jamesd on August 05, 2010, 05:20:07 pm
How could the oil companies sell so much oil at extremely high prices, almost as much as they sold at low prices? It appears that people did not reduce their consumption all that much, that's one thing.

Observe that when Reagan ended price controls we immediately had an end of shortages, followed by falling prices.  Competition and private enterprise resumed, and competition cut prices.

The government initially controlled prices.  Shortages immediately ensued - in part because many people knew that price controls would result in shortages and rationing.  So the government, to deal with the shortages, immediately introduced an vast system of rationing and fuel allocation, sending fuel to one place and not to another place, favoring the well connected, and disfavoring the less connected.  This scheme meant that the way to get more wealth was not to produce more fuel, but to get in on government, with the result that shortages became more severe.

Government price controls lead to rationing and production quotas - socialism - government takeover of the production process.  Government does not produce fuel, only good intentions, leading to more severe shortages.

The fact that the crisis ended the way it did demonstrates the perverse effects of price control.  In the long run, and by the long run I mean a year or so, price controls not only produce shortages, but higher prices.


terry_freeman on August 05, 2010, 09:28:27 pm
Please edify me. Why, during the same period, did Japan have no shortages? Would not your hypothetical hoarders have even more impact upon Japan, which has no internal sources of oil?

I posit that the American price controls, and the lack of price controls in Japan, are sufficient explanation. Your theory requires magickal hoarders who differentially affect one country, but not others.

I only have a few thousand years of historical evidence to back my theory. What more would satisfy you?

quadibloc on August 05, 2010, 10:24:53 pm
Your theory requires magickal hoarders who differentially affect one country, but not others.
I'm sure that gasoline prices were quite high in Japan.

Why this wasn't a disaster in Japan, while it would have been such a disaster in the United States that it was felt rationing is necessary, ought to be obvious. Since Japan didn't have oil wells of its own, and due to its high population density, very few Japanese people were dependent on cars to go to work. They have those bullet trains there, for example.

In the United States, on the other hand, there is a high level of dependency on the automobile, and thus while adjustment to market prices for oil could eventually take place, there would have been disruption in the interim.

jamesd on August 06, 2010, 12:56:23 am
it would have been such a disaster in the United States that it was felt rationing is necessary, ought to be obvious.

Nonsense.  We have a thousand years of experience that price controls always cause disaster, never avert problems.  Observe what happened when Reagan ended price control.  The huge inconvenience and disruption of rationing went away overnight, price rises were slight, competition set in, and very quickly prices fell.

Government intervention to lower prices not only causes shortages, but also causes higher prices.

Most respectable economists explained that Reagan was a chimpanzee, a moron, and practiced voodoo economics, and that ending price control overnight at the stroke of a pen would cause huge suffering and disruption.  They were proven wrong immediately.  Reagan's economics was the economics explained in Hazlett's "Economics in one lesson".  You should read it. magnet:?xt=urn:btih:e87fbbd4b03cae20c3530107c0521151e3d68944&dn=economics_in_one_lesson.7z&tr=http%3A%2F%2Ftracker.openbittorrent.com%2Fannounce  Price control has always caused the disasters it is claimed to prevent, always has, always will - this has been happening over and over and over again for a long time.

J Thomas on August 06, 2010, 08:03:52 am
How could the oil companies sell so much oil at extremely high prices, almost as much as they sold at low prices? It appears that people did not reduce their consumption all that much, that's one thing.

Observe that when Reagan ended price controls we immediately had an end of shortages, followed by falling prices.  Competition and private enterprise resumed, and competition cut prices.

Reagan also started a vast system of permanent deficit spending, and after the immediate improvement we got the Reagan recession. It's hard to separate out the various results if we look at the data. Start with one theory and it's easy to find data that supports it, but the other direction is far more difficult.

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The government initially controlled prices.  Shortages immediately ensued - in part because many people knew that price controls would result in shortages and rationing.  So the government, to deal with the shortages, immediately introduced an vast system of rationing and fuel allocation, sending fuel to one place and not to another place, favoring the well connected, and disfavoring the less connected.  This scheme meant that the way to get more wealth was not to produce more fuel, but to get in on government, with the result that shortages became more severe.

