In a very disappointing, yet predicted outcome, gas prices are now back down to almost $2 a gallon. A price I am afraid will lead to greater consumption and hinder efforts to develop a better, cleaner way.
This is an update to this post originally published on May 25th. As we all remember, gasoline raised to almost $4 a gallon. When the price got so high it allowed many more to enter the market and earn a profit mean the supply increased. With this increase, gas is now sold at a much lower price. As is evidenced today, we now have gas prices of almost $2 a gallon again.
As you can see from this previous post – it was predicted by economics as outlined by Thomas Sowell.
Original Post: Yes, basic economics. I was blown away by the powerful implications and the uses of what I learned from Thomas Sowell’s book, Basic Economics: A Common Sense Guide to Economics. I am however still working to understand the meaning and implications of the many insights that I will attempt to work on in these posts. Please share any thoughts that can help us all understand better.
Yes it seems that it would be boring, yet as I will display on my many upcoming posts, I learned so much from this book. It is a long and arduous read but very much worth the effort. While many of you may already know these things, I am going to share the “Wow” moments I had reading this book.
One of my first “Wow” moment happened in the beginning of the book and related to how prices, or more specifically price controls impact our world. This fact, “Quantity supplied raises directly with prices and quantity demanded varies inversely with price” has many powerful implications that altered my thinking. When reading that statement it seems counterintuitive until explained. After all, why would quantity supplied rise with prices and so what if it does?
What seems confusing is that with more, shouldn’t the price be less? However, as he shows, when the price goes up that means there is more opportunity for a better return on investment thus more will enter the market and in time this does again affect the price. Gas certainly provided a simple example of this phenomenon. When gas went to over $4 a gallon, that meant it was profitable to get oil from tar sands where before it was not because of the return they could get on their investment. Getting more oil meant in the longer term, higher supply and later a decrease in price.
Throughout the book, to relate this issue he uses the examples of what is created with price controls such as rent control or price ceilings. Through these examples, as with minimum wage, it is clearly shown that although the policy seems logical and gets political support, it does not and cannot create the desired results. As shown, it is more important to pay attention the incentives created with any policy than its stated intent.
Rent control seems to make sense for lower income people until we look at the bigger picture and learn how this change moves money to other alternative uses. As is stated over and over again throughout the book, economics discerns consequences of various ways of allocating scarce resources which have alternative uses – it is not about social philosophy or moral values.
For instance, when rent controls are in place, owners of rental property generally are not able to make a profit or even keep up with ongoing expenses. These pressures mean the property may fall into disrepair because of lack of money which often means a poorer quality of life for those that live there. This happens because how owners are incentivized. Renters want the low price so owners have no need to attract new renters because of higher demand. With regard to longer term prospects, new money will now be used to build higher cost rental properties, instead of rent control spaces because of the higher return on investment possible (alternative use for scarce resource). In the end, this means less apartments are available at a lower price. As is shown, places with rent controls are also cities with empty buildings and higher homeless rates than places without rent controls. Therefore the polices intent is not realized because of the incentives created by the policy.
In a similar way, minimum wage means those employed will make more money but less will be employed because of the amount that has to be paid to working employee’s. It of course is a more detailed situation and it is explained that it pays qualified candidates but not for the less qualified who the policy may have been intended to help. Incentives create a reality not intended by the program or policy.
This post only touches surface concepts of these issues and has been made to draw attention to the need for more careful thought about incentives developed over a policies intent. It is the incentives more so than the intent that creates a new reality. This means the most important issue to review with detail is what is incentivized by an action. For example controls limited the return on investments on modest housing projects subject to rent controls which means rent control incentivized builders to create housing for the more affluent where a better return was possible. With higher minimum wage, it means employers are incentivized to be more selective and to chose more qualified who can earn what they are being paid. If an employee is not worth what the pay rate dictates, they financially cannot afford to keep that person employed.
With regard to health education & promotion and creating interactions that generate comprehensive benefits by creating interactions so everyone and everything benefits, our focus needs to be on what is incentivized by a policy. Our policies must make healthier actions easier and unhealthy actions more difficult. Keep in mind, although the rent control policy was intended to make housing more affordable for less affluent, rent controls actually led to less housing for those of with less means.
It is important to think about what is incentivized or undesired results are created. For example government subsidies for fossil fuel extraction although intended to make transportation more affordable has led to more use of dirty fossil fuels and related climate change issues. In food production, although subsidized water to farmers was intended to make food more affordable it has incentivized an animal agriculture focused food system that damages personal and planetary health.
To use this idea in a positive way to create desired results on a daily basis we must focus on how to incentivize desired actions. As an example, according to books about Steve Jobs, he intentionally designed the work environments for Pixar and Apple to cause unplanned interactions. Both workplaces were set up so people had to leave their offices to use common areas for eating, mail and other daily actions. It was from these intention designs that they incentivized movements to create unplanned interactions from which desired outcomes evolved. It is claimed by Apple and Pixar that these incentized unplanned interactions are what makes them more creative and innovative than they could be otherwise. Powerful results from simple incentives.
Please share with me how you incentize desired actions and how you have lined up incentives with intentions of a policy or program. I look forward to hearing about your successes and sharing more.
Craig M. Becker, PhD
Lets all make life more livable for all by generating comprehensive benefits by creating interactions so everyone and everything benefit
3 thoughts on ““Wow” Post #1: Basic Economics: Powerful Implications!”
Dr. Craig Becker reading Thomas Sowell? Great insights but you may wish to combine this with the seminal “The Road to Serfdom” by Friedrich August von Hayek. It addresses many of the concepts you seem to be tilting towards in regards to unintended consequences and incentivization.
Thank you I will check it out