Robbins

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Price Gouging Part Two

When you are only concerned with one thing and have only one tool things can go awry quite easily.  So it is with our price theory friends.  They bask in the rigor of their thinking and look askance at the inability of regular folks to grasp the point of the logic of their so-called price mechanism — note the mechanical nature of it all.  The recent spate of snooty commentary aimed at Kamala Harris and her ideas about price gouging are a case in point.  I talked about this a couple of days ago with respect to John Cochrane’s typical in-your-face article praising price gouging.  Cochrane typifies the defiance of a certain sort of economist.  They take pride in being determinedly anti-social and cast aspersions on anyone who dares to cross swords with their wisdom.  Ignorance.  Gimmick.  Populist.  These economists are not short in vocabulary when someone treads heavily on their precious logic.

Which is all it is.  Logic.  Impervious to reality, but impeccable in its coherence.  

The current controversy gives us an opportunity to look a bit more carefully at the shortcomings of economics and its obsession with what it calls markets.

One victim of putting all your emphasis on prices and their formation as the be-all and end-all of economics, along with the equilibrium that is claimed as the result of the suitable matching of supply and demand produced buy the movement of prices is production.

Economics has no theory of production.  

As I have mentioned here before, some go as far as to claim there is no such thing as supply.  There is only demand.  This lunacy is entirely supportable by the logic of price theory.  Which is why price theory is a tender branch on which to balance the entire load of an economy.

You think I exaggerate?

Then allow me to refer you back to one of the primary sources of the current error.  The snootiness  began some time ago.  The arrogance set in during the 1930s.

Robbins, writing in 1932 about the application of what he refers to as the “new approach” — which is the relentless application of what we know as price theory to each and every nook and cranny of an economy, says the following:

“We may take as an example of the advantages of this procedure the modern treatment of organization of production.  The old treatment was hopelessly unsatisfactory: a few trite generalizations about the division of labor copied from Adam Smith, and illustrated perhaps by a few examples from Babbage; then extensive discursions on industrial “forms” and the “entrepreneur” with a series of thoroughly unscientific and question-begging remarks on national characteristics — the whole wound up, perhaps, with a chapter on localization. … “

Tell us what you think Lionel!  Who goes on:

“There is no need to dwell on the insufferable dreariness and mediocrity of all this.  But it is perhaps just as well to state definitely its glaring positive deficiencies.  It suggests that from the point of view of the economist “organization” is a matter of internal industrial … arrangement. … “

This is a polemic, so Robbins eschews the need to provide examples of all this shoddiness.  His point is unequivocal though.  It screams through his language:  There is one and only one source of organization in an economy: the price mechanism.  The structure of a firm, like everything else in the eye of price theorists, is a direct consequence of the playing out of prices.  

When you only have a hammer …

Unless you missed the point Robbins carries on:

“In the modern treatment, discussion of “production” is an integral part of the theory of equilibrium.  It is shown how factors of production are distributed between the production of different goods by the mechanism of prices and costs…. The doctrine of division of labor, heretofore so disagreeably technological, becomes an integral feature of a theory of moving equilibrium through time.  Even the question of “internal” organization and administration now becomes related to an outside network of relative prices and costs; and since this is how things work in practice, what is at first sight the greater remoteness of theory in fact brings us much nearer to reality.”

Please stop laughing.  And I apologize for the extensive quotations.

Robbins is dismissing any need to develop a theory of production because everything falls under the rubric of prices.  In a sweeping and quite extraordinary way Robbins lays down a marker for all subsequent price theorists.  Nothing else matters.  Nothing.  Only the logic of the price mechanism.

Notice the slippery way he avoids the question of what to produce.  He simply says that resources are distributed amongst the different goods to be produced by the interplay of prices and costs.  But who decides what to produce?  That’s a decision that precedes such interplay.  For prices and costs to have an effect, they have to have an effect on something.  How does that something appear on the stage?  By magic?  There is no room for invention, innovation, or any other form of novelty in Robbins’ telling of the story.  He simply argues that prices and costs allocate resources amongst things that already exist.  His equilibrium and his logic are utterly incapable of explaining why economies change or why new products come into existence.  His theory and its successor versions are simply a logic, elaborately extended, that seeks to explain an entirely sterile view of market exchange.  

Nor can he shed light on how to produce something.  He dismisses such talk as “disagreeably technological”.  

No wonder economics has subsequently fumbled around with theories of the firm.  When you dismiss organization as being trivial and production as being only an extension of the allocation of resources subject to prices and costs beyond the boundaries of a firm, you disable any sensible or searching inquiry into such organization.  

This crippling of economics and its turn into a narrow study of the logic of exchange rules out vast swathes of economic activity.  It reduces the relevance of economics to a sliver of the entire process of invention, production, consumption, and decomposition of the products that flow through a modern economy.  

