Thursday, June 08, 2006

High Prices vs. Low Prices

A friend asked me how I could support high prices for LBJ and then turn around and support low prices from imports. I don’t support prices being high or low. What I support are prices that reflect costs, profits and losses.

Lowering costs is important. Raising costs harms us. No one says we should ban sunlight just so people can have more jobs making candles and coats. That’s the sort of logic Senator Moliga used when he formulated his plan to ban imports in an effort to create employment here. If raising costs was such an economic stimulus, scientists would be working on ways to blow up the sun instead of making efficient things like computers or the internet.

Lowering costs legitimately lets you do other things with your money. Because we don’t have to worry about light and heat during the day, we can work to grow food, build houses and sew clothes instead. While we may lose jobs making candles and coats, we progress by being able to provide ourselves with food, shelter and clothes.

But when costs are high, we should bare them ourselves. Why? Because God said, “Thou shall not steal.” A majority vote to tax people out of their property doesn’t nullify his commandment. Redistribution is not the proper role of government no matter how you slice it. Muamua le Atua? Not in American Samoa apparently.

More importantly, bearing costs comes with the right incentives. We tailor our behavior around costs. When the costs are low, you do more of something. When costs are high, you do less of something. I’m fine with any person living an unhealthy lifestyle just as long as I or anyone else doesn’t have to pay for it. Drive as much as you want, but pay for your own gas, man.

We may open more businesses with low-interest DBAS and other federal loans, but operating a business is always a risk. Why should taxpayers bare the risk for someone else’s profit? Why should taxpayers foot the bill for someone else’s loss?

Prices should reflect profits and losses. Profits tell us what people want. If someone is profiting from the market price of lemonade, it tells everyone that lemonade is in demand. More suppliers come in and the higher supply lowers prices and eats away at profit margins. Losses, on the other hand, tell us that we need to focus our limited resources elsewhere.

Economies of scale (where one makes more money selling 100 cups of lemonade for a $1 each than 1 cup for $10) and competition ensure that sky is not the limit for prices. On the flip side, charity and humanity take care of those things that may not be profitable but still necessary in a civil society.

So while I applaud Senator Moliga and the Senate’s efforts to diversify our economy and setting the example in keeping our island clean, the debate is not high prices vs. low prices. It should be about lowering costs by removing barriers to investment and competition, lowering taxes, cutting government spending and implementing user fees.

5 Comments:

At 4:38 PM , Blogger Stuart K. Hayashi said...

Another example of your excellent reasoning, Tali Mon! ;-)

You write, "I don't support prices being high or low. What I support are prices that reflect costs, profits and losses."

I believe in exercising caution when using the word "cost" when talking about what constitutes an ethical price or profit.

The cost an entrepreneur incurred in making a single widget should be relevant to the price the entrepreneur charges only insofar as the entrepreneur prefers the price-per-widget to exceed the cost.

Ultimately, what determines the truly fair price of a widget is the meeting of demand and supply.

Suppose it costs me $1 to make one widget. But customers want my widgets so much that they're willing to pay me $100 per widget. If both my customers and I agree on that price when I sell widgets, then $100/widget is the fair price.

But then Demagoguecrat politicians -- like, say, a ficitious State Sen. Dirk Baldwell -- will complain that I victimized my customers, because it's obscene that I make a $99 profit on a widget that cost me only $1 to make.

Sen. Baldwell can then say that, because cost -- rather than demand and supply -- is what should determine prices, he is right to pass legislation limiting my profits.

He can say that it's fair if he passes laws forbidding me to charge more than $7 per widget. After all, if I charge $7 on each widget, I still make a profit -- just not a profit as obscene as the one I was making before.

The truth is that cost is not the final arbiter of price; demand and supply are. And the fair price is what buyer and seller consensually and peaceably agree to; not the arbitrary price set by politicians that stick their noses into other people's businesses.

If there is significant disatisfaction with the amount of markup I'm making, that creates an incentive for a rival widget-seller to enter the market and take away my business by charging a lower price. The new, lower price is, again, negotiated by means of demand and supply.

 
At 12:39 AM , Blogger Talifaitasi Satele said...

you're right that i left out the demand and supply when determining prices. but i tried to differentiate prices from costs, which i believe to be two separate concepts. costs for something means the efficiency of something. so if a weed eater is more efficient than the bush knife, the cost of cutting grass is the weed eater. we're not looking at a particular price of a weed eater to determine the cost of cutting grass. we're looking at the most efficient way to cut grass to determine what the cost should be. efficiency should be the focus not things like GDP to determine the progress of our economy.

 
At 11:42 AM , Blogger Stuart K. Hayashi said...

Hey Talimander! ;-)

You write, "efficiency should be the focus not things like GDP to determine the progress of our economy."

What does this mean? I believe that the purpose of the economy is to allow a person to peaceably maximize utility for himself. As long as he doesn't hurt other people, a man can do what he wants, no matter how inefficiently he does it. Growing organic vegetables is costlier than raising genetically-modified ones, while organic vegetables also yield fewer health benefits. But if people spend more moeny for less benefit by growing or eating organic vegetables, that's their prerogative.

Government should focus more on the minimization of force-initiation than on simply cutting costs. Governments have performed many immoral actions to "reduce costs to taxpayers."

"Nativist" jingoists writing to the Honolulu newspapers in April or May 2006 said that preventing Mexicans from entering the U.S. would reduce costs to taxpayers in the future, because that would mean less tax dollars are spent on the Mexican migrants' healthcare and their children's governmental "public" education.

