well.

57 Cliff November 3, 2015 at 9:53 am

“had you had good connectivity & IT even a centralized allocation algorithm would have worked almost as well.”

O rly?

58 MOFO. November 3, 2015 at 10:23 am

Is there some reason to believe that local food banks didn’t have internet access pre-2005? Ten years ago is hardly the dark ages.

59 JWatts November 3, 2015 at 10:53 am

It seems like the key was implementing an auction system versus a top down centralized management system.

60 Brett November 3, 2015 at 11:20 am

Wait a minute, shouldn’t this be labeled “Markets in Everything, Food Bank Edition”? Your game is slipping, Tabarrok, slipping.

. . . More seriously, I love reading stuff like this. It’s a good reminder that markets don’t have to end at the door of a company or distribution network – internal market systems can be quite effective as well.

61 Alex Tabarrok November 3, 2015 at 11:50 am

+1

62 Urso November 3, 2015 at 11:32 am

“Most of the food comes from large firms like Kraft, ConAgra and Walmart that have a surplus of some item and scarce warehouse space.” Seems unlikely. This implies that private, for-profit corporations might make economic misjudgments – which as we all know is solely the province of the government. The author of this article clearly needs some reeducation in the GMU Econ 101 camps.

63 Urso November 3, 2015 at 11:33 am

“I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.” Also, this quote is obviously, comically, fabricated.

64 TallDave November 3, 2015 at 11:51 am

Private companies make misjudgments all the time.

Private companies also go bankrupt and cease to exist all the time.

65 Urso November 3, 2015 at 12:33 pm

True, but that’s only due to government interference in the markets.

66 The Original D November 3, 2015 at 2:41 pm

If only the government had kept it’s nose out, we’d still have Webvan and Pets.com!

67 TallDave November 4, 2015 at 10:03 am

Private companies going bankrupt and ceasing to exist is a core function of markets.

Since governments generally face no existential threat from unprofitable investment, they do not face these pressures and are much less efficient providers on average.

68 MOFO. November 3, 2015 at 12:48 pm

Your assuming that the loss due to surplus is greater than whatever gain might come of it, such as having enough supply to meet demand.

69 Dan Weber November 3, 2015 at 1:26 pm

Here, just post this instead. It’s more entertaining: http://www.smbc-comics.com/?id=3595

70 Urso November 3, 2015 at 1:30 pm

Totally off-base. I’m actually a first-year Poli Sci student.

71 JWatts November 3, 2015 at 3:19 pm

Is it your first or second “first-year”? 😉

72 TallDave November 3, 2015 at 11:50 am

As humanity’s moral progression away from coercionism continues and IQs rise, these voluntary charities should eventually replace welfare states, though this will take quite a while.

73 rayward November 3, 2015 at 12:05 pm

I watched Paul Feinbaum interview Mark Richt the day before Georgia played Alabama. [If you don’t know who Feinbaum and Richt are, move on.] After five minutes or so of Football talk, Richt suddenly switched to God talk. [No, they are not one and the same.] According to Richt, some time during the week, Richt’s father lost a hundred dollar bill on the Georgia campus. Several days later someone brought a hundred dollar bill to Richt’s office, telling Richt’s secretary that she found it on the campus and didn’t know who it belonged to. Richt told this little story as proof that faith in markets, I mean God, is rewarded. I thought it proof that Richt is insane. By the way, he (he, not He) lost the game to Alabama, and then he (not He) lost to Tennessee and Florida, and the Georgia faithful now want him (not Him) fired.

74 Bill November 3, 2015 at 1:13 pm

Alex lauds food allocation system:

Academics devise food allocation algorithm

Based on internal market principals

Whose motto is:

“From each according to his ability, to each according to his need.”

75 Smart Wino November 4, 2015 at 12:40 pm

Actually, it’s “*Donated* from each according to his unsalable items / waste / garbage, to each according to his need.”

76 Nick Bradley November 3, 2015 at 2:14 pm

just increase food stamps and let existing markets allocate food resources.

why does the Right think a system of donating in-kind canned lima beans and pumpkin pie mix is more efficient than food stamps?

77 The Original D November 3, 2015 at 2:42 pm

Because they weren’t going to eat the lima beans anyway.

78 Nick Bradley November 3, 2015 at 2:17 pm

The IRS has an overhead rate of 0.3%. they collect over $3 trillion dollars a year on a $10bn budget.

most charities are, what, 100 times that?

79 Echo November 3, 2015 at 3:13 pm

Charities have to spend money to get people to send it to them. If the IRS had to pay for the enforcement services provided by the rest of the government, the numbers would look very different.
And charities would have much less overhead if their calls consisted of “remember: if you don’t donate to us, we’ll show up at your house with guns”.

80 intermediate micro November 5, 2015 at 10:25 pm

@Echo, go back and study up on economies of scope. then you’ll realize there’s very little marginal enforcement cost for the IRS.

81 3rdMoment November 3, 2015 at 6:48 pm

Interesting story.

But as Coase famously pointed in “Theory of the Firm,” central planning beats markets for some problems at some scales.

82 Jeffrey Deutsch November 14, 2015 at 3:56 pm

Baby-sitting co-op problem: Seems simple to me.

In the co-op, neither price adjustments nor substitutions were possible *because the payment specified the same real amount of the same good*. One coupon always bought one hour of baby-sitting. Whereas a food bank share can buy more or less of various kinds of food, depending on others’ demands and supplies.

Am I missing something?

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