One of my readers mentioned that my name for our drug dealing marketeer kept shifting between Bill, or Bob. Forgive me, if you can. One of the great things about blogging is, when you hit the "publish" button, you're done. The advantage Bob has over Bill is simple; one less letter. And when the fingers are flying, cutting down on keyboard time has advantages.
They are small. You might even call them, "marginal."
The word, "marginal" is an important word. Not just for economists, but for scientists of any sort; engineers, electricians, automobile manufacturers, home builders. Marginal improvements are small improvements, that over time can mean the difference between economic success or failure. Sometimes, you might here business reporters talking about "margin calls." What they are reporting is, that the purchaser of some intangible asset, having purchased that asset with only a small part of that asset's worth, is being told that the time has come for the payment for that asset be made in full. It is true, that in some markets, intangible assets can be purchased with only a modest outlay from the purchaser, relying upon the broker or dealer to carry the asset transfer, as a loan. Kids do it every day, promising to cut the lawn in order to get a new pair of kicks. At some point, the kid has to cut the lawn. Or, in this case, lose the kicks.
The word, "margin," is an important word for economists, since most of economic theory attempts to relay information that occurs within markets, both for the investor, but also for the public policy purposes of economic regulation. This, I hope, won't have to be repeated; I believe in a minimum of market regulation by the government. I do not believe in excessive attempts at market regulation. I'm not a market libertarian, although I want you to understand that most efforts at market regulation, even though such efforts may have names that attempt to promise cures for the excesses of the markets, are nothing more than the creators of unintended market lags, the effects of which will, in my opinion, serve more to obscure the research and understanding of markets than effect positive changes that benefit the players, both buyers and sellers, of any market. This extends from simple relationships, like those of Billy and his dope, to JPMorganChase, and their current policies to allow for short-term credit extensions to individuals, through credit cards.
Margins are important. If I'm an automobile manufacturer, and I can manufacture a car for a lower price,yet offer a competitive automobile, with fit, finish and features of my competitor, at a lower price--a marginally lower price--I may not be able to succeed in converting all buyers of automobiles into purchasing my car, but if I'm marginally successful in converting some of those buyers to my competitively priced, marginally lower-cost, automobile, I've opened up the possibility for making greater profits than my competitor.
This is an important distinction.
A few posts ago, Billy, our hippie, drug-dealing marijuana peddler, faced a conundrum; whether to sell dope with a low production cost at a price higher than the commercially available stuff, or to incorporate the ideology of the Progressive Movement (Communist/Marxist theories) by sharing the fruits of his labours based upon the inputs costs of producing this mad weed. It is important to remember, that any time anyone offers you a solution based upon the principles of Social Justice, that you remember that this is a person who is attempting to substitute Marxist, Communist ideology with Capitalism. The Labour Theory of Value is a central tenet of Communism and Marxism. Do yourself a favour, and simply Google "labour theory of value." I'm not going to tell you that all the pages are clearly Marxist or Communist, you do your own research. Whenever you hear a labour union spokesman talk about "fairness," remember of what constitutes fairness from the viewpoint of the Communist or the Marxist.
Profitability is the report card of the capitalist. Getting someone else to pay for your existence is the report card of the socialist. Whether it's food, shelter, clothing or medical care, if you rely upon someone else to pay your bills, you're a socialist. If you rely upon yourself to pay your bills, you're a capitalist.
But Bill really wasn't a socialist when he started selling weed. He needed to make about a thousand bucks a month to cover the costs of his existence. He had it worked out, that if he sold a minimum number of lids, he could cover his cost of existence. And yet, he had access to really good weed, that was twice as good as the weed he bought from his connection. But, it was virtually costless, to him.
How to determine price?
The reason why I chose a market, like marijuana, is important for economists. The sale of marijuana isn't taxed, so tax policies don't affect the sale of marijuana. Marijuana is illegal, so there isn't an open market for the sale or purchase of marijuana. Marijuana sales reflect the conditions facing a market with limited entry, for, although anyone could choose to sell marijuana, most people would find either the risks of breaking the law daunting, or, find that violating the law untenable or unthinkable, so it would take a special type of entrepreneur to enter the market. The thieving, lying, progressive hippie. Parfait!
The advantages for economic examination are bountiful. Since it is an illegal activity, entry into the market is determined by a willingness to violate the law. For both buyer and seller. Imagine the market for wheat being limited by the constraints of the market for marijuana. Or, child prostitution. Wheat? Child prostitution? Uh, what?