Putting aside the history of how it might have happened, I agree with you that all the things you say are plausible and predictable.

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Government price controls lead to rationing and production quotas - socialism - government takeover of the production process.  Government does not produce fuel, only good intentions, leading to more severe shortages.

So if there is a proper use for any of this, it's as a strictly temporary measure to handle a sudden shock. If there's a temporary food shortage then we can keep poor people from starving by one way or another getting them food during the crisis. Rationing and price controls might be useful after a crop failure, if it's plain they aren't going to affect next year's crop. If the crisis and the response are not both strictly temporary, it's no good.

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The fact that the crisis ended the way it did demonstrates the perverse effects of price control.  In the long run, and by the long run I mean a year or so, price controls not only produce shortages, but higher prices.

The traditional way to handle food shortage was for the government to stock up on food to feed the king and his court, and then talk about how sad it is that God has caused another famine. What else could they do? Government did not have a lot of technology available. I read that Lincoln handled his end of the Civil War with less than 50 clerks, who wrote in longhand.

Then we got the typewriter. The typewriter let clerks write faster so there were more papers to file. Starting with Rooseveldt, Washington DC grew faster than expected until the 1980's. By "faster than expected" I mean faster than sewage treatment plants could be funded and built. Each time they predicted the growth in population and built sewage plants to suit, the population grew more before the renovations were complete.

Typewriter-driven government was not fast enough to manage sudden shocks. By the time they got a bureaucracy set up to handle something like rationing, the shock was over and they were into "for the duration".

The welfare system is an obvious example. Starting in the late 1940's we started mechanizing agriculture in the south. As a result we didn't need many sharecroppers, and a whole lot of former sharecroppers got pushed off the land and wound up in northern cities. In the short run there were few jobs for intentionally-uneducated blacks, and it was a crisis that was worth doing something about. But what we got was a typewriter-driven bureaucracy that persisted for generations.

In the 1960's we started to get computer-driven government. Large numbers of people could collect data which could be entered into databases and which could then generate statistics which nobody knew what to do with. Economists argued about what the numbers meant.

Before we found out how to effectively use computers, we got the internet. How will internet-driven government work? How fast will government adapt?

There were a lot of complaints about government action after Katrina, but I noticed that a fair number of refugees were issued debit cards and told to look after themselves. Given the US economy that's probably cheaper and easier than setting up refugee camps.

I read part of a couple of books by people who played key roles in the Katrina recovery. I was struck by the efforts to figure out who was in control. Then the people who had authority each got buried under a giant load of requests for authorisation plus requests for assistance etc. Old-style.

Networking will eventually provide government with the opportunity to respond quickly, to do the wrong things fast and efficiently on a large scale.

It may also provide unknown opportunities for others.

J Thomas on August 06, 2010, 08:40:18 am
Please edify me. Why, during the same period, did Japan have no shortages? Would not your hypothetical hoarders have even more impact upon Japan, which has no internal sources of oil?

After the 1973 oil shocks, Japan put a big effort into energy efficiency and reduced reliance on oil. They invested heavily in integrated circuits and other industries that didn't use much oil. When the later oil shocks came it didn't affect their economy nearly as much. They could pay for high-priced oil imports. (I don't know details about how they set up their oil sales and futures markets etc, so I can't comment about what was different that way. Do you know?)

Also, depending on the ideology, it could be argued that in a free market there can be no shortages. If you want something you can't pay for, tough. Without an immortality serum everybody currently alive will be dead within a century or so, and you can't buy one for any price. So there's no shortage. Everybody can have as much as they want of whatever they can pay for.

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I posit that the American price controls, and the lack of price controls in Japan, are sufficient explanation. Your theory requires magickal hoarders who differentially affect one country, but not others.

Your explanation is sufficient but not necessary. The USA was still paying for Vietnam, the situations between the two countries were vastly different in many ways. I think your idea is partly right, it looks to me like everything you say was going on and did have an effect, and it wasn't the whole story.

