Skepticism about prices

R. S.,

You may well be right, but if there is misdirection and misunderstanding of the question then I suggest we look no farther than the 3 questions of the host to see why it happened.

I think most people haven't precisely understood the question which was

"if prices are so great at rationing scarcity, why don't people feel better about them?"


Ignorance of Economics cannot be the reason. People are ignorant about Physics and Chemistry but nobody gets mad about the Newton's Theory of Gravity, or the Second Law of Thermodynamics. Further these two scientific theories are a much greater restraint on our choices than any of the laws of Economics; yet still nobody gets mad about them, and anyone who did who probably be considered insane.

The only other scientific theory that attracts such a visceral negative reaction is Darwin's Theory of Natural Selection, and this does so because it offends very deeply held beliefs.

The only conclusion I can reach is therefore that people feel bad about the price mechanism (and many other Economic theories) because they offend either deeply held beliefs or some hard-wired notions of what is an appropriate distribution of wealth.

I would suggest there are two other reasons people react negatively to a jump in prices in a crisis situation.

#4. People have a basic understanding of economics and are disgusted with themselves at not having thought ahead and prepared for the crisis and so are subject to the higher prices to get up to speed. A fact that they know is their own damn fault.

#5. People have zero understanding of economics and have no concept of preparation, thus are pissed off because in a crisis things aren't just given to them by the government fairy wand waver. they would be just as pissed about not getting it at no cost even if the prices held steady at precrisis levels.

Personally, and because of many years of objective observation, I think my 4 and 5 are closer to the truth than 1, 2, or 3 above.

The correct answer is the morality of altruism. Self oriented action, like making a profit on oil when prices are high, is seen by most as pure evil.

Everyone wants a sense of meaning in life, the feeling that his life is not just a routine and a treadmill, but that he is "making a difference," serving some (usually altruistic) moral purpose. Case in point: no looting taxes could take from Bill Gates the amount of wealth he is voluntarily giving away in order to "do good." The Bill and Melinda Gates Foundation has nearly $40 billion.

It is altruism that explains why people think that prices are rising because of selfishness. There are too many selfish, greedy, grasping people out there waving their dollars (especially them furriners!). And that anti-selfish, anti-greed, anti-life premise is the subtext behind the chant, "We are addicted to oil." The broader, implicit message is: "Stop being so greedy; learn a little self-denial; it's not all about you, you know."

Yet another example why even the best economic arguments have no teeth without a proper moral and philosophical foundation. Who is John Galt?

The correct answer is the morality of altruism. Self oriented action, like making a profit on oil when prices are high, is seen by most as pure evil.

Everyone wants a sense of meaning in life, the feeling that his life is not just a routine and a treadmill, but that he is "making a difference," serving some (usually altruistic) moral purpose. Case in point: no looting taxes could take from Bill Gates the amount of wealth he is voluntarily giving away in order to "do good." The Bill and Melinda Gates Foundation has nearly $40 billion.

It is altruism that explains why people think that prices are rising because of selfishness. There are too many selfish, greedy, grasping people out there waving their dollars (especially them furriners!). And that anti-selfish, anti-greed, anti-life premise is the subtext behind the chant, "We are addicted to oil." The broader, implicit message is: "Stop being so greedy; learn a little self-denial; it's not all about you, you know."

Yet another example why even the best economic arguments have no teeth without a proper moral and philosophical foundation. Who is John Galt?

I'm partial to another reason people don't seem to appreciate the pricing mechanism: few things make our blood boil so much as the idea we're getting the raw end of a deal!

This goes beyond rationality and, probably, beyond economics as well.

Politicians on all sides play this to the hilt: If you're paying too much at the pump, it's because "evil speculators" are rigging the price or the "greedy oil companies" are picking your pocket. If you're paying too much in income tax, it's because welfare queens are milking the system.

The incovenient truth that reality doesn't jibe with the explanation never even enters into it. Never mind that a billion dollars taken from Bill Gates won't even buy everybody in America (let alone the world) lunch at McDonald's today. Take any issue and some political entrepreneur somewhere will identify a scapegoat who's cheating you somehow.

if there's a psychologist in the house, pls comment!

Eddie, the right answer in your Philosophy class is, "yes, Bill Gates does have too much money, while so many people are suffering." The best education you'll get in those classes is on how to tell people in power what they need to hear to maximize your personal results. Don't miss this opportunity.

