Apropos of recent discussions here, at Cafe Hayek, and at Angry Bear, I offer this example of how higher prices really do induce people to move goods from one area to another. Supply curves really do slope upward. Transportation costs are important. Read this from the Columbia Missourian from last February. Here's a sample:
A two-year drought and this year’s harsh winter weather are contributing to a national hay shortage that’s hurting many Missouri farmers. Back-to-back years of low hay production are forcing them to decide between selling their livestock or paying two to three times more than last year for hay.
...
The hay shortage has spread across the Midwest and southern Plains states such as Texas and Oklahoma. Tony Hancock, market news reporter for the Missouri Department of Agriculture, said farmers are hard-pressed to find any hay in Missouri. Most are looking to Northern states such as Iowa and Wisconsin that have seen more rainfall.
...
Going north for hay forces farmers to dig deeper into their wallets, especially those in the southern regions. Jeff O’Laughlin, owner of Missouri Hay and Straw in Ashland, said high fuel prices have forced the price of small square bales up $2 to $3. He’s charging $5 to $9 for a small square bale now.
...
The Missouri Department of Agriculture is trying to help the situation by running the “hay hot line,” which connects hay producers with those in need of the product.
If our recent discussions have intrigued you, then you definitely should read the whole article. There are so many things about this article that make is wonderful for an economics course. It is a good illustration of the application of the supply and demand model in the way that it is often applied in discussions of price gouging. And yet, the word "gouging" is not in the article at all, nor is there any sense of moral indignation. It's very matter of fact. There was a drought in Missouri. Hay became scarce. The price rose. Supplies came in from several states away. End of story.
And while I raise this point to defend the economist's usual way of approaching the issue (upward sloping supply curves and all), I am not at all trying to deny spencer's point about how Wal-Mart et al. operate in disaster regions. There are similarities in terms of the overall issue. But there are important differences that are too obvious to even warrant mentioning to the informed readers of this blog, but that I would probably take 5 minutes in a class to discuss (ideally through a Socratic dialogue).
But perhaps the most important difference does warrant a mention, and that is that the time over which this plays out is longer. There is perhaps less of a sense of urgency and catastrophe. Thus there is more time for a reasoned response by both parties in the transaction.
There is an important similarity as well. That is that there is always an additional cost to moving the goods, and that's going to show up on someone's bottom line. Wal-Mart may find that it's costs are small because of its distribution network--small enough that they can absorb it. Great. But that's not always going to be the case. Even for Wal-Mart, if their stores are damaged, the cost of the "last mile" increases substantially.
Finally, there's the government's part in the situation. Rather than punishing price gougers, in the Missouri hay shortage, the government established a hot line for the dissemination of information. Thereby improving the process of price discovery. In a disaster situation, the process of price discovery, so important for markets to work, is severely hampered. The presence of large retailers in competition with each other leads to lower prices because they are able to aggregate a lot of that information. If you have only a few of what spencer so beautifully refers to as "guys in pick-up trucks", the burden of aggregating that information falls on the consumer and that is costly. Having more guys in pick-up trucks (and box trucks, flat beds, and independent semi-truck drivers) would help. Perhaps Wal-Mart can do better, but Wal-Mart is not all powerful. There will be some places they will not reach. There will be some places too costly for them to go the last mile, at least temporarily. Why not encourage local independent sellers to move good into the area, and why doesn't the government assist with the process of price discovery like they do in Missouri. Then, while prices might rise, it would be a smaller and more temporary rise that would be more likely to do some good.
I say this with all due respect to Wal-Mart et al. and spencer's excellent defense of them because any newsreel of disaster footage will tell you that for all the big box retailers do for those areas, they do not completely solve the problem. If they did, you wouldn't have people trying to invent machines that can extract drinking water from the air. Why waste time on that if Wal-Mart can do it all at no additional cost? Because they can't. They can't do it all, and if they tried, their costs would at some point go up. Supply curves do slope up, at least when you're talking about transportation costs in the very short run in a disaster area.
Spencer always comes back to one point. Why should we celebrate the guys in pick-up trucks? Why should we hold them up as examples of how market capitalism works? Well, I'm not sure we should--at least not in the way that he is implying that free market economists do. I think what we should celebrate is the process of price discovery and whatever mechanism helps speed that process along--whether it comes in a pick-up truck, a flatbed, or a blue and white semi-truck from Bentonville. Because in different times and in different situations, each may have more or less role to play. And if government can do something to speed that process along during a time of crisis, then that is an appropriate role for government to play as well.
This post is already getting lengthy and there is, I'm sure, a lot more could be said. But rest assured, spencer, that in a 75 minute class period, there is a lot of time to discuss those other issues that don't always make it into the textbooks. It's not about celebrating the guys in trucks. It's thinking about how our attitudes and how the law affects supply responses and whether that does more harm than good. It's about how there may be good reasons for price gouging laws, but our present ones are too vague to work well. It's about whether there are things the government can do besides passing price gouging laws that might make things work better. That's what it's about--the guys in trucks are bit players in my story.
