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Opinion from a Libertarian ViewPoint

Posts Tagged ‘supply’

English Petrol Travails

Posted by M. C. on November 23, 2021

In the absence of government intervention, the price of gasoline would have risen. This would have financed higher wages and better working conditions for the drivers. End of problem. It never would have occurred in the first place. Any incipient tendency in this direction would have been nipped in the bud.

By:

  Walter Block

What is going on in England? There are long lines at gas stations and motorists are not allowed to fill ‘er up; they are limited to only a few gallons of gasoline, each. The fuel pumps are in operation. The refineries there are functioning well. There are plenty of trucks fully capable of transmitting the fuel from wholesalers to retailers. The problem? You had better be sitting down for this or you’ll keel right over: there are simply not enough drivers available to transport the fuel to where it is most needed.

Say what? There are millions of motorists in that country. Of course, not that many are capable of driving the heavy tanker trucks; however, more than enough are! But, still, there is something rotten in Denmark, well, England. Either that, or what we teach in introductory economics is all wrong.

What is the lesson stemming from econ 101? It is that whenever there is a shortage, as there is now for English truck drivers, this means demand is greater than supply. And what is supposed to happen when that takes place? Prices, or in this case wages, which are the price of labor, are supposed to rise. These, in turn, are comprised of money payments, salary, plus working conditions. But neither has occurred. Working conditions, in the form of clean rest stops for long distance haulers, have actually deteriorated, and take-home pay has not increased.

Why not? Where is the money for these raises supposed to come from? They are presumed to emanate from the ultimate consumer in the form of derived demand from him. Well, there is indeed a shortage of drivers in England. Motorists are clamoring for more gas. There are long lineups at filling stations. Why haven’t prices risen there, so as to ration limited supply until more is forthcoming?

This ordinary economic response has been rejected, and for two reasons. One, it would be considered price gouging. And that would be unconscionable in these politically correct times. Second, if the price of gas doubled, tripled, or even quadrupled, who would still be able to purchase it, and who would be left out in the cold? This much is clearer: the rich would get the lion’s share, and the poor would pretty much have to do with their leavings, or do without. But we can’t have that, not in this epoch.

In the absence of government intervention, the price of gasoline would have risen. This would have financed higher wages and better working conditions for the drivers. End of problem. It never would have occurred in the first place. Any incipient tendency in this direction would have been nipped in the bud.

Market prices are a signal. If they are squelched, they cannot do their jobs. Economics chaos of the sort we now see in England results. Suppose we all decide we are too fat. We want to go on diets. We don’t desire as much ice cream, cake, cookies, and instead demand more carrots, apples, string beans. But the farmers, bakers, manufacturers have as yet no idea of our change in tastes. Do we have to petition the government to get entrepreneurs to produce more rabbit food and less of what makes life worth living? No. We simply buy more of the former and less of the latter. This raises the prices and profits in veggies and lowers it for sugary substances. Business is led by an “invisible hand” to do our bidding. This is despite the fact that some don’t like it since some get rich (low calorie food producers) and some suffer a loss (the producers of high calorie food). But if this market signal is not allowed to function, we stay obese.

There are analogous signals in numerous other walks of life. If your bridge partner opens with a one heart, he is signaling something different than a three diamonds bid. If these signals are disallowed, the game is ruined. The conductor of the orchestra also signals. He indicates he wants the music to go faster, slower, louder, softer, etc. If he is not allowed to gesture, wave his arms about, if his signals are truncated, the quality of the music is reduced. Words, too, whether spoken or written, are signals. So are musical scores, facial expressions and hand gestures. Communication depends upon signals. Most people appreciate all this, and would be horrified if they were rendered impotent. Temple of Babble, here we come.

But prices, too, are every bit as much a signal as any of these others. The only difference is that they are not at all generally appreciated. Rather, we tolerate rent controls, minimum wages and outlaw price “gouging.” All this at the loss of a civilized order. Who wants to wait on line for several hours for two gallons of gas at an artificially lower price?

