The Market and Efficiency

Mark Thornton shares a story:

Remarkably, the cost of air conditioning plummeted over the decades. The cost of air conditioning units declined, and they became increasingly reliable, safe, and efficient in turning electricity into relief from heat and humidity.

That is until recently. Twenty years ago I had an air-conditioning system (i.e., heat pump, HVAC system) installed in a house that was almost 1,000 square feet for $1,600. I just got the preliminary estimate, not an actual bid, to replace a system on a similarly sized house for $11,000. Not surprisingly, this is the reason for this article.

Thornton goes on to describe how government intervention on behalf of the environment has led to higher prices by mandating more efficient end-user systems.  This mindset is all too common among the environmentalist crowd, and belies a shocking amount of shallowness and ignorance.

(As an aside, the efficiency of end-user products and systems tend to be targeted the most by environmentalists because it is part of their pathology.  Like the group Opus Dei, at least as described by Dan Brown, environmentalists believe that one can only show penance by feeling pain and undergoing sacrifice.  As such, they target popular consumer goods in order to feel better about all the evil that man has done to the environment.)

If the environmentalists were truly concerned about protecting and saving the environment, their analysis would take into consideration not only the efficiency of the end-user product, but the efficiency of the production process of said product, the efficiency of transporting the product, the efficiency of selling the product, and the efficiency of maintaining the product, among other things.  Consumption of the product is not the only process that consumes energy and incurs environmental costs.

Production can incur massive amounts of environmental costs.  There is pollution, obviously, in addition to energy consumption, raw material consumption, and the energy costs of labor.  All these things require environmental resources.  Energy comes from coal or nuclear plants, which have their own forms of pollution and their own energy costs as well. Workers have to eat, have to drive to work, and generally wish to relax when not at work.  These desires have an impact on the environment.  Meeting stricter production costs generally requires more materials, directly or indirectly, and requires more labor besides.  Furthermore, new standards may lead to a net increase in pollution because they require more energy.

Besides that, the higher standards may mean that the product wears out more easily or quickly, requiring either repair or replacement. Both of these processes require a net increase in energy consumption, which is not good for the environment.  The former might require a repairman to drive out to someone’s house to make a repair, which does cost energy and lead to an increase in pollution.  The latter requires more units to be produced, which likewise requires more energy and leads to an increase in pollution.

As such, when environmentalists focus on the efficiency of end-user products, they often ignore the unseen environmental costs that new standards incur.  If only there was a way to gauge systemic efficiency.

Believe it or not, there is, in fact, a very easy way to judge systemic efficiency and that is by a market mechanism known as the “price.”   Prices signal to consumers the relationship between supply and demand for given product.  In this case, cold air within a closed system is the product, and prices let consumers know how much air can be provided relative to demand.

Incidentally, the market system encourages systemic efficiency because producers have an incentive to provide a given product for the highest price to consumers at the lowest cost to themselves.  This incentive is known as “profit.”

If there are two competing companies that produce identical products and one can produce their product with one-third fewer works and ten percent fewer raw materials, they can sell their product for a lower price and make a higher profit than their competitors.  Employing fewer workers helps reduce the strain on the environment by lowering the consumption of energy as would have been used for commuting.  Lower demand for certain raw materials also helps the environment in that less energy is needed because there is less material to extract, and so on.

Thus, the market serves the goals of the environmental movement quite well.  Unfortunately, most environmentalists are too dense to realize this, and thus focus their attention on obvious costs while ignoring the less visible costs.  Their superficiality, then, has led to outcomes that are worse for the environment.   Therefore, it would simply be best to refer to environmentalists as earth-hating idiots, for they are nothing more than simpletons, unable to make any observations other than the most obvious and incapable of thinking abstractly and rationally for any length of time.  Quite simply, they are enviromorons.

Price Gouging: Why I Sold Potassium Iodide Nuke Pills For A 1500% Gain

[Disclaimer: The follow article is a fictional account of a persuasive argument and should not be construed as an assertion of facts although written in the first person.]

My nuke pills, commonly known as potassium iodide, have been languishing unloved in my emergency supplies for years since I bought them for about $5.99 each. They expire next month. I would like to have donated them to a charity that would get them to people in Japan who so badly need them.