Likewise, in the early 1900s, state governments like Wisconsin's said that, since tax dollars were spent on welfare for the mentally ill, the wholly compulsory sterilization of everyone who had mental illness in his or her family would, in the long run, reduce the amount of tax dollars spent on welfare.

And then there's this practice by certain city governments. When a city government exercises eminent domain on people's land to build a train/monorail stop, it sometimes takes more land than it needs. Once the train stop is built, what does it do with the land left over? It sells that land to a commercial developer. As University of Hawaii Law professor David Callies noted at the Libertarian Party of Hawaii convention on Sunday, June 4, 2006, this raises revenue for the city and helps pay for the mass transit system, thus reducing the amount that taxpayers have to shell out for it.

All of these allegedly cost-cutting measures remain immoral as they violate people's rights. They, in essence, reduce the tax burden of some taxpayers by imposing a new, greater cost on other taxpayers -- that burden being a new threat or exercise of violence.

Good government is not about maximizing output while reducing the dollar amount it "needs" to expropriate from taxpayers. Good government is about the minimization of force-initiation, which is why, 2,000 years from now, a truly just government should eventually eliminate taxation per se.

 
At 1:08 PM , Blogger Stuart K. Hayashi said...

Hey "Famous" Tali Amos,

In the beginning, you wrote, "A friend asked me how I could support high prices for LBJ and then turn around and support low prices from imports."

You can turn this argument back on those who advocate price controls: Why is it that the government prosecutes some vendors for "price gouging" -- the practice of charging prices that the government deems too high -- while the government also has its U.S. DOJ Antitrust Division and Federal Trade Commission (FTC) prosecute companies like Microsoft for "predatory pricing," which is the practice of charging prices that the government deems too low?

As Ayn Rand and Alan Greenspan point out in that excellent book you recommend on your Blogspot profile, Capitalism: The Unknown Ideal, this amounts to a double standard. And let's not forget that your firm can also be prosecuted if you charge what is considered the standard price in your industry -- that would mean you're not competing with other firms in your industry, but colluding with them.

Richard W. Grant satirized the price-control mentality very well in his excellent 1970s poem, "Tom Smith and His Incredible Bread Machine":

"Now let me state the present rules,"
the lawyer then went on.
"These very simple guidelines,
you can rely upon:
You're gouging on your prices if
you charge more than the rest.
But it's unfair competition if
you think you can charge less!
A second point that we would make
to help avoid confusion--
Don't try to charge the same amount;
that would be Collusion!"


So what's bad? Charging prices that are higher than those of your compeittors? Charging prices lower than those of your competitors? Charging the same price?

In the end, this is not about fair pricing at all; this is about people having an unconditional presumption of guilt against business and demanding that some government threaten physical force against entrepreneurs who do not abide by the arbitrary dictates of those who hold political power.

 
At 1:32 PM , Blogger Stuart K. Hayashi said...

Hey Tali Want a Cracker ;-)

I don't believe that a foreigner's right to sell me a TV for a price lower than what the domestic TV seller charges is in any way contingent upon the fact that the lower price the foreigner charges is good for me as a consumer. What gives the foreigner the right to sell me a TV that works -- regardless of price -- is the fact that this is a peaceful transaction that doesn't hurt anybody's person or private property and doesn't breach any contract.

Suppose a domestic TV seller named Kirk sells TVs to his fellow Americans at a high price. Then some foreigner named Galambos comes and promises to sell me a TV just as good at a much lower price.

Because I want a good bargain, I buy a TV from Foreign Galambos instead of from Domestic Kirk. And Foreign Galambos holds true to his promise -- he sells me the cheap TV and it works as well as he said it would.

So there's no victim, right? Nobody got clobbered over the head. But Domestic Kirk wails that he is the victim, because the simple and accidental fact that he was born in the same country as me somehow entitles him to receiving business from me. That he and I are of the same nationality, he insists, means I have a duty to buy a TV from him instead of from Foreign Galambos.

So Domestic Kirk goes to the government and asks the government to do something about it. The government makes the rule that Foreign Galambos is not allowed to sell TVs in America unless he charges a higher price than Domestic Kirk does.

But what if Foreign Galambos sells me another TV for a price lower than the one Domestic Kirk charges? That is breaking the law, but who got clobbered over the head? Who suffered from the loss or destruction of private property that he already had in his posession? Nobody.

And yet, if the government finds out about this, it will throttle Foreign Galambos and clobber him over the head on Domestic Kirk's behalf.

Foreign Galambos ilegally selling me a TV for a price we both agree to -- when that was his TV; not a stolen item -- doesn't cause physical harm to any person, nor does it destroy the private property anyone had already acquired.

The government punishing Foreign Galambos for such an action, however, does cause physical harm to somebody who hurt no one else's body or private property.

So which action is more brutal? Foreing Galambos selling me a product I am willing to buy, for a price I agree to? Or the government using violence on Foreign Galambos to assuage Domsestic Kirk's professional jealousy and to hobble Foreign Galambos's peaceful business dealings?

The government shouldn't care if allowing foreign imports into America's territories untaxed somehow saves money for Americans. Here, the government should keep the peace, rather than wrecking it by threatening violence against peaceful foreigners for failure to comply with ridiculously unnecessary (and micromanaging) laws.

 

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