The Way Out

I've been thinking about the last post a lot lately. Mostly as I fall asleep, which is makes it hard to type up. But I'm fairly convinced I have a response.

A quick recap:
A salesman has four bottles of water which he can sell to the two guys who are stuck on an island. One guy has $100 and the other has $10. The richer guy can buy all four bottles at $25 a piece and the poor guy won't get any. Thus the market does not distribute the water based on minimizing thirst.

So what's wrong with that? On, one level, nothing. The market does not make its criteria for distribution thirst minimization, but allocating goods to those who are willing to pay for them.

But the simplicity of this hypothetical example makes the market seem much worse than it would if there I added a couple facets that more closely approximate real life.

The first problem is that there is only one good. So if the rich guy spends all his money on the water, it doesn't matter, he doesn't give up anything to do that. If there were two goods, then spending money one water has a cost (i.e. he can't spend the money on food). Since he gets less and less thirsty with each bottle he drinks, the rich guy is more likely to spend the rest of the money on food which should leave some water for the poor guy to consume.

It is possible for us to increase the amount of money the rich guy has. This would allow him to continue to consume all of the food and water. However, each good we add increases the amount of disparity in money that the guys have to have in order for that to occur. In other words, with as many different types of goods as the real world has, for the poor person to be totally priced out, there would have to be a huge income disparity.

The second problem is that production and consumption are completely separate in the example. People are constrained to consume no more than what they can produce or produce then trade for unless they have wealth flowing to them from some other source.

I'll change the example so that the guys are producing water. One guy produces 4 bottles and the other produces zero. Since the rich guy owns his bottles, the poor guy gets nothing. Again, to minimize thirst, I could take two bottles from the rich guy and give them to the poor guy.

The problem now is that there really are two goods here. One is leisure. The rich guy who produced the bottles had to give up some time to do it. The rich guy lost leisure and water. By reallocating water, leisure is now not allocated equally. Not only do you have to know each guy's preference for water and leisure to allocate the two goods in the fairest manner who have to have some way for the worker to be compensated. Since you can't transfer leisure, that becomes difficult.

My feeling is that the information problem is so huge, that you really can't get much better by reallocating. Any forced reallocation will result in hidden costs that will make the reallocation not as good as it would seem on the face of it and potentially even make things worse. And this doesn't take into account that the process of allocation will change the incentive to produce so that by redistributing goods there are actually fewer goods to work with. So while the market can seem unfair (though it actually isn't as bad as it is sometimes characterized) it does have many good qualities.

The problem as I see it...

I've been thinking about the economic way of thinking. Attempting to think like a non-economist. But the only way I'm able to do this any more is through economics. I can't separate myself from the economic way of thinking. Fortunately, I think that is a good thing.

So what is it that separates the philosophers from the economists? Economists see people rationally (or even irrationally) determining their use value for goods then weighing those use values against the costs of obtaining those goods. People consider the amount of wealth they have and come up with what they are willing to pay. If it is a net gain, then they trade. This is all well and good for predictions. Most people behave like this and most human decisions can be analyzed like that.

Where the philosophers differ is how the use value is established. It seems to me that they see use value as some value created by the objective needs of a person who is attempting to live the "good life." This might include the various rights a person has or the food a person needs to survive. Economists see that too for the most part. The difference is in willingness to pay. Economists take willingness to pay and use value as the same thing. Philosophers seem to take them as different. The wealthy are willing to pay more than the poor for something even though the poor have a larger use value.

A rich man would be willing to pay ten dollars for a bottle of water and would get it if a poor person was only able to pay a dollar and was thirstier. This leads to all sorts of complications. The market allocates water to the people who are willing to pay which is not to say that the goods are allocated in a way that minimizes thirst.

Hmmm.

I seem to have worked my way into a corner. More on these thoughts as they develop.

A Bad Idea

I'm going to take an unpopular stance and come to the defense of oil companies. Even if those top-hatted and monocled bastards have stuck it to us recently. Exxon Mobile made a record-breaking earnings of $40.6 billion last year. Many people believe it is because oil companies gouged customers during times where oil was scarce or colluded to raise prices in the wake of Katrina. Thus these earning are ill-gotten gains which rightfully belong to the people of this great land. In the interest of fairness and honesty and integrity and vote share, we need to enact a windfall profit tax to get them back.

While, it is certainly within the realm of possibility for them to have colluded to raise prices, I'm not convinced that they did. The Herfindahl Index is a way to estimate how competitive an industry is; a score of 10,000 would mean monopoly. The FTC calculated that oil refining in the US scores around 1,300 to 2,600. This would actually make it more competitive than the markets for batteries or cereals. I may be a conspiracy theorist, but this doesn't sound like the big oil companies would have had an easy time colluding.

US News reports that even though these companies are earning more than ever before, their profit margins are still not that much better than other companies (oil companies have about 7.6% profit margin while U.S. manufacturing has about 5.6%).

It would seem that even though oil companies are sticking it to us, it is because oil costs more. Which brings me back to the wind-fall profits tax that is becoming popular rhetoric among certain parties. I didn't realize this until I did some looking, but this tax has been enacted before. During the 80's this tax was expected to generate $383 billion, but didn't pull in more than $80 billion.

This tax will not the be the cure-all to high gas prices. It will only serve to discourage investment in oil companies which leaves the U.S. more dependent on foreign countries. It also , according to one study, reduces the pensions of people who have used stocks in their retirement plans.

Clinton is advocating the windfall profits tax. What irritates me beyond belief is the fact that she went to college, she has advisers that went to college. Someone should have told her that it doesn't matter who you tax, the tax burden is always the same. The windfall profits tax will fall on consumers even if they don't realize it. I get the feeling that politicians do know the economics of their policies but ignore it because they know what will get votes. Which is why I'm a conspiracy theorist, I guess.

Fit the First

It has been a while since I've attempted a blog, but I feel excited to try again. I'm not sure what's driving this particular effort. Perhaps because I have recently heard a few political/social arguments that roused my interest. Perhaps because I have a terrible memory for the facts of my life and fear being unable to recall these upcoming years. Perhaps ego. Yes, probably ego.

Regardless, I will open with a passage from Lewis Carroll's Hunting of the Snark:

You may seek it with thimbles--and you may seek it with care;
You may hunt it with forks and hope;
You may threaten its life with a railway-share
You may charm it with smiles and soap.