Monday, June 6, 2011

What is the Price of a Thing?

Writing about economics in this format is really freeing. I don't feel compelled to follow most of the standard rules of writing for publication. And, I can actually use the words that are evoked when one comes upon the situation that suffices for improper, or at least impolite, verbiage.

Why more people don't blog is beyond me.

Any who, last time we were looking at our drug dealing buddy, who I named Bob, dealing with the dilemma of pricing his stash, on which he relied to pay his bills. On the one hand, he had the commercially available stuff, bought from his connection Miguel, and on the other hand, his locally produced stuff, which had a near-to-zero cost of production. The first supply was virtually unlimited. The locally grown was limited. The cost for the commercially grown was set by Miguel, at around $400-dollars per pound. Since the locally-grown relied upon his trespassing on his neighbor, and that it was abundantly provided with a providential amount of sunlight, nourishing soil and sufficient water, Bob's cost involved a mere couple of hours of labour, all or which were spent in serene communing with his Goddess, Gaia. (Whatever costs he incurred were deductible as a contribution to a religious institution.) Hence, zero cost of production.

The problem for Bob is, what to charge for the fruits of his labour?

As a good Progressive, a repudiation of Capitalism is de rigueur. Fortunately for Bob, Bob is addlepated,  due to his use of his own product. The product of his own contemplation of what is right or wrong, as it is based upon his own reliance upon Progressive values, is fortunately random. The breakdown of what values might apply depend upon the following:

1. The commercially available pot is limitless, since its production is based upon a range of producers who labour under no constraints, other than availability to markets, since marijuana production is, in the main, illegal.

2. The commercially available pot has a quality that is fixed; that is, one ounce of commercially available pot is able to produce fifty highs. (If you're a pothead and offer that an ounce of "good Mesican" can actually produce more or fewer highs, you're in the wrong room, go down the hall and look for "Fundamentals of Business," through the Business School. You're in an Economics classroom, now, and we're requiring you to actually think.)

3. The pot he grows himself, while essentially costless, represents a possible greater profit than that which he purchases for re-sale. While limited, it is preferential pot, since it offers 100 highs per ounce, while the commercially available Mesican only offers 50 highs per ounce.

4. There are certain costs that our Dealer Bob has to cover in order to live.

5. There are two ways of looking at the costs facing Dealer Bob. The actual cost of his mere existence, which refers to non-discretionary income, and the fantasy costs facing Bob, which relates to getting someone else to pay for his existence.

6. Bob's economic activity, selling pot, can allow him to pay for his existence. This would be, his subsistence cost.

If you're a student of economics, better yet, a graduate student of economics, or, even better yet, involved in policy discussions of economics at either a corporate or institutional level, the decisions facing Doper Bob are intriguing in their nuance. This would be a good time for a brief narrative on the value of normative versus objective economics. Normative economics is shit. Objective economics are worthwhile.

Normative economics involves such beliefs as believing that planning is a worthwhile function of governments. Normative economics involves such ideas as, equality of outcome is the paradigm of economic activity. That is to say, that the spread between the wealthiest and the poorest is the best indicator of the basic unfairness of economic activity. Normative economics attempts to achieve what religious beliefs have attempted to achieve since the beginning of mankind--to show what the appropriate outcomes of man's activity should be.

Objective economic analysis is a totally different animal. Objective economics attempts to determine what the determinants of economic activity are. That is, not what the outcomes should be, but what it is that determines what those outcomes are. What occurs isn't a matter for economics. Just as for weathermen, the weather isn't something we should look to them to change. (Neither for climatologists.) But we should be able to look at the forces that engage us in our day-to-day lives and see that there are some things, especially the actions of governments, that can affect the efforts we attempt to take on a daily basis, to cover ourselves in sheepskin capes, while digging grubs from the earth.

Bob, unconstrained from his normative views is likely to concede that the really good pot is worth more than the commercially available pot, and price it accordingly. That is, he would attempt to price it accordingly. When it comes to selling pot, the idea that killer pot would be worth more to the buyer than ho-hum pot attempts to suggest that the qualities of an item are more important that what that item is defined as, in itself.

Take the idea of gasoline.

Before we had to purchase ethanol, I could get 25 miles to the gallon in my car. Now I can only get 20 miles per gallon in my car, now that I am forced to purchase ethanol. Back when I could buy gasoline without ethanol, gas cost me two dollars a gallon. Now, with ethanol, I'm paying more than four dollars a gallon.

So, what is the value of gasoline?

Bob has an unlimited supply of fifty percent of the good pot, for which he pays $400.00 per pound. His non-discretionary costs each month amounts to around one thousand dollars a month ($1,000.00). Bob figures selling 20 lids a month at $80.00 per lid will allow him to cover his costs. This is the level of his subsistence. He has no discretionary income; all of his income is applied to providing him with the essentials of living; home, shelter and food. Any excess income above this level of subsistence would provide him with discretionary income. That would be money that he would no longer use to provide himself with the essentials, and over which he would have some choices as to how that money would be spent.

