Thursday, June 2, 2011

What Determines Price?

Last night I left you with questions, "What is the price a customer of Mikey should be willing to pay for his superdope? And who determines what that price is?"

In the theoretical, our dope dealer has two types of marijuana, really good stuff, and commercially available stuff. That is, stuff muled across the border. Leave for the moment, how much of what our hippie should sell, since we haven't determined price, the question of "how much he needs to sell to pay his bills" never got answered.

Our drug dealer friend has a problem: he believes in the cant of "social justice," and the held views of his fellow Progressives that Capitalism is the enemy; likewise, he needs to pay his bills, and the really good stuff is limited in supply, while the stuff coming across the border is basically without limit.

"But, then there's the killer weed. With this stuff, you get 100 highs per lid, versus fifty highs for the stuff I buy from Miguel. I pay $400.00 a pound for Mikey's stuff. I get the killer shit for, basically, free. What price do I charge for Mikey's stuff, and what price do I charge for the killer shit?" Let me make an editorial correction. Mikey (Miguel) is the name of our drug dealer connection. I don't think I named my drug dealer. Errors slip in. Hopefully, this correction will do.

Who determines what is fair? The buyer or the seller? There are books written about Price Theory, and many guys with Ph.D. behind their names have written long papers on the questions you and I are going to spend but a brief time considering. 

The decision to sell is autonomous. If it is your property, you have the right to decide whether or not to keep your property or, dispose of your property. Those are the only two conditions, or states, possible. At some point, we'll address the issue of neglect. Not at this time.

The graph above shows a simple relationship between a buyer and a seller. If I, as a seller, am willing to provide two widgets for two dollars, I am willing to provide one widget for one dollar. If I, as a buyer, am willing to purchase one widget for a dollar, I am able to purchase one widget for one dollar. It's a magical moment, and I'm close to tears.

For many people, and for many misguided economists, the emphasis for this transaction relies heavily upon the producer of the good in determination of price. This is, of course, the thinking of the fool, since whether a wheel rolls depends upon whether or not it is on an incline. Wheels offered up on the alter of rolling will just sit there unless there is enough motive force for the wheel to overcome certain physical constraints. True, you may have heard expressions like, "this is a seller's market," but that expression is only likely to be true when buyers sit outside, wanting to strike on the next baited hook dangled before them. The offer to sell is autonomous. The decision to buy is also, perhaps surprisingly, also autonomous.

When we started this conversation a couple of days ago, we met Sue, who had a limited income and no extra cash to speak of. When we met Bill--the drug-dealing hippie--we found out that Bill had a need to come up with about a thousand bucks a month to carry the freight of his existence. Bill is faced with earning that much income each month. And so, using his invariable wit, has committed himself to being every Progressive's best friend, by becoming their drug connection. He has two types of marijuana, good stuff (in limited supply) and the commercial stuff (in unlimited supply, but can suffer in price as anti-drug interdiction efforts succeed or fail.)

Progressives like to talk about the importance of people. If you haven't read Marx, let me cut to the chase; property, like Hardin's Commons, legitimately belongs to the People. (I don't like capitalizing every other word, but in the spirit of our Progressive, Communist friends, I do so to show how they characterize "really important concepts. I've spent too much time amongst academia to totally divorce myself from these hack writing tricks. You'll see them, again, in the future if you return here.) So, in Hardin's world view, there is no such thing as private property, since the action of any private person has the potential to harm some other person. So, pricing in the Progressive world-view becomes difficult. Since Marxian analysis depends upon the inputs of human beings to create value, the dope being carried across the border by mules has intrinsic value that the superdope of Bill doesn't have. The dope of Miguel is imbued with  the sweat of hundreds. The superdope of Bill is barely the product of any labour. And yet, the superdope provides 100 highs per lid, versus the 50 highs of the Mexican commercial stuff.

What is the fair price?

Remember what I said earlier, about selling a thing being an autonomous decision? Let's take just a minute and figure out what that means.

I've pulled out my 1934 Merriam-Websters.

Autonomous: adj. <Gr. autonomos, fr. autos self + nomos law. See NIMBLE> 1. Of or pert. to an autonomy. 2. Independent in government; having the right or power of self-government; as, an autonomous  people; also, undertaken or carried on without outside control; as, an autonomous course of study.
3. Biol.  a. Existing independently; not constituting a stage or cycle (as an embryo, larva, or seed) in the life history or development of an organism. b Responding, or reacting, independently of the whole--said of certain parts of organisms.

Autonomy is a concept that also has filled volumes, which I will, of course, again dispense with in just a few words. (To the legions of fellas with the phud following their names, I apologize, but brevity was described as the soul of wit. And too many of you really smart guys were never close to having any.)

When you have to pee, who tells you?

That is an autonomous act. When you have to sneeze, who tells you?

That is an autonomous act.

When you want to sell something, who tells you?

Geez, do I have to carry you on everything?

Buying is just like selling. Nobody tells you you have to buy anything. You do have options. And remember, we're talking about selling and buying marijuana. So, what is the fair price of marijuana?

