Tuesday, September 27, 2005

Econ 101: Prices and scarcity (a contrarian view)

The news is that gas prices are rising "in response to market pressures", and so on. The news reports talk of prices as if they were natural phenomena, and go up or down entirely on their own. Which is of course utter nonsense. Prices are human constructs, and human decisions cause them to change.

A price does not rise or fall, someone decides to change it. There is no such thing as market pressure, there is only the belief by some people that a commodity is or will be in short supply. If they are sellers, they decide to ask for more. If they are buyers, they decide to offer more. If a sufficient number of buyers and sellers share that belief, and if the buyers cannot do without the commodity, or cannot delay their purchase of the commodity, higher prices will be paid. And so on. The converse happens when some people believe that a commodity will be in abundant supply.

The theory of the free market is said to assume that buyers and sellers have the same or at least similar information, and that the transaction is based on this information. This too is nonsense. Firstly, it is not information that matters, but belief. Secondly, information functions to justify belief, and it is belief that drives the decision to buy or sell. Thus, buyers and sellers may justify their decisions based on some very different information, or disagree about the significance of common information.

Either way, however, it is the apparent scarcity that drives pricing decisions. Both buyer and seller will attempt to control information, but for opposite reasons: the seller, to make the commodity seem scarce, the buyer to make the commodity seem abundant. Scarcity justifies the seller asking for more, abundance justifies the buyer's offering less. Thus the only information that seems relevant to pricing is information about scarcity.

It is the function of advertising to make the buyer believe that the commodity is scarce in some way. This is true even of advertising that offers goods at lower than usual prices: the implication (sometimes explicitly stated) is that goods at this low a price are scarce, so get them now before the price is raised. Luxury goods are luxury goods not because they are better than other goods, but because the sellers and buyers conspire to limit the supply: there must be just enough of the precious item available that only those few worthy of owning one can buy it. Scarcity explains the high values placed on antiques, most of which are merely the kitsch of earlier generations. But people discard kitsch in enormous quantities, so that little of it survives. Scarcity accounts for the high, sometimes outrageously high, prices paid to athletes and actors for their performances. The ultimate scarcity is that of the item advertised as unique, tens of thousands of which are sold to people who hope thereby to express and announce their unique individuality. What's truly scarce, apparently, is individual worth.

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