Most people I meet who think they know something about economics are clueless. What I’m thinking about right now are people who think that companies set prices based upon their costs. A standard (incorrect) observation is, “If we raise the minimum wage, the companies will just increase their prices.” Think about how ridiculous that idea is. Imagine that McDonald’s is selling a hamburger for $1.50. They are selling it at that price because it maximizes profits (or at least they think it does). If they could maximize profits at $1.55, they would sell it for that price. But they know that by raising the price by just a nickle, they would lose a certain number of sales and in the end they would make less money. Note that this consideration has nothing to do with the cost of making the burger!
The problem with these would-be economists is that most of them have never run a business. I’ve run several, but by far the most illuminating was running a business at the huge San Jose Flea Market. For various reasons that don’t matter, I was selling make-up there. When we first started, our margins were enormous. Over time they went down, but not because our costs went up. Over time, other vendors offered the same products and we all competed to get customers and so the prices went down. Again: not costs! Every one of us was trying to make as much money as possible. The high prices at first were part of that. But so were the quickly sinking prices at the end.
I thought about this tonight because I got a copy of the Taxing Times, the newsletter of the Howard Jarvis Taxpayers Association. Jarvis was the guy that got Californians to destroy their public infrastructure by voting for Prop 13, which not only lowered property taxes, it made property appraisals lag way behind the times. During the campaign for Prop 13, Howard Jarvis tried to convince renters to vote for the initiative. He told them that with lower property taxes, their rents would go down. Of course, no such thing happened. Why would it? Renters were already paying the going rate. Why would landlords pass on the extra money to them?
That’s what I find so frustrating about this kind of stuff. I think that Jarvis really thought that rents would go down. In general, conservatives think that businesses are some kinds of charity organizations. This is why they believe in the myth of the “job creator.” It is the idea that business owners hire people because they have excess money lying around. People don’t think that way. Consider your own salary: if you got a raise would you (a) improve your standard of living; (b) save it; or (c) hire a kid to do useless work around your yard? That is the decision that rich people have to make when we give them tax cuts. For the record: they choose (b).
This situation comes up every time there is a natural disaster. Someone is caught selling a can of peaches for ten bucks. Then the president or the governor goes on TV and talks about how it is an outrage. I don’t get that. These politicians are much bigger believers in capitalism than I am. And all these canned goods sellers are doing is what every business has done everywhere at every time: maximize profits. The truth is that the can of peaches is worth ten bucks at that time and that place. Now, I’ll admit, that’s a pretty messed up system that allows one person to take advantage of another. But that is the system almost everyone in this country worships. When Walmart illegally (but without fear of prosecution) stops a unionization effort, they aren’t doing it to keep their prices low; they are doing it to maximize their profit margins. Why is the can seller evil if Walmart is good? (I would argue that the can seller is more ethical. Walmart is trying to stop workers from organizing themselves—surely the most basic of human rights. There is no coercion from the can seller.)
Is it so much to ask of the world for those who think capitalism is the greatest system ever, to understand its basics? It is particularly galling to hear conservatives talk about the marvels of the free market when they demonstrate again and again that they don’t know how capitalism, finance, or markets work. It reminds me of religious people who don’t have a clue about basic spiritual issues or even fundamental tenets of their own faith. I think in both cases, these people hold their opinions because it is part of their culture, not because they actually believe. I have had bizarre experiences talking with conservatives only to have them start saying things that are downright socialistic. Based upon this I have concluded that these people really do believe that a company would never price gouge. It’s endearing, but our economic policies should be based upon fact, not quaint notions of the honorable businessman.
The next time you think about business regulation, don’t imagine the friendly pizza parlor owner who feeds the homeless. He may exist, but he’s the exception. Think of the can seller in hurricane ravaged Florida trying to get a twenty spot for a can of beans. That’s who the typical businessman is. And he’s not evil. He’s just doing his job. If you think there ought to be limits on him, then you should be for more general limits on what businesses can do.