quietlife.net

it's simple!

02 Dec 2005

I realize now what the inspiration was for one of my aborted posts – the one about arguing economics on the Internet. It was this post by Glen Dean.

In it, he says:

“There are two reasons (price of gas). One is the price of oil, and the other is refining capacity in the United States. It is really just simple 12th grade economics, supply and demand. With economic growth in places like China and India, demand for oil has increased significantly.”

Just about any time you read someone saying that anything is “really just simply 12th grade economics, supply and demand”, what they really mean is “I don’t understand economics or the complexity of this situation, but here is my opinion anyway.”

Saying “It’s simple supply and demand” is admitting that you aren’t being honest with your readers or yourself. Very few things are “simple supply and demand”. Marshall’s theory of supply and demand for imperfectly competitive markets is a framework – a model (and one that breaks down under some circumstances, if you side with Keynes). It’s a helpful model, but you have to understand it before you can apply it, and you have to understand that economies are dynamic entities and that their dynamics are multi-causal. The fluctuations in the price of oil and gas wouldn’t be the much-studied topic they are if it were merely a matter of “simple supply and demand.” An honest analysis of the market for oil and gas involves many variables, including but not limited to: aggregate supply, aggregate demand, cartelized control over prices by varying supply on the margin, price stabilization by reserve injection, refinery efficiency and output, distribution costs, etc.

This is all just a subset of the maxim that generally any time someone rolls their eyes and asserts that “it’s SIMPLE!” it rarely is. This goes doubly for analysis of social phenomon (of which economics is one), where multi-causality is the law of the land.

Comments

Glen Dean — December 03, 2005 at 00:16 · reply

Chris, I don’t disagree with this post. I should not have used the word simple. But from what you wrote, it seems like we agree more than you realize. It is just the over-simplification that you have a problem with. Do you agree? Anyway, it is still an interesting discussion.

cwage — December 03, 2005 at 03:22 · reply

Well, no. I don’t agree. I used your post as an example of a common rhetorical usage of vulgar economics. You pinpoint the high profits of the oil industry as an example of “capitalism working” and condemn attempts at government intervention, while ignoring the fact that oil companies are not exactly operating in a vacuum independent of “government intervention” themselves, or the gross profits at the expense of consumers held hostage by a system rigged to promote short-term profit at the expense of long-term efficiency, or any other of the myriad other negative side-effects. I think your analysis is simplistic and ignores the reality of the situation, making it ultimately worthless.

If anything, we might agree that government intervention is not the answer, but I assure you that the paths you and I take to that conclusion are very different indeed. The economic situation of the oil and gas markets is complex, and there’s no clear answer. However in no case is it what I would consider an example of capitalism “working”.

Glen Dean — December 03, 2005 at 05:27 · reply

Chris, you are right. Oil profits are not operating in a vacuum independent of government intervention. Big oil is by far the most heavily regulated industry in the US. The price of oil would most definitely be much lower if it were regulated less. This would undoubtedly lower the price of gas. Of course I am not advocating that.

Also, in that same post I mentioned lack of refining capacity. This also has an upward effect on the price of gasoline. Many things affect the price of gas. I am not disputing that. But those factors remain the same over time. Over the last several years though, you cannot dispute the effect that demand has had on the price of crude oil. By demand I mean the growing economic boom in China and our own preference for SUVs.

Chris, I respect your analysis more than you realize and I see where you are coming from. The market is complex and many things affect the price.

You know Chris something tells me that you are not a fan of Milton Friedman. Thanks for the link and feel free to link to any future posts that feature “vulgar economics”.

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