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I only have a few thousand years of historical evidence to back my theory. What more would satisfy you?

Do you have thousands of years of historical evidence? Perhaps somebody's doctoral dissertation that covers that history? When have there ever been effective price controls without modern bureaucracies?

There have been official monopolies for a long time, for example kings have traditionally run salt monopolies. People needed salt, it was hard to run a secret salt mine or evaporation pool, it was bulky to transport. So there was smuggling but not enough to keep it from being lucrative for kings.

But you have examples more than 1000 years old of kings setting an upper limit on prices and enforcing them?

As a side issue, you have inspired me to a new solution to the Drug War. Legalise the drugs and set up a maximum price and a rationing system. Issue ration cards to anybody who wants to buy, say, cocaine. They take their ration cards to anybody who wants to sell, and they can buy at the official price. Say, a gram of pure cocaine for 5 cents. Anybody who tries to sell for more can be turned in to the police by dissatisfied customers or by anybody who hears about it.

It might create cocaine shortages cheaper and easier than the current method.
« Last Edit: August 06, 2010, 11:32:44 am by J Thomas »

jamesd on August 06, 2010, 01:19:44 pm
Government price controls lead to rationing and production quotas - socialism - government takeover of the production process.  Government does not produce fuel, only good intentions, leading to more severe shortages.
So if there is a proper use for any of this, it's as a strictly temporary measure to handle a sudden shock. If there's a temporary food shortage then we can keep poor people from starving by one way or another getting them food during the crisis.

On the contrary: The price controls stop "profiteers" from bringing food in, stop ""hoarders" and "speculators" from making food available.  The price controls prevent people from doing what it takes to prevent themselves from starving. A minor inconvenience becomes mass starvation.  The rulers find that they can buy food no more than those the rule, so they go around seizing food (just as during Carter's energy crisis when they seized fuel)   This shuts down food production, as happened in Chile under Allende, with the result that the food crisis rapidly escalates, just as the fuel crisis escalated. Allende guaranteed every child a certain amount of milk.  He printed money to buy that milk, the price rose, Allende imposed price controls, then set to stealing that milk, disrupting milk production, with the swift result that there was no milk to be had, unless you were well connected.  You needed political pull to get milk, and very soon needed political pull to get any food at all.  People starved in a completely man made famine.

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Rationing and price controls might be useful after a crop failure, if it's plain they aren't going to affect next year's crop.
If crop failures are likely to cause problems, people store grain.  Price controls means that stored grain becomes hidden grain.  Rationing means you send out the troops to shake down the peasants for hidden grain, which means no harvest next year.  Russian agriculture still has not recovered from the liquidation of the kulaks.


J Thomas on August 06, 2010, 02:03:37 pm
Government price controls lead to rationing and production quotas - socialism - government takeover of the production process.  Government does not produce fuel, only good intentions, leading to more severe shortages.
So if there is a proper use for any of this, it's as a strictly temporary measure to handle a sudden shock. If there's a temporary food shortage then we can keep poor people from starving by one way or another getting them food during the crisis.

On the contrary: The price controls stop "profiteers" from bringing food in, stop ""hoarders" and "speculators" from making food available.  The price controls prevent people from doing what it takes to prevent themselves from starving. A minor inconvenience becomes mass starvation.
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It appears you have this worked out to the point you have stopped thinking about it.

If there is a local shortage and people are thinking about bringing in food, what price do they require? Of course if there are price controls that prevent them from legally selling except below cost, they will at best smuggle. Suppose the price is controlled at double the price in a good year. Will that prevent them from bringing in food? Only if there is also a shortage where they want to buy it too.

I can make an argument similar to yours for stoplights. Stoplights are bad because when the government makes all the lights in all directions red and leaves them red and arrests anybody who tries to drive through the intersection anyway, then the stoplight has no redeeming qualities at all.

