Both Sides: The Free Market

"This Both Sides installment presents two viewpoints on free market systems. First, Richard Wolff posits that, from a historic standpoint, the free market has never actually existed because regulations are always necessary due to naturally introduced, undesirable affects. On the other side, Milton Friedman puts forward that free voluntary exchange, based upon the principle of mutual benefit, leads to a market that averts a concentration of power and prevents people from doing harm" (Stossel in the Classroom, Feb. 2022).

Here are some comments. 

1. The examples Wolff presents to show that regulation follows whenever a market appears are not compelling.
1. Labor contracts existed for 100s of years before governments passed minimum wage legislation.
2. Public utility regulation creates the very monopolies he condemns.
3. He conflates people willing to pay the most for an ice cream cone with people with the most money. Not all "rich" people are willing to pay a lot for a cone and some "poor" people are. Do not confuse what I just wrote with this next statement: the market system allocates more goods and services to rich people than to poor people.
4. He ignores that positive effects of the increase in the price of ice cream cones.
1. The quantity supplied increases. (He misuses the terms "demand" and "supply".
2. Profits earned by the producers encourages entry of alternative products, especially of products that cater to consumers being priced out of the market.
3. The favor that the market shows to the rich encourages production activities and investment in physical and human assets. That the market system allocates more goods and services to rich people than to poor people may be a feature, not a flaw.
2. Friedman states at the beginning of his talk that no actual system conforms completely to free enterprise.
3. Friedman spends most of his time talking about how the market system is but one example of order arising spontaneously when individuals cooperate freely and without coercion. .

Frackers Push Into Once-Dead Shale Patches as Oil Nears $100 a Barrel

The WSJ (Feb. 2020) reports: "Spurred by the highest oil prices in years, shale companies are moving drilling rigs back into oil fields that were all but abandoned a few years ago."

Soybean Prices Surge as South American Outlook Deteriorates

Drought in South America and higher prices for fertilizer have pushed up the price of soybeans (WSJ, Feb. 2022). Here are five questions.

1. How does a drought in South America (SA) affect the supply and demand of soybeans in SA? The equilibrium price and quantity of soybeans in SA?
2. How do the changes you describe in Q1 affect the supply and demand and equilibrium price of soybeans in the USA?
3. How does an increase in price of fertilizer affect the supply and demand and equilibrium price of soybeans in the USA?
4. What predictions about the equilibrium price and quantity of soybeans in the USA do your answers to Q2 and Q3 yield?
5. Why have farmers in the USA shifted from planting corn to planting soybeans as the price of fertilizer increases?

Can ESG investing stop climate change without sacrificing returns?

The WSJ gives us a clear answer:  NO. (Managerial Econ, Jan. 2022)

Why do some places prosper and thrive while others just suck?

"I  had one fundamental question about economics: Why do some places prosper and thrive while others just suck? It’s not a matter of brains. No part of the earth (with the possible exception of Brentwood) is dumber than Beverly Hills, and the residents are wading in gravy. In Russia, meanwhile, where chess is a spectator sport, they’re boiling stones for soup. Nor can education be the reason. Fourth graders in the American school system know what a condom is but they’re not sure about 9 x 7. Natural resources aren’t the answer. Africa has diamonds, gold, uranium, you name it. Scandinavia has little and is frozen besides. Maybe culture is the key, but wealthy regions such as the local mall are famous for lacking it" (P. J. O'Rourke, Eat the Rich: A Treatise on Economics).

Study: Seattle's Soda Tax Has Been Great for…Beer Sales?

A study in PLoS One reveals that beer is a substitute for sugary soft drinks (Reason, Feb. 2022).

White House Sees Hearing Aids as Chance to Lower Prices Through More Competition

What happens when the government removes barriers to entry and allows entry and more competitors? (WSJ, Feb. 2022)

"Getting a pair of hearing aids can cost up to $5,000. The White House says they should be as little as a few hundred dollars. And it says it has a plan to make that possible: deregulate the market to increase competition."

"Because of federal and state regulations, manufacturers typically sell through audiologists and other medical professionals."

"Aditi Sen, an economist and director of research and policy at the Health Care Cost Institute, a think tank, said new entrants should reduce costs, increase access and boost innovation for hearing aids aimed at mild to moderate hearing loss."

"Congress authorized the FDA to create a new category of hearing aids that can be sold over the counter for mild to moderate hearing loss in 2017. Last year, Mr. Biden directed the FDA to speed up the process."

Property rights mean self-interested monitors.

"No one kills the goose that lays the golden eggs when it is his goose" (Sowell, Knowledge and Decisions, 1980).

Coke and PepsiCo Post Big Sales Gains on Big Price Increases

 

"Coke’s organic revenue increased 9% in the quarter ended Dec. 31 from a year before, driven by a 10% increase in prices (WSJ, Feb. 2022). These percentage changes imply that the quantity sold decreased by approximately 1% assuming that nothing else changed besides price to affect the quantity sold. the percentage change in total revenue is approximately equal to the sum of the percentage changes in price and quantity sold and 1%; 10% - 9% = 1%. The percentage changes in turn imply that the price elasticity of demand is approximately equal to -0.1 assuming that the quantity sold = the quantity demanded; the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price and -1% / 10% = -0.1.

