Tuesday, May 31, 2011

'Price Gouging' Is Never Invisible

Stanley Robinson of
 Princeton, Mo. writes to Kansas City.Com HERE:

“Price gouge warning counter to principles”

“Once again, Missouri Attorney General, Chris Koster, stymies the workings of free market capitalism. According to a statement on his official website, he and all the government forces he can rally will be on guard “against price-gouging following the devastating tornado in Joplin.”

Evidently, Koster is unfamiliar with the central tenet of Adam Smith’s “invisible hand” theory of commerce. A shortage of goods or service in one location will cause a rapid rise in its price, and the result will be an inflow to rebalance the market. Disruptions in a free market will self-correct — or so it is said. Only an advocate of wet-nurse government would approve of such socialistic restraint undertaken by our attorney general. I thought unfettered capitalism and small, unobtrusive government is the default position of the Republican Party.”

A fairly typical response to the surge in prices for repairs and comforts after an act of nature, is for prices per unit of things to rise, which is commonly called (in the USA) ‘price gouging’, meaning exploitation of those in need (including sometimes of those desperate for tickets to an event).

Modern economists, and those influenced by them, can try to explain what is happening by referring to supply an demand analysis. So far so good. But then sometimes, the basic economics of supply and demand attracts the kind of mysticism shown by Stanley Robinson in his letter.

Not satisfied with explaining how markets work through very visible prices (try to think of a market working where prices are invisible!), Stanley Robinson, like too many others, introduces what he asserts is ‘the central tenet of Adam Smith’s “invisible hand” theory of commerce’ which he suggest is ‘unfamiliar’ to the Missouri Attorney General, Chris Koster.

I do not know about what the Missouri Attorney General, Chris Koster is familiar with or not (I am certainly not familiar with the politics of his tribe, Republicans or Democrats, nor am I interested, as I do not vote in Missouri). But I can say that I too am unfamiliar with what Stanley Robinson calls ‘the central tenet of Adam Smith’s “invisible hand” theory of commerce’.

It certainly is not discussed as such by Adam Smith in his Theory of Moral Sentiments (1759) or in his ‘Wealth Of Nations (1776), or, in fact, in anything else he wrote in his lifetime. In short, Adam Smith had no central tenet of commerce involving anything other than visible prices in his ‘theory of commerce’.

So why does Stanley Robinson claim, incorrectly that Adam Smith had such a ‘central tenet’?

Because, of course, Stanley Robinson has picked up the association from an invented assertion by modern economists (Paul Samuelson, among others) in the post war years as an answer to the then claims of the Soviet Union that their national state planning was superior to the anarchy of the ‘free markets’ of the West. Having a so called ‘invisible hand’ on its side supposedly helped Western markets outperform Soviet Planning, but it was the market system that achieved this result decade after decade, and it did so without Soviet- style tyranny and without an 'invisible hand'!

And ‘price gouging’ is fully explained without resort to ‘miracles’ and ‘invisible hands’ and any other mumbo jumbo. ‘Price gouging’ is very visible, as are its alternatives, such a rationing (the 'rules' for rationing are published - of the enforcers that implement the rules are very visible.

The end result is always the same – shortages, with some people going without – we can’t all go to the same concert, or all get the same tarpaulin, or whatever. That’s life. If you prefer rationing, get to the back of the queue.

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