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September 07, 2005

Economic Idiot Award V

I present, for your reading pleasure, the fifth winner of the Economic Idiot Award.

Jesse Taylor.

He thinks that prices should not rise in times of scarcity.

Just to make it clear for Jesse.

"a gouger's market is premised on very few suppliers soaking up the market for the most amount of money. It's explicitly premised against competition - hence the reason why the first gouger hoarded.  You can't have fifty gougers in a market,"

Indeed, you can’t have too many gougers in a market. That is what rising prices tell us. That there are big fat juicy profits to be made so more people try to supply that market. And thus supply rises, prices fall and ummm, hey! markets work!

Sorry, the American left will never be taken seriously until they manage to absorb a modicum of economic thought. No, you don’t have to buy the whole shebang, just a little bit, a touch of rationality is all I ask for.

September 7, 2005 in Economic Idiot Award | Permalink

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John Stossel has the most odious defense of price-gouging I've ever seen. Consider this scenario: You are thirsty -- worried that your baby is going to become dehydrated. You find a store that's open, and the storeowner thinks it's immoral... [Read More]

Tracked on Sep 7, 2005 6:55:28 PM

Comments

No, idiot.

The problem I have is artificially encouraging scarcity during times of emergency.

Or was that too fucking subtle for you, rare breed?

Posted by: Jesse | Sep 7, 2005 6:52:51 PM

In fairness Tim, there is another way of looking at this, which is to attack the issue of scarcity by administratively moving the supply curve and releasing stocks from the stategic reserves. This is what the IEA is doing, and most economists are quite happy with this.It's a question of short-term and longer-term horizons: fixing the price in this way doesn't address the longer run problem, but then it isn't meant to. Otoh, just leaving this to local dynamics isn't an adequate policy response if in so doing you put growth in the whole global economy at risk. Again, it all depends whether you believe in butterflies or not.

Tim adds: Ah, but Edward, you are assuming that "administratively moving" will lead to an optimal result. I am prepared to admit that such a thing is possible but I’d like to see real world examples before adopting it as a position.

Posted by: Edward Hugh | Sep 7, 2005 7:24:07 PM

It also fundamentally misunderstands a couple of things about the oil market in the US.

1) The SPR is unrefined crude, meaning that it would have to be refined to make gas. And it's refining capacity that has been hit hardest. If it were a matter of crude supply we'd just buy more from someplace else, but most middle-eastern oil is too crappy to make gas out of, hence the US makes most gas from Texas Sweet and other gulf-coast or Canadian oil. But that's neither here nor there with regard to refining capactiy.

2) There isn't a singular gas market in the US, localities have their own specific requirements with regard to additives, so if, say, Chicago runs short it can't just bring in gas from Cleavland to fill the gap, it has to wait for more "Chicago Blend". The entire country is a patch-work of additive requirements, which can lead to higher variance in price, and keep surpluses from moving regions. It also means refineries make smaller batches, which is less efficient.

Posted by: Timothy | Sep 7, 2005 10:23:05 PM

He's taken the moral high ground and managed to make a mess of it.

The rules of the market are fairly clear; why is it those who proclaim it the strongest when touting for votes are the first to condemn it when it looks bad? Why don't people understand economics. Oh, wait, I know that one.

This is one dodgy lefty who agrees with you Tim; understand economics before condemning those who use it.

Posted by: MatGB | Sep 8, 2005 12:03:14 AM


I'm so sorry you don't understand the concept of a non-equilibrium market. Maybe you should before giving out awards for economic idiocy, huh?

Posted by: loser | Sep 8, 2005 1:34:24 AM

Goodness me these guys are angry aren't they? Swearing and calling everybody else a moron seems to be essential. On the SPR, as I understand it, part of it is to get crude to refineries that relied on New Orleans as a port and which are working below capacity. It's a loan. As to the water issue, couching it in terms of dying babies meant it was always going to get way too emotional. The reality is that any artificial shortage will lead to hoarding either by people with money who buy up the stocks or people with guns who steal it. The end result is the same. Thus we saw the alternative in the super-dome. All the water was stolen by the biggest and strongest and those with guns. But at least nobody made any profit.

Posted by: Mark T | Sep 8, 2005 8:52:30 AM

I couldn't understand how Taylor could say that the seller is "artificially encouraging scarcity", but having looked at it for a while, I think I get it. The model Taylor is using is that a buyer A is going to buy a bottle of water over a two-day period. If he buys it on day one, he will be willing to pay p1 for it. If he is unable to buy it for p1 on day one, by day two he will be desperate, and willing to buy it for p2, where p2 > p1. The seller is only able to get p2 for the bottle by not selling it on day one. Therefore, he is "artificially encouraging scarcity" -- he isn't just profiting from the scarcity (the price of p2 on day 2), he's caused it by having withdrawn from the market on day 1.

That model just about sort of makes sense. It doesn't match the hypothetical account that he was criticising, and I don't think it really matches what happens on the ground, but it's less drastically idiotic. After all, if the seller is going to sell the same water to the same people whether he increases the price or not, then there's no social loss if he doesn't
increase it.

The root error, as usual, is denying the law of demand - Taylor is (implicitly) claiming that the only people who will buy less water if the price increases are poor people who are not able to buy sufficient for their needs. Or possibly, he's not claiming that that _is_ true, only that it ought to be, and that any wealthier person who, at time of shortage, takes advantage of "normal" prices to buy enough water for comfort rather than necesity is committing another offence, similar to that of the "gouger" himself.

This has got long, but I think it's necessary to try to understand the errors of these people, rather than just calling them idiots. They're too plentiful to dismiss.


Tim adds: You’re right in a way but I do love winding Jesse up. Other things he’s missed are that almost everyone drinks more water than is necessary to preserve life. So prices rising will mean that that "unnecessary" marginal consumption will decrease, thus improving the supply for those who really need it, and that it won’t take long for greedy capitalist bastards to see that there’s a 19x profit margin 50 miles away and come and try to get some of that. So increased prices will decrease demand and increase supply.

Posted by: Andrew McGuinness | Sep 8, 2005 12:40:27 PM

Yes, my comment got truncated (and then typepad seemed to go walkies). I've expanded it here. It's worth recognising that some of "us" think that "they" are genuinely stupid, and some of "them" think that "we" genuinely want to see the poor die - given that, trying to wind people up is a bit redundant. Even if we don't convince them, I'd like to help them see what it is that we are disagreeing with.

Posted by: Andrew McGuinness | Sep 8, 2005 4:43:07 PM

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