However, other changes were probably increasing the quantity demanded and sold. "Coke and PepsiCo, two of the world’s biggest advertisers, said they ramped up marketing spending during the most recent quarter." Moreover, the continued recovery following COVID lockdowns was increasing consumer spending in general. Therefore, the quantity sold would probably have fallen more that 1% without these other changes and the price elasticity is probably less than -0.1.

Fast food prices are jumping. They could go even higher

 

"So far, [increases in price] hasn't hit sales (CNN. Feb. 2022). Here are some questions.

1. What must be true about the price elasticity of demand for fast food if sales remain constant when all fast food restaurants raise price by 10% and nothing else changes to affect the demand for fast food? Sales is another term for total revenue.
2. What must be true about the price elasticity of demand for fast food if sales increase when all fast food restaurants raise price by 10% and nothing else changes to affect the demand for fast food?
3. Suppose that the price elasticity of demand for fast food is -1. Would the sales at a local McDonald's increase, decrease, or remain constant if it raises prices, all other fast food restaurants maintain their prices, and nothing else changes to affect the demand for fast food?
4. Does the articles describe other changes that might affect sales besides the price increases? Would these changes tend to increase or decrease sales? What do they imply about the price elasticity of demand for fast food?

Click here for answers.

The Difference Between Operations and Strategy

Christopher Stowell discusses the differences. The perspective on strategy is insightful.

Price Controls, Black Markets, And Skimpflation: The WWII Battle Against Inflation

Here is NPR / Planet Money's account of price controls during WWII.

"The policy effectively neutralized one of the central functions of the free market, which is the allocation of scarce resources. In a free market, if there's not enough of something, the market responds by raising prices. This reduces demand for that product. It also sends a signal to businesses to produce and supply more of that product. Without this price mechanism, most economists believe, the market struggles to remedy shortages and society scrambles to figure out who gets what.

During the early 1940s, when the federal government began eliminating free-market pricing on goods in short supply, it had to begin allocating these scarce resources in a different way. It created a rationing system where the government assigned ration stamps to citizens."

"To buy products in short supply — like coffee, canned foods, dairy, meat, bicycles, cars, tires, gasoline, clothes, and sugar — American consumers not only had to pay money, they also had to use government-issued ration stamps. The aim was to limit the amount of a particular good or goods that any one person or household could purchase, and ensure more equitable distribution during wartime."

"To achieve all this, the federal government erected a sprawling and intrusive bureaucratic apparatus under the Office of Price Administration (OPA). During the war, the OPA and related agencies employed hundreds of thousands of federal employees and community volunteers, including twice the number of economists as the U.S. Department of Treasury. It's a lot of work to centrally plan an economy."

"without the ability to legally raise prices, businesses resorted to other tactics to maximize their profits. One is a phenomenon we've dubbed 'Skimpflation' at Planet Money. That's when instead of simply raising prices, companies skimp on the goods and services they provide, degrading the quality of the stuff they sell."

"'Another practice — dubbed the red market — was upgrading or selling a low grade of meat at the ceiling and point price of a top-grade cut,' Lingeman writes.

Other meat sellers simply ignored price controls and sold their meat on the black market. ... By all historical accounts, the black market for price-controlled products flourished during the war."

"With plentiful jobs during the war years and a system of equal rationing and price controls, the bottom third of American earners actually increased their meat consumption by around 17 percent, by one calculation. The top two-thirds, however, saw their meat consumption decline by around 4 percent."

"As the war came to an end, government officials struggled to turn off the system. In the summer of 1946, congressional legislation that authorized price controls lapsed, and food prices shot up. The cost of meat doubled. Cowering in the face of a public backlash, President Truman and a Democratic Congress reinstituted price controls on meat. This infuriated the meat industry. Once again unable to raise prices, many meat producers and sellers were reluctant to ramp up production, and many actively resisted doing so. Meat sellers, led by livestock ranchers, withheld meat from the market. One reason was anticipation that price controls would soon expire and they could make more money selling meat if they waited."

Why Colleges Don’t Care About Free Speech

John Hasnas argues that administrators are responding to incentives and recommends some changes in the organizational design (WSJ, Feb. 2022).

Wealth Is Knowledge

 

More wisdom from Andy Kessler and George Gilder (WSJ, Feb. 2022). 

"How to create lasting wealth is surprisingly simple: Do more with less."

"'Capitalism is not chiefly an incentive system, where entrepreneurs act in rote response to rewards and punishments like in a Skinner Box. It’s an information system governed by the unveiling of surprising truths, innovation. If the creativity of entrepreneurs wasn’t a surprise, socialist planning would work.'"

"'You can keep your wealth only if you are willing to give it to others.' Think about that. If you have knowledge and capital, the only way to produce wealth is to invest in things that lower costs to consumers and slide down new learning curves. In effect, by providing something they will find productive—the iPhone, artificial-intelligence software—entrepreneurs expand their customers’ wealth. This is what I call societal wealth. Capitalism isn’t greedy, it is the sincerest form of charity." 

Questions to ask

 

All but Q2 are good questions to ask CEOs and yourself. Q2 matters to VC investors but the desire to grow can kill developing a good strategy.