Quotulatiousness

September 20, 2017

Intro to the Bond Market

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Published on 12 Jul 2016

Most borrowers borrow through banks. But established and reputable institutions can also borrow from a different intermediary: the bond market. That’s the topic of this video. We’ll discuss what a bond is, what it does, how it’s rated, and what those ratings ultimately mean.

First, though: what’s a bond? It’s essentially an IOU. A bond details who owes what, and when debt repayment will be made. Unlike stocks, bond ownership doesn’t mean owning part of a firm. It simply means being owed a specific sum, which will be paid back at a promised time. Some bonds also entitle holders to “coupon payments,” which are regular installments paid out on a schedule.

Now — what does a bond do? Like stocks, bonds help raise money. Companies and governments issue bonds to finance new ventures. The ROI from these ventures, can then be used to repay bond holders. Speaking of repayments, borrowing through the bond market may mean better terms than borrowing from banks. This is especially the case for highly-rated bonds.

But what determines a bond’s rating?

Bond ratings are issued by agencies like Standard and Poor’s. A rating reflects the default risk of the institution issuing a bond. “Default risk” is the risk that a bond issuer may be unable to make payments when they come due. The higher the issuer’s default risk, the lower the rating of a bond. A lower rating means lenders will demand higher interest before providing money. For lenders, higher ratings mean a safer investment. And for borrowers (the bond issuers), a higher rating means paying a lower interest on debt.

That said, there are other nuances to the bond market—things like the “crowding out” effect, as well as the effect of collateral on a bond’s interest rate. These are things we’ll leave you to discover in the video. Happy learning!

September 19, 2017

Even in a progressive educational bubble, this isn’t correct

Filed under: Cancon, Economics, Education, Liberty, Politics — Tags: , , , , — Nicholas @ 03:00

Holly Nicholas shared this photo, which is said to be from an Alberta school:

If this is indeed how public schools are presenting the political spectrum (and it’s unfortunately easy to believe that they do), the closest thing to a “centrist” party in Canada is the loony left Green Party … who somehow pip the NDP on the right. The far right end of the spectrum, Fascism, is graphically indicated to be all about “Market Economy, Free Enterprise, and Laissez-Faire Capitalism”, because as we all remember, Hitler and Mussolini were in no way fans of state intervention in the economy, right?

The graphic does, however, support certain shibboleths of the left including implying that libertarians (who are actually in favour of market economies, free enterprise, and laissez-faire capitalism) are in the same economic and political basket as actual fascists. Nice work, faceless agitprop graphic artist!

September 17, 2017

QotD: The great enrichment

Filed under: Books, Economics, Quotations — Tags: , , , — Nicholas @ 01:00

The most fundamental problem in Piketty’s book, then, is that he misses the main act. In focusing solely on the distribution of income, he overlooks the most surprising secular event in history: the Great Enrichment of the average individual on the planet by a factor of 10 and in rich countries by a factor of 30 or more. Many humans are now stunningly better off than their ancestors were.

This includes a gigantic improvement of the poorest — your ancestors and mine. By dramatic increases in the size of the pie, the poor have been lifted to 90 or 95 percent of equal sustenance and dignity, as against the 10 or 5 percent attainable by redistribution without enlarging the pie.

What caused the Great Enrichment? It cannot be explained by the accumulation of capital, as the very name “capitalism” implies. Our riches were not made by piling brick upon brick, bachelor’s degree upon bachelor’s degree, bank balance upon bank balance, but by piling idea upon idea. The bricks, BAs, and bank balances were of course necessary. Oxygen is necessary for a fire. But it would be unenlightening to explain the Chicago Fire of 1871 by the presence of oxygen in the earth’s atmosphere.

The original and sustaining causes of the modern world were indeed ethical, not material. They were the widening adoption of two new ideas: the liberal economic idea of liberty for ordinary people and the democratic social idea of dignity for them. This, in turn, released human creativity from its ancient trammels. Radically creative destruction piled up ideas, such as the railways creatively destroying walking and the stage coaches, or electricity creatively destroying kerosene lighting and the hand washing of clothes, or universities creatively destroying literary ignorance and low productivity in agriculture. The Great Enrichment requires not accumulation of capital or the exploitation of workers but what I call the Bourgeois Deal. In the historical lottery the idea of an equalizing liberty and dignity was the winning ticket, and the bourgeoisie held it.

