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Where Is The Pencil Czar?

George Will has more on economic ignorance:

The indignant student, who had first gone to Home Depot for a flashlight, says it "didn't try to rip us off." It was, however, out of flashlights. Ruth suggests that the reason Big Box had flashlights was that its prices were high. If prices were left at regular levels, the people who would have got the flashlights would have been those who got to the store first. With the higher prices, "someone who had candles at home decided to do without the flashlight and left it there for you on the shelf." Neither Home Depot nor the student who was angry at Big Box had benefited from Home Depot's price restraint.

Capitalism, Ruth reminds him, is a profit and loss system.Corfam--Du Pont's fake leather that made awful shoes in the 1960s--and the Edsel quickly vanished. But, Ruth notes, "the post office and ethanol subsidies and agricultural price supports and mediocre public schools live forever." They are insulated from market forces; they are created, in defiance of those forces, by government, which can disregard prices, which means disregarding the rational allocation of resources. To disrupt markets is to tamper with the unseen source of the harmony that is all around us.

The spontaneous emergence of social cooperation--the emergence of a system vastly more complex, responsive and efficient than any government could organize--is not universally acknowledged or appreciated. It discomforts a certain political sensibility, the one that exaggerates the importance of government and the competence of the political class.

Yes, an exaggeration that is reinforced by the propaganda inculcated into people by government schools.



Ralphe wrote:

If your looking for a Pencil Czar I'm your man. I am quite self reliant on the pencil front. Every week I play in a card game where scored sheets and pencils are provided. I seem to come home with another in my pocket every time I play and with no governmental assistance required.

I understand the poor students plight though, some things, like flashlights and planing ahead, are harder.

Martin wrote:

"Ruth notes, "the post office and ethanol subsidies and agricultural price supports and mediocre public schools live forever.""

Given what it does, I've always found the U.S. Postal Service to be pretty good. I know some people have had problems with it, but I never have. It is also one of the few government entities which is expressly called out in the constitution.

It should also be noted that many public schools used to be pretty good, despite their Deweyesque origins. They also used to be subject to far more local control. Given that they are now the instruments of the Department of Education (thanks, again, Jimmy Carter!) and the teachers unions, I'd be happy to see the end of the whole system.

Gil Gilliam wrote:

Corfam quickly vanished in the 50s? Then what the heck was the uniform issue peddling me in boot camp in 1984? I want my money back...

Duncan Young wrote:

Was this post written before or after Lehman Brothers, Merrill Lynch and AIG imploded, while on their knees begging for government bailouts, likely taking with them most of the unregulated investment banks in this country, and heralding what might be the greatest challenge to capitalism since the Great Depression?

(I'll note that FDR's Social Security Trust Fund is still ticking along nicely.)

Mike G in Corvallis wrote:

It's amazing how many "Progressives" believe in Economic Creationism.

"Suppose you were walking through a field one day and you found a pencil. Does not the existence of a pencil imply -- nay, demand! -- the existence of a Pencilmaker?"

Tom wrote:

Was this post written before or after Lehman Brothers, Merrill Lynch and AIG imploded, while on their knees begging for government bailouts, likely taking with them most of the unregulated investment banks in this country, and heralding what might be the greatest challenge to capitalism since the Great Depression?

Momentarily leaving aside the fact that this stuff is tied up in all kinds of knotty regulatory crap -- meaning, it's not really a free market -- why do leftists persist in pointing to failed businesses as evidence that capitalism is "challenged"?

Brian Macker wrote:

"why do leftists"

Because in general they are economic ignoramouses.

People in the know, free marketers, have been complaining about the Greenspan monetary inflation for a long time. Have been complaining that it would lead to exactly the kinds of things that are happening now. They've been complaining about past bailouts and they are complaining about these bailouts. All of which not only are NOT necessary to defend markets but actually undermine them.

Businessess going out of business is part of the process of the free market. Keeping the money supply out of the hands of government is also part of the free market.

joel mackey wrote:

Yea, social security is ticking along alright, ticking like a bomb....can you say freddie mac or fannie mae?

Josh Reiter wrote:

Gil Gilliam wrote:

"Corfam quickly vanished in the 50s? Then what the heck was the uniform issue peddling me in boot camp in 1984?"

It is still widely used in military and equestrian equipment.

Karl Hallowell wrote:

OTOH, Duncan has a point about threats to capitalism. Big failures like this are an opportunity to insert more economy-killing bureaucracy and rent-seeking into US society. Social Security is a great example of the durability of some of these bad ideas.

David Summers wrote:

I think the real issue here is that although Capitalism is the best way we know of to allocate scarce resources, it is not "fair". During normal times, that is just the price you pay for a system that actually works, but during exceptional times (ie: emergencies) it is better to skip capitalism and go to a command economy (or something like it). Wars are not run on a capitalist basis, and neither is most emergency relief - at least in our society, that are both essentially volunteers.

