I don't think they misunderstand economics. I think politicians respond to incentives, just like everyone else. They seek votes. Voters like free stuff. When you combine the two, you get horrible economic policies.
I would need to see the evidence of that statement. Public choice theory of economics seems to explain the current political climate quite well. Additionally, when polled a majority of Americans are happy with their health care. As far as war, seems as though a large percentage of Americans are happy spending huge sums of money supporting th Ukrainian war and leaving huge amounts of military equipment in Afghanistan.
Since we pay for a sizable portion federal budget with debt, current taxpayers aren’t footing the bill, future generations are with lower standards of living.
What can you expect to come out of the mouth of a communist and a brain with coconut water? I mean, she wants to ban price “gauging” (literally from her mouth) on food and grocery, why not be more bold, just put a ban of price gouging on housing. I’m sure she won’t because all US home owners will hate her
Once again John says it as it is. Being an old salesman for a variety of companies and handling many products over a 5 state region, with seasonal appeal, showed me the effects of shortages, pricing, and supply/demand. The merchants and their customers who understood what he is writes, did very well. Those who did not...disappeared.
excellent article john. you are, of course, right. should passing Econ 1 be a prerequisite to serve in Congress? be president? probably not vice president! ;-)
Sadly, many people pass Econ 1 and don't get these basics straight. Many people have PhDs and don't get these basics straight. Many people teach Econ 1 and don't get these basics straight. Moralizing and politics make it hard for lots of people to think.
Plus, if the price is too high just don't buy it! People do that all the time. That doesn't mean there should be some sort of law making it illegal to set a price that is 'too high'.
The cure to the problem of a price being too high is that people don't buy. No law or bureaucracy is required.
Well done. Price elasticity of demand is about substitutes. If it’s easy to find a substitute product when the price of an alternate product increases,. Beef and chicken for example, demand will be more elastic. If there are few or no alternatives, demand will be less elastic. Per your example of the motel, there were no good substitutes and your demand for shelter was pretty inelastic. Given your exchange with the motel owner was voluntary, I wouldn't characterize this as "price gouging." We know from experience, inelastic demand becomes more elastic over time. Harris's "plan" clearly makes things worse for consumers over a much long time.
Of course neo-classical price theory will always be the only credible paradigm to maintain the most efficient allocation of resources. QED
But your post brings up the the memory of the non-targeted debt financed cash transfers that the Trump and Biden administrations indulged in the Covid overreaction
Thanks John for praising the price system and your many examples of how the market ensures (with an invisible hand), the efficient allocation of resources. I also admire your courage as an economist, when few of your trade who write or talk for the media will explore such honesty. As voters, our job is to reject the progressive populism coming from politicians before it becomes too difficult to reverse the years of damage to our 'relatively' free markets...
I’m just looking forward to Harris’ retort to these federal economic law naysayers at her first press conference…hopefully before “day 1” of her presidency when she promised to end price “gauging” once and for all.
The $30 price ceiling on insulin just about killed my father. He couldn't get the insulin he had used since he was diagnosed with diabetes at age 27 (he's 89 now). Had to switch to another one and it screwed him up. He survived, but barely. Just sad to me now to see them tout policies that didn't stop inflation, didn't help the drug market, and now will kill the grocery industry (not to mention the new cap gains, unrealized gain tax, and corporate tax proposal)
Price gouging implicitly feels more "fair" when there is a single market price. Perhaps your mom was furious in the hotel example because she interpreted it as third degree price discrimination instead of price gouging (ie the motel owner sized you up with 4 kids late at night and charged you personally more). Not that this actually affects the surplus from the transaction, just that the owner captured a greater share of it.
Not so fast. Price gouging makes goods unavailable to people who show up on time but are not able to afford them, and who would have been able to purchase them otherwise. So what John advocates is simply favoring the better off. Survival of the fittest. That's all. This is precisely why price gouging is hated so much.
Rafal, When you damage price signals you risk really messing up the market just like the communists did when they set prices. When supply is high, prices are low. When supply is low prices rise. That is what we call a price signal. High and rising prices signal people in a free market to provide more goods so that consumers will have the goods they want and producers can make more money. That sets in motion a process that eventually will lower prices.
