What a Little Bit of Economics Does to You

By James Kwak

For a class, I read an old (1986) paper by Kahneman, Knetsch, and Thaler on fairness. It’s based on surveys posing various hypothetical situations where businesses can take some action. For example, most people thought that it was OK for a grocer to pass on a wholesale price increase to consumers (Question 7) but not to raise prices because there is a general shortage and the grocer has the only shipment of a certain item (Question 12). In short, people have an intrinsic sense of fairness the authors summarize this way: “The cardinal rule of fairness is surely that one person should not achieve a gain by simply imposing an equivalent loss on another.”

Today in class, the professor posed the first question from the paper:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”

In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50.

As the professor said, this is probably because there are a lot of business school students in this class. Business school students are classic Econ 101 robots. They know enough to know that if there is a demand shift, not only is it OK to raise prices, but you should raise prices in order to clear the market. In this case, supply is fixed in the short term, so raising the price won’t increase supply; the Econ 101 argument is that raising the price allocates the shovels to people who will derive more utility from them (because they will pay more), thereby increasing social welfare.

But this rests on a huge assumption: that willingness to pay is the same as utility. Unfortunately, however, this assumption fails in the real world; poor people simply can’t pay as much for snow shovels as rich people, and as a result a price increase will allocate shovels to rich people, not to those who need them the most.* But people who believe Econ 101 only remember the demand and supply curves they saw on the first day of class, so they think firms should raise prices.

I suspect that belief in Econ 101 is not only stronger among business school students (and the businessmen they become) than among ordinary people, but is also stronger today than it was in 1986. The free market ideology teaches not only that businesses can maximize profits by any legal means, but that they have a moral imperative to maximize profits by any legal means, including generating profits by imposing equivalent losses on their counterparties. (Essentially all proprietary trading fulfills this condition.) And three decades of this ideology have probably changed people’s responses to these types of questions.

More fundamentally, the 1986 paper shows that Econ 101 is diametrically opposed to human beings’ intuitive sense of fairness. Yet public policy largely follows the dictates of Econ 101. Is that a good thing?

* I’m not saying that there is a perfect way to allocate the shovels, just that using price isn’t perfect, and does have inequality effects.

159 thoughts on “What a Little Bit of Economics Does to You

  1. . . should have asked about raising textbook prices during a shortage. How many students, rich or poor, can relate to needing a snow shovel?

  2. I suppose this might argue for restricting the supply of a good in the case of a demand shift; such as capping the number of items sold to a customer, or only selling them to those who can demonstrate the most need. This would be much more cumbersome than simply raising the price, but could get very creative.

  3. This question is quite like someone asking for different parents.

    PUBLIC policy presupposes the private maximization of profit. It is, therefore, inherently incapable of critically addressing the circumstances which presuppose it, and which serve as it raison d’etre.

    To end private gouging, you must, at the same time, also end public policy…

  4. “… public policy largely follows the dictates of Econ 101. Is that a good thing?”

    Ask Paul Krugman. He constantly criticizes politicians, journalists, and pundits (usually political conservatives) for their ignorance of Econ 101.

  5. I would like to see the reaction to a different example, one that perhaps looks at a life-threatening or moral situation. Ask “Should a hospital or a doctor raise the price of vaccinations if a small pox epidemic (say) break out?” I would venture (hope) to say that the proportion of “yesses” would be remarkably lower, and that proportion unchanged from the mid 80s to today.

    It would be a stronger indication of the moral inclinations of economics students. Not just the bottom line in context of something relatively menial.

  6. Excellent point.

    I fully agree with the statement that business school students (and the business men they become) have completely imbibed the belief that it is somehow not only acceptable, but desirable to raise prices soley to maximize profit at the expense of counter-parties. My suspicion (fear) is that this mindset has also permeated the general public as well.

    In my field (healthcare) there is the implicit belief by many that the ability to pay more is synonymous with the right to obtain better, faster, more efficient medical care. Despite the abundant public health data which shows that this results in a worse situation for *all* concerned.

    This belief is so hard wired in many that it is difficult to explain otherwise. My most feeble attempt (sans economic background) is to posit the question as to whether the child of a lawyer *should* receive better leukemia treatment than the child of a day-laborer or truck driver. (I emphasize should because this already occurs).

    Even with such a stark example, I still find people struggling to divest themselves of the notion that health care is a product whose only concerns should be the narrowly focused realm of supply and demand.

    Thank you for the Blog. I’ve been enjoying it immensely and am working my way through “13 Bankers” as well.


  7. There is another dimension of the problem that can be considered. Competition among industry types which results as demand spikes within an industry. As the cost of purchasing, maintaining and operating a shovel intersects the true cost of hiring a service contractor to shovel for us (after opportunity costs are factored in), the service industry gains favor over the retail industry. For other consumers, the aesthetic value of snow on the ground , and small inconvenience of walking in it to get the mail or get in the car may buck the societal norm of keeping walks clean. However, this may be a value decision instead of a decision based on socio-economics. Further more, there is always the secondary market, which is available as retail prices of the “latest and greatest” snow shovel extend beyond utility value, but become status priced. The problem is much more dynamic than looking at only those who enter the retail establishment to make that purchase. There is an entire economy that exists beyond what’s accounted for in retail numbers. That’s a bit of a mystery to account for in these types of questions. Of course, now we are getting into something above Econ 101, so Econ 101 won’t provide an answer.

  8. Seems the poor man (who now can not afford a snow shovel after the snow) would gain the most utility from it as he could make money with it by shoveling the richer persons driveway. The richer person *might* do the same (shovel other peoples driveways) but I think it is less likely.

  9. Well-run organizations manages scarce resources, thus making sure that scarce resources go to the highest priority projects.

  10. ok i am a BSc Economics student who finished his 1st year

    lets say the shop kept the prices of the shovels at 15$, demand would exceed supply so the first people to go to the shop would get the shovels, while others who would be willing to pay 20$ but were late, wouldn’t get the shovels. Isnt it unfair for them??

    i might just be too indoctrinated but i believe it is a fair question

  11. James Kwak:

    The analysis is grossly inadequate here. First, the supply may fixed in the short run, but by allowing prices to rise eventually does increase supply. For example, a town hit by a hurricane does have a fixed supply of generators. If prices are allowed to rise at some point they get high enough to induce suppliers from outside the city to start bringing generators to devastated town. If there is no price increase they have no incentive to send their extra generators. Likewise good old boys from out of town may decide it is worth their while to throw some chainsaws and other tools in the back of their pickups and head down to disaster-hit town if they think they can earn higher fees. If price gouging laws are put into place these good old boys stay at home and the recovery takes longer. In short, there is an important dynamic supply effect that improves human welfare but is completely ignored in the analysis.

    Second, the critique that willingness to pay is not the same as utility also misses some important points. It ignores that the “rich” people may be banks, grocery stores, and hospitals–the very entities we want scarce resources like generators going to in a crisis so that we can get money, food, and healthcare. It also ignores the fact if resources aren’t allocated by price they will be allocated by other means that will not seem anymore fair. For example, owners of hardware stores might allocate by first come, first serve or by who they know. One can easily imagine the “rich” getting to the hardware store first or the connected getting the goods because they know the owner. The big point here is that the analysis offers up no meaningful alternative allocation and that is because there is none.

    So ECON 101 DOES makes a lot of sense here, especially on the first point above regarding the pace of recovery. If this is the level of analysis that our top law schools provide on such issue it explains why state attorney generals are so eager to impose price gouging laws after a natural disaster, even though it slows the recovery.

  12. It wasn’t until I read Mirowski’s More Heat than Light that I fully realized just how limited and incorrect is the whole field formalism of neoclassical economics, especially as presented in econ 101. The story element called “utility” was substituted for “energy” using outdated 19th century conceptions (equations) from physics. Given that econ 101 is an economics of exchange, absent a theory of production (value creation) or consumption (value loss), it is easy to become morally confused.

  13. @David. The simple country doctor in me is still scratching his head as to how “price gouging” after a natural disaster would “speed” recovery. Surely there will be the usual interplay between supply and demand. But simply making a short term profit at the expense of those with no other options does not appear to me to be a formula for speeding recovery. Indeed, I suspect that it could hinder recovery. (Unless those being gouged have unlimited sums of expendable income in the aftermath of the disaster. A situation which appears unlikely).

    I would hope that the good ol boys with the chainsaws would be motivated by more than just the fastest way to make a buck. Goodness knows that’s not the way I run my business…

  14. All of these analyses are missing the point. Following a snowstorm (or small pox epidemic), there will be a shortage of shovels (or vaccinations). The only question is who will get them and who will not.

    The store (or hospital) only has, say, 100 shovels (vaccinations). You can either give them to the first 100 people to show up at the door and turn everybody else away, or you can give them to the 100 people most willing and able to pay and turn everybody else away.

    Or you can take the utopian approach of allocating them based on “need”, which in practice means giving them to the friends and family of whoever is in charge of determining “need”.

    Is one of these so much more obviously “moral” than the others?

    Capitalism is an imperfect solution for an imperfect world. Now if only “rich” and “poor” had something to do with the value you generate for society instead of your family and political connections. Oh, well.

  15. “The big point here is that the analysis offers up no meaningful alternative allocation and that is because there is none.”

    Offers up no meaningful alternative allocation–true. Because there is none–I don’t think so.

    In this limited, artificial example, probably no method of allocation could be devised that is both workable and meets anybody’s criterion of fairness. The arguments about higher prices bringing in alternate suppliers and bringing about better results may be true in some similar situations, but may not be in others.

    But certainly there are meaningful alternatives to allocation by price for some things. Consider organ transplantation. The supply of transplantable organisms is quite limited and does not begin to approach the demand. Attempts to increase the supply by encouraging organ donation have had only limited success, and are in any case limited by the number of people who die with intact, usable organs.

    Allocation of transplantable organs is accomplished by a need-based algorithm. The organs generally go first who have no other options for immediate survival, and thereafter according to the expected improvements in survival based on diagnosis. The system is imperfect, but it works and is generally regarded as fair. Certainly it is regarded by almost everyone as more fair than allocation by price would be.

    But actually, I think James was trying to raise a rather different point than either David Beckworth or I have addressed here. I think James’ key point was that most people perceive a moral difference between capturing a gain by imposing a loss on others and capturing a gain in other ways, and that business students and others exposed to Econ 101 are less likely to perceive that difference.

  16. This post (and comments)sort of points to a discussion I keep expecting to happen, but doesn’t. That simply, intellectually, we continue to think of Capitalism as an economic system, despite the fact, that within every aspect of our lives, it clearly functions as a value system. Thus, it’s true competition consists of other value systems. It seems easy enough to judge how successful it has become. Ask any American, “How much are you worth?” However the question may be answered, it will be clear how it is understood.

  17. Good point vis-a-vis shovels. Perhaps. But wouldn’t you agree that there are other cases in which the definition of “need” is more precisely determined than order of appearance or ability to pay? I’m thinking about liver transplants, trauma cases, and (in a non-medical sense) infrastructure spending or school construction.

    Seems to me that imperfect solutions are the reason why people even bother with innovation and non-dogmatic policy making. No?