Obviously, if the government mishandles a stoplight this badly then the result will be horrible. But usually stoplights are set up so there is always some direction that's green and it eventually turns green for anybody, so the damage is limited.

quadibloc on August 06, 2010, 06:19:00 pm
On the contrary: The price controls stop "profiteers" from bringing food in, stop ""hoarders" and "speculators" from making food available.  The price controls prevent people from doing what it takes to prevent themselves from starving.
You are right, and so one of the things that happened very shortly after the October 1973 oil shock was that the price controls imposed to fight inflation were abandoned. But rationing and measures like that are not the same as price controls: they are measures which attempt to repair the damage caused by price controls.

Obviously, after the end of the oil embargo, the average American did not suddenly become incapable of commuting to work because of the increase in oil prices. Some limit to the price of gasoline might have been needed, but initially having too low a limit because of the anti-inflation program was a major cause of the crisis.

EDIT: I will add a further clarification.

Price controls, in themselves, always cause shortages. Those who remember the events of the time will know, however, that President Gerald R. Ford was handing out "W.I.N." buttons before October 1973. Thus, the problem was caused by bureaucratic inertia in not getting rid of the price controls fast enough, both so the politicians would save face, and because the OPEC nations threatened further price increases if the rest of the world attempted to lower oil prices by inflating the currencies in which they were denominated.

However, a government thug pointing a gun at the head of producers and forcing them to sell at the official price is not something that creates shortages. That is something that fixes shortages. It may still be wrong, but it doesn't cause shortages the way that price controls do.

When that graduates from "wrong" to "stupid" is when the producer is not capable of continuing to produce the good demanded while receiving only the official price for it, because he cannot both obtain needed inputs and survive if he does so.

This situation did not exist in the United States during the OPEC oil embargo. American oil companies did not face sudden huge increases in the cost of pumping oil out of the ground. Since those oil companies were huge, and hence likely to be government-created monopolies, at least as some people here claim, it's not clear that ethics does demand us to be too solicitous about their property rights.
« Last Edit: August 06, 2010, 07:01:42 pm by quadibloc »

jamesd on August 06, 2010, 11:28:38 pm
The price controls stop "profiteers" from bringing food in, stop ""hoarders" and "speculators" from making food available.  The price controls prevent people from doing what it takes to prevent themselves from starving. A minor inconvenience becomes mass starvation.

If there is a local shortage and people are thinking about bringing in food, what price do they require?

Whatever the price that they require, price control was applied because that price was higher than the government liked.

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I can make an argument similar to yours for stoplights. Stoplights are bad because when the government makes all the lights in all directions red and leaves them red and arrests anybody who tries to drive through the intersection anyway, then the stoplight has no redeeming qualities at all.

Any price control that sets the price lower than what would have been the market price means there will be shortages.  If the shortages are shortages of something vital, such as food or fuel, the effect is disastrous and frequently deadly.


jamesd on August 06, 2010, 11:49:16 pm
However, a government thug pointing a gun at the head of producers and forcing them to sell at the official price is not something that creates shortages. That is something that fixes shortages.

But you cannot force them to sell at the official price.  You can forbid them to sell at higher than the official price, but that does not force them to sell at the official price - quite the reverse.    You cannot even send the army in to stand over them and make them, because the army seldom has any idea what the producers are doing, and will merely get in the way.

The only way you can make them produce is the communist procedure of applying negative incentives for failure to make the quota:  Announce that the producers have voluntarily agreed to produce X amount, and then shoot one man in ten if X amount is not produced.  But this requires a similar system of negative incentives throughout the economy or else your producers mysteriously vanish away - requires full scale soviet style socialism, with guards everywhere, killing fields, barbed wire entanglements, internal passports, and facilities for the mass production of murder by specialized labor - Carter and Nixon were unwilling to do what it takes

Official prices, being official, fail to correspond to supply and demand.  Supposing that people actually sell at official prices, rather than wheeling and dealing, trading for influence, connections and favors, they will produce what is not price controlled, or what is price controlled to relatively higher prices, and stop producing what is price controlled to lower prices.