That even over the long run there remain some poor people does not mean the system is not working for the poor, so long as their condition is continuing to improve, as it is, and so long as the percentage of the desperately poor is heading toward zero, as it is. That people still sometimes die in hospitals does not mean that medicine is to be replaced by witch doctors, so long as death rates are falling and so long as the death rate would not fall under the care of the witch doctors. It is a brave book Thomas Piketty has written. But it is mistaken.

Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.

September 16, 2017

QotD: The US housing market

Filed under: Economics, History, Quotations, USA — Tags: , , , — Nicholas @ 01:00

… up until fairly recently, the home mortgage market was the most conservative financial market out there. The market was not a big money maker because risks were very low and the money was steady. The home mortgage market was the realm of community banks who held the mortgages as assets for the life of the loan. It was the 3-6-3 lifestyle. Borrow from the financial markets at three percent, make home mortgages at six percent and hit the links at 3:00 PM. That all changed in the early 1990’s when Democrat policymakers passed the Community Reinvestment Act and then forced banks to make loans that were far more risky in areas that the banks, for good reasons traditionally stayed away from. Then through Fannie Mae and Freddie Mac the “policymakers” bundled the good and bad paper and sold it on the financial markets creating the current mess. What I don’t understand is how increased home ownership was supposed to increase rents.

Home ownership has been a policy of multiple administrations since WW2, as has suburbanization. There are a bunch of reasons for this. One big one was that the policymakers were, for a bunch of reasons, not fond of urban life. It was considered dirty, old fashioned and perhaps most importantly a big target. This was not a small consideration to people coming back from all those ruined cities overseas.

John C. Carlton, “Who ‘Stole’ The Country’s Wealth, The Rich, Or Government ‘Policy Makers?'”, The Arts Mechanical, 2015-10-16.

September 14, 2017

QotD: The 1970s economic mess

Filed under: Economics, History, Quotations, USA — Tags: , — Nicholas @ 01:00

He then goes on to blather about the policies of the 1970’s. I lived through the 1970’s and what you need to understand was that the governing motive of policymakers then was panic. The “policymakers,” by and large Democrats, screwed up as badly as possible and just couldn’t get a grip on what [the problems] really were.

John C. Carlton, “Who ‘Stole’ The Country’s Wealth, The Rich, Or Government ‘Policy Makers?'”, The Arts Mechanical, 2015-10-16.

September 13, 2017

Our Amazing Debt (Cosmos Parody)

Filed under: Economics, Government, Humour, USA — Tags: , — Nicholas @ 06:00

Published on 12 Sep 2017

The math behind the National Debt is so complex that Reason TV decided to lean on “Cosmos” to explain it.
—-
We are about to begin a journey beyond ordinary human understanding. Lost somewhere between immensity and eternity. Join me, as we explore: Our Amazing Debt

We are all made of star stuff. And in America, we are all born more than $61 thousand in debt.

The collective debt we owe as a country now stands at $20 trillion, a level of debt unfathomable to our contemptible caveman ancestors.

How can we comprehend the sheer magnitude of the national debt? With our starship of imagination.

This is the USS Dumbitdownforme and it cost $12 billion to construct: all financed through debt. We didn’t have the money to build it and we didn’t want to raise taxes to pay for it, but we really wanted it. So, like a fiscal wormhole, we’ve used debt to puncture the reality of financial constraints, connecting what we want now to even more money we promise to pay later.

$20 Trillion is not just a lot of money, it’s all the money, and then some.

If we could round up all the US currency in existence–every dollar bill, every quarter, every penny–we’d still need another $18 trillion. All the gold that has ever been mined couldn’t even cover half of our debt.

Yet our story doesn’t end here.

Like our ever-expanding universe our debt is constantly growing larger. This year we will pay more than $250 billion on interest payments. Not the debt, just the fee for borrowing money.

Much as cosmic expansion will inevitably lead to the heat death of our own universe, the debt, too, is unsustainable. As nature seeks balance, so to will our creditors.

Will the government gut spending? Defund entitlements? Devalue our currency?

One day, perhaps in our lifetime, we will discover the answers and reach the limit of our amazing debt. But for now we can only behold this awesome force that binds all Americans, bewitching us with the fascinating possibility, that maybe, just maybe, we’re all f***ed.