We do not celebrate people's motives; economics is moot on the point. We can comment on the fact that even people with venal motives end up doing something that serves others. It carries the name "the invisible hand".
While I agree with most of this post, you're making a big mistake--if your goal is to teach economics properly--to give any credit to Spencer for his ideas, because they are deeply flawed. First off, he told Russ Roberts:
'You have a theory that the only way to get new supplies into a disaster area is through higher prices.'
Which is risible. Not only does Russ not have that theory, no one has such a theory. What the guy selling plywood or bottled water out of the back of a pick-up illustrates is that when the most efficient distribution chains are disrupted, then less efficient (higher cost) ones can be the answer.
That people are willing to pay higher prices for goods, in disaster hit areas, is pretty strong evidence that they are made better off by the entrepreneurs who are 'gouging' them. If that is their best option IN THAT TIME AND PLACE.
Then there is the little matter of Spencer's theory that Wal-Mart can merely divert inventory to the disaster area without any additional cost, and thus keep prices low. What happens to the non-disaster area Wal-Mart customers who were expecting the shelves to be stocked with that diverted inventory?
Won't Wal-Mart have go to their suppliers and buy replacement inventory for them? Will that entail paying overtime or using longer routes (burning more fuel) than normal?
Finally, Wal-Mart prices fluctuate even when there are no natural disasters. I've seen the same can of Campbell's Soup selling for between $1.58 and $2.10 in the Wal-Mart nearest me just in the last couple of months.
Patrick -- I answered essentially every one of your questions. I can not help it if you elected to ignore my answers.
William -- this is a very good example of the old corn-hog cycle and has a lot of good lessons for
economics students, especially if you are focusing on the theory of the firm. It shows how firms -- the farmers -- have to adjust their supply and demand curves in reaction to a surge in cost and/or a shortage of one of the factors of production. Interestingly, because the first reaction of farmers to higher feed cost is to reduce the size of their flocks-herds-- is to cause the price of meat in the CPI to fall so the first reaction to a surge in feed costs is a slowing of CPI inflation. Only later when the supply of meat falls do meat prices rise and the impact of higher feeds shows up in the CPI.
On of the most interesting examples of the corn-hog cycle is the Karakul sheep raised in Afghanistan. It is a very fine wool, but it is sold as a pelt that requires the lamb to be slaughtered. Depending on the price of the pelts
versus the price of meat they decided whether to slaughter the lamb at six months for the pelt or to raise it until it is full grown for its meat.
Of course this supply -demand interaction causes the price of the pelts and meat to fluctuate that generates a type of highly cyclical corn-hog type pattern.
The real point is that in a disaster the normal environment breaks down and you are not really talking about a market and in this situation there is a very good market. But the reason the guys in a pick-up truck (GPT) are able to do what they do is that there is no competition. Markets require a set of multiple,informed buyers and sellers.
But in a disaster this does not happen. The GPT is able to do what he does because of an absence of competition -- other sellers. The GPT is a situational or locational monopoly who is taking advantage of the absence of competition to extract monopoly profits from the victims. That is why the GPT is a very poor example of how markets work
because his very existence requires a break down of normal markets.
did I lose my comment. I try posting again.
Patrick -- i answered your points. If you choose to ignore them there is nothing I can do about it.
What you have here is a very good example of the classic corn-hog cycle. It is a story that is very good for teaching the principles of economics -- especially if you are teaching the theory of the firm. It demonstrates how firms -- the farmer -- has to react to a higher price of an input and how markets respond over time to shocks.
It also demonstrates why the initial reaction of a spike in feed prices is a drop in the CPI for food. Meat has a much larger weight in the food CPI and the first reaction of farmers to a spike in feed cost is to bring their herds to market early at a lower weight. this generates a surge in meat supply and lower meat prices until the second round and the supply of meat contracts and meat prices rise. So analysts are always surprised at the long lag between higher feed prices and a rise in meat prices to the consumer --it may be 18-24 months for beef.
One of the better examples of the corn-hog cycle I ever encountered was that of karakul sheep in Afghanistan and other countries. The karakul produces a very fine wool that is especially used in the Russian warm wool hats. But it is not wool in the usual sense. It is a pelt. To get karakul wool you have to slaughter the lamb when it is under six months old -- its first spring. the alternative is to let the lamb grow another year and slaughter it for meat. This decision depends on the price of the pelt versus meat prices. So it is easy to see how this generates a corn-hog type cycle with wide fluctuations in the supply and price of karakul.
