OnPoint by Keith Ng

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OnPoint: On Price Gouging

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  • Moz,

    Che, if the oldest profession is such, and politics is a profession, I think it's reasonable to call economics a profession. Profession no longer has such strong connotations of expertise, relevance and honesty as once it did. People talk about "professional liars" and "professional footballers" with nary a hint of irony.

    Sydney, West Island • Since Nov 2006 • 499 posts Report Reply

  • Greg Dawson, in reply to Rochelle,

    That’s a whole ’nother argument.

    At this point I think it’s been a week of things being well…messed up.
    There’s a certain absent emotive content in that construction.
    ETA: snap other people. stupid refresh.

    Wellington • Since Nov 2006 • 281 posts Report Reply

  • Dismal Soyanz, in reply to Idiot Savant,

    I think the problem with many economists (and the reason why they are so publicly disparaged, despite being engaged in a vital inquiry) is precisely that they don’t think about those things, dismissing them as “value-laden” – while all the time pretending that the unstated moral assumptions in their theories are not similarly “value-laden”. Its spectacularly hypocritical, and it does the entire discipline an enormous disservice.

    Actually, if you are to slag economists about "unstated moral assumptions", I would say they are pretty transparent about it. Of course, you might be focusing your comments on Eric Crampton's piece but any substantial economic analysis let's the reader know what the assumptions are.

    When an economist puts out research that is heavily dependent on its assumptions then it will typically get described as such by his/her peers. Lay people love to say that economists don't agree but fail to see that disagreement is actually useful in highlighting what the underlying assumptions are.

    that is a little too close to regarding economics a science. when in fact is a social science

    I doubt any economist would have a problem with describing economics as a social science. Economics is ultimately about how people, and the institutions that surround them, interact.

    As for "profession", I don't believe I have ever ticked the occupation box as a "professional" - a subtle but important diference. If you can talk of teaching as a profession, you can also say economics is a profession.

    Wellington • Since Nov 2010 • 299 posts Report Reply

  • Terence W,

    Seems to me there are three main problems with Crampton's argument:

    1. If people are behaving irrationally now (petrol hording when long run shortages are unlikely) what's to make him think they'll respond rationally to price signals? (i.e consume less petrol rather than focus their ire on petrol station owners, or panic buy more because they assume prices are going up because the stuff really is running out).

    2. While, contrary to what's been claimed on this thread, Crampton does attempt to address the moral objection about the impact of the price rise on the poor, his attempts don't square with the rest of his argument. He claims that more costly fuel will only push people $20 further into debt (he must have a real small car) but either the costs will have a material impact on people's finances or they won't have a substantive impact on the queues - that's how price incentives work. Or, at least, that's how they work when people are placing a very high premium on having something, in this case petrol.

    3. It ignores flow on effects -- i.e. all of a sudden it's a lot more costly to go and help people. Which is obviously bad at a time when so many people are dependent on the help of others.

    YesWeCanberra • Since Mar 2008 • 41 posts Report Reply

  • Sacha, in reply to Dismal Soyanz,

    Lay people love to say that economists don't agree but fail to see that disagreement is actually useful in highlighting what the underlying assumptions are.

    I'd suggest that's more a function of the profession's lack of transparency about those assumptions - and it often seems to have some pretty big ones such as that people always make rational decisions or that economic growth has no environmental limits. Being challenged a bit more now, certainly.

    Ak • Since May 2008 • 16996 posts Report Reply

  • Steve Barnes,

    I haven’t quite made up my mind about builders gouging though

    Builders don't Gouge, they Rout. ;-)
    A few years back there was an article, in the Listener I believe, where they were interviewing a Builder, well, more like a developer from what I read, about the "Leaky Building Crisis" who said "If your paying your builder less than $65-70 per hour then you are asking for trouble". At the time the going rate was around $45. It turns out he was paying his "employees" between $18 and $25 and charging like a wounded bull.

    The wireless north ;-) • Since Dec 2006 • 4947 posts Report Reply

  • Bart Janssen, in reply to Dismal Soyanz,

    that is a little too close to regarding economics a science. when in fact is a social science

    I doubt any economist would have a problem with describing economics as a social science.