  18. “Essentially all proprietary trading fulfills this condition.”

    Proprietary trading (otherwise known as “investing”) isn’t zero-sum, kid. What makes prop trading different from, say, what a mutual fund does is where the money comes from (i.e., customer money vs. the firm’s own money) — not what they do with the money. This is a very basic distinction.

    I agree with David Beckworth above: this post is based on exceptionally incomplete and simplistic analysis. I’d say the title is correct though: this post is what only “a little bit of economics does to you.” Stay in school, Mr. Kwak.

  19. “Essentially all proprietary trading fulfills this condition.”

    Proprietary trading (otherwise known as “investing”) isn’t zero-sum, kid. What makes prop trading different from, say, what a mutual fund does is where the money comes from (i.e., customer money vs. the firm’s own money) — not what they do with the money. This is a very basic distinction.

    I agree with David Beckworth above: this post is based on exceptionally incomplete and simplistic analysis. I’d say the title is correct though: this post is what only “a little bit of economics does to you.” Stay in school, Mr. Kwak.

  20. “Or you can take the utopian approach of allocating them based on ‘need’, which in practice means giving them to the friends and family of whoever is in charge of determining ‘need’.”

    Well, Nemo, I think you have struck at the heart of what is wrong with our society. But, I think, for the wrong reason. Indeed, it does seem that in our society things done in the name of the public interest usually turn out to be redistribution of our wealth to the cronies, sycophants, and contributors of those in power.

    But it does not _have_ to be that way. In another post below I’ve very superficially outlined the allocation of organs for transplantation–a need based system that works pretty well. (Yes, there have been allegations that a few celebrities have managed to get around the system–I have no idea if that’s really true, but even if it is, it’s quite the exception.)

    As for your alternative example of vaccines, that is a situation where one can rather easily design a need-based system. For most vaccine-preventable diseases you can easily identify groups of people who will derive the most health benefit from receiving the vaccine. (For example, for flu shots it’s the elderly and people with chronic respiratory or heart disease, and diabetics.) Giving the vaccine to them first will reliably produce more health benefit from the same number of vaccine doses than giving them to those prepared to pay the most. And the ascertainment of membership in this priority group is fairly simple to make in a more-or-less objective way that does not include nepotism/favoritism etc.

    “Now if only “rich” and “poor” had something to do with the value you generate for society instead of your family and political connections. Oh, well.”


  21. 0r you can distribute them by lottery in some cases. That is how we allot moose licenses up this way — we certainly don’t give them to the highest bidder.

    Then again, and I am thinking of the ticket-scalping game, if you distribute scarce items fairly, some people will just resell them to the highest bidder if they can . .

  22. I have thought about this too — and come to believe it is Darwinism, at root.

    Oddly enough, the Bible Right leans more to Darwinistic social values, while the Agnostic Left is more compassionate toward the disadvantaged — You who claim to follow Christ’s instuctions should do some hard thinking about this.

  23. I would tend to agree with David’s cold yet rational ideas versus the impassioned pleas of James. I think “willingness to pay” is “the same as utility.” In this stylized example the poorer would-be-snow-shoveler could borrow to purchase the shovel and could use his capacity to dig out his neighbors walks and vehicles. His willingness to pay would correlate with the amount of utility he could obtain by being employed and moving himself and his own vehicle through the voids of snow he created.

    Kwak’s analysis is similar to those pleas of motorists in San Diego who did not want to pay the toll to ride on the paid highway. If you do not need to be somewhere quickly than you can take the free highway beside the pay portion, but if you need to be at a job site at a certain time than you can do the cost benefit analysis as to whether spending an extra 20 minutes in traffic is worth the amount of the toll. People against this idea argues that it takes up more of a less affluent worker’s income to utilize the toll road, a thematic progressive appeal. But if the person rationally decides that the toll is too costly relative to what he will earn at work than his best option is to enjoy the shock jock radio as he finishes the longer commute.

    Removing the person from making a rational decision about market pricing is not only overly paternalistic, it, as David states above, creates distortions in the market and takes away that person’s freedom.

    I would ask back why didn’t this hypothetical income-in-the-lower-quartile person invest in a snow shovel the moment he arrived in his soon to be snowy location? What precluded him from buying an insurance-like product when he knew that snow could and would fall between late October and March? Also, if he has missed out on his opportunity to do his own shoveling what precludes him from borrowing a neighbors, or letting his neighbor’s child earn some well deserved coin?

    Of course in closing, I would invoke Hayek “It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know.”

  24. Achilleas,

    It is a fair question. If you read this blog enough you find out that James goes off his rocker once in a while. . .

    Hey James, how about your professor’s deduct 7 points from each of your assignments in class because you’re IQ is 9.3 points above the median of your cohort? Life ain’t fair. Your momma should have taught you that.

  25. Then is it legitimate hard-ball economics to CREATE a scarcity of some item after one has cornered the market on it? This could easily be done now by a mega-corporation with its own media resources. I am thinking perhaps a scare story based on cooked-up research, with the cure being a “scarce” or even a patented item.

  26. Great post, but its missing a reference to Robert H Frank’s “Does studying economics inhibit cooperation?” (The answer is yes)

  27. As some other commenters have said, snow shovels are a bad example. Why shouldn’t retailers maximize profit on snow shovels.

    The bird flu outbreak is a much better example. The vaccines were given to those most vulnerable first. If market forces had been applied, the rich would all have been vaccinated and none of the poor. This would have had consequences beyond a lot of poor babies dying.The vulnerable would have provided reservoirs for the virus, endangering even the vaccinated rich since the vaccine was not 100% effective.

    So the problem lies in the belief that Econ 101 applies in every situation. It should be counter balanced with Society 101.

  28. It’s pretty well known that learning economics changes behavior and beliefs – there’s a lot of research on the topic so you shouldn’t have any trouble finding it. (Interestingly, the same doesn’t seem to hold for non-physicists who study physics. They’re just as likely to make the same mis-understandings of how physics operates after taking intro physics as before.)

    It would be nice if business people continued to study economics instead of giving up after one or two intro courses. Like most fields, the deeper you go, the less obvious it seems. It seems pretty clear to me that most disciplines (at least in the social sciences) spend the first year or two teaching you the rules, then the rest of the time teaching (or researching) the exceptions.

  29. Nobody can get to the store if they don’t already have a snow shovel anyway after the storm. You raise the price just before the storm, of course.

  30. I was happy to be WOW!’d by the Olympic Games that were recently hosted in China.

    Everything about it was impressive – from the social organization to the massive scale at delivery.

    Stay with me – think about what the marshaling of ALL their resources into a PEACEFUL assembly of global humanity meant and why was that not an opportunity to sustain a certain “lifestyle”? Didn’t EVERYTHING “economic” go into it?

    From the decision to shut down all polluting industry so that the air could clear, to the deployment of an army to get rid of the locusts, new distribution channels set up for food and the housing of a couple million more people – the whole creation of those games basically solved every single problem of shifting from one mission to another!

    I’m with you on this one, Simple Country Doctor, they have no intention of stopping gouging, they’re here discussing amongst themselves how to work it. And shame on them for building all those institutes of gouging that sprung up on the Las Vegas NV landscape overnight – one high rise after another housing “Health Insurance” companies. At least we all know now where the engine is that continues to suck it all up for “distribution” to the few.

    I sincerely hope that the Oriental race gets back to wow-ing the world with living examples of how “economies” can be marshaled into something we haven’t done before as a species.

    The discussions that get into the minutia of greed – the living details, if you will, certainly is educational for those not steeped in the suck it all up mission.

    Back to “business” (for whom?!) in China – from the Olympics to a 9 day traffic jam…

  31. my god, your post just PROVES kwaks point, u are so imbedded with ECON thought, that you overlook the obvious, you cannot factor in the MORAL point, which is kwaks point, that econ WOKS like you, are so imbedded with ECON speak, u have lost the most basic and durable aspects of what a human being is, and that is caring for what is right and wrong.

  32. The “agnostic left” only *seems* more compassionate. But when you consider the fact that their compassion is based on redistributing someone else’s money (usually that of the middle class) to the poor and disadvantaged (rather than their own money), you begin to question that so-called compassion. Where are all the agnostic liberals who donate, say, 10% of their income to these causes?

    The “bible right”, seems to favor hard core, might makes right, majority rules, eye for an eye, anti gay public policy, with little awareness of the US Constitution’s basic protections for the rights of those in the minority, those who are not popular, those who are poor. But, it’s not clear what Darwin has to do with such policies.

  33. I’m surprised no commenters have questioned ‘no one should achieve a gain by simply imposing an equivalent loss on others’.

    1. All profit imposes an equivalent loss on others, in dollar terms. But surely we do not share an innate sense that all profit is unfair.

    2. It is very reasonable to assume that all or practically all buyers, even at the inflated prices, experience an increase in value from the exchange, not an equivalent loss. Were the value of a shovel less than or equal to the price demanded, the shovels would overwhelmingly not get sold at that price.

    Unfairness does not lie in whether there is profit, it lies in whether the transaction is VOLUNTARY.

    It is hard to think of a fairer system of shovel allocation because it is hard to think of a more voluntary system than commerce.

    In crisis situations, we make purchase decisions we would not have made in the absence of the crisis. This can feel like a less voluntary purchase, even though it’s not. And because we tend to think of value as fixed, even though it isn’t, we further resent the price of the shovel going up.

    But if we wish to be reasonable, we will recognize that sooner or later we were going to need a shovel, and we should have purchased one before a snowstorm hit – in the summer, probably, if we wanted the best deal. This would have benefited everyone as there would be less scarcity.

    If it’s not unfair of me to buy a shovel on the cheap in the middle of summer, then it’s not unfair of a shovel salesman to charge more when a storm is coming.

  34. man, one after the other, u guys keep proving kwaks original point. Once again, proven by Josh here above.

  35. Rather than Darwin I might say they favor the pre visit policies of Scrooge. In fact it might make sense to invent the term Scroogian to describe them. Scrooge is an incarnation of the econ 101 philosophy. Economics trumps life and human feeling. But we intuitivly know this is incorrect, the old saw about no one on their deathbed ever said I should have worked harder applies here.

  36. “Darwin” in this context means survival of the fittest. Mother Nature creates perfection by allowing the less fit to fall by the wayside, rather than pass their imperfect DNA on to future generations. Left wing compassion means helping the less fit, and thus enabling them to reproduce themselves. I am very much a follower of Jesus, in Tolstoy’s sense, yet I can understand why the Right thinks the Left is wrongheaded in the way they help the poor. But I credit the Left with forcing most of the true social advances, like ending child labour and slavery.

    Jesus said “the poor you will always have with you” i e (I think) natural competition will always result in some people being poor — yet he required us to help them. I believe this is a great challenge lying ahead for human society — to harness the recently recognized evolutionary laws and make them work for us, not against us. How do we strengthen our genetic heritage not only in “fitness” but also in compassion instead selfishness? How can we evolve away from war? How does competition (including religious competition) breed war? All of this is very much an economic issue, as well as a social and spiritual one.

