Tuesday, June 7, 2011

Bill's Dilemma

In our last visit with Bill, the druggie pusher, we found out that his connection, Mikey, was going to impose selling constraints on Bill's business activities. As you know, Bill had some killer weed with a low cost of production that he was unable to price accurately, since he was a Leftist. Leftists belong to a sub-category of humans, that require an adherence to predetermined outcomes in order to rationalize their existences. Failure to maintain ideological purity is cause for removal from that austere circle.

Bill was faced with the problem that while his really good stuff was able to provide twice the highs of the commercially available stuff, since the cost of production was lower than that of the commercially available stuff, he didn't feel it was okay to sell the premo stuff at premo prices. Which is an interesting problem, since the problem that faces the economist is, how to maximize profits while minimizing costs. For you business majors, you can remember something close to "buy low, sell high." (It is business majors who have given economics a bad name. They purport to represent the practicum of economics, but I've never met a business major who could tell you anything about the reserve rate, and how banks create money.)

This intellectual impasse was broken by Mikey, who grabbed the really good shit and implemented a mandate on Billy; sell my shit.

Who wins, and who loses?

First, Bill loses. Before the imposition of the mandate, Bill was free, with the liberty to choose the course of his actions. Bill's lifestyle represented his own hopes, dreams and aspirations for the Bill, himself. It doesn't matter that Bill's choices aren't my choices, nor that they are your choices, what matters is that the fundamental existential question of life has been eliminated from an exogenous variable, Mikey.

Prior to Mikey's mandates on marijuana supply, Bill had been free to choose the course of his own economic future; from pizza, to bean bag chairs, Bill laboured under the belief that he was the master of his own fate. When Mikey delivered the ultimatum that Bill no longer had a choice as to what product he could offer his customers, Bill was worse off in ways that may not be apparent to the casual observer.

The availability of really good shit was based upon Bill's misappropriation of property, with the added good luck of primo growing conditions and set of really killer seeds. Combined, Bill was able to extract additional rents from the inputs of his decision to grow pot that couldn't be matched by his commercial supplier, Miguel (Mikey).

If Bill had chosen to extract those additional rents.

But Bill wasn't allowed to gain those additional rents. Even though he hadn't decided whether or not to capture those rents. (For a socialist/Progressive/Leftist, rents are bad. It is an illegitimate expropriation. Take the time to read some Socialist rants, and you'll hear this theme repeatedly. It is as boring as it is wrong-headed. I expect Bill, the Drug Dealer to spend time worrying over this, but fortunately, it is mostly contained within the Leftist experience, and really has nothing to do with how markets are formed. Obviously, it impacts pricing, but the whole idea of rents being a representation of a class that impacts supply and pricing decisions is based upon an ideological view, rather than a practical view that accepts that advantage is a bonus for the holder of the advantage, and a cost for the market participant that doesn't have access to the same advantage.)

Second, Bill's customers lose. In a parody of Gresham's Law, customers who would willingly pay more for really good shit are deprived of the choice to purchase the really good shit. It seems that mandates affect both buyer and seller, and are provenanced best by the opportunity costs associated both with seller and buyer. Bill, the seller, had an opportunity to gain additional profit through the sale of his really good shit. The buyer had an opportunity to buy the really good shit at a price that might have been lower than the market price of the commercially available shit.

When mandates occur, it is usually the case that both the buyer and seller of goods are the victims of this loss of opportunity, both in the income to the seller, and the benefits of the purchaser for the buyer. The imposition of mandates in markets is never costless. Mikey could, for instance, demand that Billy sell his weed at sixty bucks a lid, instead of eighty bucks. This would reduce the cost of a lid of marijuana to a lower level, but even at that lower level, the customer of Mikey would still be coming up short in terms of the quality of Mary Jane that Mikey produced locally. The quality of the really good shit was an important loss for the market for marijuana. But because of the externalities imposed upon the sale of marijuana by Mikey, the customers have lost potential value, even though they may not be aware of the costs associated with the imposition of mandates.

The fact of the matter is, Mikey has lowered the potential value of Bill's dope customers, even if these customers don't know that they've been made worse off through the mandates applied to the market for marijuana. They still get high, Billy may have to work harder but will survive, and Mikey gets all the dough, anyway.

This may not be the way the government works. I know that when I look at all the land purchased by the Oregon Department of Transportation, in order to build the Mount Hood Freeway, that is currently being leased by cronies of the former Governor of the State of Oregon, Neil Goldschmidt, that there is a feint chance that the kind of corruption being imposed on our friend Bill is being imposed on the citizens of Oregon...or at least, Portland. Rather than having the advance system of transportation envisioned by highway engineers decades ago, we have a system of clogged arteries, while "Mikey's" friends extract rents for land that is owned by the State of Oregon, but since highway mandates have been established, the utilization of those resources has been directed towards Mikey's friends.

And just like Bill's customers, the citizens of Portland, of Oregon, don't have an awareness of the costs being pushed upon them by the transportation mandates that are currently in place. The counterbalance to increased traffic flow has been framed with the idea of a social rent, sustainability. "Massive" highway systems are designed to allow for "outmoded" forms of transportation. And the voters of Oregon seem to be well placated with such pronouncements.

Unfortunately, public goods, just like the sale of marijuana, are goods with limited entry. Marijuana is a good example of a limited entry good. First off, it's illegal. That means that normal markets don't exist. In a normal market for a good, producers compete on the basis of price to make sure that the market for their good clears. If Bill sold wheat instead of marijuana, the market forces exerted on him wouldn't be from a single source--Miguel--but from the forces of other sellers of wheat that were competing for the greatest productivity against the lowest costs possible.

Because Bill is engaged in an activity that is illegal, there is, by choice, limited entry into the market for the supply and purchase of his product. For those who are engaged in the market as sellers, there is a good chance that the buyers of the product have no way to communicate to other buyers information as to what is, or isn't, a good price for the good they are buying. Likewise, as sellers, there may be limited communication as to what is, or isn't, a reasonable price for either sale or purchase, but there is an unfair amount of moral suasion that can be applied to the re-seller due to his reliance upon his distribution network. With limited suppliers there is limited room for negotiation, especially when the supplier is willing to use coercive force to implement his supply agreements. Miguel, the drug-trafficker is able to impose mandates that restrict the choices of both buyers and sellers.

Governments, too, have the same criminal impulse.


innominatus said...

This series reminds me of an Econ class I had at OSU. The prof demonstrated diminishing returns by coming in all hot and sweaty with a 12-pack of beer. He orated for a while on how hot he was and how bad he wanted one of those cold brews. So then he actually drank one. "Phew! That was good!" Then he pantomimed drinking another. And another until he was pretending to be so full that he couldn't stand to take another sip. "That seventh beer is identical to the first and I have the same amount of money invested in it as the first beer. But I derived much less value from it. That, dear class, is 'diminishing returns' in real life."

Ten Mile Island said...

Don't know if it was Tom or Orzech, but I studied with the best there, too.

I'll be writing about diminishing returns, but the important thing right now is establishing price theory. It seems there's a lot of information that is being passed around about what should be the correct price of anything. According to our elite betters--Democrat politicians--they are better at determining appropriate prices than you and I are able to determine. What a marvelous market they are creating, where producers and customers no longer need to scratch their own little heads over what is valuable. We'll just let others make that determination for us.

Ah! the life of leisure. Life on the Plantation will be so cool!

MAX Redline said...

Well, this is what I was talking about a couple of posts back. The externalities are what control the deal, unless politically-correct politicians get involved. When the latter occurs, everyone loses.