Posted on 12/07/2005 4:08:03 AM PST by T-Bird45
With all the recent hype and demagoguery about gasoline price-gouging, maybe it's time to talk about the basics of exchange. First, what is exchange? Exchange occurs when an owner transfers property rights or title to that which is his.
Here's the essence of what transpires when I purchase a gallon of gasoline. In effect, I tell the retailer that I hold title to $3. He tells me that he holds title to a gallon of gas. I offer to transfer my title to $3 to him if he'll transfer his title to a gallon of gas to me. If this exchange occurs voluntarily, what can be said about the transaction?
One thing we know for sure is that the retailer was free to retain his ownership of the gallon of gas and I my ownership of $3. That being the case, why would we exchange? The only answer is that I perceived myself as better off giving up my $3 for the gallon of gas and likewise the retailer perceived himself as better off giving up his gas for the $3. Otherwise, why would we have exchanged?
Exchanges of this sort are called good-good exchanges, namely "I'll do something good for you if you do something good for me." Game theorists recognize this as a positive-sum game -- a transaction where both parties are better off as a result. Of course there's another type of exchange not typically sought, namely good-bad exchange. An example of that kind of exchange would be where I approached the retailer with a pistol telling him that if he didn't do something good for me, give me that gallon of gas, I'd do something bad to him, blow his brains out. Clearly, I'd be better off, but he would be worse off. Game theorists call that a zero-sum game -- a transaction where in order for one person to be better off, the other must be worse off. Zero-sum games are transactions mostly initiated by thieves and governments.
Some might argue that there's unequal bargaining power between me and the gas retailer. That's nonsense! The retailer has the power to charge any price he wishes, but I have the power to decide how much I'll buy, including none, at that price. You say, "Gas is a necessity, and we're forced to buy it." That too is nonsense. If I voluntarily purchase the gas, I do so because I deem it better than my next best alternative. Of course, at a high enough price, I wouldn't deem it as such.
In the wake of the spike in fuel prices, many Americans demand that politicians do something. You can bet the rent money that whatever politicians do will end up harming consumers. Despite a long history of their economic calamity, some Americans and politicians are calling for price controls or, what amounts to the same thing, anti price-gouging legislation. As Professor Thomas DiLorenzo points out in "Four Thousand Years of Price Control" (www.mises.org/story/1962), price controls have produced calamities wherever and whenever they've been tried.
Economic ignorance, misconceptions and superstition drive us toward totalitarianism because they make us more willing to hand over greater control of our lives to politicians. That results in a diminution of our liberties. Think back to the gasoline price controls during the 1970s. The price controls caused shortages. To deal with the shortages, restrictions were imposed on purchases. Then national highway speed limits were enacted. Then there were more calls for smaller and less crashworthy cars. With the recent gasoline supply shocks, we didn't experience the shortages, long lines and closed gas stations seen during the 1970s. Why? Prices were allowed to perform their allocative function -- get people to use less gas and get suppliers to supply more.
Economic ignorance is to politicians what idle hands are to the devil. Both provide the workshop for the creation of evil.
My nomination for best line in the article: "Zero-sum games are transactions mostly initiated by thieves and governments."
May the wisdom of Dr. Williams and Dr. Sowell ever increase and abound.
NO ONE can explain the principles of economics like Dr. Williams. He's the best. Anyone with a brain can understand his explanations.
Good article, but my question would be, should there be no laws for price gouging?
In other words, the state Attorney Generals charge motels for price gouging after a hurricane, and Home Depots would be charged if they increased the price of a generator because the demand exceeded supply, post hurricane.
Why are those instances not "good good exchanges," just like the gas/$$ exchange...it is supply and demand, after all.
Hotel rooms are scarce, price goes up; generators are scarce, price goes up. I don't have to have a hotel room (I could sleep in my car); I don't have to have a generator, (I could do without electricity.)
I don't see a difference, why are some things considered price gouging and others aren't.
Common sense is not necessarily correct, and this explanation is worthy of a kindergardener. His comment "If I voluntarily purchase the gas, I do so because I deem it better than my next best alternative" is so full of false assumptions as to be laughable. So there is almost nothing free market about my choice to purchase gasoline in comparison to alternatives to getting around.