When you only have the hammer of the prince mechanism, everything does begin to look like demand.  You have dismissed the issues of supply as uninteresting and of no consequence.  

Price theory, in its most logical form, is simply a method to study allocation of things that already exist and in places that already exist.  It stands mute on novelty.

Which is why Cochrane can claim that price gouging is a good thing.  Why?  Because the existing supply is allocated best when that last unit to be sold goes to the highest bidder — in Cochrane’s story it was the last available room in a motel.  In the mind of an economist “scarcity” has been eliminated and an optimal allocation achieved.  In the mind of everyone else, because no new supply has been called forth, the scarcity persists and the high price used to allocate that last product, deviating as it does from preceding or “regular” prices, is price-gouging at its worst.  

In another setting, the bias of price theory becomes an ideological focus when a politician like Harris dares suggest that, perhaps, the discussion of how to deal with inflation has more than one leg to it.  Traditional economics places the entire burden on fighting inflation on demand.  Rising inflation requires, in this telling, dampening down demand.  In the real world this means making some portion of the working population unemployed and reducing wage increases.  This follows precisely from the sort of analysis that price theorists use.  After all, following Robbins, they have no insight into production and thus no insight into supply.  As some of them say: there is only demand.  In this case that demand emanates from pesky workers.

Parenthetically, there is a tawdry irony at play here: tenured academics lecturing us all on the importance of flexible labor markets and the need to adjust to locate an equilibrium seems somewhat hypocritical.  They seem able to ignore this without too much self-awareness though. 

So the suggestion that some attention ought be given to the supply side of the equation is met with ribald laughter from the price theory crowd.  Their protestations of ignorance and meddling on the part of silly politicians is based on the security of their logic.  After all if there is no supply and only demand, and if production is subsumed as part of the market, it is folly to suggest taking a look at supply.  It doesn’t exist!

Which is convenient for the producers.  They don’t have to share in the pain of dealing with inflation. The economic experts say so.

Robbins blazed the path in more than one way.  Notice how that last long quote ends.  He applauds the dismissal of production and all that disagreeable technology and goes onto claim that such dismissal, far from being an odd result of some distant and abstract theory, actually moves his analysis into accord with reality.

Yes, reality.  As perceived by economists.

And that is where we find the best insight into how economics can sometimes appear absurd.  Robbins actually imagines that elimination discussions of production makes economics more realistic.   After all when you latch onto prices as the only matter of consequence in an economy, and when you laud the inevitability of equilibrium as it optimal achievement, your view of reality has become sufficiently distorted that you can actually say something like that.  The psychologists must have theories of their own to explain this syndrome.  The Brest of us just call it weird. 

Likewise Cochrane actually believes that scarcity has been erased by the extraordinary pricing we call price gouging despite not a scintilla of new supply being created.  

It’s all relative.  And its all inevitable.  The logic is solid.  Surge pricing is good for us.  We must accept the consequences of our arrival at equilibrium.  Our price theorists know a thing or two about reality.  

Well, maybe.

One last thing.

I believe it was John Holland — not a price theorist obviously —  who said that when a thing is in equilibrium it is dead. 

He’s correct.  Does that mean that price-gouging is good only in dead economies?

Asking for a friend.

__________________

Those quotes above are from Robbins’ “An Essay on the Nature and Significance of Economic Science”

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History, Aaah History

I never studied much economics until I was long out of school. I did so then to get to grips with its seeming irrelevance. I had become involved in questions of economics of the practical kind and found little – or none – of value in whatever textbooks I picked up to educate myself. I was a history major. Looking for narrative and building models based upon the lessons of prior generations just feels sensible to me. Modified, of course, by the knowledge that, while history may appear to repeat itself, it never repeats itself exactly. For one thing the actors have changed. For another, so has everything else. But ideas resonate. Since all words can only be vague approximations of the sharpness of our thoughts, the theories that provide the core of our responses to problems are also approximations. They are general, while the problem at hand is specific. This implies that when we apply them we have latitude and need to adjust them to circumstances. There is no single answer, no “silver bullet”, and no ideal. There is just the continuing unfolding of events, the constant pressure to learn, and the overwhelming consequences of being unable to adapt: failure, or, in the extreme, ultimate extinction.

History tells us this. Nothing can ever be the way it was. That unfolding is incessant. And failure to learn dooms us eventually to fall victim to change because the presumption that knowledges acquired in the past is appropriate for the present is the most dangerous of all illusions. Being steeped in even the most brilliant of all theories is meaningless if the environment has rendered that theory obsolete.

This is why I ascribe to Karl Popper’s dictum that all life is problem solving. Life itself is a solution to a profound problem. That of the ever changing universe. If yesterday provides only approximate guide to how to survive today we need to hone that guide to sharpen its relevance. We need to learn. This implies being adept at forgetting some things and being skilled at problem solving in real time. Forgetting the wrong things leads to disaster.