Wheat, marijuana, child prostitution; all markets, with sellers and buyers. While we've been dealing with something as illegal as marijuana, we've ignored the truly horrible aspects of markets. Markets bring together buyers and sellers. For Bill, selling marijuana has been an avocation that allowed him to buzz with his friends while paying the freight. For the wheat rancher, learning how to cultivate his fields, working the land and earning a profit has been his primary concerns. For the purveyor of child prostitution, there must be these types of interests in common, too.
What interests do Bill, a wheat rancher and a supplier of child prostitutes have in common?
Profit.
What differences exist in their respective markets?
Until recently, there really haven't been many similarities between the pusher, the rancher and the pimp. That seems to be changing.
Generally, we tend to think of wheat ranchers differently than we think of pushers and pimps. Wheat ranching tends to be a legal activity. A man owns or leases farmland, tills and plants, tends and harvests his crop.Wheat is a legal commodity that many plant, grow and harvest. Successful ranchers are pivotal in their communities; sponsoring 4-H events, attending church on Sundays, coaching their kids baseball teams.
We tend to view the pusher or the pimp with different lenses. The activities of the pusher and the pimp are illegal. The tend to devalue the value we put on human life. They attack the moral basis of our community, as they are threats to our children and attract elements to our community that we find less than desirable. Drug dealers and pimps are conduits for persons that threaten the public good. They are the "watering holes" that attract the morally depraved, the dishonest, and those that predate upon the common body. The civil body.
The wheat rancher drives a pick-up truck, picks up a six-pack of Hires for his crew, and takes his family boating on the weekend. The pusher hides his activities knowing that his customers must also hide their activities or risk detection and punishment. The pimp is simply disgusting. But, the same market conditions apply.
Billy is worried about social justice. The Labour Theory of Value. Of determining what an appropriate selling price for his really good stuff should be.
Not at all the problem for the purveyor of the child prostitute. Slavery is an inherent condition of the pimp. While the Progressive/Socialist/Communist is spending its time talking about the ownership of property is a crime against humanity, the pimp is a simple human-rights criminal. And so, we need to move away from the idea of what constitutes economic activity, to determining the purpose of economic activity.
What, simply is economic activity?
Grajillions of years ago--which is an order of magnitude longer than a Brazillian--Og found out that offering Oggette a pretty looking flower was endearing. Og's buddies were all about the clubbing and the hair-pulling into caves. Og found out that giving a flower to Oggette, while a transaction cost, was a successful price to be paid for Oggette's company. (If you know what I mean.)
Subsistence economics hadn't yet been discovered. Since, the only condition that was an available option was subsistence. There was no Hierarchy of Self-Actualization. You either lived, or didn't. But, at some point after Cain and Abel, it was discovered that one needn't kill in order to achieve that which one wished to achieve. This was a huge, evolutionary moment for Man. We no longer needed to rely upon coercion to succeed in obtaining that which was desirable. We could bargain for it. History is replete with instances where certain, conditioning bargaining chips might have been involved; rape, torture, invasion, domination and slavery, but the understanding that men could be motivated with the carrot as well as the stick was an understanding that would shape further generations, nations and cultures.
Billy understood this when Mikey offered him his life in exchange for a participatory franchise in the selling of his weed. You understand it when you pay your confiscatory taxes in the face of imprisonment. I guess the world hasn't changed all that much since the time that Ogg offered Oggette the flower. (Had she declined, it would have been club to the head, and being dragged off to the cave.)
That pricing works as an advantage over clubbing is a marginal shift in behaviour. People tend to return to markets where price is the only concern. People rarely return to markets that are established by clubbing. I remember reading Freud's "Civilization and Its Discontents" years ago. I think, somewhere in his introduction, his relating something close to what it is that I'm trying to describe for you now; that there is a moment in a man's life when he realizes that the way within which he comports himself is as much a description of who he is as could be defined by any other description. From Ogg, to Billy, to Mikey to you and I, we're all subject to certain forces that help us to determine the value of the services we choose to provide, as we are to those we wish to acquire. The differences may be small, and hence, described as marginal. But changes, however small, are discernible, and as much as they are discernible, are measurable. These changes are often referred to as discrete changes, or shifts. That is, however small these changes may be, there may be sufficient reason to say that the condition or state that was held previously is significantly different, although the changes may be marginal or discrete, from the states or conditions that held, previously.