A hurricane provides a great example of how rising prices take care of the market. Say a generator at Home Depot is $200. On a normal day. A hurricane approaches. Generators quickly start selling at $200. Home Depot places an order for an entire truckload of generators for the one store in your town, a rush order. The manufacturer has only a few within shipping distance, but can get more by flying them in on a cargo plane. That will cost a good bit, as will the overnight shipping in a rented truck with a driver paid extra to drive over a weekend... There are a hundred people at Home Depot who are thrilled to be able to buy a generator at $400 each. Including a pharmacy than needs the gen set to save their refrigerated medicine.
The alternative you prefer is to force people to maintain the $200 price. In that scenario, the generators quickly sell out. People who really need them, say a pharmacy with $25,000 worth of medicine that will be ruined when the power goes out and would gladly pay $1,000 or more for a generator, cannot get one. People who need that medicine will not have it available. Let's say some of those people are poor folks who have their meds paid for by the government. The pharmacy is out. They could drive 300 miles and buy it, but the gov plan can't be changed quickly so they would have to pay $1,000 out of their own pockets. Roads are blocked so it might take several days to get there and back. They could pay someone $500 to go get it, but since non-gouging laws are in place no one is willing to risk being thrown in jail for charging $500 for a normal $50 delivery fee. The Pharmacy can get more meds in the next 5 days but they would have to pay to have that delivered and the pharmacy is unwilling to risk jail since they would have to charge a lot for the meds. Add your own ending to the story, the sick person dies, maybe they have to be helicoptered out and that costs $10,000, whatever... The best solution would be to allow the market to operate and the people who need the aerators most to be able to buy them at prices that will make certain they are available.
During WW2 the government imposed price and wage controls. The country successfully prosecuted two wars and came out stronger than before. Free market ideas will not work if there is a substantial level of corruption in the system. This is why the government has to step in. Your example above assumes that people who really need goods or services can afford them. This is often not the case (e.g. seriously ill poor person in need of expensive medication).
Rafal, Good Lord man... have you not heard of the severe shortages and massive rationing that this caused?
The federal government erected a sprawling and intrusive bureaucratic apparatus called the Office of Price Administration. Hundreds of thousands of federal employees and community volunteers, were used to force people to obey the desires of the central planners in DC.
Food producers faced with going bankrupt under the price controls started skimping on product quality. You can't fake a good Filet Mignon, but you can grind up a whole cow including some pretty disgusting organs, then add beans, potatoes and bread, and still do business even with the government creeping down your back. (This happened due to your favored plans.) ...Extra fat was added, extra bone was added, horse meat, muskrat meat, and other alternative meats were added...
When whole meat (in tact) was sold, low grades were sold as high grade meat, so even when you could identify the meat as coming from a cow... it was inferior. That was called the "red market"...
What happened to the good cuts? They were sold off to the side to people willing to pay a market price in what was known as the "Black Market".
When price controls ended, prices doubled... people already upset with price controls were livid at politicians for messing up the market. Politicians pushed price controls a second time. Markets dried up, meat production fell 80%, and all the same problems from before came back with a vengeance.
The elections in 1946 were known as "The Beef Steak Elections", where voters threw out Democrats and their communistic price controls and elected Republicans left and right.
The economy was growing and food supply (along with everything else) was not. Pent up demand was present and took over after '46. In '47 inflation was 20%... and we all know that inflation harms those at the bottom of the economy more than anyone...
This lesson alone has persuaded the vast vast majority of economists from even discussing the implementation of price and wage controls (except the minimum wage, which has similar bad impacts on poor people).
I suggest that you do some research about what could go wrong when you decide that a dozen people in an ivory tower can make better decisions about spending than the hundreds of millions of people who are intimately familiar with their individual needs and resources. There are hundreds of examples, a large number of them in communist and socialist type countries...
Hey Rafal if you want to help people who can't afford steaks, teach them a trade and let them have the pride of making something of their lives. If you find someone who can't work, sign them up for welfare. Don't destroy the economy to help a few poor people and in the process damage everyone while creating more poor people.
You have to find a better example. Beef steaks are not that important. We can live without them. The unemployment rate at the end of WW2 was 1.9%. Have you forgotten the Phillips curve? So when price and wage controls were removed, you would expect inflation. At the end of WW1 inflation was much higher, 80%. This does not mean that price and wage controls were the cause of inflation. Correlation is not causality. Deception in meat production, you described, was not caused by price controls, but rather by corruption. Corruption is precisely why, in certain situations, government intervention is necessary.
I'm sure you'll never see this, but in case you do, I have a simple yes/no question: Do you believe a market can be maliciously manipulated by those in control of production to artificially inflate prices/profit? If no, why not? If yes, should we not at least attempt to curtail such harmful greed when it comes to necessities like food and housing?