It's a shame that these two men (Williams and Sowell) cannot be coerced into running for public office.
Absolutely right. The best cure for high prices is ... high prices
I agree.
And that's always been my issue. How come they charge some companies with price gouging, and then say gasoline prices are just a result of supply and demand.
Fair for the goose, fair for the gander...supply and demand is supply and demand.
Nice one sentence summary of reality, but he repeats himself.
Walter Williams teaches at my alma-mater. Although I never took one of his classes, I had friends who did. The one thing they remember from the class was that it was hard work. He teaches economics and doesn't use his classroom as a forum for his views. Everyone I know who took his class came out believing they had learned something.
Dr. Williams' normally crisp writing is suffering from a little redundancy here. :-)
And I'm repeating you. I should hit reload one last time before posting a comment. :-(
"Common sense is not necessarily correct, and this explanation is worthy of a kindergardener. His comment "If I voluntarily purchase the gas, I do so because I deem it better than my next best alternative" is so full of false assumptions as to be laughable. So there is almost nothing free market about my choice to purchase gasoline in comparison to alternatives to getting around."
Your alternatives to buy gass are almost limitless. They are not all practical. You could walk to work. No? Get a job closer. You could buy a horse. You could take a bus, a cab, a ride, hitchhike, etc. What you are actually saying is that the alternatives are not practical and you would never dream of it. Therefore you are forced to buy gasoline. If the price went to $100/gallon, I promise, you would find a way to exist in life without it, as would we all. By the same token, the market would correct itself pretty quick with all sorts of profitable alternatives. There is a threshold of pain you will tolerate. You have demonstrated by your comments that you are not even close. Neither am I.
The higher prices and profits are suppose to attract more competitors in the market. Do you know why they don't? Because our country makes it illegal or at least unprofitable to start a business that produces or refines oil. We cannot harvest any new oil because of environmental laws and groups.
It actually is all about supply and demand until government decides to affect some part of the equation. And now you can see the impact of the government getting involved.
AJ said: "explanation is worthy of a kindergardener"
Allow me to repeat myself that this level of understanding is sorely lacking in most politicians thus it is appropriate that Dr. Williams article should appear to be so basic.
AJ said: "full of false assumptions as to be laughable"
Specifics are the soul of cogent discussion. What are the false assumptions you perceive?
AJ: "So there is almost nothing free market about my choice to purchase gasoline in comparison to alternatives to getting around."
No, it is just as Dr. Williams said -- you recognize the options/alternatives, have considered the consequences, and chosen the best alternative for you. If it was any other way, then force was involved and it was no longer a true free market choice. You may state that you have to get around to work so you can have the funds to take care of your needs but the work you pursue is still a choice, assuming you are not assigned to a slave labor camp.
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Humor me. How do you figure that you are not making voluntary purchase decisions for gasoline? Is a Shell employee holding a loaded revolver to your temple and reaching out for your wallet?
One thing never mentioned in these gas price threads is that a person might choose to save money for a time of need. Yes, instead of buying that plasma TV you can put the money aside and then when gas goes to 3$ you have lots of money with which to buy the gas.
But what people tend to do is buy the Plasma TV and lots of other stuff and have not much money in reserve. Then when necessities get expensive after a disaster of some sort, want someone else (taxpayers who then do with less) to come to their rescue. The result is the taxpayers sacrifice so that bubba can have his toys.
Talk about putting words in someone's mouth!!!! I am a firm believer in a free market approach to the production, delivery, and sale of energy products. In fact, I believe in a free market approach to the delivery of all non-public goods.
I am merely pointing out that it is laughable if anyone thinks that the current market for the delivery of transportation and transportation fuels is not largely determined by government choices, policies, and regulatory processes.
I am not advocating that the government step in and further regulate prices. But Williams is naive if he thinks that when I buy gas at the gas station it is a free market transaction that I am free to decline in any meaningful sense. I can also decline to pay my taxes, and if I don't buy gas to get to work to pay my taxes, I will land myself in a lot of hot water. No it is not a free choice at all.
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