  37. Re: @ mondo pinion___So you believe that “Natural Selection” via “Religious(Social Values) is partial too dogma’s (so to say?), and that Agnostics(show me the benefits of a pragmatic society?) are compassionate to the weak? Your interregnum hypothesis is prejudiced – for the very “Root” of mankind has been building a platform of equality for the very nature of survival for “Societies”. Thusly I say unequivocally that all agnostic are bulimia…scantly clothed in a amicable but catharsis atheist conterminous distal amorphous! They care not about compassion or the betterment of society as a whole…but rather their verisimilitude narcissism. PS. A explicit argot narrative assault on religion has subjectively through ataxia shown your hand of “Economics 101” paralax? Creationist do have exceptions for Darwinism…also as in the 16th century regarding “Galileo” – learned to admire his creativity, and genius – helping society as a whole.:-)

  38. Eh? no. The organ distribution system is barred from being a market by it being illegal to traffic in human organs for profit, or illegal to pay for them or some such law. Assuming a fixed supply of organs the current system is maybe working kind of ok, but most people are NOT organ donors. Like 30-40% I think are registered. It seems likely that if you auctioned some organs to be sold to very rich people for high prices, then you could fund paying people like $100 to register as an organ donor. Assuming this pushed the population % registered up to 70% (which is conservative imo), this would add a bit of unfairness to the system, but result in it saving TWICE as many lives. To say nothing if you allowed this program to operate in poor countries with no organ harvesting infrastructure, then we might not have Americans dying because of organ shortages at all.

  39. Right on brother. Also History 101.

    Particularly the French and Russian revolutions and even the British nationalization of industry. If wealth is not re-distributed proactively, another way is eventually found.

  40. A store owner would be likely to stock more shovels if he knew that he could charge a premium price for them after a snow storm. So I think the price increase does increase supply, just not in a way that is immediately obvious.

  41. “Stay in school, Mr. Kwak.”…..hear hear…the price of shovels should be $30 not $20.

  42. well the short version of Darwin’s theory is only the best (most powerful) should survive. compassion has no place in it

  43. In the real world the solution can be different from what is predicted by the texts and by the cynics.

    Last year the Alberta Government found itself with a shortage of H1N1 vaccine. As good conservatives they first said ‘first come first served’. Many elderly and ill persons could not wait in lines that lasted 8 hours or more to get a vaccination. Then it turned out that a government friend of a Calgary professional sports team had first reserved vaccinations for the team players.

    The resulting public outcry – made them change to ‘first those in need’ I.E. those with documented medical conditions that put themselves at higher risk of not surviving an H1N1 infection. (asthmatics, elderly etc. etc.) Then after the shortage was solved – anyone could get the vaccination

    This final outcome seemed to satisfy everyone.

  44. In many universities, certain classes have limited space and this causes problems (usually resolved by first-come-first-serve or lotteries). I’ve seen a number of people (including famous economists) suggest that enrollment for these classes should be auctioned off. The rationale being that those who will benefit the most from the class will also be those willing to pay the most. Of course, this ignores the unequal distribution of wealth amongst students in that rich parents will easily afford to pay quite a sum, while those working their way through school will be left out in the cold. In short, it just allows the advantaged to buy themselves even more advantages.

    Its the same basic story as here.

  45. Re: @ mondo pinion___No – your not at all in no-man’s land but in a forum that enjoys to challenge the orthodox of “Thought”…there is no right or wrong, only for those that refuse to listen to all sides – we all take out of life what we’ve put into it, and until death, what we’ve given back. Jolly Good “Mondo” :-))

  46. Many of the poor are priced out of the market for snow shovels year ’round. Shortages tend to be the exception rather than the rule in market economies, the opposite in socialist economies. There the shortage is resolved through political connections and bribes. Perhaps more people understand this now than in 1986, and are answering the question with the socialist alternative in mind. Or not–maybe they’re amoral robots and inferior to you in every way. Hard to know without additional data. It’s unclear what alternative you have in mind (lottery?), how you define free market ideology, and–frankly–what the point of this post is. If econ professors are claiming that supply and demand curves are inherently moral, then shame on them. If you’re claiming they’re inherently immoral, shame on you. [Disclosure: no business school, very little economics]

  47. What? You are actually saying that because someone is lucky enough to be born into a wealthy family they are more “fit” than some who was not? Think about that for a second.

    I guess you haven’t watched any of the Celebrity reality shows or you haven’t seen the wealthy in their every day lives. Without their money the majority could not survive. Can’t change a light bulb, let alone shop for a healthy meal.

    I can’t believe the arrogance and stupidity of your comment.

  48. Sadly, what we have now is that the rich people control the weather and then proceeded to corner the market on shovels; storing them all in their off-shore garages in the Cayman Islands. (lots of snow there).

    The weather controlling rich then started an epic snowstorm and then feigned amazement at the Democrats inability to get the snowstorm cleaned up with no shovels. Eventually, noblesse oblige wins out and the weather-controlling rich decide that they’d be willing to sell the government some shovels but only at a 500 percent mark-up and only after either the Republicans are elected during midterms or the snow has melted, whichever comes first.

  49. so we produce an incentive murder maybe? after all, if we kill enough people we can increase the supply. and rich people’s organ’s would likely be high value as they do tend to better health care.

  50. Should people be rewarded for anticipating their needs and buying a shovel before it snows? Wouldn’t that be fair — what ever fair means?

    Is it fair to shovel-less customers that the merchant keeps his inventory small (because there is no upside to having stock and being able to raise prices in time of high demand to balance out the risk of having unsold stock at the end of a mild season) and runs out of shovels when a heavy storm is forecast?

  51. and besides there is that other problem. disasters tend to make transporting goods difficult to near impossible depending on what disaster we are talking about. and haven been in several before. I have never seen any business want come in after one, as they really have a tough time getting their products to customers, and finding said customers is also difficult. after all, almost always the local media options dwindle to nothing.

  52. Ah, another false premise: Taxing people is taking “their” money and distributing it to someone less deserving. Taxes are a price we pay for living in a civilized society. As an agnostic lefty I object to my tax money, (Three trillion of it) going to fight an illegal war in Iraq, but those on the Right had no problem with spending MY tax dollars there. In fact I object to the vast and wasted sums that we spend on the military in general, but you on the Right continue to demand that I send MY tax money to a bloated Military industrial complex.

    On the other hand we do see compassion and practicality in taking care of the less fortunate. Sick people cost more to treat, unless of course you would rather they just died. Ill fed children are more difficult to teach and without and education will simply repeat the cycle of poverty, we want to end it, right?

    But to be fair, how about you send you tax money to buy bombs and I’ll send mine for schools, hospitals, police, fire protection, infrastructure and welfare. My bill will still be less than yours.

  53. here’s a dumb question.
    but why is profit? what makes it so?
    and how is having snow shovels and raising the price when a spike happens fair? and is that really a voluntary transaction?
    what if it was air that some one was selling and their was a shortage of it? or oil?

  54. Quite right. If you are priced out of the market for snow shovels when they are on sale, things probably aren’t going to get any better for you when they are in high demand.

    If you can afford a shovel when it is cheap but do not buy it then, shame on you when you need it.

    If for reasons beyond your control you cannot afford shovels ever (or take the more extreme – though not quite analagous – case, life-saving medicine) then that may be a matter of fairness and consequently of concern to society. If so, responsibility for it should rightly be shared across society, rather than being solely the responsibility of the shovel seller.

    While we might honor a shovel seller who foregoes his own income to help someone too poor to pay for a shovel, it is hardly fair to lay off our own sense of responsibility on him.

  55. Sure, it’s a fair question.

    And the answer is, perhaps you should have read the article fully. Because what he’s talking about is that there are many different ways of allocating a scarce resource, and ‘to the people with the most wealth’, which Econ 101 teaches us is THE ONLY WAY (and which may be the best way for believers in the absolute pure religious form of capitalism) is not always the best way for society.

    For example, let’s say there is only one shovel. You could sell it to the Entrepreneur, who wants to start a snow-shoveling business, thus adding value to it, even though (since he doesn’t already have a business) he can’t afford to pay much for it up front. You could sell it to the Good Neighbor, who can afford a decent price and who would be willing to loan it out to everyone in his neighborhood. You could sell it to the Renter, who will charge $50/hour for use of his shovel. He probably has a lot of money, and so can afford to pay more for it. Of course, this means that the very poorest will never get their driveways dug, and so will probably lose their jobs, but hey, there have to be losers in capitalism, so there can be winners, right? Or, finally, you could sell it to the Collector, who will pay any price for this unique shovel, and will hang it on the wall and admire it forever. He’s already got a hundred others, including one that’s in bad enough shape that he doesn’t mind using it to shovel his walk, although he’d never think of loaning or even renting a shovel to someone else.

    Which one produces the most societal good? If you’re an Econ 101 person, the answer is, ‘What’s societal good?’ And that’s really the point of this article.

  56. Just a few minor corrections to your worldview:

    In this stylized example the poorer would-be-snow-shoveler could borrow to purchase the shovel and could use his capacity to dig out his neighbors walks and vehicles.

    In this stylized example, the poorer would-be-snow-shoveler could apply for a loan, for which he would be turned down, because as we all know, poorer people don’t get loans to buy useful, tangible goods. (Not even houses, after 2007). A middle-income person with a regular paycheck could do this, sure, but one presumes that he would be less likely to want to give up his current job to become a snow-shoveler than someone who was having serious trouble making ends meet, and was therefore totally ineligible for a loan.

    In other words, you took a simplified example and you simplified it so far (anyone can get a loan) that it’s no longer useful.

    But if the person rationally decides that the toll is too costly relative to what he will earn at work than his best option is to enjoy the shock jock radio as he finishes the longer commute.

    The sane argument against this is that these express lanes are paid for 99% by taxes and 1% by those who are willing to pay extra for them. So, again, the middle-class who can’t afford the perks are subsidizing the rich.

    The only way these things would be fair is if the money collected were enough for AT LEAST the upkeep of the entire road, not just the part that the rich guys get to drive on. (It really should also pay a portion of what it cost to build the road as well. And any new roads created for this purpose should be built entirely with bonds, to be paid off by fast-lane commuter funds.)

    But that’s not what’s being discussed. Instead, it’s ‘let’s find a price that will keep the riffraff out and the commute times low, and set it there. Then the riffraff can pay for our roads, but we get to avoid traffic.’ That’s EXACTLY how they’re setting the prices.

    In the end, all the arguments about capitalism are between two kinds of people: people who think that people are more important than money, and people who think that money is more important than people. And unfortunately, that’s where the arguments break down, because most of the time, it seems that each side simply cannot understand how the other side could think that way. One side says, ‘What if someone needs a shovel or they’ll starve to death,’ and the other side says, ‘Then they’ll be willing to pay a higher price for it.’ And the first says, ‘But what if they don’t have the money?’ And the second says ‘Well, then they should have saved up for it. It’s his fault for not getting a shovel while he could.’ (Or, an alternate, ‘Well, then they should get a loan,’ but since that’s essentially delusional, it’s a less useful argument.)