These are theoretical questions, of course. No such thing has or ever will happen, of course. Laissez-faire!
Absolutely right on all counts, and I say this as someone who grew up with plenty of hurricanes. Know what else jacking up prices after emergencies does? Tells people: Be smarter next time.
True story - I came home after a trip to India in Jan 2020 and said, Honey, it's going to get bad. We stay ready for a coupla months as a general practice, random weather events or whatever, but went out and bought an extra chest freezer, started buying extra every time we went to the store. By the time others were panic-buying and posting pictures of empty shelves everywhere, we were staying home out of the frenzy.
To those who do not expect - in 2024! - to self-rescue or be self-sufficient I say: good luck, you'll need it.
Full agreement (so price controls on e.g. groceries ARE an absurd idea -- last tried by Nixon, I believe?)... as long as the crucial bit (quoting the post) applies: "free to not buy" if too pricey.
But that cannot apply if you're legally FORCED to buy -- e.g. consider SCOTUS case "City of Grants Pass v. Johnson": cities can arrest and/or fine anybody who chose not to buy lodging (maybe because it was too pricey), which amounts to a legal mandate to buy lodging.
Absurd ruling, IMNSHO, but it does carry implications by nullifying the "free to not buy" core idea (yes, one COULD in theory move forever until they find a place allowing homelessness or with cheap rents, but, can one find such a place in one day or two? and abandon jobs, old ailing relatives, children in joint custody, etc, etc...?)
Given (by SCOTUS) the absurdity of getting arrested if you don't buy X, then suddenly allowing suppliers of X to charge WHATEVER they'd like becomes atrocious. Yeah, rent controls have never worked well (which is why what I think is absurd is SCOTUS' ruling), but, UNLESS "free not to buy" applies to some good or service X (and legal mandates can make it inapplicable), things become extremely different (again, IMNSHO).
Axiom: Politicians always misunderstand economics to their advantage
ALL humans misunderstand economics (and other things EVEN we're not experts on) to their advantage! :-)
The post and your two comments remind me of what I've long thought: People don't misunderstand economic thinking. They actively sabotage it.
I don't think they misunderstand economics. I think politicians respond to incentives, just like everyone else. They seek votes. Voters like free stuff. When you combine the two, you get horrible economic policies.
I think people don’t want their taxes going to terrible healthcare system or war
I would need to see the evidence of that statement. Public choice theory of economics seems to explain the current political climate quite well. Additionally, when polled a majority of Americans are happy with their health care. As far as war, seems as though a large percentage of Americans are happy spending huge sums of money supporting th Ukrainian war and leaving huge amounts of military equipment in Afghanistan.
Since we pay for a sizable portion federal budget with debt, current taxpayers aren’t footing the bill, future generations are with lower standards of living.
What can you expect to come out of the mouth of a communist and a brain with coconut water? I mean, she wants to ban price “gauging” (literally from her mouth) on food and grocery, why not be more bold, just put a ban of price gouging on housing. I’m sure she won’t because all US home owners will hate her
Once again John says it as it is. Being an old salesman for a variety of companies and handling many products over a 5 state region, with seasonal appeal, showed me the effects of shortages, pricing, and supply/demand. The merchants and their customers who understood what he is writes, did very well. Those who did not...disappeared.
excellent article john. you are, of course, right. should passing Econ 1 be a prerequisite to serve in Congress? be president? probably not vice president! ;-)
Sadly, many people pass Econ 1 and don't get these basics straight. Many people have PhDs and don't get these basics straight. Many people teach Econ 1 and don't get these basics straight. Moralizing and politics make it hard for lots of people to think.
Plus, if the price is too high just don't buy it! People do that all the time. That doesn't mean there should be some sort of law making it illegal to set a price that is 'too high'.
The cure to the problem of a price being too high is that people don't buy. No law or bureaucracy is required.
Some goods are inelastic. But, still shouldn't have price ceilings.
Well done. Price elasticity of demand is about substitutes. If it’s easy to find a substitute product when the price of an alternate product increases,. Beef and chicken for example, demand will be more elastic. If there are few or no alternatives, demand will be less elastic. Per your example of the motel, there were no good substitutes and your demand for shelter was pretty inelastic. Given your exchange with the motel owner was voluntary, I wouldn't characterize this as "price gouging." We know from experience, inelastic demand becomes more elastic over time. Harris's "plan" clearly makes things worse for consumers over a much long time.