But note, that this is a market and so is your example -- a combination of very many informed buyers and sellers. That is the big difference here and in a disaster situation where normal markets shut down. The guy in a pick-up truck (GPT) story is one of where normal markets are not functioning. That is a necessary condition for the GPT that there be no competition. The GPT is a situational or locational monopoly where the absence of competition allows him to act like a monopolist and extract monopoly profits from storm victims.
It is not a story or example of normal markets.
The GPT is a story of what happens when normal markets break down.
The point of fact that seems to be ignored here is that WMT says it gets supplies to disaster areas at their everyday low prices.
But what Patrick Sullivan and others are arguing is that WMT is wrong.
I explained why what WMT says is correct in the modern economy.
Maybe Sullivan should explain why he does not believe WMT management.
'The GPT is a situational or locational monopoly where the absence of competition allows him to act like a monopolist and extract monopoly profits from storm victims.'
A monopoly in an 'industry' you can enter with only a pick-up truck and supplies you can buy at Costco. And which existence is going to be measured in days, if not hours. Yeah, thinking of that as monopoly is really useful.
Well, folks, I'm back. The musical (Wicked) was great. The snow and ice were not. I'll post a follow up tomorrow (or late tonight if I get the urge).
Ok, I'm going to do a new post, but first a couple of comments.
First, to King Banaian's point about motives. True, the motives don't matter when we draw the supply and demand curves. However, what I had in mind was Milton Friedman's famous line from his article "The Social Responsibility of Business is to Increase Its Profits" where he says "That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom." And "...so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
I think the same thing applies to individuals in our economic endeavors. So therefore I have no more love for the "price gouger" who uses deceptive tactics than I do for the guy selling fake Rolexes on the street corner. Neither one embodies my capitalist ideal.
More about ethical custom in my next post.
And spencer, though your sheep example is interesting, I get the feeling you are changing the subject. The article does not address the corn-hog cycle in any direct way. What the article does address is that a weather shock makes a product relatively scarce in one area. Prices rise. Supplies come in from other areas. Period. Yes, you rightly note that this is a functioning market with good flow of information... but that was my point all along! Read it again: My whole point is that the process of price discovery is hampered in a disaster. If the government really wanted to take the lead and help people, it would get out there and help the flow of information...sort of an emergency version of the "hay hot line".
And finally, (argh, I feel like I'm repeating myself) why do you think it is that the guy in the pickup truck is able to have a temporary monopoly. (Yes, Patrick, spencer is right on this one... it's also what I meant by elasticity changing over time in my comment at Angry Bear.) It is a (perhaps very) short term monopoly situation. But the question is: Why does the guy in the pickup truck have that monopoly, and what allows him to keep it for as long as he does.
Hint: It is a kind of barrier to entry. If it's as easy as loading up on supplies at Costco, why don't more people do it? More on that in my next post.
Friedman Link:
http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
Finally, one of Patrick's comments deserves a separate response.
"While I agree with most of this post, you're making a big mistake--if your goal is to teach economics properly--to give any credit to Spencer for his ideas, because they are deeply flawed."
On the contrary, what I have tried to do in my comments and my posts is to show where I think spencer is correct and where he goes a little off track. In summary, the notion of Wal-Mart et al. being able to move large quantities of goods at a low cost is perfectly sensible. But notice that everywhere I have mentioned it I say that it is a low cost, not "no cost". I think spencer has overstated his position in some respects, and I have said as much several times. But you'd have to be ignoring the obvious not to realize that firms like Wal-Mart, Home Depot, Lowes, etc. (and there are only a handful that really can do this in such a big way) are in a unique position to do some social and economic good in these cases. Spencer first made this point (as far as I know) on this blog over a year ago, and I acknowledged it as a sensible idea then... but I have continued to assert that Wal-Mart et al. cannot completely fill the void. It is in the "last mile" that the higher cost alternative may be the best (and only) solution, at least temporarily. I have said that repeatedly. Spencer, when he has chosen to address that point, generally dismisses it as unethical (guys in pickup trucks not doing anyone any favors), which I think misses a lot of interesting fodder for discussion which I am trying to stimulate.
So I have to disagree that it is a mistake to credit spencer for the good points he has raised, though I continue to try to win him over on a few of the points where we still disagree.
His main point that I find compelling is that there are a few firms that are large enough to be able to absorb some fairly significant disasters without raising their costs very much--perhaps pennies on the dollar compared to smaller operations. The effect on their bottom line (and prices) spread out over their entire system may be hard to see unless you are really looking. Plus, the original article (in the Oregonian) talked about their weather forecasting operation. That is a fascinating aspect of the issue as well. Wal-Mart clearly sees this as a risk management problem, as well they should, and just another cost of doing business. That's really interesting!
We just don't see eye-to-eye on some of the details.
Ok, next post coming soon...
"The GPT is a story of what happens when normal markets break down."
