Noxious Emissions

Noxious Emissions
Gouging and Other Economic Fallacies
By Jefferson Paine

In the wake of gasoline prices increasing across the country, a growing legion of supposedly "Gouged" victims have been bellowing hot, noxious fumes of late.

With worldwide demand for petroleum surging ever higher, why wouldn't we expect this to put pressure on price increases at the pump? Furthermore, natural disasters, government restrictions, geo-political uncertainty, and oil cartels have all driven the global price for crude oil to new record-highs.

Consequently, which way would we expect prices to go? - Yet, borne of economic-illiteracy, the outrage of mythic Gouging continues to grow around the country.

I continue to be amazed by the angry accusations of "greed" by "evil oil companies", but have yet to encounter one of these conspiracy-buffs who can objectively define what they mean by "gouging" of consumers at the pump - let alone present any evidence of it whatsoever. What it boils down to is gouging stems from a tightly-wound ball of feelings and fear built around widely accepted economic fallacies.

"Gouging" seems to be the new buzz-word that the economically-challenged, and the strife-loving Media alike, have latched onto as a sort of replacement for the old expression of being "ripped off". I could understand this term if it was used in the context of someone attempting to purposely mislead or deceive a consumer into parting with their hard-earned wealth - in essence, defrauding the consumer. But, I fail to see how any petroleum company which has elected to invest gargantuan resources in exploration, refinement, and distribution amidst crude-oil cartels, geo-political unrest, severe storms, maintenance of infrastructure, labor union demands, and a plethora of government dictates all while trying to deter their many competitors from gaining an advantage in the marketplace - is somehow able to brazenly defraud its customers at the same time!? Can anyone explain how this strategy could be successfully pulled off in a highly competitive and open marketplace?

This is where the gouging faithful must then retreat into fantasies of grand conspiracies within the petroleum industry - collusion among the filthy-rich oil brethren in order to get away with as much nefarious gouging as possible.

Remember just recently when gasoline prices DROPPED by 70 or 80 cents in a short period of time after Hurricane Katrina wrought her destruction? This was proof of a healthy competitive marketplace, demonstrating how prices in a free marketplace balance resources with demand. This could not happen if oil companies were conspiring amongst themselves to keep prices illegally and artificially high!

Not only is there empirical evidence in abundance showing there is no grand conspiracy of them somehow circumventing the marketplace - not to mention defying the laws of economics - but, common sense tells us it is impossible for the necessary thousands of industry players it would take to remain in perfect silence, without any leaks of their crimes getting out.

Are consumers "greedy" when they, blind with indignation, demand lower prices for goods, such as gasoline, when it is NOT justified by the underlying costs and by other competing economic interests for the same resources? But it's much easier to vilify those who go through amazing trouble to supply this product in abundance and who ask to be compensated fairly for it by fluctuating prices.

In a market economy, unfettered prices have historically proved the fairest way to allocate resources - forcing competing interests to literally share amongst themselves, actually self-rationing their consumption by voluntarily bidding against each other by paying the prevailing prices. And this is done by millions of individuals freely deciding for themselves how much of a product they want to buy at the offered price. But this system, providing products to consumers most fairly and efficiently, is also predicated upon the producer being allowed to also freely set their prices as they wish and adjust them according to their own supply and demand constraints. And, conversely, consumers must be free to choose to accept any given price or not.

But the economically illiterate unfailingly find this arrangement of mutual, voluntary exchange to be inexplicably unfair, thus promoting their fantasies of the mass "gouging" of consumers under the common misconception that prices can be set arbitrarily - that is to say that there is no underlying REALITY of the costs, uncertainties, limited resources, competition, etc. which actually GOVERN these prices. So, as it turns out, Gouging is pure myth, and actually refers to consumers freely paying prices they just don't like.

Free markets, with prices coordinating the balance between supplies and demands, perform phenomenally, especially when contrasted with what happens when it is constricted by government intervention, or by other dictates such as by thuggery, as the method for rationing limited resources among peoples. Such interventions often come with disastrous consequences - and usually have the opposite effect to what the benevolent dictators are promising the supposed victims - thus, further victimizing them.