Written and produced by Austin Bragg, Meredith Bragg, and Andrew Heaton. Edited by Austin Bragg.

Tesla’s experiment in price discrimination

Filed under: Business, Economics, Technology — Tags: , , , , , — Nicholas @ 05:00

Alex Tabarrok links to a story about Tesla using an over-the-air software update to help Tesla owners in hurricane-threatened areas get more range from their lower-battery capacity cars … but he says this may eventually come back and bite the company:

Tesla knows that some of its customers are willing to pay more for a Tesla than others. But Tesla can’t just ask its customers their willingness to pay and price accordingly. High willing-to-pay customers would simply lie to get a lower price. Thus, Tesla must find some characteristic of buyers that is correlated with high willingness-to-pay and charge more to customers with that characteristic. Airlines, for example, price more for the same seat if you book at the last minute on the theory that last minute buyers are probably business-people with high willingness-to-pay as opposed to vacationers who have more options and a lower willingness-to-pay. Tesla uses a slightly different strategy; it offers two versions of the same good, the low and high mileage versions, and it prices the high-mileage version considerably higher on the theory that buyers willing to pay for more mileage are also more likely to be high willingness-to-pay buyers in general. Thus, the high-mileage group pay a higher price-to-cost margin than the low-mileage group. A familiar example is software companies that offer a discounted or “student” version of the product with fewer features. Since the software firm’s costs are mostly sunk R&D costs, the firm can make money selling a low-price version so long as doing so doesn’t cannibalize its high willingness-to-pay customers–and the firm can avoid cannibalization by carefully choosing to disable the features most valuable to high willingness-to-pay customers.

The kind gesture to Tesla owners in Florida is probably deeply appreciated right now, but…

Unfortunately, I fear that Tesla may have made a marketing faux-pas. When it turns off the extra mileage boost are Tesla customers going to say “thanks for temporarily making my car better!” Or are they going to complain, “why are you making MY car worse than it has to be?”

Human nature being what it is, the smart money is betting on the “Thanks for the temporary upgrade, but what have you done for me lately?” attitude setting in quickly.

September 11, 2017

Harvey, Irma, and Frédéric – the “Broken Window Fallacy” returns

Jon Gabriel tries to set the record straight on what a natural disaster means for the economy (hint, ignore anyone who says the GDP will rise due to the recovery efforts):

Ever since Hurricane Harvey slammed into Texas two weeks ago, we’ve seen countless images of heroic rescues, flooded interstates and damaged buildings.

As awful as the human toll was, it was not as bad as many of us feared. But it will take months to repair the homes, businesses and infrastructure of Houston and the surrounding area. The same will be true in Florida after Hurricane Irma.

The economic impact could be felt for years, but many economists and financial experts think there’s a silver lining.

The Los Angeles Times crowed that Harvey’s destruction is expected to boost auto sales. CNBC reported that Harvey “could be a slight negative for U.S. growth in the third quarter, but economists say it may ultimately provide a tiny boost to the national economy because of the rebuilding in the Houston area.”

Even Goldman Sachs is looking at the bright side, noting that there could be an increase in economic activity, “reflecting a boost from rebuilding efforts and a catchup in economic activity displaced during the hurricane.”

Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of all the money that street sweepers, construction workers and Home Depots will rake in.

And what about all those windows broken by the high winds? This will be the Golden Age of Texas Glaziery!

Not so fast.

All of this is based on a misunderstanding of what the GDP actually measures. It’s a statistic that often gets mentioned in the newspapers and on TV, but it is almost always used in a way that misleads people about what is happening in the economy. GDP — Gross Domestic Product — is intended to show the approximate total of goods and services produced in a national economy. Thus, when the GDP goes up, it means that the current period being measured recorded more goods and services produced than in the previous period.

When a natural disaster like a hurricane, earthquake, flood, or tornado strikes a city, state or region, all the work required to fix the damage will artificially boost the recorded GDP for that year. But the affected area isn’t that much richer than it was before, despite the GDP going up, because the GDP does not measure the losses suffered during the natural disaster.

This is where Frédéric comes in. I’m referring to the French economist and author Frédéric Bastiat, who brilliantly illustrated the GDP misunderstanding in his essay “What Is Seen and What Is Not Seen“:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

The GDP problem I identified at the start of this post is a general case of what Bastiat called the “Broken Window Fallacy”:

Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.