Of course neo-classical price theory will always be the only credible paradigm to maintain the most efficient allocation of resources. QED
But your post brings up the the memory of the non-targeted debt financed cash transfers that the Trump and Biden administrations indulged in the Covid overreaction
Thanks John for praising the price system and your many examples of how the market ensures (with an invisible hand), the efficient allocation of resources. I also admire your courage as an economist, when few of your trade who write or talk for the media will explore such honesty. As voters, our job is to reject the progressive populism coming from politicians before it becomes too difficult to reverse the years of damage to our 'relatively' free markets...
Brilliant and thank you for explaining.
I’m just looking forward to Harris’ retort to these federal economic law naysayers at her first press conference…hopefully before “day 1” of her presidency when she promised to end price “gauging” once and for all.
Exactly.
Now let's do why the boom bust cycle is good. Gales of Creative Destruction!
The $30 price ceiling on insulin just about killed my father. He couldn't get the insulin he had used since he was diagnosed with diabetes at age 27 (he's 89 now). Had to switch to another one and it screwed him up. He survived, but barely. Just sad to me now to see them tout policies that didn't stop inflation, didn't help the drug market, and now will kill the grocery industry (not to mention the new cap gains, unrealized gain tax, and corporate tax proposal)
Price gouging implicitly feels more "fair" when there is a single market price. Perhaps your mom was furious in the hotel example because she interpreted it as third degree price discrimination instead of price gouging (ie the motel owner sized you up with 4 kids late at night and charged you personally more). Not that this actually affects the surplus from the transaction, just that the owner captured a greater share of it.
Not so fast. Price gouging makes goods unavailable to people who show up on time but are not able to afford them, and who would have been able to purchase them otherwise. So what John advocates is simply favoring the better off. Survival of the fittest. That's all. This is precisely why price gouging is hated so much.
Rafal, Don't regular prices also make goods unavailable to people who cannot afford them.
Let's just set the price of everything at $0 to remedy that. What could go wrong?
Your point is addressed in the post. If you must, give out cash, don't mess with the price system.
Rafal, When you damage price signals you risk really messing up the market just like the communists did when they set prices. When supply is high, prices are low. When supply is low prices rise. That is what we call a price signal. High and rising prices signal people in a free market to provide more goods so that consumers will have the goods they want and producers can make more money. That sets in motion a process that eventually will lower prices.
A hurricane provides a great example of how rising prices take care of the market. Say a generator at Home Depot is $200. On a normal day. A hurricane approaches. Generators quickly start selling at $200. Home Depot places an order for an entire truckload of generators for the one store in your town, a rush order. The manufacturer has only a few within shipping distance, but can get more by flying them in on a cargo plane. That will cost a good bit, as will the overnight shipping in a rented truck with a driver paid extra to drive over a weekend... There are a hundred people at Home Depot who are thrilled to be able to buy a generator at $400 each. Including a pharmacy than needs the gen set to save their refrigerated medicine.
The alternative you prefer is to force people to maintain the $200 price. In that scenario, the generators quickly sell out. People who really need them, say a pharmacy with $25,000 worth of medicine that will be ruined when the power goes out and would gladly pay $1,000 or more for a generator, cannot get one. People who need that medicine will not have it available. Let's say some of those people are poor folks who have their meds paid for by the government. The pharmacy is out. They could drive 300 miles and buy it, but the gov plan can't be changed quickly so they would have to pay $1,000 out of their own pockets. Roads are blocked so it might take several days to get there and back. They could pay someone $500 to go get it, but since non-gouging laws are in place no one is willing to risk being thrown in jail for charging $500 for a normal $50 delivery fee. The Pharmacy can get more meds in the next 5 days but they would have to pay to have that delivered and the pharmacy is unwilling to risk jail since they would have to charge a lot for the meds. Add your own ending to the story, the sick person dies, maybe they have to be helicoptered out and that costs $10,000, whatever... The best solution would be to allow the market to operate and the people who need the aerators most to be able to buy them at prices that will make certain they are available.
During WW2 the government imposed price and wage controls. The country successfully prosecuted two wars and came out stronger than before. Free market ideas will not work if there is a substantial level of corruption in the system. This is why the government has to step in. Your example above assumes that people who really need goods or services can afford them. This is often not the case (e.g. seriously ill poor person in need of expensive medication).
Rafal, Good Lord man... have you not heard of the severe shortages and massive rationing that this caused?
The federal government erected a sprawling and intrusive bureaucratic apparatus called the Office of Price Administration. Hundreds of thousands of federal employees and community volunteers, were used to force people to obey the desires of the central planners in DC.
