Saturday, April 4, 2009

Adventures In Price Setting

This if from "The Turning Point", by Nikolai Shmelev and Vladmir Popov. Shmelev and Popov were economists in the former Soviet Union, a resume stain that I hope they've been able to overcome.
I've seen references to this story for years, but had no idea as to the original source. Its about what happens when government gets into the price-setting business instead of allowing prices to fluctuate on their own. This story happens to be about fur. .

"When Alice eats or drinks something in Wonderland, she either begins to shrink or becomes enormous, and she can't get back to her normal size. In actual fact Goskomtsen (the Soviet price-setting bureau) finds itself in a similar situation. It systematically either underestimates or overestimates the atual cost of a product and cannot "hit the nail on the head". At best, it is able only to correct the most obvious price disproportions several years after they appear.
In 1982, for example, to stimulate production of goods made of inexpensive fur, purchasing prices on moleskin were raised from 20 to 50 kopecks per pelt. State purchases increased, and now all the distribution centers are filled with these pelts. Industry is unable to use them all, and they often rot in warehouses before they can be processed. The Ministry of Light Industry has already requested Goskomtsen twice to lower purchasing prices, but the "question has not been decided" yet. and this is not surprising. Its members are too busy to decide. They have no time: besides setting prices on these pelts, they have to keep track of another 24 million prices. And how can they possibly know how much to lower the price today so they won't have to raise it tomorrow?"

Well, they could stay out of it altogether, and let vendors try to sell fur for as much as possible, and let customers try to purchase it for as little as possible, and the Invisible Hand will determine at what price the transaction will take place.

On a related note, here's what has happened when California's government put a .05 cent bounty on aluminum cans. The idea was to conserve, be green, and save the earth. Instead, people are flocking to California with their aluminum.

Thomas Sowell says it over and over and over, and we still don't get it. Programs and policies should be judged and evaluated in terms of the incentives they create, not their stated goals and objectives.


Dr Ralph said...

Call me a cock-eyed optimist (rather that what I'm usually called in these parts) but I see no inherent conflict between incentives and having goals and objectives. It's one way of achieving those goals -- and I agree it's often the best way.

Am I missing something here?

And I'd be careful fooling around with that "Invisible Hand." You don't know where it's been.

fembuttx said...

OkaY oKAY...Cock eyed and invisible hand??!! If I pursue any of the 12 instant thoughts that popped into my head....Oh the Whited would be deleting my a$$ like in seconds......

The Whited Sepulchre said...

If you're looking at nothing but definitions, there's probably no difference.
But should government have intervened to save the buggy whip industry from Detroit? How about saving the typewriter industry from Bill Gates?
Or....should we get involved in making sure that every single aluminum can on the west coast gets recycled (while keeping the selling price of canned Coke low) ?
Any time our saviors get involved in price-fixing, its a mess.

Dr Ralph said...

Here I try and be agreeable for once and still with the arguments. What's a mother to do?

Are you saying the government should have no policies and programs whatsoever? Not to have a policy is a policy.

I fail to see your point here. If it is that the bus driver should keep his hands off the steering wheel...I think I want on a different bus.

The Whited Sepulchre said...

Not meaning to be totally disagreeable, but given a choice between No Policies, and what I'll soon be calling The Failed Policies Of The Last Three Months, I'll go with the former.

And to stretch the analogy, I don't think we need a driver. Or a bus. We can all drive.

Dr Ralph said...

Let's see...this economic mess has been some 6 - 8 years in the making and you're calling the current attempt to fix it a failure after 90 days?

Your proposed solution sounds like an economic version of Waiting for Godot: simply wait for the recovery because there's nothing to be done.

At this point given their track record, I'm not sure Free Marketer are even capable of walking without harming themselves or someone else.

The Whited Sepulchre said...

Doctor, Doctor, Doctor,

The roots of the current mess (in my opinion) go back much further than 8 years.
They go back to that blessed moment when our government declared that all citizens should be homeowners. Then they implicitly or explicitly guaranteed every single thing that Fannie and Freddie did. Since those loans, no matter how unlikely, were then good as gold, all sorts of goofy stuff got linked to them, and leveraged against them.

I don't want Godot to intervene.
I want the chips to fall where they may.
I hope Godot, and everyone with delusions of Godot-hood, to keep their messianic selves at home.
Have you looked at the staggering number of messiahs busy pulling us out of the ditch, and how many of them were previously employed digging the ditch?

Dr Ralph said...

Back further than 8 years -- like to Ronald "Laffer Curve/Trickle Down" Reagan?

Don't delude yourself -- you and I are both beneficiaries of the idea that all citizens should be homeowners. As are any number of our neighbors.

Funny, but there is a curious strain of "I got mine" in most Libertarian propaganda that I find off-putting.

The Whited Sepulchre said...

You are correct in that the idea of home ownership has helped us. We can also thank oh, Captialism, The Free Market, a system of courts to handle externalities and enforce contracts, various Bob The Builders, etc etc etc.

I would put the downhill slide somewhere around the LBJ era, if we're going to do carbon-14 dating on the root causes. Poverty, along with a host of other ills, was disappearing nicely on its own until then. At that point, the dollars spent to eliminate poverty vs. tangible result went into the tank.

I wholeheartedly disagree with your "I got mine" comment. Most libertarians that I know are reasonably generous people, motivated not by "I got mine", or "I wanna keep mine", but, "If we could get various busybodies out of the way, almost everyone could get theirs".

What a wonderful world it would be.

Which group gives the most vocal opposition to Milton Friedman's "Open Borders" concept? Libertarians, or the (ahem) voices of compassion and equality in The Mommy Party?

People continue to bang on the doors to get in here, and it ain't because of a proposed Nancy Pelosi/Barney Frank regulatory framework and Nanny State. It's because of the exact opposite.