IMO, explanation #2 is the most frequent driver, for the reasons Brad gives.

I'd have to agree with most and say 2 is the most rational explanation. Most people see the seller as person making a profit; without providing an actual product (in essence missing the fact that a transfer of goods occurred).

I recently got in an argument with a professor (philosophy) that stated that Bill Gates has too much money, while so many people were suffering. To which I replied that Bill Gates' money came from developing a product that helps the masses.

i.e. the power point presentation through which he was making his point would not be possible if not for Bill Gates. And that limiting his earning potential would in essence diminish the importance of his work.

I like 2&3 but I would say it is really neither. People don't like scarcity, or at least they don't like the effects of scarcity on their personal consumption.Fundamental to the notion of scarcity is that wants and needs always exceed supplies,psychologically people are adverse to not having their wants and needs fulfilled. In a crisis situation this is merely magnified because the effects of scarcity in certain goods becomes very immediate and often life-threatening.

It is our nature to maximize returns and minimize effort.

Increased prices violate this tendency.

Popular economic conceptions are heavily tainted by Marxist/Populist dialogs. (Profit making as evil)

Politicians, among others, always require perceived evils from which they can rescue us.

Perceived evils must always be in a minority.

2 and 3 don't seem that different to me...or, at least, they're so easy to come together that they might as well be the same thing.

People wish it worked other than it did, and it seems particularly difficult/harsh in a crisis for that to be the case. I think Russ/Munger's point in the econtalk 'price gouging' podcast was the most helpful for me here (as I used to get REALLY pissed off about that topic, especially here in Florida following our storms and preceding them re: gas prices):

(paraphrased) the best way to get MORE product into a strained area is to allow prices to rise. If you don't do so, who in hell is going to get all of that product where it really needs to be, spending the time/risk of doing so. It's way more likely that they'll just sit home, in their comfortable non-endangered houses, and shake their heads at your plight, merely wishing you well.

I think it's pretty rational to be upset about a higher price when you're the buyer. Realizing that the alternatives could be worse is not an easy exercise. We tend to overlook constraints, "reality", and are very good at self-deceiving. This can be useful when we launch out on a new path or start a new enterprise. But one thing is to self-deceive about our own individual situation, and another is to self-deceive about how the world work, what people should be entitled to, the ability of gov't to fix reality etc....

Hazlitt's "Economics in one Lesson" nails it, I think, by starting with the two mistakes people make in thinking about social problems: they don't consider the effects on people other than the immediate parties to the deal, and they don't think about long-run effects. Probably because it's hard.

I'm voting for #2. I wish it were more #3, but that's obviously (and sadly) giving people too much credit.

I'll offer up (4)... People expect someone (i.e. the government) to take charge and take care of everyone in an emergency. The obvious lesson of Katrina is that the government is incapable. The emerging lesson of Katrina is that private mobilization efforts faired much better, but come at the "cost" of not being directly coordinated by someone in charge of coordinating.

Its 2, but mainly 3. Economics isn't as counter-intuitive as Physics, yet people listen to Physicists with reverential awe, whereas Economists are generally considered foolish and unworldly or corporate shills.

2 is certainly true, most people are ignorant about most things, even about things that are important to them. How many people could give a correct description of how a plane flys; how many soccer fans could correctly state the offside rule?

However most people are also happy to out source the understanding of stuff to specialists (so much so that we even have a special word - "nerd" - to describe people who don't behave in this way). And most people don't care how planes fly, so long as they fly. But with Economics most people seem to have a visceral, negative reaction to even the most simple, basic and uncontroversial insights. As far as I can see this can only be because we have notions about the fairness of the distribution of goods so deeply hardwired into our brains, that it requires a huge effort to overcome them.

I'm putting stock in explanation 2 as well. Most people think prices are "cost of goods + cost of labor + reasonable profit", and that's how prices should be set.

As an example, my wife and her sister just started a business of gourmet food / confections. When they were discussing pricing, they looked at it from "well, it costs us this much ingredients, plus this much labor time, so we'll set our price at X". I had to explain to her that the price of gourmet confections is dictated by the market, and she had to set her selling price based on what she reasonably expects people to pay. Only then can she look at input costs and determine whether there would be enough profit to make it worthwhile.

The market sets prices, not the seller. Changing market conditions can widely affect prices, even if the input costs don't change. It's that last bit that people find "unfair".