Dan M wrote: > >> I'll add one thought that keeps coming to me. If free markets reliably >> regulate prices, how the heck did we have such a crazy spike in oil prices >> recently? >> > > It's rarely as simple as portrayed in economics 101, but this type of > problem has been long known. I think that I learned about it with hog > prices...the fact that there is a time constant between the price of hog > bellies and the ability to add new hog bellies to the market. This leads to > market volatility, since when prices are high, a lot of new little piglets > are raised, causing an excess in supply, lowering prices, causing few > piglets to be raised, causing a shortfall in supply, etc. > > Now, you might think that folks could see this and enough farmers would > counter-trend in order always make money, and thus smooth things out. > Indeed, the futures market was created to help with this, my father-in-law > regularly sold future harvests on the futures market to lock in prices and > to decrease fluctuation This is called the Cobweb Theorem, first articulated by Kaldor.
But there is another issue here, less well understood, and that is the part about Economics 101. The book that led to modern economics, The Wealth of Nations, first laid out the idea of the invisible hand which supposedly proves that markets are always efficient at setting prices and maximizing output while minimizing prices. While this is a very useful, it critically depends on the conditions of perfect competition to be true. While this market form was fairly common in Adam Smith's day, it decidedly less common today (see Shepherd, 1984, for instance). When markets are dominated by large firms, many with significant market power, relying on Smith's results is essentially stupid. Sadly, all too many Economics 101 classes ignore that (or, which is only slightly better, give it passing mention in the context of an overall worship of markets.) In markets of this kind, you absolutely cannot assume that markets will either produce optimum levels of output or the best possible prices. When you are in a doctoral program in economics, one of the things you are drilled in is that the assumptions you make in developing your models are often the most significant factors in the results you make. That is why grad students and their profs all have large repertoire of jokes in which the punch-line involves an economist making an assumption (e.g. "Assume a can opener.") In the case of perfect competition, the assumptions include: 1. Numerous buyers and sellers 2. Homogeneous product 3. Perfect information in the market 4. No barriers to entry or exit For all of these reasons I am not one to subscribe to the quasi-religious faith that markets are always the optimum solution. But in the case of the gasoline market, there is in fact some fairly persuasive evidence that there is a pretty high degree of competition. It is the fact that prices do move around a lot, and in both directions. When firms have a large amount of market power, you definitely do not observe this kind of price movement. Firms with power set prices, and control those prices, so as to maximize their profits. You just don't see a lot of price movements. But with gasoline you see prices move on a frequent, even daily basis. Regards, -- Kevin B. O'Brien TANSTAAFL [EMAIL PROTECTED] Linux User #333216 "People call me feminist whenever I express sentiments that differentiate me from a doormat or a prostitute." -- Rebecca West _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