If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.

And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.

Now let us consider James Goodfellow.

On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.

On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.

Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window.

From which, by generalizing, we arrive at this unexpected conclusion: “Society loses the value of objects unnecessarily destroyed,” and at this aphorism, which will make the hair of the protectionists stand on end: “To break, to destroy, to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”

Related: Shared by Thomas Forsyth on Facebook:

QotD: Does inequality matter?

Filed under: Books, Economics, Quotations — Tags: , , , , — Nicholas @ 01:00

The central problem with the book, however, is an ethical one. Piketty does not reflect on why inequality by itself would be bad. To be sure, it’s irritating that a super rich woman buys a $40,000 watch. The purchase is ethically objectionable. She should be giving her income in excess of an ample level of 2 cars, say, not 20; 2 houses, not 7; 1 yacht, not 5 — to effective charities. Andrew Carnegie enunciated in 1889 the principle that “a man who dies thus rich dies disgraced.” Carnegie gave away his entire fortune. (Well, he gave it at death, after enjoying a castle in his native Scotland and a few other baubles.) But the fact that many rich people act in a disgraceful fashion does not automatically imply that the government should intervene to stop it. People act disgracefully in all sorts of ways. If our rulers were assigned the task in a fallen world of keeping us all wholly ethical, the government would bring all our lives under its fatherly tutelage, a nightmare achieved approximately before 1989 in East Germany and now in North Korea.

Notice that in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. Piketty’s vision of apocalypse leaves room for the rest of us to do very well indeed — rather non-apocalyptically — as in fact since 1800 we have. What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer, too. His worry is purely about difference, about a vague feeling of envy raised to a theoretical and ethical proposition.

But our real concern should be with raising up the poor to a condition of dignity, a level at which they can function in a democratic society and lead full lives. It doesn’t matter ethically whether the poor have the same number of diamond bracelets and Porsche automobiles as do owners of hedge funds. But it does indeed matter whether they have the same opportunities to vote or to learn to read or to have a roof over their heads.

Adam Smith once described the Scottish idea as “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.” It would be a good thing, of course, if a free and rich society following Smithian liberalism produced a Pikettyan equality. In fact, it largely has, by the only ethically relevant standard of basic human rights and basic comforts. Introducing liberalism in Hong Kong and Norway and France, for instance, has regularly led to an astounding betterment and to a real equality of outcome — with the poor acquiring automobiles and hot-and-cold water at the tap that were denied in earlier times even to the rich, and acquiring political rights and social dignity that were denied in earlier times to everyone except the rich.

Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.

September 10, 2017

QotD: Peak oil

Filed under: Economics, Quotations, Technology, USA — Tags: , , — Nicholas @ 01:00

Witness, brothers and sisters, witness. The oil, it’s going to run out. Peak production of the world’s oilfields has either passed or is about to pass; from here on out it’s rising oil prices forever. Now we wave our hands and pronounce that the energy-guzzling capitalist West (and especially Amerikka) is so addicted to cheap oil that its decadent empire will collapse, collapse I tell you. Barely concealed gloating follows.

There are so many mutually-reinforcing idiocies here that it’s hard to know where to start. As I was thinking of writing about this, one of my commenters pointed out that above $32 per barrel it becomes economical to build Fischer-Tropf plants and make your oil out of coal. This is old tech; the Germans did it during WWI. At slightly higher price points, MHD generators to burn garbage start to look good.

These are instances of a more general phenomenon: markets adapt to price shifts! To wreck an economy with oil-price rises, they’d have to spike so fast and so far that you somehow couldn’t run the cement trucks to build the Fischer-Tropf plants. Not gonna happen.

In fact, the long-term trend will be that the amount of oil invested per constant-dollar value of goods produced in the U.S. economy drops faster than the price of oil rises. This is a safe prediction not because manufacturers have all bought into Green ideology but because they want to make money. This means that they have a market incentive to use their inputs (including oil) a efficiently as possible, and to substitute less expensive inputs for more expensive ones. It’s called capitalism, and it works.

(And, by the way, the cheapest input of all is information. Buckminster Fuller pointed out forty years ago that as technologies mature, the products tend to get smaller and lighter and less energy-intensive and smarter. Your cellphone today weighs less than it used to, and costs less oil to produces than it used to, because its design is smarter. Information has replaced mass. This trend will continue and accelerate.)

