Opinion, Berkeley Blogs

Beeronomics: I'll drink to that

By David Zilberman

This past week I attended the fourth Beeronomics conference in Seattle. The conference brings together economists and other scientists who work on the economics of beer. The first three conferences were in Europe; this was the first U.S. conference.

I was excited about the conference first because of the location: I wanted to see my friends and family in Seattle; our new granddaughter, Nava; her brother Geo, and her parents, Shie and Leigh. The weather was warm and pleasant and I guess that climate change may benefit Seattle (unlike Berkeley, where the heat seems unbearable).

Of course, I was also very curious about the topic; but I prefer wine to beer, and knew relatively little about it. Still, beer plays a significant role in the life of many of my friends, and I have always been fascinated by the way beer is marketed.

Finally, I was scheduled to give a talk, “Beer: The Poster Child of the Bioeconomy,” which allowed me the opportunity to learn about it.

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As I understand it, the Beer Consortium was founded by two beer aficionados: Jo Swinnen and Julian Alston. Actually, their fascination with beer seems to be shifting, from the applied side to theory. The consortium has attracted the attention of the industry and a diverse group of fascinating scholars.

The conference was organized by Jill Macloskey, AAEA president and one of our most prominent alumna, and Tom Marsh, a professor at Washington State University. It was further supported by WSU, whose provost, Ron Mittelhammer, participated in the conference.

Beer through the ages

I learned a lot about beer from this experience. First, it seems from the blogs that it's unclear which came first: beer or bread? Historians speculate that prehistoric nomads may have made beer from grain and water before learning to make bread . The ancient Egyptians who built the pyramids got paid by beer, bread and green onions. Different cultures use different grains to make beer; and beer served for nourishment, pain relief, and socializing.

Swinnen suggested that the Low Countries (Holland and Belgium) won their independence from the Spanish because of beer. They financed their armies from beer tax, while the Spanish relied on tax on silver. The beer won. We learned that people consume more beer than any other alcohol and that the gap is increasing in spending and consumption. As in many other arenas, China has overtaken the U.S. as the largest consumer of beer.

What’s more surprising is that Russians consume more beer than vodka. Swinnen suggests that one reason could be that advertisements of vodka were disallowed in 1995. He also suggests that beer consumption increases with per capita income, but that once GNP per capita is greater than $30,000, beer consumption declines – this has been true in Germany, the U.S., and Belgium. But overall production continues to increase due to increased export.

book cover: the economics of beer

Prohibition in the U.S. was a traumatic event for the beer industry. More than 80% of the breweries disappeared, but those that survived became stronger, according to Carlos Hernandez, an economic historian from UCLA. Survivors switched to other drinks, such as sodas, and I imagine that during Prohibition, they were able to gain a foothold in the black market.

Another economic historian, Martin Stack from Saint Louis University, suggested that between the 1870s and 1950s, the poor were drinking local, unpasteurized beers with many exotic flavors, while the well-to-do middle class were buying more expensive pasteurized, uniform beer. After Prohibition, there was a period during which the big companies provided bland beer accessible to everyone.

And now, we live in a period of the budding sector of craft beers. The difference is that the middle-class pays the extra for the local, exotic beers while individuals with lower income purchase the standard beers. One encouraging statistic is that 46% of Millennials claimed not to consume Budweiser.

Beer is produced from yeast, hops, water and malted barley. The West Coast, and especially the Yakima Valley in Washington, specializes in hops, which is a high-value crop and is managed effectively through contracts. But the barley industry, which is a low-value crop, is declining in the U.S. and Canada. Furthermore, there is little breeding of it to provide more flavorful beers.

Enter craft beers

One interesting lesson from this conference is that the emergence of the craft-beer industry -- with its emphasis on product diversity and quality -- provides the opportunity to establish a specialized malt-barley sector. In particular, the new tools of crop breeding could be employed to develop special varieties of barley that will provide improved flavors resulting in better beers.

I expect that the 21st century will see immense growth in the bioeconomy, which consists of the sectors of the economy that use biological processes to produce products like food, fiber, mineral, fuel and other consumer goods. The bioeconomy is part of the renewable economy (which also includes solar energy and the recycling sector) that will allow humanity to deal with the increasing monetary and environmental cost of non-renewables and climate change.

The potential of the bioeconomy has been enhanced immensely with the discovery of DNA and new technologies that utilize modern molecular biology, genetics and information technology. Beer is perhaps the oldest sector of the bioeconomy, and its history has many lessons for the modern bioeconomy. The supply chain of the various sectors of the bioeconomy consists of at least two elements: the production of feedstocks and their processing to a final product. In the case of beer, feedstocks vary across locations and have changed over time. Beer-like products use wheat, corn and of course barley. The fermentation process has become a science based on increased selection and better management of yeast.

Technology and regulations are two drivers of the various sectors of the bioeconomy. The discovery of the use of hops in beer production around the 14th century improved quality and taste, as hops contributes bitterness (to counter the sweetness of barley), adds flavor and aroma, and contributes to the preservation of the beer.

Refrigeration, gradually introduced in the 19th century and improved ever since, redefined brewing . It improved production processes and created new types of beer, assured uniform products and expanded the reach of breweries becoming a major source of economies of scale in beer production.

Beer and public policy

The history of beer at various locations was affected by its taxation as well as regulation on alternative products, such as wine. Regulations of production practices and distribution were introduced for safety, as well as to serve the interests of various groups, such as brewers.

The negative side-effects of alcohol led to an excessive reaction in the form of Prohibition in the U.S. But by 1933, society realized the folly of excessive regulation and bans, and repealed Prohibition. But even after Prohibition, breweries were denied the right to sell beer to the public.

In 1982, the current mayor of Berkeley, then state Assemblyman Tom Bates, sponsored AB 3610, which legalized brewpubs in California. It was followed by similar legislation elsewhere and spawned the craft beer industry in the U.S., which became the most creative and dynamic segment of the beer industry.

The rich history of beer illustrates the potential and the unpredictably of the nascent sectors of the bioeconomy. It demonstrates the expanding revenue potential originated in the agricultural sector, the importance of cleverly designed supply chains, the challenge of combining globally affordable products with differentiated, high value, specialty creations, the capacity of science to increase the diversity and safety of the product, and the necessity of creative regulations that assure safety but don't impede creativity.