VISIBLE PRICES OR VOODOO ECONOMICS?
Paul Kerin posts ((January, 2017) in The Australian HERE
“Live where you like, but pay a fair price for services”
“Why are location-based subsidies problematic? They distort our choices. Adam Smith’s invisible hand theorem — that the public interest is best served by letting individuals make voluntary choices to exchange goods and services — applies to location choices too.
…Why are location-based subsidies problematic? They distort our choices. Adam Smith’s invisible hand theorem — that the public interest is best served by letting individuals make voluntary choices to exchange goods and services — applies to location choices too. But they also distort other choices. For example, SA country residents have incentive to use water even when it benefits them less than the real supply costs, while metropolitan residents use too little water (the benefits they’d enjoy from addition usage would exceed the real supply costs). The invisible hand only works if we all receive price signals that reflect the real costs of our choices.”
Paul Kerin’s assertion about ‘an invisible hand’ is problematic: how does every individual know that the VISIBLE price is subsidised or that the actual supply is manipulated? Mostly she doesn’t and needn’t. Moreover, her voluntary choice to drink (buy) water or not remains available. She acts on the VISIBLE ‘price’, not the ‘politics’ of water supply (of which latter she may not know nor be influenced of and by the details).
So what does the so-called ‘invisible hand theorem’ contribute?
Here in Edinburgh, despite my long residence, I have no idea what the price of water is today - the bill is paid annually - hence it does not influence my hourly demand choices. I would still turn off a running tap to avoid any mess from spillage, or open it to wash down my bird haunted patio. Markets work from VISIBLE prices, including their cross comparisons, and daily, hourly, annual, changes.
There is no role for a literary metaphor, invented by modern economists that doesn’t exist in fact, except in voodoo economics.