    I have no problem with the science of economics. And describing it as a social science is an irrelevant distinction. Social sciences are just as scientific as any other science. The only distinction I would place is that most folks like to be able to test hypotheses with experiment, however like some other sciences (eg physics) some economic hypotheses are difficult if not impossible to experimentally test. That means economic theory is sometimes built on observation of past events without the ability to properly test by experiment. In such situations it possible to build plausible consistent but ultimately wrong theories.

    Auckland • Since Nov 2006 • 3472 posts Report Reply

  • Dismal Soyanz, in reply to Sacha,

    Rational decisions is a minefield. Actually just about every decision can be described as rational – it just depends on the framing. For example, an addict’s decision to continue with the addiction is entirely rational when a heavy enough weight is put on near term utility. The problem with the usage of rationality in economics has not been the concept of rationality but rather the information set that is used. [ETA: And things like what goes into the utility function.] There is plenty of work going on in behavioural economics that looks to extend this.

    I’m taking a stab at what you mean by environmental limits – perhaps an example of considerations that we can see in hindsight but were not taken into account previously. In that such things are an implicit assumption in that they do not feature in decision making, I agree. Certainly environmental concerns are increasingly being taken into account, reflecting greater both social awareness and also better information. Not sure if that is what you are getting at tho.

    Wellington • Since Nov 2010 • 299 posts Report Reply

  • Dismal Soyanz, in reply to Bart Janssen,

    theory is sometimes built on observation of past events without the ability to properly test by experiment. In such situations it possible to build plausible consistent but ultimately wrong theories.

    Kinda like paleontology?

    Wellington • Since Nov 2010 • 299 posts Report Reply

  • Sacha, in reply to Dismal Soyanz,

    I’m taking a stab at what you mean by environmental limits – perhaps an example of considerations that we can see in hindsight but were not taken into account previously.

    Say, biosphere constraints - known for decades but ignored by most economists in favour of assumed perpetual unlimited growth in resource usage. Still going on and not just a matter of "better information" so much as the right sort of information to be heard by unwilling ears.

    Ak • Since May 2008 • 16996 posts Report Reply

  • 81stcolumn,

    Ooooh ‘speriments: Try these on –

    There is a shortage of milk.

    i) Two piles of milk of the same size; the first pile is in a courtyard surrounded by other people, the second pile is in a room where no one can see you leave or how much you leave with.

    ii) Variation - you know that the pile of milk is shared with people you know or with strangers.

    iii) Another variation - The milk is presented in a context where a group is under a genuine threat of something that may be alleviated if everyone gets some milk.

    Which conditions actually change how much people take and by what amount ?

    My point really is the context and how that feeds into dynamic systems models that allow us to differentiate normal (but variable) functioning from sudden rapid changes caused by changes in critical variables. What are those critical variables and by how much do they have to change ? Not all of them are obvious or indeed explicit to humans.

    Nawthshaw • Since Nov 2006 • 732 posts Report Reply

  • Dismal Soyanz, in reply to Sacha,

    Though I would hazard a guess that if it were widely known amongst policymakers and other economic agents, it would have been recognised in some form. I suspect that environmental concerns have not been ignored by all economists (and by extension economics) but that it is taking time to be incorporated into mainstream practice.

    None of which to say that some economists won't willfully close their eyes and ears to concepts that do not suit them, just that it is unfair to say that this is endemic behaviour.

    Wellington • Since Nov 2010 • 299 posts Report Reply

  • Keith Ng,

    Actually, I'd take issue with this. To the extent that they are predicated on unstated assumptions of ethical egoism - that people should do whatever is in their best interests, and screw everyone else - then that is exactly what they are.

    It's not as explicitly normative as you put it. Their argument goes: people are self-interested (empirical/axiomatic), but this results in optimal outcomes (empirical to an extent), and therefore being self-interested is good (normative).

    Sure, they may treat "self-interested behaviour results in optimal outcomes" as a matter of faith, but only a select, special few would maintain that self-interested behaviour is inherently good, regardless of its consequence.

    --

    And in some situations, self-interested behaviours really do result in optimal outcomes.

    If everyone had equal wealth, price rationing (and the profit-maximising behaviour on the part of the shopkeeper required to make this happen) would actually work *perfectly*. Those who need it the most would pay the most for it, and the goods would go to where it's needed the most.

    Of course, wealth isn't equally distributed, so it never works perfectly, and always results in inequality in practice. But the *source* of that inequality isn't in the pricing of goods, but in the income distribution.