Which was the chicken and which the egg in this case? It is unclear as to whether the low price and restrictions on quantity were the cause or the result of the problem. What is clear is that one way to ameliorate the problem is to allow market prices to operate. When they do, in a shortage, initially prices will rise. But that will attract greater supply, and prices will fall once again. Meanwhile, no shortages.


Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans

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Thomas Sowell Turns 90: The Greatest Living Economist (Still)

Posted by M. C. on July 4, 2020

He began with the simplest theorem of economics, scarcity — “at zero price, there is greater demand than supply” — and applied it to a key economic resource, which is arguably the central economic resource: accurate knowledge. For 400 pages, he mined his unregistered claim for all it was worth. It turned out to be the mother lode. Why? Because knowledge is widely regarded as a free good. Even when it is not so regarded, it is regarded as a good that ought to be free. Sowell showed in ten cogent, carefully argued chapters that accurate knowledge is never free.

https://www.garynorth.com/public/21054.cfm

Thomas Sowell turned 90 on June 30.

He received a wonderful birthday present. His publisher released his latest book, Charter Schools and Their Enemies. If you want to treat him to a nice present — book royalties — order a copy here. Think of it as a gift to yourself.

I first encountered his name in 1967, when I was writing the chapter on Marx’s economics in my first book, Marx’s Religion of Revolution (1968).

Sowell had written an article for the American Economic Review in 1960. I did not know at the time that he had written it while he was in graduate school, which is unheard of for any author of an AER article. He received his Ph.D. in 1968, the year my book was published. I also did not know that Sowell was a Marxist. In 1960, the year the article was published, he got a job as a summer intern in a federal bureaucracy. He began to abandon his Marxism.

I was not overly impressed by the article. I cited it in a footnote:

Thomas Sowell, “Marx’s ‘Increasing Misery Doctrine’,” American Economic Review, L (1960), pp. 111-20. Sowell argues that Marx did hold to the absolute increasing misery doctrine before 1850 or so, but in the context of this chapter, I have tried to indicate that he also wrote in terms of it after 1850.

Little did I suspect what was to come.

There is no Sowell theorem in economic theory. There is no Sowell movement. Nobody has publicly identified himself as a Sowellist. Then why do I regard him as the greatest living economist? This:

1. He applies simple but fundamental concepts of economics to real-world problems, which are often problems that are not widely perceived as being heavily influenced by economic categories.2. He relies exclusively on verbal communications, not graphs or equations, to explain these concepts and their applications. This keeps his expositions firmly within the realm of historical cause and effect.

3. He never begins his economic analyses with this phrase: “Let us assume. . . .” The only time he ever uses “let us assume,” is when it is followed by “for the sake of argument,” which is in preparation for a lambasting of some conventional political assumption.

4. He writes in well-honed English that is the product of over 30 years of writing newspaper columns: clear, precise, and rhetorically persuasive — in short, efficient.

5. He is the most creative economist in our era — or perhaps in any era — in implementing the division of labor in his writing. He hires astoundingly productive research assistants, and then he incorporates their remarkable but diverse discoveries into a single coherent narrative.

6. He is a better historian than he is an economist. Other economists have made observations similar to his. But no other historian matches him in his chosen specialty: economic motivations that have prompted the international migration and subsequent economic successes of modern racial, national, and religious groups.

7. His commitment to discovering historical applications of economic theory, which keeps his theories from straying into the realm of irrelevant mathematical precision, where most academic economists prefer to dwell in safety — preferably tenured safety.

8. He does not suffer fools gladly. He takes no prisoners.

9. He writes editorials with such regularity that he warrants a permanent Drudge Report link. This volume of output, written under the pressure of deadlines, gives him ample opportunities to make wrong-headed, off-the-cuff statements. He has kept these to a minimum, usually confined to areas in which he claims no expertise.