But potassium iodide is only available by prescription in Japan and I am not interested in engaging in the international smuggling of controlled substances. So I did the next best thing: I just sold them for $99.99 apiece representing a net realized gain of approximately 1,500%. One of my best investments yet. But with the nuke pill market’s backwardation more severe than the silver backwardation why would I sell them?

price gouging

The price, where a producer and consumer meet in negotiations, is an extremely valuable, even vital, tool.

PRICE GOUGING DEFINITION

Price gouging has a nasty connotation. This is mostly due to the true cause of shortages, governments, attempting to spread disinformation about how markets work. For example, the Florida Division of Consumer Services asserts:

In the wake of natural disaster, essentials — such as food, ice generators, lanterns, lumber, etc. — may be in short supply. Charging exorbitant or excessive prices for these and other necessities following a disaster is not only unethical, it’s illegal.

Under Sections 501.160 and 501.205 Florida Statutes, it is illegal to charge unconscionable prices for goods or services following a declared state of emergency.

Individuals or businesses found guilty of price-gouging could face fines up to $1,000 per violation.

HOW AND WHY VOLUNTARY TRADE WORKS

If I own potassium iodide pills there are two mutually exclusive ways for you to acquire them. One option is for me to voluntarily sell or gift you the pills. The other option is for you to steal or rob the pills from me.

Trade works because everyone has different preferences, talents, abilities, competitive advantages, knowledge and desires. For example, Mozart had different talents than Einstein. The baker and the painter are each able to perform work the other values and when they engage in a voluntary trade then it implies that the baker derives more value from what the painter offers than from his bread. Because the baker is better at baking than the painter and because the painter is better at painting than the baker therefore when a trade is voluntarily concluded then both the painter and baker are better off which raises the standard of living for both. Even nations have comparative advantages.

However, when property is either stolen or robbed then only one party benefits to the detriment of another party. This type of parasitic behavior does not encourage additional productive activities. In fact, it decreases wealth by requiring the aggrieved party to expend additional resources on protection which ultimately gets passed on to legitimate moral consumers in the form of higher prices.

It should be noted that since governments are force and force is violence they are by nature parasitic in this stealing and robbing way. And they have the nerve to call a party to a purely voluntary transaction unethical. Thus, the Florida division should probably be named something a little more accurate like the Florida Division of Victimizer Services.

THE VALUABLE NATURE OF THE PRICE

The price, where a producer and consumer meet in negotiations, is an extremely valuable, even vital, tool. It helps the baker know whether he should produce 5 loaves or 500. Because the baker is also a consumer therefore a price is communicated by the baker to the farmer about whether he should plant one acre or 100 acres of wheat.

And so on through the increasingly complex economy with people being able to build up considerable comparative advantages by learning such disciplines as xenotransplantation, mechanical engineering, robotics, proctology, hematology or biomedical gerontology. It is through the price that individuals, all acting according to their own dictates, decide how to allocate their time, talents and capital to meet the needs and desires of each other.

When the pricing mechanism is immorally interfered with by the use of aggression then individuals are hindered in their ability to know how much demand exists for a particular good or service. Misallocation of wealth happens which results in its destruction and a lowering of living standards for society. When a price control is implemented through the use of force then it leads to shortages which are often used as an excuse to implement rationing. In the modern world with such technological advances there is a sole cause for all the starvation and shortages: governments.

For example, there always seems to be a shortage of blood, particularly the rarer kinds, for transfusions. But there are billions of able-bodied adults who could voluntarily agree to sell their blood. Theoretically there should never be a shortage of blood as it should merely be a function of price. But instead many governments have implemented price controls. In exchange for about an hour of one’s time and getting stuck with a needle, sometimes multiple times, the most you can receive is a cookie. Sometimes a T-shirt and some warm fuzzies are thrown in.

The reasoning is that if people were able to legally sell their own blood, oh the irony to think one is free, then there would be a higher probability of contamination in the blood supply. But that does not make any sense because the medical companies already perform extensive screenings of the blood supply. The real issue is that a pint of blood goes for a couple hundred dollars. The government imposed price control serves at least two functions for those who make a profit selling blood: (1) reduction of raw material costs to zero and (2) decrease in supply.

