Wednesday, August 09, 2006

Why Blame Adam Smith?

From 'Hernando Today', Florida (8 August):

"The supply and demand hoax" by Dr Maglio

The price of gas steadily increases although it rarely goes down. Straight-faced politicians tell us it is simply a result of the "Law of Supply and Demand". In 2006 this reasoning is a pathetic attempt at placating us while anyone connected with the oil industry rakes in the dollars.In an ideal world, according to Adam Smith, as the supply of a commodity goes up, the price comes down to attract more buyers and as the supply goes down the price goes up. As individuals realize the great potential for making a profit they are motivated to increase the supply. This greater supply causes the price to go down. These are the forces of supply and demand.”

Dr Maglio sets up supply and demand as a ‘law’ from Adam Smith (many authors, e.g,, the Greeks, Mandeville, preceded Smith with the essence of the law – he developed his own ideas along the same lines as Cantillon) and then asserts that said law is being ‘manipulated’, that is it is not being allowed to operate, that it is a 'hoax'.

Our economy has progressively moved away from allowing these free market forces to operate. We are living in a regulated world. The modern oil market is anything but free. It is not being shaped by competitive forces. It is being manipulated.The following are blatant examples of interference with the laws of supply and demand. Our government has been hijacked by special interests ranging from speculators, to environmentalists, oil producing nations and politicians. This has created an oil policy that does not serve the general public but does serve the special interests and the politicians who are trying to be re-elected. These self-serving influences are anything but free in shaping the market."

If the supply and demand – the quantity supplied to a market (not stored) is less than the quantity demanded in that market, then prices will rise; if people believe the quantity demanded is stable and credible reports circulate that the quantity to be supplied may be interrupted, then people setting future contracts will raise their prices and these will filter through on deliveries, people with stocks will re-price their stocks; price will rise.

These are not violations of the ‘law of supply and demand; they are precise evidence of it working. There are lags in such a process too; it is not instantaneous. Building or modernising refineries (expensive investments) takes time; exploring and turning wells into operational fields takes time; giving the ‘tax breaks’ that Dr Maglio suggests among his ‘solutions’ rewards the current gainers for what he also considers to be their complicity in the current supply shortage in the market.

Governments ‘rake’ in the tax dollars too and may be less inclined to take action when there are large government spending deficits.

Hence, why Adam Smith is pilloried for what is perfectly explainable within the law of supply and demand makes little sense to me – unless mentioning Adam Smith in any article on economics is almost a cheap stab at ‘recognition’ for authors to gain attention for their views.


Post a Comment

<< Home