Monday, February 07, 2011

Economics and economists

Ross Gittins has today in the SMH stated the obvious that economists' views are more political than they admit. Part of this is bound in the fact that their view of methodology (the last of the positivists) is shielded in error.

What he does is makes an excellent point that standard classical economics has no place for Government spending because the economy is only made up of the choices of firms and individuals. So all the market solutions revolve around individual choices.

The theory makes a concession for the need for Government to create and enforce property rights, but gives no explanation of how such an entity can even evolve out of a market economy. (In reality the causal relationship is the reverse, that government - usually authoritarian - exists first and creates property rights and from that a market economy can evolve).

This circularity is not unusual for economists. They define the problem as one of choice, define efficiency on a principle of choice (there is no trade which makes one person better off and no one worse off), and then prove that markets are efficient. Wow. If I design the system so people can choose, the system allows people to choose.

A good example of the misapplication of the classical model was in an article on the same page by Stuart Washington. This was about his mate's purchase of a standard fan for $8.

He was prepared to concede the product might have been a "loss leader" but really concluded that the price meant we were undervaluing resources like metals and oil. He says;

My argument is that the floor fan is an indicator of a world in which certain inputs are not being accurately priced. I don't think the metals that went into the fan were priced properly. Nor were the petrochemicals.

No evidence is advanced for this. The reality I think is that world commodity prices are still quite high, not low. What he misses is a whole range of other possible sources of the low price being a price below the (average) cost of production.

The first is that this is the end of summer - a time when retailers and manufacturers want to eliminate stocks of unused product. At the specific level it is cheaper to sell below cost than to pay the cost of working capital to have the item wait for next summer. This can be compounded if there is a decision to replace the model of fan before the next season.

More generally there is a temporal price discrimination - you charge well above cost earlier in the season when demand is stable and high, then low at the end when demand is fluctuating but low.

Finally there is the possibility that the product is really a dud.

There is no reason to conclude the inputs are mispriced, just that final prices don't reflect input prices the way classical theory tells us.

Mind you - I find $44 for a multi-function colour inkjet printer at Dick Smith really low too. But that's a different story. The "business" is in selling you the ink cartridges....just like "free" mobile phones.

Novae Meridianae Demetae Dexter delenda est

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