Absent a full scale system of slavery, terror, and mass murder, pointing a gun at someone's head and saying "You may not sell at higher than price X" does not mean he sells at price X.  More likely, when you return the next day to point the gun at his head again, you find he has called in sick, and is circulating his resume some place where he is less likely to get a gun pointed at his head.

quadibloc on August 07, 2010, 06:11:22 am
The only way you can make them produce is the communist procedure of applying negative incentives for failure to make the quota:
Because the major American oil companies were fairly large and visible entities, monitoring their levels of production to ensure they didn't suddenly drop would not have required quite the level of enforcement that, say, getting food from Zimbabwe's farmers would have.

In general, I quite agree that we don't want a nightmare like Mugabe's Zimbabwe or Stalin's Russia. But to claim that it would take something like that to get America's oil companies to behave is not accurate - unless one means "like that" in moral principle, rather than like that in practical extent.

EDIT: While I do think it would have worked out quite well in the short run, of course in the longer run you could still be proven right. I'm not sure how good government bureaucrats would be at oil exploration, to develop new American oil supplies, after all.
« Last Edit: August 07, 2010, 06:13:46 am by quadibloc »

terry_freeman on August 07, 2010, 06:30:38 am
There have never been effective price controls, period. Price controls disrupt markets.

This is economix 101; I am not going to waste any more electrons debating it with people who refuse to educate themselves.

terry_freeman on August 07, 2010, 06:34:32 am
I found this interesting observation on racism and the State:


From page 111 of the 1918-1919 Negro Year Book, published by the Tuskegee Institute and edited by Monroe N. Work:

Railroads Attack Validity
Separate Car Laws.
The Supreme Court of Tennessee in a decision rendered in March, 1918, relative to white and Negroes being served in dining cars upheld the validity of the separate car laws of the United States, providing separate cars for white and Negroes. In December, 1918, the validity of the Kentucky law for the separation of races on trains was attacked in appeals to the Supreme Court by the South Covington and Cincinnati Street Railroads and the Covington and Erlanger Railway Company. These companies had been convicted in the lower courts for failing to provide separate coaches or compartments for Negroes.


Note that the suit was brought against railroad companies, which objected to the extra expense required by law to accomodate the preferences of racists to have their own coaches or compartments.

I don't argue that racism would not exist in an AnCap society; but without State support, the impact would be greatly diminished. I am certain that there would even be some few people who fail to appreciate the beneficial impact of markets, and retain that old-time religious faith in statism, but without the State, their deleterious impact on the rest of us would be greatly diminished.

jamesd on August 07, 2010, 08:23:00 pm
The only way you can make them produce is the communist procedure of applying negative incentives for failure to make the quota:
Because the major American oil companies were fairly large and visible entities, monitoring their levels of production to ensure they didn't suddenly drop would not have required quite the level of enforcement that, say, getting food from Zimbabwe's farmers would have.
But the level of production did drop - not to zero, but in a thousand small ways - and in part dropped because they were being monitored, and this monitoring was burdensome and irksome, so that a thousand individual people in the company, in a thousand individual ways, were not contributing to production - the best simply left, the rest spent more time dealing with government, and less time dealing with oil.

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In general, I quite agree that we don't want a nightmare like Mugabe's Zimbabwe or Stalin's Russia. But to claim that it would take something like that to get America's oil companies to behave is not accurate

Experience is that they did not behave.  Britain and Australia had similar but larger scale crises in the late 1940s, ending in 1949, when the entire price controlled, rationed, and quota driven economy did not behave.  Britain was heading towards famine.  The lifts in the treasury building stopped working.  The British government considered full scale Leninist terror measures to make people behave, and laws for the widespread application of slave labor were drawn up, but recoiled from such measures, and instead backed away from postwar price controls, rationing, and production quotas, pronouncing that central planning was unBritish.

Similarly, Allende's economy collapsed, and he did proceed to move towards full scale Leninist terror measures.

These illustrate the Hayekian and Misean critique of central planning.  A capitalist economy is coordinated by price signals,  Screw up the price signals, bureaucrats have to coordinate, which as Mises points out results in chaotic tangle of red tape that strangles everything, and as Hayek points out requires terror and mass murder.

 

anything