September 15, 2005

WRTA

Brown Shoes Diary

Gougers In Our Midst

Whenever I go to China (the Chinese prefer to outsource high-paying service jobs like mine, while insourcing low-paying manufacturing jobs) I fantasize about becoming a missionary.  Not a missionary for any particular religion, but one for the philosophy of capitalism.  I see myself with a copy of Adam Smith's The Wealth of Nations in one hand while preaching on a street corner in Commieland to the dispossessed of economic truth.  Last Tuesday's talk show, which I co-hosted with Doug Herendeen, made clear that I have plenty of missionary work on behalf of capitalism to do right here in the good old U.S.A.

Price gouging became the topic du jour, which I've written on before, but obviously with little success.  Like every missionary, I think the next effort is going to be the one that leads to conversion and I can't help myself from trying.  So here goes.

Perhaps the single most important element of a successful economy is profit.  That a business or company makes large profits is not a cause for alarm, but rather a reason for applause.  Profit is the measure of how much value a business is creating for society.  Companies that lose money are effectively making society poorer, while those that make money can only do so by making society better off.

You're probably not convinced with my last comment so I'm going to break profit down into its two components.  Profit is Revenue minus Cost.  Let's look at these two components of Revenue and Cost to see why large profits by any company are good for society.

Revenue is determined by multiplying the price of a good times how many units of the good a company sells.  Despite beliefs to the contrary, price is beyond the control of every business.  Price can only be set in the private sector through the balance of supply and demand.  If the oil companies, for example, have a short supply of oil and the demand is high, then the price will have to be high to prevent shortages.  No customers like long lines waiting for empty pumps.  If the supply of oil is plentiful and demand is low, the price will have to be low to prevent surpluses.  No business likes an overflowing inventory and gasoline is particularly expensive to hold in storage.

It's true that retailers and wholesalers post prices, but that does not mean they set prices.  They are merely making guesses at what price will balance supply with demand, for that is the only way to maximize consumer satisfaction.  The fact that maximizing consumer satisfaction also maximizes their own revenues, dear readers, is the Invisible Hand Principle so superbly presented in Adam Smith's writings 230 years ago.

Since prices are basically out of the control of sellers, then so too are revenues.  What is within the control of sellers (somewhat, at least) are costs.  A business that is efficient will minimize its cost of production.  This saves valuable resources for others in society.  When a business produces a good where revenues are greater than costs guess what happens?  It makes a profit.  Let me say this another way (and pay attention this time, please!)  A company that produces goods or services that provide more value for consumers than it costs the rest of society in lost resources will make a profit. 

Yet another way to put this is that profit is the surest signal that a company is doing good for society.  Sure, we could take a vote or send out questionnaires or call a radio talk show (I highly recommend that last idea!), but that's all talk.  A consumer  who pays for a product with his own money is exerting the most powerful and believable of all methods of communication.  For companies that make a profit, consumers are saying, "Good going!"  Likewise, companies that lose money are getting a clear signal to change their behavior.

I have asked, in vain, each person who claims the oil and gas companies are gouging on their prices for a definition of gouging.  None have come forth.  So I have come up with a definition of gouging on my own--gouging is when consumers are forced to buy from uncompetitive producers. 

Several examples come to mind.  First, government schools.  Taxpayers are forced to pay ever-increasing amounts for ever-decreasing performance.  To get an idea of how expensive and uncompetitive government schools are just compare them to private schools who have superior performance at less than half the price.

A second example is first class mail.  How do I know the U.S. Post Office is uncompetitive?  Because there's a law that forbids any competitors.  If the Post Office were competitive, no such law would be necessary.

A third example is the War on Poverty.  Taxpayers have been forced to pay trillions of dollars since the 1960s and what exactly do we have to show for it?  Recent events in New Orleans come to mind.  Events there also suggest how little we're getting for the hundreds of billions spent on homeland defense.

Did you notice what those gougers above have in common?  All are state-sponsored enterprises, not free enterprises.  They fail on a colossal scale and their supporters use their failures as reason for increased taxation and coercion.

Just one more example of the hundreds I can come up with concerns WRTA.  WRTA would like to set up a new shop in Altoona, but Altoona authorities are demanding all sorts of irrelevant things for the new location that will unnecessarily cost tens of thousands of dollars.  Here there's the possibility of a happier outcome, because WRTA does have the freedom to move out of the grasp of this particular gouger.

There's a verse in the New Testament that says don't worry about the speck in your neighbor's eye when there's a log in your own.  I say don't worry about gouging in the private sector (gouging is uncompetitive and therefore self-defeating in a competitive environment).  Focus, instead, your wrath on the public sector, for that is gouging of the most serious and destructive sort.