    Neither side is ever convinced of anything. Person A ends up thinking person B is callous and unfeeling, and person B ends up thinking person A is naive and dumb. But it’s really, again, just a question of whether you think property rights or human rights are more important. All else flows from that.

  57. Right, because the only question of fairness is that of fairness among buyers, right?

    Fairness to the seller means nothing, so of course we only need to talk about “price rationing” vs. “need rationing”. Buyers are important; sellers are unimportant parasites upon the people. Right?

    So anticipating a need for shovels and taking steps to have shovels available to sell in a crisis is not something that should be rewarded. Arranging for shovels to be around, when no one else has arranged for shovels to be around, is antisocial and exploitative if James decides he needs a shovel right that minute and further decides that he deserves a higher claim to a shovel than people willing to spend more. Because moving shovels from where they aren’t needed to where they might be needed makes you a Dirty Speculator. And as everyone knows, all rationing plans and planning schemes would always work out splendidly if it wasn’t for Dirty Speculators, Counter-Revolutionaries and Black Market Betrayers of the People.

  58. I was taught that, if you shifted prices too quickly in the wake of a natural disaster, you were inviting trouble from the do-gooders who would charge you with price gouging.

    The smart thing to do is to know the weather forecast, inside and out. If it looks like a big storm is on the way, corner the market by sending some kids out to buy up all of the shovels being sold by your competitors. You may lose a little money on this endeavor since kids don’t do anything for free.

    Then, when the big storm hits, your shovels are “buy one for $25, two for $35.” That way, you can show that you weren’t profiting so much as you were trying to get people to buy an extra shovel, at a discount, for their shut-in neighbors.

    If it looks like you’re trying to be a good guy, you won’t get burned so bad. Bear in mind, I retired early, and I’m still living off the vast amount of wealth I accumulated when I inherited control of my Father’s company, so I do know how business works.

  59. That incentive exists now, the illegal part of that is the murdering people. No policy causes no harm at all to anyone, I’m trying to point out that a system that successfully harvests probably less than 10% of the organs that willing (and naturally dying lol) donors would happily donate if they trusted the system and were compensated in some way is not really much of a role model. Our current system kills hundreds of people every day, we shouldn’t be proud of it.

  60. tbrookside,

    Your argument has a lot of merit from a purely economics perspective. The problem lies with the assuming the purely economics perspective.

    Yes, fairness to the seller is an important consideration, but the facts are that if the seller of the shovels was wiped out due to a climate change-induced flood, the seller would be clamoring for some good old socialism in the form of subsidized loans and relief funds. (and rightly so in my opinion…see BP Oil Disaster)

    Economics lends itself very well to the understanding of core principles relating to the allocation of resources but only in the abstract. In reality people form societies to protect themselves collectively from that which are very difficult to protect themselves from individually. Therefore, when it comes to societies, things will never be as cleanly configured as a nicely plotted set of intersecting supply and demand curves. Whether the speculators are dirty, counter-revolutionaries is beside the point.

  61. I was referring to the fairness of the distribution of the existing supply.

    You quite correctly point out that many criticize the system because, with payment for donation barred, the supply is lower than it could be. Frankly, I think your estimate of 70% registration for donation if payments were allowed is wildly high–there are a lot of non-economic reasons people don’t register as organ donors. Among them are religious concerns, mistrust of the health care system, objections by family members, the “ick” factor.

    But that is a digression in any case. One could still have publicly funded payment for organ donation, ban private party transactions, and retain the existing system for distributing the harvested organs.

  62. Luckily, though imperfectly, the market seems to take care of this too.
    People tend to react to perceived unfairness by holding a long or permanent grudge. After the snowstorm, they may walk several blocks or miles out of their way for years to patronize a different hardware store. The smartest suppliers understand that these long term grudges bleed onto their brand, and prohibit their vendors from exploiting market irregularities too much. Apple is absolutely tireless in their enforcement of prices. Their products sell at face value, first come first served, until they run out. then they make more. Once there is a surplus, they ultra aggressively police the market to prevent discounting.
    It was common practice among dealers of the big 3 car brands to charge huge premiums on new models when demand was highest. BMW and Toyota actively discouraged this. Their current market shares tell the tale.

    In the case of the smallpox vaccine, triage practice and public health policy demand that the vaccine be given to the first 100 people to show up, as keeping some vaccines in reserve waiting for wealthy buyers does nothing to curb the spread of the infection. In fact, in extremis situations like a smallpox outbreak, and maybe even a bad snowstorm, we demand that private institutions suspend commercial interest to serve the public good. Those that don’t are severely punished by the markets, or maybe the Center for Disease Control, afterwards.

  63. Exactly. Taxes are the price we pay… But more than that, they are supposed to be the dividend of our common investment in infrastructure, schools, courts, and the other things that make business prosper.

    WE, the People invested from the 30s through the 70s in infrastructure, and then beginning with Reagan’s tax cuts the dividend of that investment was siphoned off to an already-wealthy few. And now we’re seeing the results of that diversion. Investment in society stopped and now we see the infrastructure and our competitiveness crumbling.

    Which is why I say Tax Cuts Are Theft. http://www.ourfuture.org/blog-entry/2010083209/tax-cuts-are-theft

  64. That is true but there are circumstances where shortage is temporary and random, that is, it won’t trigger new entry/expansion that discipline against opportunistic profiteering. For example, in the UK during the ash cloud when airplanes were grounded, train and ship companies increased their fares to cross the channels by multiples, given the extraordinary increase in demand and their fixed capacity. After the crisis ended, prices returned at comp. levels. In this case though public outrage won’t trigger new entrants that increase capacity, as you are not going to sunk lots of money on the ground that another random event might come sooner or later. So there is no self-correction here, and no point in expecting consumers to anticipate the temporary disruption.
    So, would you call this unfair profiteering?

  65. Perfection is unobtainable. In this context, it is impossible to design and execute a financial system that is always fair to everyone, or implement a system where abuse and criminality are always prevented and punished. As our current system clearly proves, humans are far from perfect and prone to a wide array of unsavory, unhealthy, and sometimes criminal activity to secure entirely selfish ends.

    That said, this interesting post and commentary indicates to me, that a strong regulatory governmental apparatus, with teeth, and the ability to punish or dissuade abuses and criminal activity in the financial system is critical to minimize the very potent dangers and threats to the greater society, and advance and protect the peoples best interests.

    All industry seeks to maximize profit which is healthy, – but – and our current turmoil is a striking case in point, – when industry – in this case the financial services industry is given too much free reign, and not enough disincentives to play fair, or operate legally and work towards the greater good of society – inevitably abuses and criminality infect the industry and the system creating unnatural imbalances and severe injury to the larger society.

    Now the liaise fair, deregulation, freemarket proponents will counter that any restraints on industries ability to expand and garner profit by the government diminishes said industry’s competitiveness.

    That may be true, but the question then arises – is industry that is wayward, criminal, and deleterious to the greater good of society in it’s practices, policies, and underlying ideologies truly “competitive”, or simply dominant, or oligarchic, – and then is that industry tolerable in a healthy society.

    Note the Mexican drug cartels. Market share and profit are the primary and exceedingly selfish ends, and they are quite successful in this enterprise irregardless of the manifest harm to the greater society. Drug cartels, like any crime syndicates succeed by ruthless lawbreaking on an epic scale. There are laws prohibiting these illegal enterprises, but because of the imponderable wealth the drug cartels garner, (much of which is laundered through US finance oligarchs) these enterprise are able to sustain and succeed.

    Now the predatorclass and the finance oligarchs are not murdering officials and beheading opponents, – but the ends and means of their enterprises are similar that both are focused entirely on their individual and select interests and neither exhibit or practice effort for the greater good of society.

    Biggovernment is slimed by the freemarket profiteers who profit obscenely from a market that is certainly NOT free or fair or in many operations legal.

    Biggovernment and a stern regulatory apparatus is critical to protect and defend the greater good of the nation, and advance the peoples best interests, and forcefully constrain the systemic abuses and criminality of the socalled TBTF oligarchs.

  66. true enough, dw, but we need to steer and not just tumble down the slope wherever evolution takes us. if we want to be compassionate beings, we have to work with Darwin’s laws in designing our social systems so compassion is more compatible with survival/reproduction than selfishness is.

    Henk, if people are rich they may not be “fit” in the competition game, but some of their ancestors probably were — and they carry that DNA. Plus, fitness in Darwin’s theory has to to with the ability to reproduce oneself — it’s that simple ie it is a numbers game — and being wealthy certainly gives one’s kids an edge . You are failing to understand the concept of survival of the fittest.

  67. Proprietary trading is NOT investing and only bares a superficial resemblence to it. Further, it IS a zero sum game. The only real value added to the stock market is the profits generated by corporations providing goods and real services. Trading (buying and selling securities in anticipation of a short term change in the price of those securities) simply re-allocates money from those who predict correctly from those who predict incorrectly.

  68. After a *large* snowstorm, you don’t really need a *snow* shovel, you just need a shovel. I know this from experience; during the Seattle snowstorm of 2008, I managed to get to Home Depot after being stuck for a day, and they were all out of snow shovels. So I just got a regular shovel, and figured out that a snow shovel is better than a regular shovel after a not super heavy snowfall. It’s got a bigger blade, which is good for moving not super deep snow. But after a heavy snowfall, the limiting factor is your strength, not the blade size of the shovel, and if the snow is deep, you can easily get as much snow as you can carry into the blade of a regular shovel. So not having a snow shovel isn’t that big a deal, and if it doesn’t snow much where you are, you’re better having a regular shovel because you can use it for dirt later.

    So, an argument can be made that jacking up the price of snow shovels is fair, so long as there’s a supply of regular shovels. A consumer can respond, “OK, go ahead, jack the price up as high as you like, I’ll just get a regular shovel, which will serve me just as well.”

  69. Eric O – Good point, and it’s not only the brand-name supplier who benefits from restraint. No locally-owned hardware store is going to give its customers an excuse to defect to L*we’s or H*me Dep*t. There’s a short- vs. long-term-thinking dimension here. Paolo – next question is, how many voters would consider it unfair profiteering, and would that be enough to induce some party to add an ‘anti-gouging’ plank to its platform?

  70. I really do not think the analysis can be so simple.

    If credit is due anyone for ending slavery in the US, a whole lot of it goes to a collection of hard core, devout, Christians (abolitionists) in the north east, and Lincoln’s Republican party. Is that the left? Is it the right?

    Another example of the complicated nature of this matter is found in the pro-life/anti-choice/whatever label you prefer movement, which sincerely believes itself to be defending the lives of innocent beings who lack the most basic of protections in the legal system.

    Now, whether you agree or disagree with their perspective on a fetus, I don’t see how, within their world view, they could be labeled Darwinian. They see themselves as helping the weak in this situation.

    In order to view them as Darwinian, you must impose your own world view on them, insist that what they view as a weak and defenseless being is just a meaningless clump of cells, and conclude that their true intention is to bring about a Darwinian elimination of pregnant women who don’t want a child — by forcing them to give birth to another generation. Or something.

    So, we can call those particular anti-choice, right wing folks a lot of things, but — Darwinian? Huh?