I'm going to pull out a "Keynesianism" to share. Progressives, by the way, love the Keynester. John Maynard Keynes once quipped, when asked about the long-run said, "In the long-run, we're all dead."

Setting the tone for serious debate over economic theory for the last eighty years. So much so, that most of the intellectual debate over economic theory has been determined by a long view--of some eighty years--that no longer reflects the speed with which economic decisions are today made. The close to paralytic view of Progressive economists matches the pace of many of their critical current initiatives, from limiting free-trade, to re-introducing railways as the mode of transportation of the future.

Bill, our hippie, has dope to sell and bills to pay. How does Bill rationally price his weed?

The Labour Theory of Value posits, "from each according to his ability, to each according to his need." N'est ce pas? Bill's need is imminent. He needs to sell enough weed to cover his crib, feed and whatever encumbrances he chooses to shower himself with. The anti-market concept of "to each according to his need" is the nexus of Billy's existence. To Billy, having for himself over-arches the claims others may have to their own needs. While the Labour Theory of Value purports to prove that Capitalism is Theft, it ignores the fact that the Labour Theory of Value is itself the source of most crimes, petty and grand.

The Progressive can make claims about social responsibility, but it is only the Capitalist that recognizes the autonomous nature of Man. Our ability to exist independently. We aren't really very good at hiving.

So, finally, poor Bill. The hippie drug dealer. With some really good pot, and some meh pot.

Billy chooses to sell the meh pot for $80.00 per lid. Twenty lids per month. Keeping it under the radar. And yet, what is it that allows Bill to do this?

The willingness of the purchaser to pay $80.00 dollars per lid. (At least twenty times per month.) Billy cannot sell his good stuff.

Again, there's a lot of literature about why Bill cannot sell the good stuff. Bill knows from his past experience--shades of Labour Theory--that he has sold twenty lids a month for eighty bucks, and has no reasonable expectation that he shouldn't be able to sell another twenty lids for the same price, next month. That is, Bill has expectations that drive his beliefs on what appropriate pricing should be, and therefore, will be. As much as Billy wants to believe that his pricing theory is based upon another principle, that he needs to price the fruit of his efforts in order to return to him "according to his need," it isn't so, at all.

Bill's view of the appropriate pricing for his weed is based upon his experience, and the need to cover his bills. It is based upon his recognition that his supply of weed will allow him to exist only if his pricing is set at a level that the excess of his revenue flow is adequate to cover the costs associated with his continued existence. Without even recognizing, or giving credit to guys like Drucker, Billy has become another case study of how profitability serves as a report card as to how well drug dealers like Bill are doing. Bill's understanding that economic activity serves to provide him his subsistence is a first step. Yet, being on the lowest of the rungs of our society's economic ladder, is unable to see how his philosophical inconsistencies are actually the result of his own, autonomous existence. Thankfully, Bill's use of his own product will continue to fog his perceptions, making his own self-actualization impossible.

But druggies never were about teh smart.

Tonight we talked about equilibrium, and states of equilibrium. We talked about the principles of markets; free sellers and free buyers of goods and services. We touched again upon the marginal propensity to consume, and that at below subsistence levels, we tend to spend all of the revenue/income we receive. We talked about constraints that are imposed by others through the introduction of externalities. We talked about endogenous versus exogenous variables. We talked about price theory, and determined that the buyer of the good or service was the determinant of the price of that good or service. We talked about how we may attempt to apply normative values to the discovery of price, but that the actual price paid is an autonomous function of the buyer. We talked about the comparative values of Keynesian and Rational Expectations economics.


MAX Redline said...

If Bill needs to sell at $80/oz but his neighbor in the complex can sell for $75, then the buyer will purchase from the neighbor and spend the remaining $5 on Cheetohs at the nearby Safeway. Bill has no choice but to beat the price, even if that means he has to purchase less expensive snacks for himself. Otherwise, he's left with a pound of pot and no cash.

Of course, he could shoot the neighbor, but this course of action raises other issues which may harsh the buzz. The question becomes whether the risk associated with eliminating the competition is outweighed by the benefit of securing a temporary monopoly, which would allow Bill to raise the price.

In this situation, the buyer has no choice but to meet the price and forego the Cheetohs.

ZZMike said...

I get the feeling I'm visiting someone I've read before, with a different name.

Talking about the Price of Things reminds me of the little essay, "I, pencil" - various sources, here's one:

I, Pencil

... which, as you'll remember, starts out

"I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.
. . .
Yet, not a single person on the face of this earth knows how to make me."

The essence is that word "single".

Your essay and the Pencil essay struck a chord because there's a new book out:

Your Teacher Said WHAT?

Partway through, Joe Kernen puts the same story to his son, this time using shoelaces.

One of the Big Questions in both places is, who tells the maker how many to make, and who tells him how much to charge?

Ten Mile Island said...


Quit reading ahead. Let the other kids catch up.


Now who could that be? I'm flattered, I guess, but chances are whoever you're referring to has simply disappeared.