    So I don't think that it's evil to say: "People should profit-maximise because it leads to the optimal outcome." It is not true in this case for very specific reasons - doesn't mean that it can never be true. And even if the factual component is wrong, that just makes it wrong - not evil.

    Auckland • Since Nov 2006 • 535 posts Report Reply

  • Keith Ng, in reply to Dismal Soyanz,

    Kinda like paleontology?

    And evolutionary science. 8-)

    Auckland • Since Nov 2006 • 535 posts Report Reply

  • Keith Ng, in reply to Rochelle,

    Do you think Keith that you could keep the English language more accurate and less offensive, by using "mess" and "messing" instead of the f.... words above.

    Hmm. I'm a little torn about this. I know some people are offended, but on the other hand, I use these words specifically because they are the most accurate words I can find.

    I did not mean to say that "price gouging will mess with the core of the community". I very much meant to say that "price gouging will fuck with the core of the community". To use any milder word would not accurately convey my meaning.

    I'm afraid the best that I can do is to be restrained and sparing in my swearing (which I am already doing). Also, I'm glad you didn't read the footnote, or you may have been considerably more offended.

    Auckland • Since Nov 2006 • 535 posts Report Reply

  • Sacha, in reply to Dismal Soyanz,

    if it were widely known amongst policymakers and other economic agents, it would have been recognised in some form

    You're possibly conflating 'know' with 'act'. Deciding which information gets acted on is a political process. Economists are not immune from that.

    Ak • Since May 2008 • 16996 posts Report Reply

  • Ben Winters,

    Keith I like the first three paragraphs of your post. But your argument from then on is unconvincing. If I can paraphrase your argument: "Nonprice rationing is efficient. The end." You believe in this so much you'll even punch somebody. Colour me unconvinced.

    First hording occurs because people can see the market is not being allowed to clear and they correctly foresee shortage occurring. You correctly explain this phenomenon in quoting Crampton but then incorrectly say it is due to insecurity. This is quite wrong. People horde anything, including toilet paper (Soviet Union), when getting more means queuing for hours or going without.

    Second, you argue petrol is special in some sense because it means security. No doubt this is true for some people, not others (public transport is still going, there are cabs, and flights out of town for $50). But there is nothing about security that is not captured in the demand for petrol. You argue that makes petrol demand inelastic, and if allowed to go free the price will rise enormously. How do you know? I doubt it very much. Unaffected petrol stations are operating just west of Christchurch last I heard. The roads are so bad I imagine a lot of people don't want to, or can't, drive anyway.

    You wisely note at the start that the problem is not that Crampton is evil, but that there is a rationing problem, and he simply prefers price over non-price rationing. I don't believe affordability is generally the main constraint for most people - the situation is temporary, everyone knows petrol is on the way, many people demonstrably can get by without their cars even at current underpricing, and those who would be genuinely priced out of the market by $4 petrol and who really need their car and who can't do it any other way - isn't direct government aid or charity a far more efficient way to help than to misprice a key, perhaps the key resource, for the entire city in crisis?

    The fundamental mistake you are making is to see price increase as immoral or opportunistic, rather than the automatic and fundamentally useful response to shortage. As you correctly note, there is a genuine shortage problem to be solved here - the petrol has to be allocated somehow, and I am not persuaded that all the people in those 1km lines for gas were the most needy in any sense. Again as you note - they are the people more likely than average to have the time and flexibility to queue, which probably is unrelated at best to their need. I rather suspect the people really in crisis, and there are more than a few, have better things to do than wait hours in line for gas. Even if this is only partly correct, then nonprice rationing is probably second best, especially is government aid and charity is able to help the people in genuine need and with a cash shortage.

    You don't consider supply side effects either, but they are obvious: petrol at $4/litre in the city is going to attract people who can buy it for $2 in Darfield or Ashburton or Kaikoura who then drive it into town and make a tidy profit and help alleviate the shortage and cap the price spike.

    I'm disappointed and mildly surprised so few commenters seem to subscribe to this view. It is entirely consistent with compassion and being human to argue for the allocation mechanism that gets an important resource in short supply to where it is most needed. Keith you put all the fundamentals in place, and them abandon them to assert but not show the merit of nonprice rationing.