    These simple left/right — compassionate/darwinian dichotomies just don’t make a lot of sense to me.

  71. This is the “poor among you” phrase in context – don’t tell people to get off the road and resign :-):

    “Nothing out of the ordinary happened until near the close of the feasting when Mary the sister of Lazarus stepped forward from among the group of women onlookers and, going up to where Jesus reclined as the guest of honor, proceeded to open a large alabaster cruse of very rare and costly ointment; and after anointing the Master’s head, she began to pour it upon his feet as she took down her hair and wiped them with it. The whole house became filled with the odor of the ointment, and everybody present was amazed at what Mary had done. Lazarus said nothing, but when some of the people murmured, showing indignation that so costly an ointment should be thus used, Judas Iscariot stepped over to where Andrew reclined and said: “Why was this ointment not sold and the money bestowed to feed the poor? You should speak to the Master that he rebuke such waste.”

    (1879.4) 172:1.6 Jesus, knowing what they thought and hearing what they said, put his hand upon Mary’s head as she knelt by his side and, with a kindly expression upon his face, said: “Let her alone, every one of you. Why do you trouble her about this, seeing that she has done a good thing in her heart? To you who murmur and say that this ointment should have been sold and the money given to the poor, let me say that you have the poor always with you so that you may minister to them at any time it seems good to you; but I shall not always be with you; I go soon to my Father. This woman has long saved this ointment for my body at its burial, and now that it has seemed good to her to make this anointing in anticipation of my death, she shall not be denied such satisfaction. In the doing of this, Mary has reproved all of you in that by this act she evinces faith in what I have said about my death and ascension to my Father in heaven. This woman shall not be reproved for that which she has this night done; rather do I say to you that in the ages to come, wherever this gospel shall be preached throughout the whole world, what she has done will be spoken of in memory of her.”

    It was because of this rebuke, which he took as a personal reproof, that Judas Iscariot finally made up his mind to seek revenge for his hurt feelings. Many times had he entertained such ideas subconsciously, but now he dared to think such wicked thoughts in his open and conscious mind. And many others encouraged him in this attitude since the cost of this ointment was a sum equal to the earnings of one man for one year — enough to provide bread for five thousand persons. But Mary loved Jesus; she had provided this precious ointment with which to embalm his body in death, for she believed his words when he forewarned them that he must die, and it was not to be denied her if she changed her mind and chose to bestow this offering upon the Master while he yet lived.

    (1879.6) 172:1.8 Both Lazarus and Martha knew that Mary had long saved the money wherewith to buy this cruse of spikenard, and they heartily approved of her doing as her heart desired in such a matter, for they were well-to-do and could easily afford to make such an offering.”

  72. i dropped out of an MBA program because i was one of the few entering it who wasn’t a business major as an undergrad. i simply could not understand how greed had become a virtue, how social safety nets were always seen as reducing economic welfare, how unions were destroying our economy, and how the government could never do anything right.

    these things were all surprises to me, in large part because my person experience had proven all of those assumptions to be horribly wrong. yet business grads all just knew they were right. there was no question in their minds.

    it’s scary to think that these are the people who run our country.

  73. Well, Mondo, see what you started? Another “religious war…more about WWJD…2000 years of re-write…wish I had a penny for every self-serving interpretation in those 2000 years (maybe someone DID put in a schekle everytime a good one came along?)

    Here’s my fav from the MOST forbidden book on the planet (doesn’t that just get the teenager in you interested?):

    “This cleansing of the temple discloses the Master’s attitude toward commercializing the practices of religion as well as his detestation of all forms of unfairness and profiteering at the expense of the poor and the unlearned. This episode also demonstrates that Jesus did not look with approval upon the refusal to employ force to protect the majority of any given human group against the unfair and enslaving practices of unjust minorities who may be able to entrench themselves behind political, financial, or ecclesiastical power. Shrewd, wicked, and designing men are not to be permitted to organize themselves for the exploitation and oppression of those who, because of their idealism, are not disposed to resort to force for self-protection or for the furtherance of their laudable life projects.”

    Guess we need to specify separation of CHURCH and BANK – two completely different “religions”…

  74. Economics 101 can be a bit more nuanced than this!

    Let’s assume two possible responses to the shovel problem (and these ARE the two a normal shopkeeper in a crisis typically views as his option space):

    – Keep prices as is (which, given the storm, most people will view as a relatively trivial expense): this is essentially first-come first-served.

    – Raise prices

    Economics 101 may say there is may be a societal advantage to choice #2. And the argument is very, very, solid; maybe it’s refutable but if you don’t even see the point (and most people don’t when they are first introduced to the idea) you are the poorer for it. To caricature this insight – and it is an insight – as “raising prices is _the_ best way of solving the shovel allocation problem” or “if it’s true for shovels, it’s true for organ donations too” seems to be willfully stupid. Especially if you aren’t willing to take a stand on how such allocations _should_ be done. (I credit the commentor who in effect says that the purveyor in the middle of this crisis calmly takes a societal impact statement from each purchaser, then chooses the best – at least he proposes another concrete alternative even if it might be seen as a tad other-worldly.)

  75. That would be a big improvement, I was basing my 70% off a poll that said 70% of people approve in theory of organ donation, and assumed that most of them were just too lazy to do their homework on the subject and register. A payment of $100 would dispel a lot of laziness, ick factor, etc., esp outside the U.S. The state should have a role in either distributing the organs or regulating the trade.
    But still, don’t diss econ 101 when econ 101 would save at least twice as many lives.

  76. Fred, you say “there are many different ways of allocating a scarce resource, and ‘to the people with the most wealth’, which Econ 101 teaches us is THE ONLY WAY…is not always the best way for society.”

    If ONLY this were ONLY taught in Econ 101, most regular people would go on about being regular people, which is to say, often fair-minded and kind.

    But NO. ‘To the people with the most wealth’ is taught by the media, day in and day out, online, over the airwaves. It is parroted by otherwise decent people as the American gospel. The whole darn country is indoctrinated with it. And anyone who suggests another way is slammed as a feeble-minded liberal.

    Of course James was talking about societal good, sometimes called “the common good.” To too many Americans, he was speaking a foreign language.

  77. LOL. After it was adopted by several classes, my publisher raised the price of my textbook from $45 to $65. Of course, in my opinion, if they were pricing it by “utility” they should be charging $165, although some of my students would say $1.65. But they weren’t going to pass anyway.

  78. Here’s a 101 simple inquiry – adding up the mysterious loss of net worth of the “savers” among 5 of my female friends – 1 BA, 1 MBA, 1 Phd., 1 MS-Engineer, 1 MD is well over 1.5 million – BA actually saved the most, she had a terrifying “vision” decades ago about not having $$$ to pay the gang of men who came for her…

    So who is keeping track of the TOTAL loss – I heard 14 trillion but that seems low…and certainly not enough to cover the “derivative” fiat money…

    That was some CHEAP war, Rumsfeld.

    Sounds like Cheney got a “donor” – makes sense why so many in the inner game took up smoking cigarettes recently – “boutique” small business with finite circular $$$ flow – nope, not “inwesting” in “saving lives” by growing the human organ swaps trade…

  79. Economic rent does make sense in the short term, at least in some situations, but not when it is chronic. In this case, the rise in price will likely not increase the supply of shovels. In the case of an extended power outage, a rise in the price of generators might induce people to bring more in, if they think the disaster will be prolonged. But of course, that is not the only way to increase the supply of generators.

  80. I used to not take the Tobin Bridge into Boston owing to the toll. But then when gas hit $4 a gallon I joined a carpool and, due to the extra savings, we always take the Tobin now. In other words, charging extra helps encourage conservation. The money I save not driving some of the time offsets the toll. The time I save taking the Tobin offsets the dropoff and pickup times. It all works.

  81. Re: @ CBS from the West___In China they sentence hundreds to death every day…and every day they have the firing/killing sqaud executioners given one kill-bullet too a (strategic kill shot not to damage the valuables) prostrated/masked, and handcuffed/shackeled death-row organ donar. Next to every fresh “dead body” is a team of extractors/disectors that harvest the organs within seconds and have them on ice and in individual ambulances at the ready in front of each victims ghoulish end. Guess who gets the prizes? You got it the wealthy,and the politically connected bureaucratic families. This also happens on the “QT” in,…? Finally is this supply and demand, or is it just a “Grow too Harvest Society” that gone wild, ie. fit the “MO” your on the dinner list?

  82. If you say that raising the price of the shovel means that those who value it more will be the ones to buy, doesn’t that assume that the price means the same to all the buyers?

    If the shovel is the same price for all buyers, then if one buyer uses the weekly food budget to buy the shovel, and another is able to buy the shovel without it affecting his other spending, the shovel has a different value to both buyers.

    This would be true whether the price of the shovel was raised or not, but it seems to me that it negates the idea that raising the price means the shovel will go to the ones who value it most.

  83. @Annie: “Here’s a 101 simple inquiry … So who is keeping track of the TOTAL loss … That was some CHEAP war, Rumsfeld.”

    Who are you asking? Beats me, maybe government statisticians, maybe Al-Quaeda, maybe you; why are you asking here? If I myself had time for counting things, I guess I’d limit myself to the US and look and #’s dead per year because of its health-care fiasco. But the “101” bit intrigues me: are you referring to psychology 101, or 101 something else?

    If I had to guess, it seems fairly clear to me: you are ranting pure and simple. You’re a bit annoyed that America elected, and then more damningly re-elected, a thoroughly corrupt/incompetent government. Do you think the field of economics endorses this in any way? The answer is, by and large no, but (a) the field gets unwittingly mis-used, and (b) there are idiots willing to be wittingly-used in any field. It scarcely condemns an important field of inquiry as a whole.

    Ok, but you still want to damn and destroy Economic study by some implicit association with the Bush disaster? I sort of understand, but even then, be logical: please deal with the Christians first and come for the relatively inconsequential small-fry later.

  84. It’s not just conservatives that are corrupt. Centrists and Liberals do it to. Remember the no-strings-attached-no-consequences bank bailouts?

    And it’s not corruption in determining need. It’s just straight corruption. In fact, need is just used as a pretext for a massive giveaway to the connected. Sometimes there is also a crumb for some genuinely needy people buried in the midst of it. The health care bill would be a good example of that.

  85. You SERIOUSLY don’t want to throw your cheap psychobabble spunk at ANYONE anymore…trust me…

    I asked WHO is tracking the TOTAL NUMBER of savings “lost”.

    You have GOT to be kidding me that that is a RANT.

  86. Property rights vs. human rights?

    Human human or corporation as human?

    Let’s make it a WHAT has “property rights” and see where that logic goes to advance the discussion…

    WHAT owns property?

  87. confused by sentence structure – are you saying we must constantly strive to make life MORE fair or LESS fair?

  88. Nemo, “All of these analyses are missing the point. Following a snowstorm (or small pox epidemic), there will be a shortage of shovels (or vaccinations). The only question is who will get them and who will not.”

    There WILL BE a snowstorm in the winter. BET ON IT.

    There will be a small pox epidemic among the people who have not received the full potent dose of an immunization. BET ON IT.