The peak-oil collapse scenario is not credible for five minutes to anybody who understands market economics. But the sort of people who believe it are blinded by their own prejudices; fundamentally they think market economics is an invention of the Devil. They need to believe in the collapse, because they need to believe that the wickedness of Americans and capitalists and Republicans will be punished.

Eric S. Raymond, “Peak Oil — A Wish-Fulfillment Fantasy for Secular Idiots”, Armed and Dangerous, 2005-11-13.

September 9, 2017

Minimum Wage: Bad for Humans, Good for Robots

Filed under: Business, Economics, Government — Tags: , — Nicholas @ 04:00

Published on 7 Sep 2017

Jacking up the minimum wage sounds like a good idea, but it comes with disastrous consequences: low-skilled workers getting canned, employers cutting hours, and, of course, robots.

QotD: Picketty’s unsupported inequality claims

Filed under: Books, Britain, Cancon, Economics, Quotations, USA — Tags: , , — Nicholas @ 01:00

Piketty’s definition of wealth does not include human capital, owned by the workers, which has grown in rich countries to be the main source of income, when it is combined with the immense accumulation since 1800 of capital in knowledge and social habits, owned by everyone with access to them. Once upon a time, Piketty’s world without human capital was approximately our world, that of Ricardo and Marx, with workers owning only their hands and backs, and the bosses and landlords owning all the other means of production. But since 1848 the world has been transformed by what sits between the workers’ ears.

The only reason in the book to exclude human capital from capital appears to be to force the conclusion Piketty wants to achieve. One of the headings in Chapter 7 declares that “capital [is] always more unequally distributed than labor.” No it isn’t. If human capital is included — the ordinary factory worker’s literacy, the nurse’s educated skill, the professional manager’s command of complex systems, the economist’s understanding of supply responses — the workers themselves, in the correct accounting, own most of the nation’s capital — and Piketty’s drama falls to the ground.

Finally, as he candidly admits, Piketty’s own research suggests that only in the United States, the United Kingdom, and Canada has income inequality increased much, and only recently. In other words, his fears were not confirmed anywhere from 1910 to 1980; nor anywhere in the long run at any time before 1800; nor anywhere in Continental Europe and Japan since World War II; and only recently, a little, in the United States, the United Kingdom, and Canada. That is a very great puzzle if money tends to reproduce itself as a general law. The truth is that inequality goes up and down in great waves, for which we have evidence from many centuries ago down to the present, which also doesn’t figure in such a tale.

Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.

September 4, 2017

QotD: Even a world of perfect abundance would not be a crime-free world

Filed under: Books, Economics, Politics, Quotations — Tags: , , , — Nicholas @ 01:00

So, when I woke up this morning I woke up thinking of how time is different in different parts of the world, which is what the people (Heinlein and Simak included) who pushed for the UN and thought it was the way of the future didn’t seem to get (to be fair, in Tramp Royale it becomes obvious Heinlein got it when he traveled there, and realized it was impossible to bring such a disparate world under one government.)

A minor side note, while listening to City, there is a point at which Simak describes what he might or might not have realized was Marx’s concept of “perfect communism” where the state withers away because there’s no need for it.

Simak thought this would be brought about by perfect abundance. There are no crimes of property when everyone has too much. There are no crimes of violence either, because he seems to think those come from property. (Hits head gently on desk.)

This must have seemed profound to me when I first read the book at 12, but right now I just stared at the mp3 player thinking “what about people who capture other people as sex slaves?” “What about people who covet something someone else made, including the life someone made for themselves? Just because everyone has too much, it doesn’t mean that they don’t covet what someone else made of their too much.”

Which is why I’m not a believer in either Communism or for that matter big L Libertarianism. I don’t believe that humans are only a sum of their material needs and crime the result of the unequal distribution of property. (There is also the unequal distribution of talent, or simply the unequal distribution of happiness, all of which can lead to crime — after all Cain didn’t off Abel because he was starving.) And I don’t believe humans are ever going to become so perfect we can get away with no government, because humans will always (being at heart social apes) lust for power, recognition and heck simply control over others (which is subtly different from power.) So we’re stuck with our good servant but bad master.