Of course some solutions maintain their relevance longer than others. There are problems that repeat closely enough to their past pattern that an old solution is still useful. Such solutions can be codified and embedded deep into the machinery of life. They become what I call “primary knowledge”. The code transmits forward information sufficient to resolve a repeat, or near repeat, of an old problem. Our landscape is littered with primary knowledge. DNA can be thought of this way. So too can the rules and routines of business. So too are the traditions of society and its institutions. Vastly different yet united in their representation of coded learning projected forward to guide future action. In the hope that such action will enable successful solution to a future problem. In this way primary knowledge provides continuity, stability, and well understood response. It is this predictability that is its strength. We know what we’ll get. We know it works. We can take comfort in its efficacy.

But, as Popper tells us, the universe doesn’t care for tradition. It never is the same. It is akin to river Heraclitus warns us about. It may appear to the same, it may have all the surface qualities of continuity, but underneath is roiling change and turbulence, which, when accumulated, alters everything. And renders primary knowledge useless. Worse, it dooms anything dependent solely upon primary knowledge. We really can never step into the same river twice.

So we need to learn. And the ability to learn, what Popper described in his notions of falsification, is what I call “secondary knowledge”. This is our ability to solve unique problems by maintaining and then deploying a set of talents consisting of both outward and inward flows of information, and then the ability to process that information in order to devise new solutions quickly. Better yet: it is preferable to be able to test those solutions before applying them. The falsification process can be truncated that way, and the risk of failure reduced. We do this by thinking through problems and countering them with what we call ideas. These ideas can be tested and pay the consequences of failure, saving us from that fate and allowing us to adapt until we locate an idea that passes muster. Once we have, we have learned. The problem is solved and the solution can be stored as part of our primary knowledge to be replicated and used anew.

Why am I lost in all this?

Read these quotes:

“For hitherto war has been the only object of governmental loan-expenditure on a large scale which governments have considered respectable. In all the issues of peace they are timid, over-cautious, half-hearted, without perseverance or determination, thinking of a loan as a liability and not as a link in the transformation of the community’s surplus resources, which will otherwise be wasted , into useful capital assets.” – Keynes, 1933

“It is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the budget – that we must go slowly and cautiously with the former for fear of injuring the latter. Quite the contrary. There is no possibility of balancing the budget except by increasing the national income, which is mush the same thing as increasing employment.” – Keynes, 1933

“There are still people who believe that the way out can only be found by hard work, endurance, frugality, improved business methods, more cautious banking, and, above all, the avoidance of devices.” – Keynes, 1933

“We are of the opinion that many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of public authorities …. [which] mortgage the budgets of the future, and they tend to drive up the rate of interest … the depression has abundantly shown that the existence of public debt on a large scale imposes frictions and obstacles to readjustment very much greater than the frictions and obstacles imposed by the existence of private debt.” – Hayek & Robbins, 1932

“Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world.” Keynes, 1935

I could go on. As I kept coming across these quotes, taken from the debate between Keynes and classical economists during the 1930’s as he developed his General Theory, I kept on noting how apt they are today. We really are re-living the depression. We really are locked in our own depression. Our primary knowledge now is that same as it was then. We forgot during the interim what we learned in the 1930’s. We forgot Keynes. Or, rather, we unlearned him. We fell prey to an ideological backlash that banished exactly those solutions most appropriate in our current circumstances.

Instead our current policy solutions are mainly those of the classical economists, which were shown to be in error back then and are in error today. When we deploy Keynes it is half-heartedly and with regret. For we are convinced he is apostasy. He is not the pure or the ideal. For he teaches us that intervening in markets is a better course than allowing them total freedom. He places a constraint on freedom, and that notion is not in vogue.

Worse: when the centrists in politics are all homogenous in their thinking, as they are today. When they are all in the thrall of erroneous theory and are replicating the tragedy of the 1930’s. When they have all deliberately abandoned the positive message of social or activist response and taken up cause with the pessimism of conservatism that teaches us to abandon ourselves to the fate and destiny of “natural forces”, they expose us to the rise of extremism. For people want response. They yearn for action. They demand leadership. They thus gravitate to anyone who promises to lead and fight for a cause. When the centrists are frozen by their inherited primary knowledge those who offer an alternative, however specious, however pernicious, however awful it may be, will develop a following.

In the 1930’s the utter failure was that of the centrists in Germany. They dithered and were beholden to outmoded ideas. Hitler wasn’t. We know the result.

Today?

Political instability is on the rise. This is not because people have become more extreme. Nor is it because we have more virulent ideas today – we don’t yet have a modern version of Nazism. It is because our elite is inept and locked in error. It cannot lead because it cannot shed its old ideas. It cannot bring itself to learn. Or re-learn.

History, aaah history.

We forgot the wrong things.