    So what are the Econ 101 students saying, you can’t make any money by preparing supplies for WHAT WILL HAPPEN?

    Criminie jiminie – let’s send the suckers to go climb Mount Everest without any supplies. Dialing my favorite sherpa now :-)

  89. “More fundamentally, the 1986 paper shows that Econ 101 is diametrically opposed to human beings’ intuitive sense of fairness. Yet public policy largely follows the dictates of Econ 101. Is that a good thing?”

    The premise here, I take it, is that human beings’ intuitive sense of fairness is an intrinsic good and should be followed. Who says?

    Human beings have lots of intuitive senses, drives, and motivations. Not all of them – I hope we can agree – are good, let alone should they form the basis for public policy.

  90. Mission accomplished, James :-)

    I feel like Jane observing the gorilla tribe – who knew even sociopaths insist on “government” to enforce:

    More misery for others = more money for ME ME ME

    Just how much mathematics are they expected to pass these days? As much as the PE engineer who signs off on bridges (toughest PhD in the world)?

  91. “It’s not just conservatives that are corrupt. Centrists and Liberals do it to. Remember the no-strings-attached-no-consequences bank bailouts?”

    Not sure what your point is about “liberals” here. In case you have forgotten, that was Bush and Paulson.

  92. In answer to your question of who is this tracking this number: I, myself, don’t know. I kind of doubt anyone is but I may be wrong. Maybe your estimate is as good as anyone in this world has today?

    What I want to know is why you ask your question here? There are millions of blogs, of forums, of comment threads, on all sorts of topics. There are blogs about movies, about knitting, about cars, about kittens, about astronomy, about astrology, about whatever. Why aren’t you asking the same question there? Maybe you are??? Did you just pick this thread at random or is there something about it that incited you to think it is relevant to the topic of your curiousity?

    If I may ask a second question (I doubt I can but anyway), what does “You SERIOUSLY don’t want to … …trust me…” actually mean? I don’t know who you are. Why would I trust you? Not just trust you, but “SERIOUSLY” trust you. I doubt, and would not expect, you would extend the same courtesy to me. And “anymore”? I truly cannot make sense of your intent in this sentence.

  93. “well the short version of Darwin’s theory is only the best (most powerful) should survive. compassion has no place in it”

    Humans survived because we lived in communities, taking care of and watching out for each other.

  94. I would note, James, that this question has more interesting implications on things which we consider necessities, and which, in that context, is destined to occur more and more in a world of shrinking supply of many necessities and growing demand for the same. In agriculture, generally, we have shown the ability to keep pace with population growth, but we still see some commodities being priced in odd ways. Someday in the future, the allocation of foodstuffs by price manipulation will have dire consequences without question.

    I like the example of health care. Today, medical science is making amazingly rapid progress on finding cures and treatments for most maladies and diseases. However, the cost of providing optimal care is becoming staggering. We heard the debate about rationing during the reform efforts made by Congress. I would argue that, by necessity, in health care, there will always be rationing. Sadly, the reforms have put pricing decisions in the hands of the parties who are only profit oriented and not treatment oriented. A plethora of examples of this surfaces every day. This is one arena where we need to make major changes which the reform law doesn’t even consider. How can a huge health insurer be asked to forego its stockholders benefit for endless nameless and faceless insureds. I makes no sense unless there is a neutral arbitor, sort of ombudsman agency, that serves as the last word in appeals from coverage and treatment decisions made by the underwriters.

    Wall Street, on the other hand, can be prosecuted for all kinds of malfeasance in rigging the game for their benefit.

    Still, I am saddened to be living in a world which seems to have completely tuned out Ghandi and Jesus in favor of Machiavelli, to the max.

  95. True that Bayard Waterbury.

    Darwin’s theories apply to, and were based on observations of nature, plants and animals, not economics. Civil societies exist under laws. Humans may or may not have evolved from lower animals, but we supposedly did evolve, we developed societies, laws, order, tools, healing remedies, technologies etc. There may be no compassion in nature, but it is the lynchpin of civil societies.

    Applying the shovel analogy to Darwinian theory, – then two brutes walk up the guy exploiting his fellow citizens by gouging them on price when people are in most need of shovels. One brute distracts the seller with questions of the quality of the shovels, and the other brute crushes the sellers skull with one of the shovels sans compassion. The two brutes then take all the sellers shovels, and whatever else they can pillage from the seller. Half the shovels, they sell for $18 at 100% profit, the other half, they give away to their tribe of fellow brutes.

    If survival of the fittest is Wall Street’s stated mantra, and no doubt it is – then let the games begin. Snipers, bombmakers, and skullcrushers will dominate.

    Of course then Wall Street will bewail the benefits of finance to the greater society, and whine and cry about incivility and lawlessness. You speak with forked tongues and have no eyes and no ears and no hearts.

    In a world where there are no laws – there are no laws for anyone predatorclass biiaaatches.

  96. Or we could always distribute the shovels based on who is most likely to share them.

    The point is, there should be more criteria than just what maximizes profit.

  97. James

    replace the shovels with rice, wheat, butter, milk, or anything like copper, wood, energy, etc.; declare everything and anything legal and you have the perfect “free market”.

    That’s “perfect” for the few involved with it, not so much for the masses depending on it.

    What’s next for Capitalism’s or is this its final lap?


  98. Read The Man Who Corrupted Hadleyburg and then come back and set the angels spinning on the pinheads again.

    If we can’t educate and roll out a new class of “untouchable” administrators and put them in charge (carefully monitored of course by people whom we’ve vetted and monitor as well)of a an actual workable planned economy, then we need national and global floors on poverty and ceilings on wealth. It most likely needs to be a global effort at this point as people will just look for the best geographic arbitrage plays if not.

    It seems so hard to define a high floor for education, healthcare, housing, and the like. Is it really that hard? We can feed every single person on this planet. We can even reduce the population in a non-repugnant way to make this easier. We can provide a very high minimum level of health care for every living soul on the planet too. But the only way to do these things is to take command. 10’s of thousands of interest groups tugging away at cross-purposes isn’t going to do it. There must be a way to shock the entire world into shutting up and cooperating (besides imminent asteroid event). Maybe it could be done through creative economics? Perhaps some devious souls could use greed and fear to inflate and explode all the economies of the world and give the population of the world a much needed slap in the face. With the chaos and fear this would bring, most everyone would beg for a strong hand to guide them out. Conveniently leaders with a big plan could step up and suggest some really workable ideas. We would shout: Amen! Let’s do it!

    These leaders could be really good at propaganda, and could even make people think that they’re governing themselves. The trains would run on time, we wouldn’t have to worry about price gouging, etc

    What does it really matter though. We’ll be uploading ourselves into electric bucky balls in the coming decades, and it’s all too moot. It’s our meat suits that cause all this bellyaching. Once those are gone we can play darwin games all we like and it won’t hurt anyone (unless we build that in for reasons of nostalgia).

    Just a few more decades.

  99. I think business must have social responsibility and moderate their greed for profit. Taking advantage of a situation that will produce more profits to the business, but will cost much more to the consumer is both unethical and immoral.

  100. The Danish law professor Alf Ross once wrote what translates into something like “when lawyers use fairness as an argument, you know they are out of arguments”.

  101. Reality check;

    There is no such thing as a “free market.” Never has been a “free market.” Never will be a “free market.”

    The extent to which markets are “free” is subject to the discretion of the common or public interest.

    All those Econ 101 genius’ deserve a grade of ‘F’ for putting the cart before the horse.

  102. “You assume corruption in determining ‘need.'”

    Power tends to corrupt, and absolute power corrupts absolutely.
    -Lord Acton

    I don’t think that Lord Acton was thinking of GWB and his cronies when he wrote this in the 19th century.

    No system devised by man will perfectly allocate scarce resources among those in need. We never have perfect information about the relative levels of need between different candidates. Price is also imperfect, however it is also the most objective assessment of the relative levels of need.

    The difference between the respondents in the 1986 survey and the class is probably attributable to increased exposure to economic concepts like price signaling. I suspect that the same percentage of people ‘feel’ that it is unfair, but a larger percentage believe that the importance of the price signal outweighs the other considerations.

    Life is choice among imperfect options. Most people are compassionate and would prefer that other people not go without food, health care, or shovels. Capitalism is choosing self-reliance over faith in the decisions of others.

  103. Not to do your background homework for you, but this is where ethics comes in and is not taught. I took Econ prior to that paper being written and while I do not remember everything from the day-to-day class lectures, I do still own the text book, and I remember lectures on ethics, government involvement and monopolies when the public is being taken. My one son who graduated from a large school did not have ethics in his Econ class — it was all numbers/ formulas and little on how the “theory was just a theory”. My middle son who is at a smaller state school currently, so we can pay for it all and keep him baiscally out of debt until he goes on for his Masters, has had lectures on ethics and how theory is just that theory.

    Using theory I could make one item that will keep me alive if some catastrophy was to happen and make another to sell for the person who wanted to pay the most for it and be very rich. But it would in reality do me little good as there would not be a civilization of people to live with me and the other person. Your shovel example is much like that yes you could raise the price and people might buy it, but what damage have you done to your reputation as a store when there is not need for an item. Where is the social aspect of community? What will be the overall cost for that shovel if the shop sells it at a higher price?

    The real question is which son has had the better education — the expensive large school or the cheaper state school?

  104. Um, no, you give the 100 vaccinations to the doctors, paramedics, and police, in that order, because they can do the most good with them. For the record, I have no doctors, paramedics, or police in my family. You should hold the snow shovels for the local government, if they need them, then it’s first-come, first-served because we assume the people who need them the most will try to be first in line to get one. Really, we’d be better off if the store raised their prices, so long as there’s some mechanism to enable the lower-income person who needs a shovel to still be able to get one, either through the business providing some help, or the society providing some help. The second-best way to determine need is to use price in the case of the snow storm, but the real desire is to get the snow shovels to the people who can do the most good with them.

    It seems like one of the reasons we have government is to decide, preferably beforehand, on the distribution of critical resources in situations where the free market doesn’t work acceptably for the public good. We use the free market for most distribution because it’s usually the most effective tool. But we as a society decide when it’s the appropriate tool. Our tools for deciding are our constitutions, legislators, and laws. Our goals are to “establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty”.

  105. I asked about SAVINGS (meaning instead of buying another pair of Manolas, the CASH went into the piggy bank – get it?) that were placed in a BANK that disappeared among 5 women to the tune of 1.5 million.

    You are telling me that has NOTHING to do with “finance” and why don’t you just go away…?!

    And no one is monitoring how much of that kind of basic saving for a rainy day got STOLEN? You’re kidding me, right?

    Guess we moved beyond the “trust” part of the program being something the banksters need or want to keep whatever it is they are doing now going….

    Watch out for the “keeping a grudge” factor creeping into the financial industry…

    YOU need to learn a little history – start with “Katyn” – and don’t think it could not happen to you.

    Lord knows the banksters have given MILLIONS of people reason – unlike the Bolsheviks who had no PERSONAL reason to do what they did other than they could.