Sarah A. Hoyt, “Time Zones”, According to Hoyt, 2015-06-23.

September 3, 2017

QotD: Picketty’s misunderstanding of the supply and demand curves

Filed under: Books, Business, Economics, Quotations — Tags: , — Nicholas @ 01:00

The technical flaws in Piketty’s argument are pervasive. When you dig, you find them. The fundamental problem is that Piketty does not understand how markets work. In keeping with his position as a man of the left, he has a vague and confused idea about how supply responds to higher prices. Startling evidence of Piketty’s miseducation occurs as early as page 6.

He begins by seeming to concede to his neoclassical opponents: “To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which would lead to a decline in its price.” The words I italicize clearly mix up movement along a demand curve with movement of the entire curve, an error of first-term college students. The correct analysis is that if the price is “too high” it is not the whole demand curve that “restores equilibrium,” but an eventually outward-moving supply curve. The supply curve moves out because entry is induced by the smell of super-normal profits.

Piketty does not acknowledge that each wave of inventors, entrepreneurs, and even routine capitalists find their rewards taken from them by entry. Look at the history of fortunes in department stores. The income from department stores in the late 19th century, in Le Bon Marché, Marshall Field, and Selfridge’s, was entrepreneurial. The model was then copied all over the rich world. In the late 20th century the model was challenged by a wave of discounters, and they then in turn by the internet. What happens is that the profit going to the profiteers is more or less quickly undermined by outward-shifting supply. The original accumulation dissipates. The economist William Nordhaus has calculated that the inventors and entrepreneurs nowadays earn in profit only 2 percent of the social value of their inventions. If you are Sam Walton the 2 percent gives you personally a great deal of money from introducing bar codes into stocking of supermarket shelves. But 98 percent at the cost of 2 percent is nonetheless a pretty good deal for the rest of us. The gain from macadamized roads or vulcanized rubber, then modern universities, structural concrete, and the airplane, has enriched even the poorest among us.

Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.

September 1, 2017

The complex dance of supply, demand, scarcity, and price

Filed under: Economics, Environment, Government, Law — Tags: , , , — Nicholas @ 04:00

Tim Worstall explains why laws against “price gouging” are denials of economic fact and actually work against getting urgently needed items to the people who require them:

Those little diagrams at the start of the Econ 101 class (supply, demand, price) are not optional extras to our universe, they are instead accurate descriptions of how we humans interact with it. If and when demand rises then price rises, this in turn encouraging an expansion of supply. Thus why we desire to have price flexibility in the face of either changes in supply or demand.

Consider Houston right now in the wake of Hurricane Harvey. It seems a good bet that the tapwater supply is disrupted — flooding has a tendency to do that. We would therefore assume the demand for bottled water has risen – the sensible who normally hydrate from that wondrous invention, the municipal water supply, will not be able to do so, thus increasing the demand for the bottled stuff. Equally, on the other side, there’s going to be a certain difficulty with supply at present — roads 5 feet underwater don’t exactly help trucking.

We thus desire to do two things simultaneously. We want to restrain demand to only the really important things and we want to incentivize greater supply.

Which is exactly what a price rise does for us.

With water at (just to make up a price) $99 a case, people are only going to buy it for drinking water, perhaps only in sippy cups. Which is excellent — we want whatever limited supply of potable water (we’ve really plenty of non-potable around, that’s the basic problem) there is in place to be used for that most valuable use, being potable. We’ve achieved one of our goals therefore, by allocating that scarce resource to its most valuable use: keeping people alive.

We also want to increase supply, though, and being able to sell in Houston for $99 something bought for $9.99 in Beaumont (again, just to invent an example) might well get a few boats carrying loads in – although quite possibly not from Beaumont. Thus, by allowing prices to rise, we’ve at least potentially increased supply.

Our price system, operating without constraint, is thus achieving the two things we desire, a curtailing of demand through rationing to only truly important uses, and a rise in supply.

“But,” goes the cry, “this isn’t fair!”

Indeed it isn’t, and ain’t that a shame, fairness not being a notable feature of this universe we’re struggling to inhabit. All we can do is the best we can. Which is, again, why I insist that there should be variable prices, why there should be no laws against price-gouging. Because this really is a disaster, there really are significant shortages in Houston right now, we really do want to solve them. Which means that we should be using all of the tools at our disposal.

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