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People have a bunch of instincts honed by millions of years in small tribes. Those instincts appear to be calibrated around resources being vaguely fixed and de

by roenxi 3y ago

People have a bunch of instincts honed by millions of years in small tribes. Those instincts appear to be calibrated around resources being vaguely fixed and depend on the tribe's foraging luck. The supply-demand curve logic is an excellent argument to point out to people that, based on some basic and obvious axioms, their intuitions are dead wrong. They are justified with just that observation. Take, eg, a crisis. Price caps in a crisis are a terrible idea that are about to make the situation much worse. There was a shortage, now there will be a bigger shortage. That seems to be unintunitive to most people but anyone who has had some basic supply-demand curve training can be talked out of imposing caps.

arethuza 3y ago
I'm not disagreeing with the point you are making but I do find it would be helpful if people referenced actual examples of these things happening in real world scenarios rather than thinking that a simple model is sufficient?
- roenxi 3y ago
  In my experience, which is not nothing, if you try that you'll end up in endless conversations where people go with some variant of "well it worked there, but it won't work here!". Economists have been idly trying to figure out a way to pitch the idea that wages are a price and therefore subject to supply and demand model for decades. No luck so far; it is difficult to get a man to understand something when that thing is his salary. Also, it is more interesting to try and find places where supply-demand doesn't work and then figure out why not. Usually the answer is regulation that creates shortages or overproduction. If you want a specific example; masks in COVID. There were price caps that guarantee we'll be caught short of masks the next time a respiratory crisis rolls around. It isn't like Bill Gates didn't see it coming, if there was money to be made he'd have a strategic mask reserve ready to go for the next one. But no. Price caps. There was even an article about a US mask producer who was refusing to expand production because he knew how it'd play out, unless my memory deceives me [0]. [0] EDIT Found the article - https://www.wired.com/story/surreal-frenzy-inside-us-biggest-mask-maker/ https://www.wired.com/story/surreal-frenzy-inside-us-biggest... . Bowen doesn't mention price caps, but you can see he is no stranger at all to how that sort of medical crisis plays out. He'd be the sort of person in a great place to make decisions about what sort of surge capacity to have on hand and how to plan for it and he is mainly responding to basic price signals. I still suspect that he'd be sensitive to the eminent domain risks under crisis conditions.
viburnum 3y ago
Price controls are bad in textbook economics but they can actually work well in certain circumstances. See Weber’s “How China Escaped Shock Therapy” and Galbraith’s “The Theory of Price Control.” This is the problem with supply and demand as the master theory of everything, it leads people to be overconfident theorists and ignore evidence.
tsimionescu 3y ago
What a good example of how bad economic modeling is for real world applications. If there is a crisis for a critical good, the only solution that works is to throw the market out altogether and create a temporary planned system of rationing. If five people are on a desert island with five watermelons, allowing the billionaire to eat all five because she has more money is not going to help. Similarly, if a nation can't produce or import enough food (e.g. in war time), you not only cap prices on food, you ration all the available food to try to make sure no one starves to death even if everyone is left hungry (or in even worse crises, allow people who wouldn't survive anyway to starve so that those that have a chance can get some rations). In reality, even for much milder crises, finding extra supply if prices are allowed to rise indefinitely happens rarely. Letting prices rise to any value is typically just a way to make sure the existing suppliers become filthy rich, it rarely does anything else. Of course, there are limits. If the government capped smartphone prices at 1$, we wouldn't actually get 1$ smartphones, we'd see the supply plummet to 0.

by roenxi 3y ago

arethuza 3y ago

I'm not disagreeing with the point you are making but I do find it would be helpful if people referenced actual examples of these things happening in real world scenarios rather than thinking that a simple model is sufficient?

roenxi 3y ago
In my experience, which is not nothing, if you try that you'll end up in endless conversations where people go with some variant of "well it worked there, but it won't work here!". Economists have been idly trying to figure out a way to pitch the idea that wages are a price and therefore subject to supply and demand model for decades. No luck so far; it is difficult to get a man to understand something when that thing is his salary. Also, it is more interesting to try and find places where supply-demand doesn't work and then figure out why not. Usually the answer is regulation that creates shortages or overproduction. If you want a specific example; masks in COVID. There were price caps that guarantee we'll be caught short of masks the next time a respiratory crisis rolls around. It isn't like Bill Gates didn't see it coming, if there was money to be made he'd have a strategic mask reserve ready to go for the next one. But no. Price caps. There was even an article about a US mask producer who was refusing to expand production because he knew how it'd play out, unless my memory deceives me [0]. [0] EDIT Found the article - https://www.wired.com/story/surreal-frenzy-inside-us-biggest-mask-maker/ https://www.wired.com/story/surreal-frenzy-inside-us-biggest... . Bowen doesn't mention price caps, but you can see he is no stranger at all to how that sort of medical crisis plays out. He'd be the sort of person in a great place to make decisions about what sort of surge capacity to have on hand and how to plan for it and he is mainly responding to basic price signals. I still suspect that he'd be sensitive to the eminent domain risks under crisis conditions.

viburnum 3y ago

Price controls are bad in textbook economics but they can actually work well in certain circumstances. See Weber’s “How China Escaped Shock Therapy” and Galbraith’s “The Theory of Price Control.” This is the problem with supply and demand as the master theory of everything, it leads people to be overconfident theorists and ignore evidence.

tsimionescu 3y ago

What a good example of how bad economic modeling is for real world applications. If there is a crisis for a critical good, the only solution that works is to throw the market out altogether and create a temporary planned system of rationing. If five people are on a desert island with five watermelons, allowing the billionaire to eat all five because she has more money is not going to help. Similarly, if a nation can't produce or import enough food (e.g. in war time), you not only cap prices on food, you ration all the available food to try to make sure no one starves to death even if everyone is left hungry (or in even worse crises, allow people who wouldn't survive anyway to starve so that those that have a chance can get some rations). In reality, even for much milder crises, finding extra supply if prices are allowed to rise indefinitely happens rarely. Letting prices rise to any value is typically just a way to make sure the existing suppliers become filthy rich, it rarely does anything else. Of course, there are limits. If the government capped smartphone prices at 1$, we wouldn't actually get 1$ smartphones, we'd see the supply plummet to 0.