I do not doubt that any of you would open your houses to your neighbors for the night if they lost theirs, nor do I doubt that you would run to assist during an emergency - these are actually fairly normal behavior, because if you are in an emergency, the normal economics rules do not apply. (You don't have to discourage mooching during an emergency).

So, how should you price flashlights during an emergency? In a perfect system, the flashlights would go at normal price to the few who needed them the most. I think the closest you can really come to that is the old command economy standby, rationing.

I am a firm believer in Capitalism, but there are a few settings were it should be suspended in my opinion: In families, and during emergencies.

Rand Simberg wrote:

No, rationing is the economically illiterate, market-wrecking reflexive response. The proper response is to let the market work, so the price signals balance supply and demand, and provide financial relief to those who are in need, and can't afford the temporarily high prices.

David wrote:

Rand, as an example, should a doctor in Galveston performing triage include in the triage formula wealth?

I all honesty, I would argue that he should - a wealthy person is likely a more critical link in society than one that commands fewer resources. But what triage really should (and attempts to) try to measure is future societal utility from an individual... but they do currently leave out wealth, which in my opinion an indicator with one of the highest correlations to future value to society.

The disposition of flashlights is really no different. Triage rules should apply, no economic ones - and for the same reasons. During a true emergency there just isn't time for the market to set prices correctly - seller competition is not possible.

I guess perhaps we are talking about different things - I am not really talking about selling flashlights to students, I agree that if people aren't dying the markets will work. I am really talking about the situation where:

1) Seller has X
2) Buying is going to die without X
3) Seller can demand absolutely anything, up to the present value of all future earnings of the buyer

The basic problem with this is the obscene difference in negotiating positions... societies that enforce negotiations arrived at with that level of power imbalance are not stable, and stable societies are desirable.

I agree that students getting upset about flashlights is rather silly - you won't die from the dark.

Karl Hallowell wrote:

David, what do you mean by "need"? If I'm willing to pay $100 for a flashlight, then that shows I need it. But what if I happen to have an "in" with the bureaucracy doling out flashlights. Where's my need then? The real demonstration of the bankruptcy of rationing occurs when people acquire a ration of goods and then scalp them for a considerable sum. As they say, a market routes around inefficiencies. "Fairness" isn't fair when the people who need the goods can't get the rations.

Rand Simberg wrote:

David, this discussion was not about "dire" need. It was about allocation of commodities in times of sudden shortage. Obviously if people are in need of rescue, you rescue them if you can (and yes, sometimes triage is involved), and worry about costs later, if at all.

Getting More Shrill With Panic By The Day wrote:

Not to worry folks.

When McCain-Palin wins, Palin's stellar record as Wasilla mayor will be duplicated in the financial management of our economy. She will set things right on Wall Street and even raise Lehman from the dead. Hallelujah! Praise and Joy!

And John McCain will fight, fight for what is right on Wall Street.

I can't wait for this great and beckoning future.

Jeff Medcalf wrote:

Hmm... I think that there is a misunderstanding of "value" here. "Value" is nothing more or less than what one is willing to give up to obtain something else. What, for example, are those students willing to give up to get a flashlight? I suspect that it's less than what, say, a hospital would be willing to give up, because for the hospitals, non-flaming light sources really could be the difference between life and death in a power outage.

Gas is a much better example, because one often hears about price gouging on gas and seldom on flashlights. Are you willing to give up more than the ambulance company or the police department to get that gas? If yes, then you value it more highly than they do. If no, then you value it less highly. The market sets a price for the goods (it's way more complicated than that, because "market" is shorthand for a very complex interaction among a large number of individuals with differing levels of information and differing goals) that ensures that there will always be some available. Eventually, it gets so expensive that only those in truly dire need value the good highly enough to pay the market price for the good. The interesting thing about this is that it encourages places where the good, gas in this case, is in surplus, to ship it to places where the supply is in deficit, because they will make more money by doing so. Thus, the price signals work, and the gas gets where it's needed.

Now let's look at rationing. Let's say that there is an emergency, and thus the gas is in higher-than-normal demand (running generators as well as cars, etc) and lower-than-normal supply (difficulty shipping the gas into the area, etc). So the government then arrogates to itself the power to set the price. What happens? Well, if the government sets the price so low that too many people see the gas at that price as more valuable than the money they give up to get the gas, the supply of gas disappears because demand exceeds supply. If the government sets the price too high, then fewer people buy the gas, and there is excess gas, but those who bought the gas had to pay too much. Only in the case that the government gets the price at the same level that the market would naturally set in the emergency does the supply balance the demand, ensuring that no one pays more than they must for the good and that the good is still available to those who truly need it. Given the inability of a single person to make that calculation, the odds of the government getting the price exactly right are slim, and even then it can only match the market's efficiency. Otherwise, the government-set price (and this is true even if the price is "free, 2 units limit") is either ineffective in the former case, or inefficient in the latter. And this does not even take profiteering into account, where one person who doesn't need gas nonetheless acquires as much as possible, in the certain knowledge that supply will soon dry up, at which point they can make a tidy profit selling it back.