But these types of violent interferences are not limited to necessities like food, water, potassium iodide or blood but are extended through licenses for hair cuts to medical services, are found in regulations limiting the type of light bulb or toilet you can buy and of particular interest to the bureaucrats is healthy food and why raw food recipes are going underground.

With potassium iodide pills available in Japan by prescription only; thus, even though many may have rationally prepared for this emergency the costumed criminal gangs made it illegal and threatened to violate offenders with fines or jail. As Rand Paul teased out during his Senatorial questioning; these bureaucrats found throughout the world are not pro-choice or pro-consumer but violent aggressors against freedom of choice and a primary cause for lower standards of living.

PRICE GOUGING ECONOMICS

How are producers supposed to know what consumers demand? Without the ability to charge what the market will bear it is impossible to find out. When that knowledge is buried or price discovery prevented then entreprnuers are unable to make calculated risks in hopes of profit. When entreprenuers fail to perform thier vital service of bringing goods and services to market then price gouging is not an issue. As the old saying from communist Russia goes, “Sausage is one ruble per link. But there is no sausage.” Pretty soon the only noble profession left will be that of a smuggler.

As David Brown observed in Price Gouging Saves Lives:

“Price gouging” is nothing more than charging what the market will bear. If that’s immoral, then all market adjustment to changing circumstances is “immoral,” and markets per se are immoral. But that is not the case. And I don’t think a store owner who makes money by satisfying the urgent needs of his customers is immoral either. It is called making a living. And, in the wake of Hurricane Charley, surviving.

Be prepared.

NUCLEAR FALLOUT ON THE WEST COAST

The jet streams show it is possible that the Japanese nuclear meltdowns could deliver nuclear fallout to California, Oregon, Washington and other states. At the end of the day, governments and bureaucrats do not care about your personal safety. They will lie, deceive, cover-up and exacerbate problems if they find it politically expedient. No one cares as much about your health and well-being as you do. Therefore, you must take whatever precautions and actions you deem necessary and prudent.

CONCLUSION

So why did I sell my nuke pills? Sure, the 1500% gain was nice. But the real reason was because I wanted to make sure that particular good went to its highest and best use at this particular moment in time. How else would I know what that use was without a price signal? In my opinion the probability of someone in California or Oregon needing the nuke pills within a month for a life saving purpose is extremely low; less than 1%.

Thus, I derive more value with the FRN$s than the counter-party to the trade. Plus, if needed I will just get on a plane and head down to La Estancia de Cafayate, which has a very favorable geographic location for nuclear fallout concerns, for their two events this month. I sure hope the counter-party to my nuke pill trade derives sufficient value from being prepared and I hope even more they never have to actually use the potassium iodide.

But even if they never do use them I bet having them in the hand relieves a lot of anxiety that comes from being unprepared! And if you are ever in a situation where there is a shortage of something know who to blame: governments.

The Light Begins to Dawn ...

… and personally I think some corporate fortunes are going to fall hard as this “$800 tablet” trend comes to a screeching halt before it really gets started.

I almost certainly wasn’t the first blogger to discover that you can get into a decent Android tablet for less than $200, but I caught on before blowing big money, anyway.

Today, the Wall Street Journal’s Brett Arends takes notice:

A lot of people are likely to stand in line to pay $500 or more for Apple’s iPad 2 when it goes on sale Friday.

I didn’t want to spend $500 for a tablet computer. I didn’t even want to spend $400.

So instead I went online and bought a brand-new tablet for a bit less.

The cost? Less than $200 … and about 20 minutes of my time.

No kidding.

I don’t think Apple itself will come to grief. Their business model has always centered around being the fashionable high end in hardware. But Motorola and Samsung (to name two) are probably going to take big hits to their bottom lines if they’re betting big on selling tablets in the $500+ range.

A few weeks ago, I was at my local Micro Center. The managers there all recognize my family, because we’re always in there buying something (not always something new or expensive, but something). One of the managers came over to chat me up, and we talked tablets. I told him that I was waiting to see an e-reader/low-end tablet in the $100 price range, and that I expected to see truckloads of them at Micro Center when the bottom fell out.

He got a little cagey with me, and told me (quote as best I can remember) “at this point, there’s really no way of predicting Micro Center’s future with tablets.”

