Tuesday, May 31, 2011

Economic Fun Damentals

I'm attempting to figure out how so many people get stuck when attempting to talk about economics. Or, understanding economics. Or, figuring out whether or not the person they are listening to talk about economics is talking bullshit or not. There are a lot of people out there who hold ideas about economics that equates economics to something that is more closely related to a recipe for making cookies than an understanding of the myriad of forces that eventually appear as some kind of recognizable economic state. Cookies are fairly easy to understand; flour, sugar, chocolate chips. Maybe some molasses and brown sugar. But if you keep attempting it, at a certain point you will end up with something close to our idea of what a cookie is.

Cookies as a simile for economics isn't all that far-fetched. A lot of what I hear folks talking about, when it comes to economics, resembles housewives comparing cookie recipes. Add a little stimulus here, a little bit of tax increase there, and viola! Economic policy! When listening to our current masters in Washington, D.C., or in our state's capital, Salem, I continually hear the same manner of cookie-cutter thinking; in order for us, as either a nation or as a state, to prosper, we need to make sure that our nation, or state, is moving in the right direction.

It is difficult for me to sign-on to this type of discussion, since this discussion rates up there with the kind of grade school discussions that are held by young boys discussing whether or not, if Hitler had won World War Two, would we be speaking German, or would the Germans be speaking English, by now. And yet, a lot of our discourse over current policies, from tax policies and regulation policies, to monetary policies and the question of whether or not we can attain socially justified goals seem to center around this type of debate.

I happen to believe that we would be taught German, but that's just me. Whether or not we would speak it, on a daily basis is up for conjecture.

The graph at the top of the page is as good a place to start a discussion of economics as is any other. There are a couple of fundamentals that you need to accept to understand where I'm going with this dissertation. Over on the bottom, left-hand corner is the intersection between two common values. In this case, the common value is the number zero, reflecting a commonly accepted truth, that if all things cost nothing, an infinite number of those things will be consumed; and consequently, at a price received of a producer of goods, the value of zero would result in nothing being produced.

To listen to many in the press, to listen to many of our elected leadership, to listen to the barroom chatter of the class that considers itself as better educated than the many who would disagree, this fundamental assumption of supply and demand seems to slip consciousness at any available turn in conversation. Let's take a brief moment and test the information that is on display, above.

If you wanted to buy an apple, would you be  more or less likely to buy an apple if it was a buck, or if it was ten bucks? No tricks now. ("If I can find an apple in ten minutes, my child will live!")

If an apple was selling for ten bucks, and your could buy a peach, a box of strawberries, two pears and a package of licorice for three bucks, could you replace your desire for an apple for three peaches, three boxes of strawberries, six pears and three packages of licorice? By comparing the basket of goods one could receive for the same ten dollars, the comparative surfeit recognized by a profound number of fruits and candies, compared to a single apple leads to a simple question. Would the comparative prices of substitutable goods tend to put downward pressures on the price for apples?

The cool thing is, we don't need to answer this here. All I'm attempting to point out is, that the price of a good doesn't simply reflect the price of that good at that time. When you take that price and compare that price to other goods that are also available, you can begin to see that price, by itself, is a pretty poor gauge of what something is worth. Is an apple worth three peaches? Is it worth three boxes of strawberries? Six pears?

When the press, politicians and the chattering class begins to talk about economics, the first thing thrown out of the conversation seems to be common sense. They become so fixated on their ideas of what is, or isn't, important, that all other possible outcomes are ignored. There are any manner of examples of what I'm talking about, occurring in conversations around you every day. The big ones currently seem to center around discussions involving such things as gasoline, the prices of medicines, and the need to spend money on projects that will build things, like Green buildings and light-rail systems.

Throwing additional confusion into this mix is reference to a class that is either self-referred to, or referred to, as expert. That is, there is a group of people, a class or people, who either assert or claim the necessary training or allegiance to views that reflect training, that advances these peoples as those upon whom we must credit their training or views a certain credence that those without these credentials cannot reasonable expect. That is, if you hold opinions or views that aren't coincident with their opinions or views, you are simply wrong in the opinions you hold.

That isn't true.

It doesn't matter to me what training, or what set of beliefs it is that you hold. If you are wrong, you're simply wrong. No matter how deep your resume or curriculum vitae, if you're wrong, you're simply wrong, and no amount of illegitimate appeal to authority will change this. What your parents were trying to tell you about the other kids doing it applies here. Just because Billy is smoking marijuana doesn't mean that you should smoke marijuana. Even if Billy is getting laid. A lot. At a certain point, there are things you need to know to make decisions about the issues and people trying to persuade you to hold certain ideas that requires you to know, and to be able to defend robustly, what is and isn't true. 

So we again return to this simple graph. When prices are zero, the quantity of apples provided to the market is zero. When prices are zero, the quantity of apples demanded is infinite. When prices exist above some low price--which is why these graphs typically don't touch either the x or y axes at zero--suppliers begin to supply and buyers begin to purchase. Let's begin, first, on the left-side graph.

We agree that supply is dependent upon price. We agree that the quantity demanded depends upon price. That is, the higher the price the market is willing to pay, the more likely it is that the product being demanded will come to the marketplace. If I was growing peaches, and found out that apples were being sold at three times the price of peaches, would I be wrong in reducing the amount of apples I was producing, and attempt to increase the amount of peaches I was producing?