So rationing simply doesn't work, not even during an emergency. The evidence I have seen for rationing in every case has come down to "the system didn't collapse." But that's a pretty low standard to meet, if you are defining running out of a good as not being a systemic collapse, or restricting the availability of a good in surplus as not being a systemic collapse. WWII is a poor example, because normally people aren't as supportive of government efforts as they were then, but even there, there were some pretty big problems with rationing at home, which is why the postwar economy (once the government imposed controls were removed) kicked into the largest expansion in our history.

No Price Gouging Here

We're Honorable, So We Don't Have Any Stuff

It had been raining for three days. Jim went to Sam's Hardware Store in town. There were deep road puddles everywhere.

Jim: Hi Sam. I'm looking for a good water pump. My basement is drowning.
Sam: Hi Jim. I'm sorry to tell you that I had three WP-ABQ pumps in stock before this rain. A pretty good value at $140 too. But, they sold out.

Jim: I'm in trouble. There is 3" of water in my basement and it is rising slowly. I really need that pump.
Sam: I feel for you. My last pump sold to a guy who didn't need it now, but wanted to be safe. At the standard price of $140, he decided not to wait.

... Continued at

David wrote:

Rand, I agree, I was broadening the discussion well beyond the rather silly flashlight question, and I did not communicate that well.

Jeff, your example is a good one - rationing gas during a crises (defined for this discussion as a short unforseeable event, like an earthquake). The problem with capitalism for such things is that the supply is essentially fixed - the short duration means no new supply can be created. So you are now allocating among various buyers - the price will float to where people will merely go without, rather than purchase.

The problem is that 1% of the population or so is very wealthy (the indicator of a working society) - so that 1% is essentially uneffected by any conceivable pricing strategy. Bill Gates does not change his driving habits due to the price of gas - even at $100,000 per gallon. That means that (in your example) Bill Gates would be driving to work and flying his personal jet while a hospital (which could not afford $1M/hour or so to feed the generator) closes its doors.

In general, people are not dumb - they really do tend to operate according to sound economic principles. In an emergency, Bill Gates stops flying his plane. Not because he can't afford it, and not because the price of gas is high, but rather because it is the "right thing" to do. In pure economic terms, I believe this is to avoid a backlash against himself - but that is just emotionality implementing a complex economic equation.

This is very far from the original topic, but still interesting, I think.

Rand Simberg wrote:

The problem with capitalism for such things is that the supply is essentially fixed - the short duration means no new supply can be created.

No, but you can hasten the time in which it will be. If the price is declared by fiat to remain what it was pre-emergency, where is the incentive for anyone to bother to truck in supplies from other states (at high cost and risk)? Again, the solution lies in helping those in need, not in screwing with the markets and price signals, and arresting people for "price gouging."

Jeff Medcalf wrote:

I think you miss the point, in two ways, David. First, jet fuel is not comparable to auto fuel, both because they are not substitute goods for each other, and because the plane can refuel outside the physical boundaries of the emergency.

Second, and far more important, you are simply factually wrong about the supply being fixed, except in the very, very, very short term. If gas is selling for $8 per gallon SE of Houston, $5 per gallon in Houston, and $3.50 per gallon elsewhere, and you have a tanker truck full of gas, where are you routing that tanker truck? By and large, you are putting it SE of Houston if you can physically reach that area at acceptable risk to the truck, driver and cargo, and into Houston otherwise. This will cause supply to run lower everywhere else, and the price will rise everywhere until the net price for a supplied gallon of fuel equalizes. After the emergency, competition will force the price of gas down everywhere. (I charge $0.10 less per gallon at my station than at your station across the street. You actually lose revenue until either you lower your prices sufficiently to attract customers or I run out of gas to sell.)

Let's take the same example, but with price fixing. (We'll get to rationing in a moment.) In this scenario, the government (for these purposes, price fixing can be happening at any level of government) has arrogated itself the emergency power to set gas prices, and SE of Houston and in Houston itself, the gas price is fixed at $4.00, while outside of the area, it remains at $3.50. Now, it takes $3.30 per gallon to distribute fuel generally, but $3.80 per gallon into Houston and $6 SE of Houston. Now where do you send your tanker? If you are numerate and like staying in business, you send it anywhere else, where you get a 6% profit. (Sending it to Houston provides only about 5 1/4% profit, while sending it SE of Houston results in a large loss as well as increased risk. So as a result of price fixing, the emergency area is starved of fuel, and the supply on hand will not be replenished. No one gets gas after the most immediate period.