    That’s all the CEOs are doing – “killing” jobs to increase their PERSONAL PAY – and who got killed – especially in “regulatory” roles? Yup, those who were STUPID enough to think their job was to regulate.

    Timmy G. still is laughing at everyone who believes a regulator is supposed to regulate….

    Wall Street is nothing more than a cult of sociopaths and top dog psychos that make you “feel” like you’ve climbed a success ladder when you have to ceremoniously become a brown nose.

    If the trust portion of the program is finished, so is the RESPECT that can be demanded in a “conversation” about “what the heck happened?”

    You don’t have until 2015 to keep the suck hose turned on – you don’t even have until November.

  106. TWO YEARS is more than enough time to hear the facts and SEE the devastation.

    DECISION TIME – are we or are we not going to shut down the writing of shape-shifting “regulations” that are continuing to suck every drop of blood out of the hands of HUMAN BEINGS – the sheer INSANITY of such perfidy is so clear in a FIAT MONEY SYSTEM.

    This is manufactured poverty FOR WHAT REASON? WHAT IS THE POINT?

    NO ONE IS STOPPING THIS – hell, D.C. is protecting the scam artists!

    There are no “christians” left and all the Abrahamic religionists of authority FINALLY worship the same god of MONEY and follow the same “laws” that THEY wrote to protect their INIQUITY. Keep stoning women for sport…

    I always thought the Romans, so to speak, would be enough of a counter-balance POWER to keep the delusionalists from taking down civilization from behind a computer…guess not….bunch of Bolsheviks now….

    “This cleansing of the temple discloses the Master’s attitude toward commercializing the practices of religion as well as his detestation of all forms of unfairness and profiteering at the expense of the poor and the unlearned. This episode also demonstrates that Jesus did not look with approval upon the refusal to employ force to protect the majority of any given human group against the unfair and enslaving practices of unjust minorities who may be able to entrench themselves behind political, financial, or ecclesiastical power. Shrewd, wicked, and designing men are not to be permitted to organize themselves for the exploitation and oppression of those who, because of their idealism, are not disposed to resort to force for self-protection or for the furtherance of their laudable life projects.”

    Have a WONDERFUL 911 celebration of 9 years of prevarication, all you “money men”….

  107. Based on having gone to business school, I don’t think business school students Actually consider how the price “allocates the shovels to people who will derive more utility from them (because they will pay more), thereby increasing social welfare”; instead they think abouut how the demand shift enables the seller to achieve a higher price without an expected decline in volume. Its also nonsense to say that a business school student will think “you should raise prices in order to clear the market”; the shovels will sell out fatser at the lower price. The reason to raise the price is not to clear the market, its to capture the profit.

  108. Step 1: demand / product supply / cost / profit / price

    Step 2: demand / product scarcity / less cost / higher price.

    Step 3: demand / scarcity up/ product quality down /still less cost /still higher profits / high price remains the same.

    Step 4. product supply restricted / less labor required / still less cost / still high price from demand / still higher profits from less labor costs.

    Step 5: less jobs, less money, less product. more scarcity related demand and selected private economy of distribution.

    Step 6: Austerity wages imposed on existing labor…take it or leave it economy of no-choice.

    This is not taught in Economics 101. That is the problem. False economy creates false price structure which only promote differential access to resources that favor a higher price for less supply under increased demand…primarily because it is NOT shovels that are being distributed but money itself. The production of “profit” perverts and inverts supply and demand. The supply of money now determines the true market on both sides of the D/S equation and, in the process the nature of the product and the actual demographics (categorically = class) of the market.

  109. Broken Politics, Bubble Pricing, Environment, and Agriculture by Joe Costello

    “However effective you think “markets” are at pricing, one thing you can say is bubbles completely distort pricing mechanisms to the point of being valueless. When you add into that a corrupt political process using government to further distort costs, you get a system that is completely dysfunctional and incapable of meeting the challenges of the times.”

    Also see:
    The New Aristocrats of Finance Pose a Serious Threat to Our Democratic Way of Life
    Across our political system, we have lost checks and balances. It’s time take back what’s ours. READ MORE
    Joe Costello / Archein

  110. There are two issues here:

    1. Seller segments the market
    2. Buyer maximizes her utility

    When the seller hikes the price up, she has (re)segmented her market to match the utilities of the buyers whose budgets will allow this. If the seller goes out of business, the buyer will shed no tears. So why bother with a sense of fairness that is not measurable anyway?

  111. Wow, a lot of people are not getting this, thereby illustrating James’s title. The point of his example is not the cost of snow shovels in December. You do not change or refute his point by adding on arbitrary hypotheticals about the production of snow shovels, the availability of imported snow shovels or the effect of seasonal forecasting on snow shovels. These do not make a more sophisticated model; he was not trying to build a model in the first place. Most of these are just adding more shovels to the unspecified number in the problem, that does not address his point.
    Given a limited number of shovels, is raising the price fair? Depends on your definition of fair, but Econ 101 does not answer this question. Econ 101 predicts that a sudden demand increase will raise prices given an unchanged supply. This is a reasonable assertion but very naive. The seller may distribute according to his own notion of fairness, he may bow to community pressure and not gouge, he may drop prices now to undercut his competitors, etc. Regardless, Econ 101 is just a prediction and Econ 101+ is just a (hopefully) more sophisticated prediction. It does not tell us how we SHOULD allocate resources or price things, it does not tell us that the ‘free market’ is the best system for anything.

    Price is not utility (whatever you think that is). Price is not desire, since we don’t all have the same amount of money at any given time; desire is not rational desire, since we don’t have perfect information or reasoning; and rational desire is not need, since we don’t weigh a murderer’s desire against a victim’s desire to live.

    We can hash out what the ideal system is for a given situation but a lot of people have imbibed the religious idea that an arbitrarily defined ‘free market’ is the best you can do and that simply doesn’t follow.

  112. @ Dave Johnson

    ““It’s not just conservatives that are corrupt. Centrists and Liberals do it to. Remember the no-strings-attached-no-consequences bank bailouts?”

    Not sure what your point is about “liberals” here. In case you have forgotten, that was Bush and Paulson”

    It was initiated by Bush and Paulson. But Obama interrupted his campaign to go down to Washington and push for the bailout. And he and Geithner/Summers have continued this policy and other major giveaways to the banks ever since. The Congressional vote for the bailout ultimately was bi-partisan and supporters included people from all sides of the mainstream political spectrum.

  113. You know James, I probably am basically in support of your arguments here (in this post), but I have a problem with this sentence:

    “The free market ideology teaches not only that businesses can maximize profits by any legal means, but that they have a moral imperative to maximize profits by any legal means, including generating profits by imposing equivalent losses on their counterparties.”

    The specific part I have a problem with is the wording “moral imperative”. I highly highly doubt your economics textbook uses those words and my guess is your economics Prof. would probably not be using those words in his class.

    That’s just an “educated guess” on my part….

  114. That’s deliberately opaque, circular, and illogical, not to mention idiotic. I think you are mis-quoting some other nutjob.

  115. If “a sense of fairness” is not worth bothering about, and can’t be measured Guidothekp – what will prevent the buyer from crushing the sellers skull, and taking all the sellers profit. Again, forked tongued, no eyes, no ears, no heart.

    Fairness, the rule of law, good citizenship, etc., are the basis, and foundation of civilized societies and one would hope healthy economies.

    Human’s continually run into problems, – and I’m talking huge massive horrorshow problems, resulting in repeated massive culling of people – when unfairness, lawlessness, criminality etc take root, metastasize, purchase and commandeer, and become systemic in governments, markets, and economies.

    Again perfection is unobtainable. Sad but true. The complex PONZI scheme, – the toxic, ruthless, sociopathic, dysfunctional and criminal structure of the current socalled global financial system is unsustainable.

    One last issue, and this in not an insult aimed at the commentator, whom I do not know, – but on the September 9, 2010 at 3:16 am comment, which is creepy

    “We can even reduce the population in a non-repugnant way to make this easier.”

    The only way for our the current toxic financial system to sustain, and the existing panjandrum of exceptional mastersoftheuniverse, and olympians to maintain their ruthless dominance, – not to mention the vast bulk of the worlds wealth and resources, – is if there were a great culling, a pandemic, a real horrorshow bug/chem/nuke war, a man made or assisted catastrophic natural disaster etc..

    The nefarious technologies exist today to prosecute these kinds of unholy ends, and the den of vipers and thieves in the finance sector, the predatorclass, and the oligarchs perfecting these monstrous designs and technologies are intertwined and interpenetrating.

    Sad, – but true.

  116. I only wish the world actually worked like the Econ 101 scenario you describe.

    A more important question to ask would be how is the demand going to be met? If there is limited supply, there is limited supply.

    If the supplier did not raise prices, then you will complain about the rich taking their cars/limos/taxi-cabs and getting to the store faster than the poor to buy the shovels.

    Would you rather have a “socialist” scenario where people stand in line for hours to buy a shovel and when their turn comes up at the cash register, find that the store just ran out of shovels? Then come to find out that the government official who was responsible for distributing the shovels has “sold” many to his buddies and cronies and was bribed. And after all that the shovels were defective to begin with because the govt. run enterprise that manufactures them is corrupt and so on so forth.

    I find this debate about Socialism versus Capitalism to be so boring and tiring – a false dichotomy to create a perception amongst the masses that they actually have a say in matters. Today, I would say the issues is not one of “Business versus State” but one of “Business and State versus the people.”

  117. But there’s an additional complication in the case of immunizations: a free-rider factor. The person who is not vaccinated may not get the disease because all those who do get the vaccination cause the prevalence of the disease to decline throughout the population.

    Boy, James got a lot of people thinking seriously about this subject. That’s got to be the determining factor in a good blog.

  118. Some of the comments above have used the example of availability of scarce vaccinations in the event of an epidemic. Those comments have included the concept of who among the potential population is most at risk, as a means of allocation.

    I’ve actually had the pleasure of joining my doctor wife as she goes to conferences in her specialty, particularly the annual meeting of the Infectious Diseases Society of America.

    I naturally go to the poster presentations for entertainment and was introduced there to the concept of “Adjusted Quality Life Years”. For a quick description see:


    It certainly raised my level of interest when I saw what was immediately recognizable as an economic concept being used in considerations of public health and treatment protocols – and how validly it was being applied in that setting.

    Anyway, it is a concept that suggests that there is more to treatment than simply being “at risk” or “relatively at risk”. (Perhaps analogous to the limited value of value at risk?)

    This is only to say that there is a concept extant, which has considerable economic basis and would potentially turn the “at risk” standard on its head.

    For a look at another economic issue as applied to infectious disease see a book by Brad Spellberg, MD called “Rising Plague – the global threat from deadly bacteria and our dwindling arsenal to fight them” (Prometheus Books, 2009). The thesis is that, from a clinical point of view, we are entering a post-antibiotic era where drug development is failing to keep up with evolving bugs (see in particular the rapidly declining rates over the last 4 decades of new FDA approvals issued for drugs against infectious diseases). At least part of the problem – and maybe a considerable part of it – may be addressed by economics.