This is an important, if not quintessential question. If I'm a dirty, pot-smoking, long-haired, anti-social idiot, and I figure out that the prices of apples are higher for apples than peaches, and I put more effort into peach production, am I violating any concept of social justice? Let's put it another way; if I can grow pot that gets you really buzzed, so much so, that half an ounce can get you high fifty times, but my regular pot requires you buy an ounce for fifty highs, should I be able to charge a higher price for the better pot? What is it that creates value, the amount of pot (ounce)? Or the number of highs? What is it that determines the price of pot? The quality, smoothness of smoke, the color, taste or odour? How many seeds? How much stem?

These are demand-side concerns. But there are also supply-side concerns. The Feds have increased border surveillance, and word comes to you that the price of weed is going to go up. There is more risk involved in moving weed across the border, so the mules are requiring higher prices, or attorneys, whatever, in order to move product up the supply-chain. You know that the price of your replacement inventory is going to double from the price you last paid for your inventory of smoke. If you want to replace your current inventory, you're going to need to lay-out twice what you laid-out last time. Where does the money come from?

As an independent dealer, you need to be aware of price fluctuations that may occur, outside of your control. If you get a whiff that the price for a pound of pot is going to be going up as a result of increases in the cost of providing you with your dope, if you want to stay in business, you're going to have to start increasing the price of your current stash in order to be able to afford to re-supply yourself. But, this is for your crappy smoke. The really good smoke, that you grow yourself and for which you're already charging a higher price, could be sold for a lower price than the cheap stuff, but since you're in the getting high business, it makes no sense to sell the good stuff based upon weight, at a lower price than the cheap stuff, based upon weight. Drugs are sold on effect, not volume.

As a good little hippy, you're faced with a dilemma. To remain a dependable source for Mexican weed, you'll need to begin charging more for weed today, in order to afford to purchase a new inventory of weed, tomorrow. At the same time, your own, locally produced superweed is still lower in cost than the cheap stuff will be in the future.

So, on the right side is the dilemma facing the pot dealer. On the right, the resistance to price changes faced by the consumer. If there had been a big increase in demand, we'd be looking at the left panel and focusing on discussing how increases in demand for weed was driving the price up.  But, on the left, we see that as prices increase, the amount of pot being offered for sale increases while demand for weed decreases. As prices move from S' to S, the amount of dope being sought by hippies will decrease. Not that the amount of MaryJane available to sell decreases. If you're willing to pay enough, you could continue to buy more dope, but maybe you find it just as satisfying to buy a couple of bottles of cheap wine to get you off, than a lid. For a high enough price, an idiot will be found to attempt to move weed across the border.

What is the correct path to choose? In a social justice sense? Do we fail to pay the poor, pregnant, illegal immigrant carrying the weed across the border for the increased risks she faces? Or, instead, do we look at our dealer, asking "Why should he charge more? The stuff he's selling now didn't cost him anymore!" And more importantly, why are you smoking marijuana in the first place? You can miss the whole problem of marijuana supply and demand by simply removing yourself from the market. Don't buy weed. Hate the price of cigarettes? Don't smoke. How many social justice issues can you have over the market for marijuana if you don't involve yourself in the marijuana trade?

I guess you could involve yourself, in a sort of amicus manner. Doing good for it's own sake, as it were. Butting in where you don't belong could be used, as well. Why get between a druggy and his supplier? I'm thinking Chinatown rules. So, how does the socially conscious hippy get around supply and demand?

So, what are the principles we've discussed? That the price of a good determines both the amount of the good supplied, and the amount of the good demanded. That not all prices are true determinants of value, as factors which weigh in favour of determining price may not be immediately apparent. That there may be substitutes for goods demanded (wine for grass.) And, that externalities can imposed on markets, creating shortages and driving up prices for goods demanded. And that there are cases where neither the suppliers or demanders of a good, solely or together, are responsible for the current price. It's hard to determine social justice policies when neither the supplier nor the consumer are responsible for the price. Do you want to get laid? How badly? If any port in a storm will do, then the costs of getting laid may turn out to be low. Externalities may exist, however. So that you find that although the apparent initial cost was low, subsequent costs may turn out to be high, or quite higher. I'm not sure getting laid has a social justice template that can be applied. To each, according to his need. From each, according to his ability.

Point is, the next time you hear a talking head talking about economic policy, you need to take a moment and ask yourself some important questions. If you want a steady, dependable supply of high-quality marijuana, are you willing to pay for it, or not? If you just want to get high, do you need to get high on marijuana, or can you get what you're looking for from a bottle of cheap chianti? Or your mom's supply of oxycontin? At what point does social justice depend upon a framework of you getting what you want, or getting you what you need? And, at what point do you stop pointing fingers at your dealer, and start making choices that enable you to get the buzz you feel you require?

How high does the price of weed have to get before you stop smoking it? Or, would you be using substitutes to extend the effects of the weed, so that you could consume less, while gaining whatever benefits you feel you gain from its use, without having to earn more income?

And how can we blame this whole mess on George W. Bush?

Go outside and play now.

1 comment:

MAX Redline said...

In this case, the common value is the number zero, reflecting a commonly accepted truth, that if all things cost nothing, an infinite number of those things will be consumed; and consequently, at a price received of a producer of goods, the value of zero would result in nothing being produced.

This somewhat reminds me of the first American experiment, which was essentially socialist, and resulted in nothing being produced. It was a disaster, of course, but it led to the introduction of capitalism.

This is rather a wide-ranging discussion, as you bring up pot without reference to varietal potency, for example. It's one thing to compare apples to pears, but it tends to fall apart when comparing drugs. I'm pretty sure that a couple of quarts of Ripple don't equate to a few grams of pot, nor to a hit of acid.

And then you get into the relative costs of getting laid. I've long maintained that anyone can do that. Hell, anyone can get married. It's just a question of how low or how high you choose to set your standards.

Nice to see you back; your perspectives have been missed.