Food producers faced with going bankrupt under the price controls started skimping on product quality. You can't fake a good Filet Mignon, but you can grind up a whole cow including some pretty disgusting organs, then add beans, potatoes and bread, and still do business even with the government creeping down your back. (This happened due to your favored plans.) ...Extra fat was added, extra bone was added, horse meat, muskrat meat, and other alternative meats were added...
When whole meat (in tact) was sold, low grades were sold as high grade meat, so even when you could identify the meat as coming from a cow... it was inferior. That was called the "red market"...
What happened to the good cuts? They were sold off to the side to people willing to pay a market price in what was known as the "Black Market".
When price controls ended, prices doubled... people already upset with price controls were livid at politicians for messing up the market. Politicians pushed price controls a second time. Markets dried up, meat production fell 80%, and all the same problems from before came back with a vengeance.
The elections in 1946 were known as "The Beef Steak Elections", where voters threw out Democrats and their communistic price controls and elected Republicans left and right.
The economy was growing and food supply (along with everything else) was not. Pent up demand was present and took over after '46. In '47 inflation was 20%... and we all know that inflation harms those at the bottom of the economy more than anyone...
This lesson alone has persuaded the vast vast majority of economists from even discussing the implementation of price and wage controls (except the minimum wage, which has similar bad impacts on poor people).
I suggest that you do some research about what could go wrong when you decide that a dozen people in an ivory tower can make better decisions about spending than the hundreds of millions of people who are intimately familiar with their individual needs and resources. There are hundreds of examples, a large number of them in communist and socialist type countries...
Hey Rafal if you want to help people who can't afford steaks, teach them a trade and let them have the pride of making something of their lives. If you find someone who can't work, sign them up for welfare. Don't destroy the economy to help a few poor people and in the process damage everyone while creating more poor people.
You have to find a better example. Beef steaks are not that important. We can live without them. The unemployment rate at the end of WW2 was 1.9%. Have you forgotten the Phillips curve? So when price and wage controls were removed, you would expect inflation. At the end of WW1 inflation was much higher, 80%. This does not mean that price and wage controls were the cause of inflation. Correlation is not causality. Deception in meat production, you described, was not caused by price controls, but rather by corruption. Corruption is precisely why, in certain situations, government intervention is necessary.
Believe what you will...
I'm sure you'll never see this, but in case you do, I have a simple yes/no question: Do you believe a market can be maliciously manipulated by those in control of production to artificially inflate prices/profit? If no, why not? If yes, should we not at least attempt to curtail such harmful greed when it comes to necessities like food and housing?
These are theoretical questions, of course. No such thing has or ever will happen, of course. Laissez-faire!
Absolutely right on all counts, and I say this as someone who grew up with plenty of hurricanes. Know what else jacking up prices after emergencies does? Tells people: Be smarter next time.
True story - I came home after a trip to India in Jan 2020 and said, Honey, it's going to get bad. We stay ready for a coupla months as a general practice, random weather events or whatever, but went out and bought an extra chest freezer, started buying extra every time we went to the store. By the time others were panic-buying and posting pictures of empty shelves everywhere, we were staying home out of the frenzy.
To those who do not expect - in 2024! - to self-rescue or be self-sufficient I say: good luck, you'll need it.
Full agreement (so price controls on e.g. groceries ARE an absurd idea -- last tried by Nixon, I believe?)... as long as the crucial bit (quoting the post) applies: "free to not buy" if too pricey.
But that cannot apply if you're legally FORCED to buy -- e.g. consider SCOTUS case "City of Grants Pass v. Johnson": cities can arrest and/or fine anybody who chose not to buy lodging (maybe because it was too pricey), which amounts to a legal mandate to buy lodging.
Absurd ruling, IMNSHO, but it does carry implications by nullifying the "free to not buy" core idea (yes, one COULD in theory move forever until they find a place allowing homelessness or with cheap rents, but, can one find such a place in one day or two? and abandon jobs, old ailing relatives, children in joint custody, etc, etc...?)
Given (by SCOTUS) the absurdity of getting arrested if you don't buy X, then suddenly allowing suppliers of X to charge WHATEVER they'd like becomes atrocious. Yeah, rent controls have never worked well (which is why what I think is absurd is SCOTUS' ruling), but, UNLESS "free not to buy" applies to some good or service X (and legal mandates can make it inapplicable), things become extremely different (again, IMNSHO).