Are there journalists or editors at The Economist who read EconLog? Or perhaps they have not lost all their classical liberal heritage, as the venerable magazine was created to advocate the abolition of the protectionist Corn Laws in the mid-19th century? Anyway, I do hope I am not outing anybody who worked on the article “‘Greedflation’ Is a Nonsense Idea” in the July 6 issue.
I believe the authors should have elaborated on the idea that “[w]ith too much cash chasing too few goods, it was inevitable that companies would make more money,” which refers to the inescapable monetary theory of inflation. They could also have explicitly mentioned the difference between inflation and relative prices. Yet, my goal is not to criticize them (for the Nth time, a story of love and hate as I previously explained), but to praise them for explicitly expressing a basic economic idea that seems to be very mysterious for most of our contemporaries, including for many journalists and even the financial press. The Economist writes:
Regardless, the fact that companies raise their prices in response to shortages is not only defensible but desirable. The alternative to letting the price mechanism bring supply and demand into line is to rely on something worse, such as rationing or queues.
With some knowledge of economics, there is a good future.
READER COMMENTS
MarkW
Jul 12 2023 at 12:39pm
It is, indeed, a good sign whenever left-leaning economists or pundits point out absurdity of ‘greedflation’.
Thomas L Hutcheson
Jul 12 2023 at 1:20pm
However one leans.
MarkW
Jul 13 2023 at 11:11am
Yes, of course, but are there any right-of-center economists who bought into the ‘greedflation’ idea in the first place?
Thomas L Hutcheson
Jul 12 2023 at 1:25pm
I can only take this as damming “The Economist” with faint praise. 🙂
Pierre Lemieux
Jul 13 2023 at 11:26am
Thomas: The glass is half full and half empty. 🙂
Mark Brady
Jul 12 2023 at 3:16pm
And is it equally a good sign whenever right-leaning economists or pundits critique the concept of “wageflation”?
Pierre Lemieux
Jul 13 2023 at 11:30am
Mark: I would certainly answer affirmatively.
David Seltzer
Jul 12 2023 at 3:27pm
Pierre: Inflation as a result of profiteering businesses or wage earners? Friedman in his response to that nonsense pointed out that neither businesses, wage earners, households or unions have printing presses.
Pierre Lemieux
Jul 13 2023 at 11:33am
David: Good way to put it, if it’s clear that money printing presses is what is referred to.
David Seltzer
Jul 14 2023 at 6:26pm
Pierre: I should have been more careful with my words. I let context imply money presses rather than expressly stating money presses. My bad.
steve
Jul 12 2023 at 9:08pm
I think what you describe is rationing by price. No one wants to support rationing so I understand you wanting to avoid that term, but it’s still rationing.
Steve
Pierre Lemieux
Jul 13 2023 at 11:18am
Steve: Your comment is important, even if it may reveal a flaw in your understanding of markets. For one, I never tried to avoid the term: for example, see my Regulation article “Dispelling Supply Chain Myths“:
However, I understand why some of my economist colleagues want to avoid it, for it is somewhat misleading. There is a deeper reason for that than the effect of this “rationing” that increases quantity supplied. Having your choices constrained by the consequences of the equal freedom of choice of all other individuals is not the same thing as having your choices limited by the coercive power of a group of individuals that call themselves “government” or “state”.
Jose Pablo
Jul 14 2023 at 6:27pm
Rationing by choice is completely different from rationing by mandate.
The same way that traveling to Novosibirsk in order to visit the local Zoo is completely different from traveling to Novosibirsk because you have been deported to Siberia.
Robert EV
Jul 15 2023 at 2:11am
Why is rationing bad?
A good instance of rationing, that I think almost everyone can agree on, is when a bartender cuts someone off who has had one too many.
Another common form of rationing is when everyone is allocated one slice of a cake before anyone can come back for seconds.
I can only see rationing as a universal bad when it results in limiting production (except in cases when more important factors require a limit in production for other reasons).
I can imagine a situation where a possible competitor, who would have increased production, is unable to do so because they can no longer afford to go into business.
A fourth “alternative to letting the price mechanism bring supply and demand into line” is to make it more worthwhile for people to save that money instead of spend it. Hooray for higher interest rates.
Robert EV
Jul 16 2023 at 10:52am
“I can imagine a situation where a possible competitor, who would have increased production, is unable to do so because they can no longer afford to go into business.”
: Because of “greedflation” of the components needed to start that business.
Pierre Lemieux
Jul 16 2023 at 11:50am
Robert: We may say that rationing is “bad” when individuals are forbidden to bid up the price of the rationed good or service (except as a consequence of a private contract or institution, which always rations something in some way).
On your interest rate example, prudence is required. If reasonably efficient capital (credit) markets exist, a low or high interest rate is neither good nor bad in itself. A high interest rate can be caused either by a high demand for credit or by a low supply of credit (as per standard supply-demand analysis). An example: in Europe, the rate of interest on loans decreased from 20–30% at the beginning of the 16th century to 3% or less during the 17th, thanks to the development of capital markets in the low countries.
Robert EV
Jul 22 2023 at 1:05pm
That’s bad for people with more money, but for people with less it may be good.
If a singular object or service, or even a category, is rationed it’s not a big deal. Just an annoyance to those with more money. If everything is rationed then production in the broad economy is discouraged (since people can’t get more by working more), even though increased production would end the requirement for rationing – assuming production can be increased, and that inputs to the things being produced are not fundamentally constrained.
You make this point well with the evolution of interest rates, which helped me understand it.
I still think mandated rationing is okay in many instances, though the externalities have to be carefully monitored, and the allocations dynamically adjusted in real time as production increases or decreases.
In a sense rationing can be used by those of lower-wealth to engage in rent seeking behavior, to the benefit of all. As a teenager I did this with trading cards. There was a purchase limit, so I gave other kids money to buy card packs for me, giving them a single (non-rare) card from each pack that they bought. Of course this too can become gamed and exploitive.
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