Bookish Economics vs. Empty Bellies
July 16, 2007 3:08 pm economicsFark says it best: “What happens when you give an old crazy man with no understanding of economics the reigns to a wealthy country?”
The answer is obvious: rampant shortages, the collapse of the business environment, black marketeering, and riots. Poverty and starvation are right around the corner.
Zimbabweans are shopping like there’s no tomorrow. With police patrolling the aisles of Harare’s electrical shops to enforce massive government-ordered price cuts, the widescreen TVs were the first things to go, for as little as £20. Across the country, shoes, clothes, toiletries and different kinds of food were all swept from the shelves as a nation with the world’s fastest shrinking economy gorged itself on one last spending spree.
This sort of market-blindness isn’t just in Zimbabwe of course; Chavez has been putting in price caps in Venezuela too. The difference there is that Chavez can buy out his mistakes with a steady income of Venezuelan oil money. It’s not just an “over there” issue either; hurricanes such as Wilma and Katrina bring up talks of anti-price-”gouging” laws.
What most people (including national leaders apparently) don’t understand is that the number involved in a price (including the price of labour: wages) is pretty much arbitrary: it’s just a placeholder for actual value/wealth. Changing prices across the board doesn’t make things more or less valuable or available; all it does is change the value of the cash itself, both in hand and in bank accounts. Force people to sell at below the market price and you’re not making goods more accessible: you’re simply transferring value from the business to the consumer in a one-time shot. You can’t afford to do that forever (or even more than once); there’s no incentive to create more wealth if you’re going to have it taken from you.
The same goes for minimum-wage increases by and large: by dictating that business pay employees more, you’re not creating more wealth to better the lives of those employees, you’re just moving the goal posts. A employee who earns the minimum wage is also earning minimum value, and that doesn’t change when you increase the number attached to the law. What does happen is that you evaporate the value of anything that’s tied to a particular amount: things like savings accounts and old-age pensions which aren’t indexed to inflation.
Mugabe doesn’t realize (or intentionally ignores) the relationship between money and value — and so he’s going to get hit in the head with the reality of “bookish economics” in short order. Let’s hope everyone else learns the lesson.
July 19th, 2007 at 6:51 pm
I think anti-profiteering during Wilma is a fundamentally different animal. No one would argue that food, fuel, and ammo are more *valuable* after a disaster, only that a government is probably right to prioritize rebuilding over the merchant’s value proposition (and, really, the kind of short-term stuff going on with the disaster isn’t the same as what Muguabe is doing).
-Marco
July 20th, 2007 at 12:15 pm
No one would argue that food, fuel, and ammo are more *valuable* after a disaster,
Food is valuable all the time of course. Non-perishable food becomes much more valuable after the power goes out, but perishable food is less so… so let’s call that even.
Fuel (gasoline) is certainly more valuable after a disaster. Not only does it provided power for transportation, but it also fuels generators, which in turn powers communication, lighting, food preparation/preservation, reconstruction, and entertainment (several of our neighbors ran their TVs on generators during Wilma just to pass the workless hours away).
Ammunition also becomes more valuable during a disaster if there’s a big increase in crime; the outsourced protection (police) that you normally rely on are overburdened and less effective, and so you must pick up the slack yourself.
Also, note that I was originally talking about prices, and not necessarily value. The difference depends a bit on what definition of value you use. The things I pointed out above are mostly about utility; price also takes into account availability and demand, which of course get all screwy when an economy gets disrupted.
only that a government is probably right to prioritize rebuilding over the merchant’s value proposition
Price caps aren’t about priority though. In fact they serve to deprioritize specific actions because the goods in question are more available to everyone than they normally would be. If you want your rebuilding crews to have access to goods, having them fly off the shelves with artificially low prices isn’t a good way to accomplish that.