Is that an admission that markets break down even with Wal-Mart's amazing supply chain? Are you admitting that I might have a point about the "last mile"? If so, then it's not a big leap to admit that at least temporarily, they may have an advantage and should be compensated for their opportunity cost (upward sloping supply curve).
I do not have anything against the GPT.
What I have my troubles with are the people who make a hero of him.
Every thing you say about the GPT is right in theory. But the other side of the coin is that the GPT has an infinitesimal impact on supply. One 18 wheeler from a big box retailers probably provides about the same amount of goods that a 1,000 guys in pick-ups can.
It is a measure of significance -- can you show me a single story where the guys in pick-ups had a significant impact on supply.
"I do not have anything against the GPT."
You don't? Go back and look at some of the things you wrote. For starters:
"Justifying the guy in the pick up truck jacking up prices in a disaster situation is both bad morality and bad economics."
Ok, so clearly you say that justifying their actions is bad morality. Got that. But if it's bad morality in your opinion to justify the behavior, then you must think the behavior is bad morality too, right? How could it not?
Then how can you come in now and say that you have nothing against them? Aren't you saying that they have bad morals?
So which is it? Do you oppose the guys in trucks or the economists who laud them? Or both? It would seem odd to oppose the economists but not the guys in trucks, but whatever.
"Every thing you say about the GPT is right in theory. But the other side of the coin is that the GPT has an infinitesimal impact on supply. One 18 wheeler from a big box retailers probably provides about the same amount of goods that a 1,000 guys in pick-ups can."
Actually, by my rough calculation it's probably more like 50 to 1--with considerable variation depending on how they are loaded--maybe 75 or 80 to 1 at the outside. So is it reasonable that a couple dozen converging on an area from different directions could bring significant supplies? I think so.
"It is a measure of significance -- can you show me a single story where the guys in pick-ups had a significant impact on supply."
That question, or challenge, makes no sense. First of all, the threat of being punished if you raise your prices at all is enough to keep many of them at home. I have come across news accounts of this in the past. And as I think we can probably all agree, if there were more truckloads of whatever size getting into the hardest hit areas, price discovery would happen more efficiently and prices would be lower.
And second of all, let's get away from the pick-up truck image. If someone, even a little guy (i.e. not Wal-Mart of Home Depot), wants to get supplies into an area in a serious way, he would probably take a small box truck that could carry, say, 10% or more of what a semi-truck could carry. Wouldn't take very many of them to get a significant volume of materials into the area.
So let's think for a minute. Because among all the stories of price gouging and corporate generosity, there are many stories of people loading up those box trucks with private donations.
Would you say the same thing about them? Would you be saying, "Can you show me a single story of little Salvation Army trucks carrying private donations has had a significant impact in reducing people's suffering?"
Of course you wouldn't. Give me a break.
I did come across a story in the Sept. 5, 2005 Dubuque Telegraph Herald that told of John Deere sending 11 truckloads of generators down south after Katrina and SELLING THEM OF THE BACK OF THE TRUCK. The article didn't say what size truck, nor what they charged. They probably charged a reasonable rate. But can you sit there and say, well, that's just a few truckloads...it really didn't help that much?
I have come across story after story of how long it took to get good into an area. Story after story of how big retailer's stores were damaged in the storm and unable to open. Story after story of people suffering for days without essentials. And even a few stories about people driving a couple of states away to get things like generators.
And after reading all those stories, I started to get a little upset by your challenge. You show me a single story about how the big retailers went all the way and satisfied everyone's demand in a matter of a couple of days. Not token donations. Not a restocking of the store after a week. Tell me that more can't be done.
Then I don't care whether it's pick-up trucks, box trucks, flatbeds, semis, or a camel caravan. But I see one article after another of increasing opportunity cost in the form of higher wholesale costs, transportation costs (including overtime and lodging for workers, which is not trivial), security risks, and so on.
People had to drive to Arkansas to get generators! Load 'em up in box trucks and move 'em down!
Seriously, a few decent sized box trucks from reputable stores (but perhaps not big boys like Wal-Mart and Home Depot) could make a serious dent. If all they did was to make it so a few people didn't have to drive to Arkansas for a generator, wouldn't that be significant?
You ask me to show you where they have made a difference. I tell you that our clumsy attitudes have prevented some from even trying. And that's a shame. If you raise your prices at all and there is a complaint, the AG might hit you with a subpoena asking you to justify your price increase. You don't think that's a deterrent?
Yes, after reviewing some of the news articles from disasters in the recent past, I am a bit angry at the lack of ability of anyone--small or large, public or private--to get enough done. Do some "price gougers" raise their prices too much? Yes. Would a little competition from reputable businesses wanting simply to recover their opportunity cost drive some of the crooked ones out and lower prices? I think so. So forgive me if I think that your challenge is a bit off base.