Now let's try rationing. Let's assume that the local government has decided to buy all the fuel in the area (stop laughing, I know they would simply steal, er, requisition it; I'm being nice) to hand out as needed. Who makes the determination of need? Some bureaucrat or low-level elected official. Let's say that this person is an angel (stop laughing, it's distracting) and immune to corruption. Now, he decides to allocate 10 gallons to each local family for private vehicles, 100 gallons per emergency (fire, police, ambulance) vehicle, 50 gallons to each construction vehicle and 1000 gallons for generators. Presumably, since this is now government fuel and it's an emergency, the fuel is free or at cost, but regardless, the price is the same for everyone.

Now let's say that some families simply don't need the gas. Would they take it anyway? Yes, because it's free or at cost, which is a deal in the first place. But even without that, an intelligent family would take it even though they didn't value it intrinsically. Why? Profit. You see, the gas supply is what it is, so you won't get any except what is rationed out to you. No opportunities exist to make it extra profitable to divert gas into the area, and the costs of doing so have gone up. Therefore, the gas supply in the area will shrink. (For now, let's ignore the horror of national rationing.) This leads me, as the possessor of 10 gallons of gas I don't need, to find opportunities for those who value it more than I. Say, the guy next door who will get about 300 feet in his SUV on only 10 gallons of gas. He'll probably pay me well above the market price (or any price at all if the gas was free to me), which makes it worth my while to take the gas and sell it to him. Or maybe the lady across the street with a generator and an unhealthy love of soap operas will buy it at a good price to run her TV. And if I'm really smart, I'll start buying people's rations at a little above what they're paying for it, and then hold onto the gas until the fuel runs short, at which point I could sell it at a fantastic profit. How much do you think the ambulance company would pay when it cannot get enough fuel? What about the guy who wants a front end loader to clear the road to his property, but the construction company has used up its allocation?

Let's say I am an angel, and would never do such a thing. Does that fix the problem? Not unless everyone in the area is an angel, and if you can find the locale where that's true, please let me know so I can submit my application to live there.

Unless the rationing authority exactly determines who gets how much fuel so that the balance is ideal, the market will open (a black market, in this case) and the fuel will get reallocated through other means. But it would get reallocated more slowly (because it has to go through extra steps) and at a higher price (due to hoarding and low incentives for outside resupply) than if the market had just been allowed to function in the first place.

Or do you propose to give the government the power to say not only how much gas I may have and at what price I may have it, but also whether, when and how I can use or transfer it? And if you propose that government should have that power, only during "emergencies" of course (as defined by the government; hmmm, let's hope our politicians are all angels), than what other goods does it apply to? If I have a warehouse full of rain boots, and there's a flood, can the government take them, directly by confiscation or indirectly by mandating I give them out or sell them at government's discretion? Can the government mandate when and if I sell rain boots? What about food? What about food I raised myself in my garden? My farm? Really, where does it end? Flashlights? Batteries? What's off limits? Because in an emergency, the laws of supply and demand still operate, and any good might be critical to someone.

David wrote:

So it seems that the most critical aspect is that supply will never really be fixed - if we really had $100,000/gallon gas prices, heaven and earth would move to increase the supply. That sounds pretty accurate to me.

Thanks for the interesting discussion.

Larry J wrote:

Allowing the price to rise to the market price discourages hoarding. I was in an area impacted by Hurricane Katrina a week after the storm. Not only had gas prices risen, FEMA implemented a $20 cap on gas purchases (about 5-6 gallons) in the affected area. People were going from station to station and buying all the gas they could haul to power their generators and equipment.

I've often heard of price gouging claims against hotels following a disaster. If you have a family of 4 and a room costs $50 a night, you might want to get multiple rooms for your family. That'll mean fewer families will have a chance to rent a room. If a room cost $200 a night, you'll probably want only 1 room. Ultimately, which is more "fair"?

john hare wrote:

There are other incentives to let the market work. If I have a gas station that Might Be in the path of a storm, my actions prior to the possible storm arrival will also be dictated by risk/reward. If prices will be fixed after an emergency, I have little incentive to make darn sure I have all 20,000 gallons of fuel tanks full. It might get contaminated by storm debri, or set on fire by lightning, or spilled over the landscape by impacts to the tanks.

If I can charge enough to make it worth the risk, it is just possible that I and everyone else will stock up to the point that the damaged area is not short of necessities while transport is difficult. That 20,000 gallons of prepositioned fuel (or other commodity) will have cost me substantially less than the fair market value of emergency delivered supplies. Even at a large profit, it could cost less and be available in a more timely manner.

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This page contains a single entry by Rand Simberg published on September 14, 2008 2:08 PM.

Meet The New Change was the previous entry in this blog.

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