The price of everything, the value of nothing
Saipan — Recently, a radio talk show announced it was hosting a virtual forum for the two candidates for attorney general. This was one of the questions they had to answer:
“How are you going to advocate for consumer protection, including protecting consumers from the rising cost of electricity and gas?”
I believe the follow-up question should have been, “Are you in favor of repealing the law of supply and demand?”
A seemingly widespread, deep-seated aversion to basic economics is the primary reason why most of us are frustrated with politics and elected officials most of the time. Among many other things, we expect them to “do something” about “high prices.” And for many of us, the prices of most of the things we buy are always “high” or are not “low” enough. We believe that the government’s (armed) law enforcement officers and the court system should go after “greedy” businesses that raise prices.
We demand price controls, not knowing that they have never “worked” since they were first implemented…thousands of years ago.
“The notion that there is a ‘just’ or ‘fair’ price for a certain commodity, a price which can and ought to be enforced by government, is apparently coterminous with civilization,” Robert L. Schuettinger and Eamonn F. Butler wrote in 1979. “For the past forty-six centuries (at least) governments all over the world have tried to fix wages and prices from time to time,” they added. “When their efforts failed, as they usually did, governments then put the blame on the wickedness and dishonesty of their subjects, rather than upon the ineffectiveness of the official policy. The same tendencies remain today.”
Basic economics tells us that when the supply of a certain commodity is less than the demand for it, its price will rise. Why? Because some of us are willing to pay more to acquire that commodity. As if in an auction, we will try to outbid each other.
The price of oil plummeted at the height of the global Covid-19 pandemic when not a lot of people were traveling, and many businesses, including factories, were downsizing or shutting down. There was reduced demand for oil so its price went down.
But early this year, many countries around the world lifted travel restrictions, and many businesses and factories re-opened. As industry observers would put it, global energy demand was starting to outstrip supply. And then Russia invaded Ukraine. Oil and gas supplies from Russia were disrupted. Just when global demand was rising, supply dropped further.
The price of oil, and therefore gasoline, went up and up, and voters all over the world demanded that their government and politicians “go after greedy, profiteering oil companies.”
Profits. Another misunderstood economic term. We should actually be glad that businesses, which provide services and products we need, are earning profits. Otherwise, they can’t afford to remain in business. Businesses, moreover, are taxpayers and employers whose workers also pay taxes — and are customers of other businesses. Businesses themselves are vendors of other businesses.
As I write this in mid-September, the price of oil is going down. Why? Did the greedy oil firms find religion? Or were they frightened into submission by angry politicians?
No. Once again, it’s all about supply and demand. The Wall Street Journal said the demand for oil is down mainly due to “fears of recession and reduced consumption.” Reuters, for its part, said “global oil prices may rebound towards the end of the year — supply is expected to tighten further when a European Union embargo on Russian oil takes effect on Dec. 5.”
Supply and demand.
Government, to be sure, can “set” prices, and punish non-complying businesses. That’s what government did back in the day.
From Schuettinger and Butler’s Forty Centuries of Wage and Price Controls: How Not to Fight Inflation:
“In 306 B.C. in Ancient Egypt, the government ‘fixed’ farm prices at all levels. Result: farmers abandoned their farms, and food supplies dwindled. Babylon’s Code of Hammurabi imposed a rigid system of controls over wages and prices. Result: economic decline. The ancient Greeks also implemented price controls to fix their perennial food shortage. ‘An army of grain inspectors…was appointed for the purpose of setting the price of grain at a level the…government thought to be just.’ The penalty for offending merchants was death. Result: failure. Ancient Rome likewise believed that government-imposed price controls would mean lower-priced food items. The result was, once again, not surprising: farmers stopped farming.”
Then and now, people do not go into business to lose money.
Prices, in any case, are one of the foundations of a free-market economy. Says Isaac M. Morehouse of the Foundation for Economic Education: “The price mechanism lets us know what's valued where, by how much, to whom, relative to what else.”
Quoting economist F.A. Hayek, Schuettinger and Butler say the price system “informs buyers and sellers of the relative scarcities of all products and simultaneously encourages them to restore supply and demand to equilibrium. For normal products, when demand exceeds supply, prices will be bid up. The prospect of higher profit margins will draw more sellers into the market or will encourage present sellers to increase their supply and hence supply and demand will once more be restored to equilibrium. When supply exceeds demand, prices will fall and buyers will absorb more of the product, while sellers will reduce their output. Equilibrium is once more restored.”
History shows that price controls don’t work. However, as Schuettinger and Butler have noted: “If a historian were to sum up what we have learned from the long history of wage and price controls in this country and in many others around the world, he would have to conclude that the only thing we learn from history is that we do not learn from history.”
Zaldy Dandan is editor of the NMI’s oldest newspaper, Marianas Variety. His fourth book, “If He Isn’t Insane Then He Should Be: Stories & Poems from Saipan,” is available on amazon.com/.