Features 1-7 are guaranteed to keep him from winning a Nobel Prize.

He was not an overnight sensation. It was two decades between that article on Marx and his breakthrough book. In 1974, he hit conceptual pay dirt. He began working on a project that resulted in a specialized monograph. He began with the simplest theorem of economics, scarcity — “at zero price, there is greater demand than supply” — and applied it to a key economic resource, which is arguably the central economic resource: accurate knowledge. For 400 pages, he mined his unregistered claim for all it was worth. It turned out to be the mother lode. Why? Because knowledge is widely regarded as a free good. Even when it is not so regarded, it is regarded as a good that ought to be free. Sowell showed in ten cogent, carefully argued chapters that accurate knowledge is never free. Any attempt by the state to make knowledge free will backfire, he argued. The digital counter-culture’s slogan — “information wants to be free” — is nonsense. It is a variant of the ancient quest of something for nothing, which always ends badly.

Then he hit publishing pay dirt. The manuscript was accepted by Basic Books, the leading publisher of academic books on the Right. It published Knowledge and Decisions in 1980. I regard that book as the most important one-volume monograph in economics that I have ever read. I thought so in 1980, and I still do. Why? Because there are so many areas of life in which we have ignored or discounted the cost of accurate and applicable information. Unless you have given a great deal of thought to this, you have missed most of them.

Also in 1980, he went on the payroll of the Hoover Institution. Hoover decided to trade a guaranteed salary in exchange for Sowell’s future output. This was a deal for Hoover comparable to Red Auerbach’s trade in 1956 of Cliff Hagen and “Easy” Ed McCauley for a newly drafted and untried rookie, Bill Russell.

In 1986, I offered to pay him $3,500 to fly an hour to Los Angeles, give a speech, and fly back to Palo Alto. That was worth about $7,300 in today’s money. That was over three times what I had ever offered anyone to speak at one of my conferences. I knew that he normally asked $10,000 per speech. So, I tried the old trick I use when dealing with used car salesmen. I sent him the check. He sent it back, but he thanked me for making the offer. He thereby proved to me that his time was an economic good. At zero price, there was way too much demand for my budget. He clearly placed a high price on his time. Over the next quarter century, he justified this price in terms of the value of his output.

I must now issue a warning. Four of his books, which were written for his academic peers, are second rate. Why do I say this? Because they violated the criteria that I apply to his later work. They are unclear, without rhetorical power, dishwater dull, made no impact on the economics profession, and sank without a trace. First is his monograph, Say’s Law, published by Princeton University Press in 1972. Second is Classical Economics Reconsidered (1974), also published by Princeton University Press. It was much better than Say’s Law, because it was 90 pages shorter. Third, there is his book on Marxism, published in 1985. As of today, you can buy a hardcover used copy of his book on Marxism on Amazon. You can pay $191.37, $318.18, or $318.20, plus $3.99 for shipping. Don’t.

His original economic textbook, Economics (1971), was unmemorable. It had a lot of graphs, which conveyed no useful theoretical knowledge beyond the text, and which made reading the book far more laborious. It was a conventional textbook. It was therefore boring. Its main benefit was that it was short: 340 pages, not the standard 1,000 pages of a college-level textbook. It therefore had this advantage: it is better to bore captive collegiate readers out of their skulls for 340 pages than for 1,000. The proof of how mediocre his textbook was is this: his 2004 non-textbook, Basic Economics: A Citizen’s Guide to the Economy. It was written for a non-captive audience: readers who are not enrolled in college. It contains no graphs or equations. It is intensely real-world focused, as are all of the books that he wrote for the general public.

This is his great contribution. With a few exceptions, which I regard as youthful indiscretions, he has written for the general public. No Nobel Prize for him!