That statement was what motivated me, a few days later, to go ahead and jump on the Velocity Micro Cruz Reader for $120 elsewhere. And naturally, within two weeks, what do I see at Micro Center? One of my other top picks … priced to sell at $109, with an “open box” return for less than $90 (when Micro Center sees me coming, they sigh and start clearing a path to the “open box” returns area).

I suspect some corporate policy prevented that manager from giving me a wink and a nudge and saying “wait a couple of weeks and we’ll have a deal for you.” His job was to interest me in what they had in stock, at the current pricing. He didn’t push that too hard, because he’s dealt with me enough times to know I don’t work that way. Unfortunately, it probably cost him a sale.

Anyway, whether or not you heard it here first, you are hearing it here: Unless you’re an Apple cultist (NTTAWWT), don’t blow $800, or even $500, on a tablet. Chances are you can find one that does everything you really want to do for less than $200, maybe even less than $100.

Is There Such a Thing as a Free Lunch…in the Scifi World?

Art and commerce have long had an uneasy relationship. In fact, I can’t help thinking about economics and writing without being reminded of the saying attributed to Moliere, the French playwright: “Writing is like prostitution. First you do it for love, and then for a few close friends, and then for money.”

In other words, there’s a not too subtle association of pure artistry with poverty and an equally strong suggestion that if you write for money you’re somehow whoring yourself out…but we’ll come back to that point. What interests me is a subject that’s less frequently discussed even than art or sex: economics, specifically, economics in fiction. This means everything from how economic forces are shown to shape human identity and desire (hint: it’s usually bad) to how authors and their characters conceptualize economics.

I’d like to start with science fiction and the Free Lunch Question. In his SF classic The Moon is a Harsh Mistress, science fiction grandmaster (and libertarian) Robert Heinlein popularized the term TANSTAAFL which means “There Ain’t No Such Thing As A Free Lunch.” Meant to show the down to earth (ha!) pragmatism of his lunar colonists whose tough situations stripped all fantasies away from their economic calculations, TANSTAAFL has passed in to science fiction fandom as a generalized accepted truth. It even makes an appearance in Wikipedia where the entry on the phrase indicates it shows an understanding of opportunity costs.

The Moon is a Harsh Mistress came out in 1966. Flash forward 35 years to another writer, Spider Robinson (who was, early in his career, tagged as the next Heinlein), and we have The Free Lunch. Now, given Robinson’s well-known appreciation of Heinlein (he’s written a gushing essay on Heinlein and finished a work Heinlein left as a stack of notes), from the title alone I’d to assume this is meant to be read as an open and direct answer to the master, and that suspicion is confirmed in Chapter 17 when one of the main characters thinks of how universally true this “Heinlein proverb” has been.

But what does Spider offer in its proverbial place? The Free Lunch, while pleasant, falls decidedly short in its understanding of economics, especially Friedrich Hayek on prices. Robinson gives us a lovely portrait of a multi-sensory amusement park (Dreamworld), characters who are genius outcasts with hearts of gold, and a string of fun encounters that make the book a good light read. However, the free lunch that gives the book its title is, well, silly, and it’s tied in to an extremely complex plot twist.

A number of weak, dwarfish time travelers have come back to our time to interfere with the flow of history and make a new world. You see, humanity so polluted the world that it has poisoned itself. The crux point is suspiciously close to our own time; they must act now or miss the chance and let the world poison itself. These time travelers decide that most of the problems humanity’s had have come from “insufficient wealth” and that they’ll solve this by secretly using their advanced technologies to make everyone rich. Leaving aside a number of problems (Is this really where our problems come from? If they have this superior technology, why don’t they fix their damaged genes?), there’s still a major question of information contamination.

Among his other contributions, Hayek showed that prices function to communicate dense amounts of information. Pumping free goods into the economy, making technologies work better than they should, and increasing production by making software bug free, the idea is that the free lunch will enable us to build a civilization strong enough to weather the coming crash.

While this shows Robinson’s well-established good heart, I have to squint and say…hmm. You’ll destroy the price system and increase production and consumption to ward off an ecological crisis? I think, my friend, that your free lunch will be quite costly in the end.

But perhaps I’m wrong. Take a look at The Free Lunch and let me—and Spider—know what you think.