When the call came in that a truckload of food was available, it would dial the first partner on the list. That organization usually would have about six hours to make a decision. If it said yes, it was responsible for going to get the food—it would use its own truck and pay the cost of transporting the food itself. If it said no, it’d be moved down to the bottom of the list for the next call. (Feeding America didn’t move through the list exactly in sequence, since some partners covered big areas and others small areas, some covered wealthier areas than others, and so on.)
The partners who declined were moved down on the list in part because there was some imperative to keep the donors happy. It turns out that if a distributor or manufacturer calls again and again with offers that aren’t accepted, it stops calling. So Feeding America created a penalty for declining donations.
The shortcomings of central planning
There were a couple problems with this system. One big one was that three-quarters of food banks’ food comes through direct donations, such as from local retailers, and therefore Feeding America had no idea what its partners had and how much of it they had. This was particularly a problem because of spoilage: not only did sending, say, yogurt to some place that already had yogurt mean that it didn’t go to some place that needed or wanted it more, but it also created some likelihood that the yogurt would spoil and go to waste.
An example that illustrates how insensitive this system was to individual partners’ specific food needs was provided by one of the people who was on the committee that developed our market system. He was a food bank director in Idaho, and he would routinely get phone calls from Feeding America saying, “Great news, we have potatoes for you.” But of course, he already had warehouses full of potatoes.
Another problem was that there were some areas of the country that were very close to a lot of distributors and food production, and others that were not. If you’re a food bank in Wisconsin, you’re getting a lot of food anyway. If you’re in East Texas, you’re not near a lot of production and distribution. So some food banks are systematically better off than others.
A third problem was the six-hour decision window the partners had when they received an offer. Often what would happen was that after six hours, the partner would say it couldn’t get the food, and then Feeding America would call somebody else, and that partner would have another six hours. This, in the language of economics, is a very illiquid market. It moves really slowly.
And finally, there was a logistical problem. If you pick two random points in the US, on average they’ll end up being about 1,000 miles apart. In other words, donations were often located quite a long way from whichever food bank or pantry they were being offered to.
A market for donations
Our solution to this problematic operating procedure was to create a marketplace for donations and a new type of currency, which we called shares. Twice a day, Feeding America’s partners submit sealed bids for the donations available in the market—on a given day, there’s usually about 60 truckloads of food—via a website, and they receive an email shortly after the auction ends to notify them whether they’ve won. Partners’ budgets of shares vary in proportion to how many clients they need to serve. So if you’re a food bank in Mississippi, which is the poorest area that Feeding America has, you’d get more shares per capita. But if you’re in Los Angeles, you will also get lots of shares, because there’s a huge population to serve. We also created a money-supply rule that, at midnight each day, recirculates whatever shares have been spent that day—again, according to the magnitude of each area’s need.
There are three broad reasons why a system based on markets and a specialized currency has been useful in addressing Feeding America’s problems.
First, as noted earlier, everyone doesn’t value all types of food equally. The market gives each partner a way to express what it needs and doesn’t need.
Second, money is what’s called “a store of value.” Suppose that I’ve already got a ton of donations this month, and I don’t really want or need any more food. I can take my shares and sit on them and wait until next month, next year—whenever my need is greater—to spend them.
Finally, the bidding process that partners use to purchase food allows Feeding America to price donations in a way it previously couldn’t. For example, the most valuable type of food is cereal: cereal is great because it’s durable, it doesn’t need refrigeration, and almost everybody likes it. If you had asked the people at Feeding America, prior to the creation of our market, whether food banks preferred to get cereal over apples, they would’ve said sure, of course they do. But they had no way of knowing how much more they preferred cereal. The market has revealed the price dispersion between different types of food, and it’s far greater than anyone would have guessed.
There are other advantages as well. One is that the market is more liquid than the old system—most of the time, the food is picked up from the donor within 12 hours of it going on the market, whereas in the past, it would sometimes be sitting for three days. This is a strong incentive for donors, many of whom are motivated not entirely by altruism, but also by a need to get this excess food out of their warehouses.
And what about all that excess food I mentioned food banks and pantries had sitting around? Under our system, that partner with an extra truckload of yogurt can take it and put it on our market and become a seller. It’s another way to increase food usage.