  119. OMG – boy this is an interesting when-worlds-collide moment!

    It is considered a SUCCESS, the actual whole point of the mission, to inoculate enough people that you PREVENT an epidemic! There is no such puerile judgmental THOUGHT as a “free rider”!

    YOU are a “free rider” on Spaceship Earth – how are you taking care of it and yourself AND OTHERS? Look, others have as much of a right as YOU do – there is NO ELITE. “Ask not what your country can do for you, ask what you can do for your country” – was THAT philosophy a “free-ride”? Did that person DESERVE a bullet in the head because he was not the “fittest” and did not DESERVE to survive among the fittest who think that eradicating a disease means that everyone else who do not have to worry about getting sick from THAT virus (there WILL ALWAYS BE A NEW ONE) is free-riding on those who received a cure first?

    For god’s sake, people, stick to shovel ready projects and leave whatever you really think about the fat load in the cubicle next to you OUT of ANY and all discussion regarding JOB CREATION that provides VALUE to the TASK of solving problems FOR THE GREATEST NUMBER on Spaceship Earth.

    Stop freekn’ CONSUMING and basing all logic on MINIMIZING what someone else DESERVES to consume in relation to you. Grow up!

    Get creative. Once the Russians decide they are done with the ISS, the last ship could take a handful of brown nosing bloggers and leave them on the station to live or expire together – depends on whether you can transfer your brain into the quantum mechanical pulsations of perpetual motion :-) and flap your way out past Pluto.

    So now what? A minutia analysis of the impact an ISS prison will have on the “inwestors” who won’t get enough prisoners into the “private” prisons in Arizona? Really? That’s all we got for a FUTURE? Competing for prisoners?

    pairochucks opined, “But there’s an additional complication in the case of immunizations: a free-rider factor. The person who is not vaccinated may not get the disease because all those who do get the vaccination cause the prevalence of the disease to decline throughout the population.”

  120. The SCIENCE is clear. In order to accomplish such a massive “bugs go in but they don’t come out” cleanse of everyone but “us elites”

    the environment of Spaceship Earth would be a dead zone – who is going to “bury” 6 billion bodies at once?! Robots? Share the name of the manufacturor of those 6 billion clean up robots – now THERE’S an inwestment – because there has got to be a substantial number needed


    they can be sold at manipulated prices amongst the free riding drug dealor scum bags selling the junk for the mercenaries who no doubt will deliver the death “wha’ever”!

    Look, Tony, WE have a duty to bring them to justice NOW while their numbers are still really PUNY. Yes ONE of them can do a LOT of damage,

    but so can ONE do a lot of good with “technology”.

    All these years of study of the male brain and it still eludes me sometimes – so I have to ask, what the heck is WRONG with your brains lately?

  121. After all the geniuses weighed in on this thread with “economic” theory, how NORMAL would it be for everyone else to count on them to:

    1. CARE that the population is being dwindled down indiscriminately – music composer and Hannibal Lechter both die next to each other – more for ME ME ME

    2. Or produce the “smartest people on the planet” to work on the discovery – doesn’t it seem like the “smartest people on the planet” show up to be smarty pants analysts always after a disaster caused by their genius theory?

    3. “Economics” don’t matter because the wizard came out from behind the curtain to tell us that the government is never “broke”, only PEOPLE and local services of civilization can be “broke” whenever the government decides to make us “broke” for lion’s den entertainment – after all, the war is winding down and how to satiate the bored mind of the sadist unless ALL Americans are set at each other’s throat arguing about what time in 2012 the world ends?

    This money mind game is the absolute biologic equivalent of rabies ravaging the raccoon. I’m darn near speechless at how sick this is. There is NO CURE for such iniquity is there?

  122. A shift in demand quite suffices,
    With a given supply, to raise prices;
    This idea, though descriptive,
    May not be prescriptive,
    To guide one to virtues from vices.

  123. Different Josh here. I don’t think economics is merely predictive. Microeconomics is definitely instructive – it helps producers understand how they ought to determine how much to produce and how much to charge.

    Many of these principles seem incredibly simple, yet those who are familiar with economics generally underestimate how foreign some of these concepts seem to the public at large. How many people really understand that you should produce the number of widgets at which producing an additional widget reduces your total profit? It’s kind of scary actually in my experience.

    I think the point James raises is an interesting one, not because maximizing profits is wrong, but because it’s a reminder of how difficult it is to explain to someone who has no interest in economics why they are wrong to blame (non-monopolistic) business for scarcity.

  124. There is another aspect that is not being mentioned. IF you raise the price, you have both the incentive and the wherewithal to pay a premium price to get more shovels brought in ASAP, thereby getting more shovels into the hands of folks… same with the vaccines.

  125. Surely there are positive externalities for clearing snow after a snowstorm that aren’t taken into account by the market price?

    It seems that even on Econ 101 logic, the business students fail.

  126. I didn’t see anybody mention this problem specifically, but it does seem worthwhile to put out here. If the basic question is whether to favor a “political distribution” over an “econ 101 distribution,” then there are two possible outcomes, both of which have historical support for their likelihood: 1) the 100 vaccines are diluted to the point where they do no good for anybody, or 2) there is no political consensus who should get them and they spoil before anybody gets them.

    I agree with those who say the “econ 101” choice is no less poltical than any other choice. But I also believe that the “econ 101” way will NEVER be followed reliably. The mere existence of the idea of “price gouging” as a common idea tells us this – no matter what the seller does, he’s dreaming if he thinks he has an easy way out here and that he won’t be second-guessed as to his conduct.

  127. Yes, “people have an intrinsic sense of fairness”, but not everyone has the same sense of fairness. Obvious, right, since in the 1986 survey less than 100 percent believed it was unfair to raise the price of the snow shovel.

    I know it is natural for each of us to believe our own sense of fairness is right and if others disagree they are wrong – this belief is just how a sense of fairness works – but what evidence can we bring to bear on the issue? How do we choose between the 1986-majority’s sense of fairness and the 1986-minority’s sense of fairness?

    In Kwak’s original post he assumed the supply of snow shovels was fixed, but surely the possibility of raising the price to $20 when it snows would motivate the hardware owner to keep a larger inventory in the first place. That is to say, it is at least possible that the “unfair” hardware store would have a larger inventory on hand than the “fair” store down the street that won’t raise its price. In the short run (before the resupply trucks can navigate the snowy streets) the supply remains fixed, but one store has more snow shovels on hand to sell to consumers in need.

    How would that affect your moral analysis?

  128. “The store (or hospital) only has, say, 100 shovels (vaccinations). You can either give them to the first 100 people to show up at the door and turn everybody else away, or you can give them to the 100 people most willing and able to pay and turn everybody else away.”

    What an amazing lack of imagination.

    There is another choice – look at who was most likely exposed and vaccinate based on exposure. That will also be of most benefit to people who don’t receive the vaccine.

  129. So you think that Paris Hilton is at the pinnacle of human evolution. I think your genes are inferior.

  130. So just what class do you think the left comes from? –The vast majority of people on the left I’ve known come from the middle class; so according to your analysis, they’re redistributing their own money. And as far as providing money to causes for the economically disadvantaged, we already typically pay more than 10% of our income in taxes so we should certainly have a voice in how that money is spent.

    I hope you don’t imagine that the government is not in the business of redistributing wealth; it inevitably does so, and often in favor of the upper classes not only because of the power of their lobbyists but because the scale of government business inevitably involves not small businessmen but large corporations. I want to see more of my taxes spent to help the disadvantaged, partly just because societies work better when there are not huge disparities of income between its members. Unfortunately those disparities are increasing in America.

    Moreover, many on the left have chosen lines of work outside the corporate world, and often those types of work are not richly financially rewarded because our society does not value them as much. For a long time I earned less taking on the responsibility of caring for teenagers in a group home than some people earn parking other people’s cars! Should we have any less say about what the government does with our money than someone whose income is much higher? In a democracy, there is only one acceptable answer to that question in my mind.

  131. The question is not – THAT – “people have an intrinsic sense of fairness”, but if those people who actually “do” have “an intrinsic sense of fairness” have any control or access to the operations of the government or the finance system.

    Any cursory examination of our current environment proves, there is NO “intrinsic sense of fairness” in the existing system, – and in fact – there are well documented instances or rank abuse, fraud, collusion, taxevasion, and other crimes systemic throughout the entire structure of the global finance system. Tragically it is the intrinsic sense of UNfairness that marks this crisis and this moment.

    We either tolerate this systemic and endemic UNfairness, or we don’t. If we don’t – then woe to our children, for the Amerika they inherit will be buried in debt, dependent on PONZI scheme economics, less competitive, less educated, more divided, and owned and controlled by predatorclass den of vipers and thieves.

    If we do – then buckle up America, and let the games begin.

  132. Again perfection is unobtainable. Sad but true. The complex PONZI scheme, – the toxic, ruthless, sociopathic, dysfunctional and criminal structure of the current socalled global financial system is unsustainable.
    len tieng

  133. In this condition, the hardware store should stop selling snow shovels. Instead it should rent snow shovels for $10/hour with a $200 deposit. This will maximize its profit while encouraging maximum utility of the shovels.

    The professor should endeavor to have his students think outside the parameters of discussion and to solve problems with outside-of-the-box thinking.

  134. I think the question is , do people’s “sense of fairness” can be converging to some basic principles? If yes, do this “intrinsic sense of fairness” bring any benefit to human society (e.g. higher survival chance)? If yes, how can we formalize this “intrinsic sense of fairness” so that it is easier to follow?

  135. Willingness to pay is the same as utility. Unfortunately, however, this assumption fails in the real world; poor people simply can’t pay as much for snow shovels as rich people, and as a result a price increase will allocate shovels to rich people, not to those who need them the most. That is it.

  136. I have really enjoyed the article and the responses thus far.

    The snow shovel example is an excellent indication of the disconnection between “willingness to pay” and “utility” however shouldn’t we consider the long run also? Certainly the increased price of shovels will result in only the wealthy having access to shovels in the near term. In the long term however the increased profitability in the production of shovels might encourage more producers to enter the market thus increasing the total availability of shovels and decreasing the price back to the market equilibrium. If the price were fixed at the original then no additional production would be incentivized and the shortage of shovels (the original problem) would never be addressed. I understand that the problem would persist for the duration of “this” snowstorm but winter happens every year (as does flu season).

    I appreciate the incompleteness of Econ 101 and the demand for a human approach to these issues in addition to the quantitative approach. If the shortage is a one time or infrequent event then I only want to suggest that policy crafted to address the “exception” rather than the “rule” can be distortionary in the long run. Such distortion can often be more painful than the exception it is intended to address.

  137. > Mark K: “Should a hospital or a doctor raise the price of vaccinations if a small pox epidemic (say) break out?” I would venture (hope) to say that the proportion of “yesses” would be remarkably lower, and that proportion unchanged from the mid 80s to today.

    Maybe, but look at the cost of AIDS medicines.
    Look at costs of medicines in general since mid 80’s.
    Or try this:
    “Suppose the Govt decides to pay half the cost of medicines, driving greater demand. Should suppliers raise prices to drive the demand back down?”

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