The bulk of this post was an attempt to draw the reader into understanding that certain changes in the way a reader views things around him can change. Some of these changes can be quite jarring, such as moving from the activities of a wheat rancher, to the activities of the person involved in child prostitution. Yet, change is what the economist values. It is these changes that economist refer to when describing an economic activity's marginal change. Whether it is the marginal change in demand, the marginal change in supply, of the marginal propensity to consume, the economist is interested in testing whether or not these marginal changes occur as a result of internal values, or as the result of external forces. When describing these differences, we view these as either endogenous or exogenous variables. While it would be hard to suggest that the efforts of the hippie weed seller, or the wheat rancher are on a moral par with the pimp of children, these activities occur for the same reasons; profitability.
Moral equivalence is often attached to economic activity. Some people view profitability as an erroneous pursuit, for those engaged in private enterprise. That is to say, if one conducts an enterprise so as to gain a profit, that the morality of that profit is on par with the man who would subject others to slavery. The wheat rancher is just as much a moral villain as is the trafficker in child slavery, since the motives of both are related to the pursuit of profit. One of the questions one needs to ask is, was the offer of the flower from Ogg to Oggette the moral equivalent of child slavery? Both were economic actions, both were seeking outcomes based upon transactions, and both had preconceived notions of outcomes that were beneficial to the various actors.
Are transactions moral events? Or, merely economic events? Are economic events issues of morality? Or, are actions unto themselves worthy of moral description, or simple economic description?
Ten Mile Island
Thursday, June 9, 2011
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.
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.
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?
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?
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.
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.
Wednesday, June 1, 2011
Selling Dope
Last night I started out talking about supply and demand. I ended up talking about price theory, and need to flesh out a couple of things. If I'm a hippy selling dope, what determines the price I sell a lid?
Roughly, the place I live costs me around four hundred bucks a month. I spend about four hundred on food. I walk most places, but when I need some wheels I'll call a taxi or ride the bus. So, unless the bike breaks, I can get by on fifty bucks a month. I rely on the free clinic at the Health Department for medical, so that's like, zero. Electricity, phones and heat, figure $150 a month. Clothes, around ten to twenty bucks a month.
Add it all up, it's going to cost me around a thousand bucks a month to live. My Propensity to Consume is a different thing to think about. That is, if I had more money, would I spend it?
Hard to say. The cool thing about dope is, if I have my munchies and TV, I'm pretty much set. But if I had more money? I might buy a new board. Or an X-Box. Chances are, I'd blow it. Head for the corner bar and spend it while explaining how I was putting it to the man.
But that thousand bucks. I gotta cover it. Problem is, I sell two types of marijuana.
One, I buy from Mikey (Miguel) down the street. Mikey gets his stuff from across the southern border. There are so many people willing to come to this country illegally, that getting the stuff is fairly easy.
Two, there's this farm out in the country where I have a patch that I've grown for years. Good southern exposure, and the strain--totally organic--is totally intense. It's better than any grass I get from Mikey, even though I don't harvest that much. And, my cost of production is really low. Since I trespass, I don't pay for the use of the land. No mortgage, no property tax. There's enough local rainfall that I don't have to worry about irrigation, plenty of sun, and so far no one knows where my patch is. For the few hours I have to spend pulling weeds at the start, I'm able to grow two hundred pounds each year of this killer weed. For free.
The stuff I buy from Mikey costs me. I pay four hundred dollars a pound for his stuff. Each pound I buy, I break into 16 lids that I sell for $80.00 per lid. So, each month, I have to sell at least 20 lids, at eighty bucks per lid. That's a gross of $1600.00 a month. Each lid costs me twenty-five bucks ($400.00 ÷ 16 = $25.00), so for me to net the grand I need each month to pay for my crib and my kicks, I only net $55.00 per lid. Twenty lids per month, or one a day, Monday through Friday, every month including February. Some days I sell two lids. Some days three. Some days zero. But I'm pretty low-key, so things are tight, a'ight?
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?
There are two theories of value that are prevalent today. One model seeks to reward the inputs for their share of added value, by looking at the end product and allotting to the inputs a proportional share of the selling price as reflected by that inputs added value. The other model, the labour theory of value, points out that nothing created could be created without the labour of those who have produced it, and since capital is a form of theft, that the returns of any enterprise should be returned to those who laboured in the production of that good.
The first model, that seeks to allocate rewards to the inputs based upon their relative value to the completed product sold, views labour as simply another input. It might be argued that labour is necessary to build an airplane at Boeing, but it is also true that the guy who buys the mill used by the millwright should also be rewarded for his timely investment in capital goods. In fact, the terrible notions put forward by the Labour Theory of Value. "For Marx, labour is value."
If you have the intellectual ability to disregard the value of the other inputs in the process of production, as does the Leftist, then you have the mental disregard to view the only deserving recipient of the proceeds from the production of any good or service as being simply dependent upon the worker, or workers, involved in the process of making the finished good or service. Go to the factory floor. The heroes are the men you find there.