There is one other thing. Sowell, in his dust jacket photos, has always looked at least ten years younger than he is. I like to think they were Photoshopped, but Photoshop is too recent. This has annoyed me for over three decades. (My solution: I never put my photo on my dust jackets. I don’t want to be reminded.)

[I published this on March 9, 2013.]

If you want evidence of my evaluation, watch this interview. It was recorded in December 2018, when Sowell was 88. It is on a topic that is a hot topic these days: economic inequality. He talks about his youthful dalliance with Marxism, and what cured him.

For an assessment of his career written by an Austrian School economist and a mainstream free market economist, go here.

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The COVID Stimulus is the Government’s Latest Rejection of Say’s Law | Mises Wire

Posted by M. C. on May 11, 2020

Say’s law reveals that a deficiency of production is what ultimately limits demand and consequently wealth and living standards. Therefore, the federal government is not only resorting to unproductive consumption through fiscal and monetary stimulus efforts, it is not even generating real demand. Say points out that for demand to exist, goods must be produced for the purpose of exchange, goods which the government does not provide.

https://mises.org/wire/covid-stimulus-governments-latest-rejection-says-law?utm_source=Mises+Institute+Subscriptions&utm_campaign=baf7186961-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-baf7186961-228343965

The fiscal and monetary response to the economic shutdown embodies the federal government’s most recent rejection of Say’s law of markets. Contrary to the actions taken and the assurances made by these authorities, the economic fallout from COVID-19 is not due to a scarcity of money, but a scarcity of goods and services.

Although J.B. Say developed his law of markets to dispel the idea of general overproduction, he also captures the shortcomings and consequences of policymakers’ response to the virus. Say’s law brings to light the fact that the supply of a good is what constitutes demand. In other words, it is production alone that brings about the means for consumption. Say reminds us that there is no need to worry about a lack of consumption, because production always falls short of man’s wants. This is especially true under current economic conditions.

Say’s law reveals that a deficiency of production is what ultimately limits demand and consequently wealth and living standards. Therefore, the federal government is not only resorting to unproductive consumption through fiscal and monetary stimulus efforts, it is not even generating real demand. Say points out that for demand to exist, goods must be produced for the purpose of exchange, goods which the government does not provide. Monetary and fiscal authorities exercise control over the medium of exchange and where it shall be spent, but they do not contribute to supply.

Since mid-March, Congress and the Federal Reserve have responded to the shutdown by making several attempts at economic relief. They have also rung up quite the tab for the American public in the process. The Federal Reserve has effectively set rates to zero and expanded its balance sheet by trillions of dollars in the form of loans and asset purchases. Congress followed suit with the passing of the $2 trillion CARES Act (Coronavirus Aid, Relief, and Economic Security Act​), perhaps with more on the way. Despite these efforts, the economy remains in an unproductive halt and only continues down this path with each passing day of quarantine.

The economic shutdown has severely hurt many industries, including airlines, restaurants, retail stores, and even food supply chains. Virus fears and stay-at-home orders have required businesses to close doors and lay off workers at unprecedented levels. More than 175,000 business have closed and around 30 million Americans have filed for unemployment since mid-March. Say’s law shows that current economic conditions are unable to foster the level of production that is required to sustain demand.

Congress and the Federal Reserve have engaged in a surrogate consumption that acts as a false cushion to support this fall in output. In reality, the several-trillion-dollar credit expansion and spending plan generate an illusion of demand that does not allow prices to reflect the increased scarcity of goods and services resulting from the lack of production. The result is a continuing economic decay spurred by resource misallocation and increased consumption of a diminishing supply of goods, or capital decumulation. Calls for even more monetary growth, coupled with a Fed official’s reminder of their infinite money printing capabilities, indicate that fruitless policy measures may not cease any time soon.

Say’s timeless contribution to economics reveals that no matter what levers are pulled by the fiscal and monetary authorities, stones will not be turned into bread. The longer this economic shutdown lasts, the more critical it becomes to end it.

 

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