Wednesday, October 27, 2021

Real World Economics: When Good Intentions Go Bad

Todd Buchholz’s “New Ideas from Dead Economists” is a classic short history of economic thought. But sometimes one must go back centuries to the dead theologians and philosophers to understand contemporary issues.

edward loterman

This is the case for Minnesota Attorney General Keith Ellison’s action against Sparbo Eggs – taken because the prices the company charged for eggs during certain months in 2020 exceeded the limits mandated in government Tim Walz’s COVID emergency orders Was.

To help understand this kerfuffle, one can go back to the 13th-century Catholic theologian Thomas Aquinas, the Greek philosopher Aristotle, and the 16th-century Protestant reformer John Calvin.

The core principle here is that of “fair value”—a principle that has caused more hunger, suffering, and wastage of resources than almost any other idea in Western philosophy. Yet it remains strong in Catholic social thought and in the secular political and economic cultures of Latin America. It is also big among American progressives.

It is also one of those ideas – such as the rent control initiatives currently being considered in both Twin Cities – that universally align economists with political similarities within their discipline or across a wide range of schools of view. drives crazy.

Understand that prices are not just ad-hoc, isolated numbers. They are important in complex information-generating and incentive-transmitting social systems that promote the efficient use of resources to meet people’s needs. Yes, market systems do not work perfectly in all circumstances. Often hunted. But they are generally better than alternatives – especially when cautious, prudent measures are applied to correct “market failures.” Prices should not be set, nor should their movements be canceled without careful consideration and for important reasons. Price increases are arbitrarily restricted to percentages during a pandemic in which the income of most households does not meet these standards.

Historical real world results need to be looked at. Economists dislike rent controls because it is impossible to find a historical case where they suppressed the housing supply – either by building or offering more rental housing, thereby raising prices for those actually entering the market, home ownership. Discouraging, resulting in higher benefits for low-income people rather than high-income people.

Similarly, in the old days, religious scholars Calvin and Aquinas raided grain merchants with full warehouses, who raised prices after a low harvest. If they had grain in store, they should continue to sell at pre-scarcity prices, the theologians thought. After all, the goods had already been produced before the rain started or the frost started.

The problem is that if we restrict any increase in prices in times of scarcity, we also kill the incentive to build warehouses to guard against future shortages. And these qualified theologians never proposed any remedy for the trader when a bumper crop caused a drop in prices. Calvin ordered consumers in Geneva to buy grain at above-market prices, not just to protect merchants from losing money. Nor did Gov. Walz or his well-meaning peers in other states order the same price-range.

The same principles apply to business. If a Venetian merchant sent five ships to Constantinople and got back in one way, was it permissible for him to charge a higher fee for the remaining cargo when landing at the Rialto? No. The loss of a ship was the will of God. Spreading the price of that loss was a sin, an attempt to escape God’s will.

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Similar situations arise even today. If a storm topples trees, hundreds of thousands are left without power, with some enterprising individuals filling rental trucks with chainsaws and generators swept north from the shelves of big box stores. Driving through the night, they soon park somewhere, selling saws and generators for double the price. People watching TV news sitting on comfy chairs are angry at such abusive language, taking such greedy advantage of the needy! Yet they themselves do not hire trucks to drive south, which they will sell at cost plus a few bucks for gas.

There are believed to be situations where wage and price controls are at least a poor choice, such as major wars. These usually included rationing and labor rushing to a great deal of cost, quantity and acceptable prices, as the Office Price Administration did during World War II.

It is mandatory in some situations. A real historical example of allocating “dresser couplings” is the part of Hermann Wouk’s novel “War and Remembrance”. These allow quick and precise connection of steel pipe without elaborate threading. He accelerated the release of the engines in the wooden landing craft. They also allowed the addition of successive sections of the giant gaseous-diffusion cascade at Oak Ridge, Tenn., for bomb-grade uranium. There was no time or information for the markets to function.

The motivation to stop someone from committing a sin seems natural to some, but they leave objective questions unanswered. Why the 20 percent price range instead of 17 or 24? Why eggs but not sauerkraut?

Many food prices fluctuate all the time. Which is just coming to a five-year low, just like the one that is at a three-year high? What was magically “justifiable” about a particular set of prices just before price controls were implemented? When millions of chickens in Minnesota died of avian flu in 2015, egg prices rose dramatically and subsequently fell to historic levels in the year before COVID. The government did nothing in both the cases.

Supporters will say that we need to protect the poor. Yet when prices are cut, there is usually a reduction – as is the case with rent controls. If someone has to hunt for eggs during a pandemic, who can do it so easily? Moderate earners working safely from home with two computers to check prices and availability, plus two vehicles to snag suddenly discovered stock? Or the 80-year-old pensioner or single mom living on rent, who has to take a bus and walk 10 blocks to get out of a supermarket? With rent control, in real life, most of the benefits go to those far from the needy.

In a historical situation like a pandemic, helping the most affected and the poorest people to meet their needs is a commendable and necessary act of the government. There are efficient and proven ways to do this, especially if a system is planned and ready to be implemented ahead of time. Ad-hoc price controls imposed on arbitrary sets of products at some arbitrarily wide percentage increase cause more harm and injustice than they help or solve. Aristotle, Aquinas, Calvin and more were bright thinkers, but at a “reasonable price” they were not only wrong, but tragically so.

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