Case in point are price 'floors' such as mandating a "minimum wage", or price 'controls' such as mandating gasoline prices lower than is warranted by the economics of the marketplace. In both cases, these artificial prices, either higher or lower than required by the marketplace, tend to cause the exact opposite effect than the problems government saviors purport to be "fixing". From time immemorial, it can be shown with basic economic principles, why government intervention in fixing prices in the marketplace can have disastrous consequences for people.

If ever there was a case for Gouging, government has imposed a plethora of them upon the People such as mandating a Minimum Wage. Don't we all know that the true minimum wage is $0.00? If one does not produce something that someone else values, and is willing to voluntarily pay for, why would we assign an artificial price which someone else if FORCED to pay?

In direct contrast to the supposed benefits, Government dictates forcing a minimum wage CAUSES the following problems:
1) It gives an artificial, and instant pay raise to people who have done nothing to earn it
2) It forces employers to artificially pay more than the market-value created by certain employees - more than what an employee's efforts are worth in a free and competitive marketplace
3) It upends the natural incentives for employees to strive to improve the value of their skills - why would they work harder if Government will artificially reward them for doing nothing to earn more?
4) It also creates a strong disincentive for those who were already earning near the minimum wage level through their own efforts - why should they work as hard as they have when their less-skilled co-workers are instantly put at their level for doing nothing?
5) It artificially and instantly increases an employer's business costs, by government dictate, thus causing pressure to raise prices artificially - causing them to be less competitive in the marketplace
6) It artificially and instantly increases an employer's business costs, by government dictate, thus causing them to frequently LAY OFF some employees - and how are they benefiting then?? (Pay rate for those who are laid off: $0.00)

And, sadly, generations of Americans utterly do not know, or have forgotten, what happened when the U.S. government intervened with gasoline prices in the 1970's in an attempt to ration gasoline "fairly" to the masses. Basic economics shows us that when prices are kept artificially low by government fiat, one of three things inevitably happens: 1) quantities of that product decline, 2) the quality of the product declines, or 3) both will happen.

So, as a matter of fact, in the 1970's, as OPEC put the screws on the world oil supply, prices reacted by rising, as they should in a marketplace with price coordination of resources, yet it also resulted in widespread screams by outraged Americans demanding cheap gasoline regardless of what was happening in the marketplace. In short, they exhorted politicians to "Do Something" about their sudden plight of having to personally conserve, shift to alternatives, or frankly respond rationally to the changes in the marketplace. So, what in their wisdom did our government-saviors do? They instituted domestic price caps on petroleum in the U.S. This resulted in acute shortages of gasoline at the pumps, creating long lines of waiting cars extending from filling stations out into the streets, and produced even more outraged citizens. And, amazingly, many citizens then wanted even MORE government intervention, dictating additional "solutions" - thus exacerbating the shortages. To sum up, constriction of global oil supply was caused by OPEC - but the acute SHORTAGES of gasoline at the pump were caused by Big Daddy Government.

So, today, whenever you hear something like this, "Well, these gas prices are outrageous - we've got to DO something about it," please DO NOT look for economically-illiterate politicians to solve your problems - they'll most assuredly make them worse.

So, what should we do about rising gasoline prices? We should do exactly what we always do, adjust our millions of individual decisions about how we want to spend our own resources in direct response to changing prices and economic alternatives - let the free marketplace take care of it most fairly and efficiently as it inevitably does.

With ever-increasing government taxation and regulation accounting for an ever-increasing share of the price of gasoline, make no mistake about it, the closest thing to egregious "Gouging" in our economy can be found right within our own government. This affliction is congenital, and if left to its own devices, it could be fatal. There is no cure, but government gouging can be reduced drastically. All we need do is reduce the size and reach of government itself - and gouging will be on the decline.

Of course, governments could become part of the solution if they'd allow for new refineries to be built, allow for extraction of known energy reserves, allow for nuclear power, and stop interfering in the marketplace allowing for the natural innovation of Americans to accommodate our future energy needs as the economics of the marketplace change.

But tragically, freedom is not the vision our economically-illiterate saviors in Big Government have in store for us. Let's get a grip on the hysteria currently seizing our good senses in America regarding our incredibly benevolent economic system. What's truly amazing is how historically LOW gasoline prices have been, and continue to be in America in our free marketplace without dictatorial interference.

Posted by JeffersonPaine at January 04, 2007 12:06 PM | Email This