Being a hippy is its own reward. It doesn't cost much to be a hippy. Respect for law is minimal. And respect for the property rights of others is non-existent. In fact, property itself must be disposed of in order for there to be a regime installed that values the worker for what he is worth, rather than for the Capitalist who offers only the slavery of the proletariat.
"But the concept of the homogeneity of productive human labour, underlying that of ’abstract human labour’ as the essence of value, does not imply a negation of the difference between skilled and unskilled labour. Again: a negation of that difference would lead to the breakdown of the necessary division of labour, as would any basic heterogeneity of labour inputs in different branches of output. It would then not pay to acquire skills: most of them would disappear. So Marx’s labour theory of value, in an internally coherent way, leads to the conclusion that one hour of skilled labour represents more value than one hour of unskilled labour, say represents the equivalent of 1.5 hours of unskilled labour. The difference would result from the imputation of the labour it costs to acquire the given skill, While an unskilled labourer would have a labour potential of 120,000 hours during his adult life, a skilled labourer would only have a labour potential of 80,000 hours, 40,000 being used for acquiring, maintaining and developing his skill. Only if one hour of skilled labour embodies the same value of 1.5 hours of unskilled labour, will the equality of all ’economic agents’ be maintained under these circumstances, i.e. will it ’pay’ economically to acquire a skill." (ibid.)
Social justice requires one to hold such thoughts in one's head.
How do you solve the problem of the hippy who uses land owned by someone else to grow his superpot? And since hippies are all about the social justice, at what price should he sell the stuff he gets from Mikey, and what price should he sell his good shit?
One thought that comes to mind is equality of outcome. What is more important? The number of highs received from a lid, or a reflection of price based upon the costs of inputs? I have two hundred pounds of the good stuff. What is it worth?
Under the labour theory of value, the hippie should basically give it away. He really didn't do any work to harvest the poundage. This, of course, is one of the failings of the labour theory of value. It doesn't really mean anything, since the more important question is, what would a customer be willing to pay.
One of my favourite books was written by Peter Drucker, and titled "Management: Tasks, Responsibilities and Practices." I know that our hippie, drug-selling, marijuana peddler would be lifted up by one of Drucker's observations about profitability. There are plenty of totally intense, awesome ideas out there. Don't view profit as the result of predatory practices of the Capitalist Pigs. View profitability as a Report Card. Lots of profits means that your ideas have social acceptance and social value. The more profitable you are, the more social acceptance and social value your works have. Since we live in markets where we may never know the end user of our labour, profitability is the "Thank You" card that you never receive from satisfied customers. In fact, the highest praise that a civilization can give to the truly worthy is a report card that exceeds the "Thanks" that you would accord the guy that sweeps the floor at the end of the workday.
So, you sell dope. You have two types of dope--run-of-the-mill and superweed--and you're trying to price the weed you're selling. The run-of-the-mill costs you more, but gives you fewer highs per ounce. What is a fair price?
The Labour Theory of Value really doesn't help you, does it?
There is a story, involving Henry Ford, of a breakdown on the assembly line that plagued Ford some seventy or eighty years ago. The call went out to a retired engineer, who came in and solved the production problem within an hour, leaving Mr. Ford with a bill for two-thousand dollars. Receiving the bill, Ford shot the bill back, requiring a breakdown of the bill to explain a two-thousand dollar bill for an hour's work. Back came the bill, itemizing the following:
On-site time: One hour, $20.00.
Forty year's experience: $1980.00.
There lies, between the lines, some similarities between Marx's Labour Theory of Value and the capitalist view of value expressed by Drucker. Marx notes the distinction between Skilled and Unskilled Labour, suggesting that the differences between are ameliorated after time. Mr. Ford's workman fixed a problem, relying solely upon his own skills, his own, human, capital. What was it worth to Mr. Ford to pay the gentleman? His down condition was costing him thousands. Any cost less than that, was an advantage to Ford.
What is the price a customer of Mikey should be willing to pay for his superdope? And who determines what that price is?
Tonight we've examined several different concepts, from comparative value, to determination of price. We've also looked at the propensity to consume, touched on the edge of disposable income, and seen that economists have different starting places when it comes to legitimizing the values of goods and services being bought and sold. Ideas, like "social justice" are normative values, while looking at the discreet costs of various inputs in the production process are more likely determined by objective values, that rely upon the increase in value of the final product through the production process as a result of that input, than merely an assertion based upon someone's arbitrary view that claims sole possession of value, through labour.
Thanks for reading.
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