Don Boudreaux sends this letter to the Washington Post giving a concise explanation of the role of prices:
To the Editor:
Kings of yore occasionally killed messengers bringing bad news. By voting to outlaw so-called "price gouging," the House of Representatives proves that its members are just as irrational as these ancient monarchs ("Tipping-Point Shock," May 24).
Higher prices report an underlying reality such as constrained refining capacity, rising demand, higher taxes, and more regulations. Statutes that prevent prices from rising do nothing to improve the underlying reality. Indeed, by silencing information about reality, restraints on price hikes keep consumers and producers acting in ignorance - thus making matters worse.
Sincerely,
Donald J. Boudreaux
I spent two years working as a controls engineer for Westinghouse. I would liken a price to a feedback signal. The better quality your signal, the more robust and responsive your system is. If your signal becomes degraded or dampened, your system performance suffers, sometimes leading to catastrophic failure. (That's essentially what happened to the USSR when they tried to operate without prices -- they eventually experienced economic collapse.)
In a control system, you never want to reduce the quality of your signal. So too in the economy.
5 comments:
There is no doubt that we do not want a command economy, with too much govt. interference.
However, the reality is that unfortunately, corporations are not immune from the corruption and human flaws we see in govt as well.
Just listen to the audio tapes of the Enron energy traders joking about manipulating energy prices in California (see the documentary on Enron "The Smartest Guys in the Room"). That is a huge reality check. And we are not talking about Ken Lay or Jeffrey Skilling, we are talking about the rank and file employees brazenly joking about sticking it to the state of California. It was funny, too, how when this was going on, and some claimed that energy prices were being manipulated in California, how some tended to discount that. Now we see that it was indeed all true.
In fact, one memorable quote is Enron exec Skilling telling a joke explaining that the difference between California and the Titanic is that when the Titanic went down at least the lights were on.
It's funny how the oil companies always find a refinery to take down around the peak summer months.
The energy business is very complex and is really an oligopoly. The avg person cannot just start an oil company to compete. And the average consumer does not have access to the type of information needed to understand what's really going on.
So, no, I am not in favor of some govt regulatory scheme to control the energy industry. But at the same time, it is not difficult to believe that the oil companies are, to some extent, manipulating the realities to their advantage and to the disadvantage of the consumer. In that sense, a little govt pressure doesn't hurt.
Here are some choice quotes from Enron employees when they were manipulating energy prices in California...these were tapes that came out during the Enron hearings:
One observes, with frat-boy mock-compassion, that they are turning out the lights on "Grandma Millie" and then sticking the high prices "right up her a**." Another says, "There's plenty of power available -- for the right f*ckin' price." One hopes that the Golden State will simply break loose and drift out to sea: "Let 'em use candles."
Here's more:
They had to do a rolling blackout through the town and there was a red light there he didn't see," one Enron trader says on tape.
"That's beautiful," a second voice responds.
"I'm like, this is causing animosity throughout the state now," the first says. "Cars are blowing up."
More, on Enron deliberately closing down energy power plants:
"Ah, we want you guys to get a little creative..." one voice says on the tape.
"OK," a plant operator replies.
"…and come up with a reason to go down," the first man finishes his sentence.
Plant operators were coached on how to lie to officials.
"Just call 'em, Hey guys…we're coming down," one Enron trader says. The plant operator replies, "OK, so we're just comin' down for some maintenance, like a forced outage type thing?"
"Right," the trader says.
"And that's cool?" the plant operator asks.
"Hopefully," the trader responds, to which the men are heard laughing.
Yet more:
"Sorry California," an Enron trader says. "I'm bringing all our power out of state today. I moved out six — over six hundred megawatts."
The "shut downs" and "pull outs" triggered sky high power prices.
"We're just making money hand over fist!" one voice is heard saying on the tape.
And when states complained, the guys at Enron seemed to have a response.
"Get a f****** clue," one says. "Yeah," another chimes in. "Leave us alone. Let us make a little bit of money."
"Exactly," says another trader.
So do I believe the energy companies are blameless little angels...no way. Sure there are market forces at work, but make no mistake about it, these big oil companies are milking the situation for all its worth, and in the process, are sometimes crossing ethical boundaries.
And the average consumer does not have access to the type of information needed to understand what's really going on.
Thinking, I think you're missing the point about the information prices convey. The beauty of the price system is that people don't need to have detailed info about what's going on -- they only need to know that prices go up or down. If there's a shortage of goods, prices go up and people buy less just like they were intentionally conserving to help with the shortage. No other info is necessary. Read Hayek's The Use Of Knowledge in Society to get a better feel for this.
There's no doubt that some businesses sometimes engage in fraudulent behavior, but that is very rare and Enron's example shows how swiftly the market punishes such behavior when it is discovered. Don't think that laws affecting prices aren't also used by politicians and special interests (those same businesses) to benefit themselves. It is much more reliable and cost-effective to manipulate the political process through special interest groups than it is to try to influence market mechanisms in some way. The marketplace is self-regulating. Regulations and restrictions, once in place, rarely go away.
Prices should everywhere and always be allowed to fluctuate or else they send distortionary information to the marketplace. That's the problem with Enron -- people priced their value at a wrong level due to misinformation. That is exactly the effect that laws with price floors or price ceilings create. Wrong valuation can lead to a whole host of problems.
The marketplace is vastly superior at picking the "right prices" than government bureaucrats and regulators. To illustrate one only needs to compare the USA to USSR or South Korea to North Korea.
Corporate executives should be severely punished if they engage in fraudulent activity, but they should not be assumed to be guilty just because "they might be". I don't want to live in a Minority Report type of world where people are punished for things they might be suspected of eventually doing.
Punish people who do wrong but leave the innocent free to trade without government interference. It makes for a much better world.
Dr. Bri:
I agree that I do not want price controls on oil.
However, I think that these big oil companies are not worthy of total trust.
You state that Enron was rare, but is it that rare? You state that the market punished them swifly, but did it really? It took years for the market to catch on to what was going on, and then when such punishment was meted out, it was far too late for many, many Enron employees, investors, and certainly the people of California.
Plus, what the market did was to pull the rug out of the stock price of Enron, which really only hurt the small investors. The real punishment to the most guilty Enron execs happened due to federal laws and prosecution. Otherwise, they would have gotten away with their stashed gains. So the market punishment alone would not have been sufficient.
The market works most effectively when people operate honestly and ethically. Indeed, it has been often noted that only a sufficient degree of social capital enables a market economy to effectively function.
But people are flawed, and thus are their institutions, including both governments and corporations. So the market mechanisms do not always work perfectly. They still may be the best alternative, but they are not perfect.
So I am all for free trade and free floating of prices. But I don't mind if govt honestly investigates these energy companies or sometimes applies pressure. It certainly would have worked better with Enron. That is a necessary check and balance in the system.
Thinking: You've made a wonderful case against government giving "natural monopoly" grants of power to corporations such as Enron. I'm not sure what is has to do with a free price system.
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