    Auckland • Since Feb 2011 • 14 posts Report Reply

  • Dismal Soyanz, in reply to Sacha,

    True - economists are not immune. In fact, the politics is a huge element of it. I know plenty of policy analysts who will only put up to Cabinet papers which they know will receive a sympathetic ear. But I don't think it is fair to say that because a certain piece of information was not acted upon as part of a political process is a fault inherent in economics or economists in general. Ultimately, in order for the known to be acted upon (or explicitly included) requires a mandate (in whatever form) from the electorate.

    Wellington • Since Nov 2010 • 299 posts Report Reply

  • Sacha, in reply to Keith Ng,

    even if the factual component is wrong, that just makes it wrong - not evil

    You could argue that repeating something known to be true only in a perfect world but not in this one and which consistently disadvantages vulnerable people is far from 'good' in any conventional moral framework.

    Ak • Since May 2008 • 16996 posts Report Reply

  • Sacha, in reply to Dismal Soyanz,

    Ultimately, in order for the known to be acted upon (or explicitly included) requires a mandate (in whatever form) from the electorate.

    And the electorate need to know the contextualised implications of the (suppressed) information. Who's fulfilling that role?

    Ak • Since May 2008 • 16996 posts Report Reply

  • Ben Winters,

    Terence W

    1. If people are behaving irrationally now (petrol hording when long run shortages are unlikely) what’s to make him think they’ll respond rationally to price signals?

    There is nothing irrational about hording in shortage - quite the opposite. If people anticipate future shortage then hording now is an obvious response.

    3. It ignores flow on effects – i.e. all of a sudden it’s a lot more costly to go and help people. Which is obviously bad at a time when so many people are dependent on the help of others.

    I'm sure Crampton is fully aware of this. You are quite correct that a potential cost of raising the price of petrol is that less help will be offered using vehicles, because they are more costly to run. A part of the argument for efficient pricing is, however, that for each litre of petrol not used on help, the gas will, on average, be redistributed to other uses of even higher value. The other part is on the supply side: raising prices can get gas from out of town where it is cheaper and plentiful into town where it is more expensive and in short supply and most needed.

    Auckland • Since Feb 2011 • 14 posts Report Reply

  • Dismal Soyanz, in reply to Ben Winters,

    It’s not a supply side issue. Knowledge of price differences would be pretty hard to disseminate. And supply is pretty inelastic as well given the short time-frame we are talking about.

    Given the perceived (if not actual) need for having fuel as soon as possible, I don’t believe many would think that driving across to other suburbs to fill up is a realistic option.

    Government aid is not really relevant. Setting up transfers takes more than a couple of days, by which time supply is likely to have been restored.

    While there are other things people would rather be doing than queuing, they would also have other things they would want to spend their money on.

    This is not my typical field but I would suggest that during periods of trauma, equity and fairness become hugely important. Making everyone wait (or only receive a fixed amount) regardless of their wealth would meet this.

    [ETA: Price signals in this case might work on demand but not on supply. And that might is only likely to be on the sightseers. If you need to get across town to check on your family, you will do it, whatever the cost.]

    Wellington • Since Nov 2010 • 299 posts Report Reply

  • Dismal Soyanz, in reply to Sacha,

    You do know that not all economists are indentured to the government, right?

    Wellington • Since Nov 2010 • 299 posts Report Reply

  • Ben Winters,

    Sacha - what part of Crampton's argument does not hold in the real world? Is it not common ground that there is a temporary shortage? Is it not common ground that quantity demanded for goods, even petrol in a crisis, is decreasing in price? is it really so hard to believe that a better way to allocate a scarce resource is to let its price temporarily increase and to then target cash assistance for those in genuine need and affected by that price increase? I see little that is hard to believe in these propositions.

    Auckland • Since Feb 2011 • 14 posts Report Reply

  • Ben Winters, in reply to Dismal Soyanz,

    Dismal

    It’s not a supply side issue. Knowledge of price differences would be pretty hard to disseminate. And supply is pretty inelastic as well given the short time-frame we are talking about.

    Why not? An arbitrageur need know only two things: a) the going rate for petrol in Christchurch, and b) the rate in a nearby town. These are discoverable even in a crisis. The arbitrageur would also need the means to get petrol from A to B. Why can't supply start arriving within an hour, or a day, of the quake from someone who happens to have the necessary equipment? Surely you're not arguing supply isn't relevant to solving a shortage?

    Auckland • Since Feb 2011 • 14 posts Report Reply

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