Fortunately for Bob, the people who buy dope from him are willing to pay $80.00 bucks per lid for an ounce of dope. This pretty much guarantees Bob a successful existence, that, while low on Maslow's Hierarchy of Needs, allows Bob to muddle through another day. But, an Honest Bob, to reflect his views on Progressive Values, needs to live his life according to his adopted values, or risk being called an opportunist. Remember, there are two schools of "economics." The Normative and the Objective. The Normative School values outcomes rather than describing what occurs. The Objectivists allow you to see what affects outcomes, without labeling those outcomes as either good or bad. Economic systems are either efficient or inefficient. Using labels, like Good or Bad are like movie reviews that tell you that the last movie you went to that you enjoyed was a bad movie. If you goal is to achieve certain ends, then you need to adopt a certain Normative outlook. If you don't have a clue as to what a certain end should be, you are, without adopting anything, an Objectivist.

If Bob is able to grow 200 pounds of free weed, at 80 bucks per pound, Bob is able to meet his annual subsistence need without buying any of Miguel's commercially available weed. But, what would happen to Bob?

Social justice is a two-edged sword. Miguel would be offended at Bob's unwillingness to apply social justice rules to his sale of killer weed, and his failure to sell Miguel's weed would result in an offer to cut Bob's throat if Bob didn't sell Miguel's weed. In fact, Miguel's sense of social justice is so finely tuned, that he is willing to take all of Bob's super stuff in order for Bob to continuing to breathe on the upside of dirt. Miguel's normative values don't depend upon "how" things work, but instead rely upon a system that produces the "right" outcome.

Since, according to the Normative values of the Progressives, property is theft, Miguel's intervention in Bob's pot distribution enterprise is a welcome implementation of newly discovered Progressive, normative values. This is the beauty of normative values, since they aren't objectively determined, the normative values with the greatest threat of personal harm for non-adoption are the most widely adopted. Following the adoption of Progressive values in Venezuela, and the current adoption of Progressive values in places like Egypt, are good examples of how successful normative value systems are in imposing restraints on certain behaviours and practices that are not popular in societies that value objective, rather than normative, values. Just like our Progressive brothers in the former Soviet Union, reluctance to adopt the normative values of others can result in instances where the decision to make economic decisions that benefit ourselves as individuals, comes into conflict with the views of those who wish to influence our choice through the imposition of economic policies.

This new-found reality of economic activity is something that economists call Externalities. The common usage refers to such things as the environmental impact of an economic activity. What is ordinarily missing is the recognition that externalities are are also imposed on economic activity, by guys like Miguel, who want to make sure you're selling the right kind of marijuana. And are willing to use threats to impose their views of social justice on those who would rather not subject themselves to the imposed norms offered by Normative Economics. (And, just as there is tit-for-tat, there are also Internalities, which I offer only because of the apparent lack of interest on behalf of the Wicky folky.)

So, it appears that there is an element of supply that affects the price of a thing. In Bob's case, it is the willingness of Miguel to mandate certain externalities on the sale of weed. Even though Bob could sell better weed at a lower price, Miguel was able to exert influence on Bob, so much so that Bob was willing to adopt the progressive, normative values being sought by Miguel. And, the problem of externalities only gets worse, as Miguel is able to assert his normative values across a greater swath of the market for weed. It is, as if, the application of Normative Values may have as great the practical implications of its effects on cost as would those economic activities that were described, during the Progressive Era, or as Monopolistic practices.

As normative values are imposed upon sellers and buyers of products, even though the purchaser may not know there are externalities being imposed, obviously it occurs to Bob that his choices have been short-circuited by the imposition of Miguel's views of social justice. While, ordinarily, the value of a thing has been determined by the purchaser of an item, with the imposition of external values--normative values--the prices of things may end up being set by forces (externalities) that have nothing to do with the production of the good or service, at all.

Today we've looked further into what economists refer to as price theory. In free markets, sellers of goods and buyers of goods are free to determine for themselves what is a fair price to offer for the sale of a good or service, just a buyers are free to determine for themselves what they are willing to pay for those goods and services. In a free market, without buyers, inventories are reduced, and prices drop in order to find the equilibrium price for the market in that good or service. Externalities are imposed from forces that lie outside the relationship of the buyer and seller, and internalities are those forces that are adopted, willingly, by either the buyer or seller. Is the mandate of ethanol, where service stations are barred from selling a cheaper, more popular form of gasoline, an externality, or an internality?

Just like Bob, are you better off being forced to buy Miguel's weed? Are you better off being forced to buy ethanol? And, even though the price is higher, isn't it better to do the right thing, according to someones Normative Values, than that thing you would prefer to do, as an Objective Value?


MAX Redline said...

in order for Bob to continuing to breath on the upside of dirt.


And Bill, not Bob.

Otherwise, not so bad.

Ten Mile Island said...

Fixed the "e." Thanks. And Bill or Bob, he won't care. Short name, starts with a "B." Bob has three letters, ergo...