Skip to comments.Understanding Economics
Posted on 09/26/2012 3:59:50 AM PDT by Kaslin
Here's a question: If there's a disaster, a war, a severe drought or some other calamity that restricts future supplies of a commodity -- such as oil, coffee or corn -- what is the intelligent thing for people to do right away? If you said "use less now and try to produce more," you'd be absolutely correct. That's not rocket science, but understanding the machinery involved in getting people to do so is a bit more challenging.
The best way to get people to use less and produce more is to allow prices to rise. For example, say a Middle East conflict restricts oil supplies and causes prices to rise. The effect of higher prices for oil is that it gives individuals incentive to eliminate or reduce the low-valued uses of oil. For example, a low-valued use of oil is for homeowners to allow the heat that it generates to seep through walls and leaky windows. Higher oil prices create incentives to homeowners to install insulation. Higher gasoline prices force motorists to economize by taking measures such as carpooling and taking fewer low-valued trips.
Suppose that in the wake of a natural disaster -- in the name of anti-gouging or some other nonsense -- government officials mandate that prices cannot rise. What's the economic message? The mandate encourages people to continue their consumption as if the disaster didn't happen. Let's use gasoline as a concrete example. Suppose a family is fleeing a pending hurricane and has a half-tank of gas, plenty to get them to a safe destination, but they would feel more comfortable topping off the tank. If the price of gasoline remained at a pre-hurricane price of $3 a gallon, they might do so. But if the price shot up to $5, they'd wait until they arrived at their destination. Their decision has the effect of making more gasoline available for others. So here's my question: Which alternative is preferable for a family, fleeing the hurricane with their gas gauge showing nearly empty, gasoline available at $5 a gallon or gasoline unavailable at $3?
You might say that when there's an emergency, the government should step in to prevent prices from rising by establishing price controls. During the 1970s, the Nixon and Ford administrations, in reaction to a jump in fuel prices caused by cuts in production by OPEC, did just that. Price controls led to massive shortages, long lines at gasoline stations and massive misallocation of resources.
Whenever there are expected shortages of a commodity, there are millions of wonderful nongovernmental people who enter to help. These people, often vilified and called every name except child of God, are the speculators. Efficient allocation of resources requires allocation over time. If speculators guess there will be future shortages, they will buy the commodity now in the hopes of making a personal gain when prices rise. Their purchases have the effect of raising the commodity's price now and making more available in the future -- and at a lower-than-otherwise price.
Last April, President Barack Obama called for his Department of Justice to lead a task force to root out manipulation of the oil market and gouging of consumers at the gas pump. U.S. Sen. Bernie Sanders, I-Vt., introduced legislation called the End Excessive Oil Speculation Now Act. White House and congressional attacks on oil speculation do not alter the oil market's fundamental demand-and-supply reality. What would lower the long-term price of oil is for Obama and Congress to permit exploration for the estimated billions upon billions of barrels of oil off our Atlantic and Pacific shores, the Gulf of Mexico, and Alaska -- not to mention the estimated billions, possibly trillions, of barrels of shale oil in Wyoming, Colorado, Utah and North Dakota -- but doing that would offend the sensitivities of environmental extremists who have the ears of Congress and the White House.
It’s a shame that such basic truths must be explained over and over to every generation of economic illiterates miseducated in govt schools.
There is no such thing as gouging. Even when it comes close, like when professors assigned me giant, glossy, illiterate, useless textbooks costing $120 presumably because they cut a deal for 20% with the publisher. Or at least that’s my best guess. In any case the only reason it was so expensive is because of the false demand created by the professorial fiat.
It wasn’t gouging, however, because first of all you can pass without reading the books, if for no other reason than today’s C- is the F of decades ago. Also because no one says you have to go to college. I won’t say it’s all a big textbookesque scam, but almost.
Reading the Hazlitt inoculates your mind to being taken in by any utopian or "compassionate" schemes of politicians or idealists. You automatically process the theory or scheme through a series of and then A and then B etc and you see where it will actually take things.
Price “gouging” in the case of a disaster is what gets needed supplies to the people in need the fastest and in the greatest quantity as suppliers see an opportunity to make greater profits from peoples’ misfortune. As many entrepreneurs race to get to the site and reap the high profits the price falls because the market gets rapidly supplied. When “gouging” is prevented supplies take much longer to arrive and suffering is prolonged and intensified. A disaster site is dangerous for suppliers and they won’t choose to make the effort if there is no offsetting higher return. Depending on charity and government guarantees prolonged suffering and poor supplies. New Orleans after Katrina is illustrative.
It’s a tough sell though, because in crisis situations, emotions overtake reason.
Thus, “never let a crisis go to waste.”
Having done some research into book printing costs, I can also say that a large factor in high textbook prices is that many textbooks never reach the economy of scale in printing that makes them cost-effective to produce. For color hardcover books, you’re looking at a minimum of 20,000 units to make printing costs even remotely affordable. Maybe.
And that’s before adding profit margin and distribution costs. Yes, the demand is driven by the book being assigned, but the per-unit production cost of the supply is also very high, compared to a mass-market novel, for example.
I should think that a big portion of the cost is due to the bloated features that students wouldn’t pay for if they didn’t have to. How much do they waste on paper and cover quality, glossy Colorado photos, overpaid authors, profusely useless text, and CDROMs no one ever uses? The biggest profligacy is in the endless new editions, just different enough to push used copies off the market.
I was happy with moldy, yellowing, slightly elevated newspaper quality used books when I was allowed. I’m absolutely certain it would be cheaper to print textbooks if students he to choose to pay for them.
Colorado = color
Example: The Physician's Desk Reference is updated annually, with Amazon selling the upcoming 2013 version at about $60. An ebook distribution model may instead say something like $30 for the PDR plus $20/year subscription, which would get you quarterly updates. Cheaper, and more up-to-date.