Economics Notes, Part 3: Hurricanes and Choice
There are certain things that make economics very potent- a multitude of ideas and concepts that govern most of what we do in life. However, the more I study and read I find that there are many things about economics that are a bit questionable.
First of all, allow me to clarify something I did not mention in previous posts: Economics has a variety of belief systems, the set of beliefs and assumptions that I am referring to in these posts is called “Neoclassical Econimics.” The reason I will be primarily mentioning Neoclassical economics is because it makes up around 90-95% of economists in the U.S.. It’s pretty crazy how homogeneous the makeup is… Apparently many economists will be confused if you tell them they are part of a classification of economics- they just think there is one. In any-case, I’ll continue my notes:
One assumption that I find particularly interesting is this: CHOICE is all-important. There can never be too much.
And the people must be allowed to have the choice.
One interesting side-effect of this is that the market loses any sense of ethics- any sense of priority on one good over another. So in the market a breast implant is just as valuable as education. Now I don’t mean to pick on breast implants… err… I’m not sure where I was going with that sentence. Anyway, the economics justification for ethical apathy is this: We are economists, not ethicists! Let the PEOPLE decide which is more important.
But can people really decide for themselves? Is there really no such thing as too much choice? Why do grocery stores shove tons of candy in the check-out aisle? Why do advertisers spend billions on finding ways to manipulate the buyer? Are people really in complete control?
Even if people are completely in control, the econ view of people states that people make decisions myopically- they choose immediate benefits/pleasure. If people really are short sighted, then we can expect them to give into some very poor decision making. Why else would the university I attend pile the eateries with cake, chicken wings and candy? In fact, there are entire eateries on campus devoted entirely to different kinds of fried chicken… and the lines are out the door. Why is no-one at the salad-bar?
Afterwards, when people will pay a price for not looking to the long term- economists shed all responsibility. “You had a choice, had you not?“. Despite the fact that, in econ, people are expected to make these poor short term decisions.
Dr. Browne introduced to the class what he called the “Hurricane illustration”. It works like this:
Let us look at some products that are in high demand during a hurricane: Plywood, milk and gas. The supply of these products is relatively low during the normal operations of a coastal city. Suddenly, WHAM… a hurricane hits and suddenly there is an extremely high demand for plywood, milk and gasoline. What happens? Well the prices for each of these goods sky-rockets- money acting as a natural rationing device. If people cannot afford these goods and ask for help the economists simply turn to them and ask: “Did you know you live on a coastal city? hmm… Did you know that coastal cities are prone to hurricanes? interesting… Did you also know that the destructive power of a hurricane could complete wipe out your house and belongings? intriguing… so, I must ask you, why do you wish to burden the poor tax-payers with your problems? You did, after all, have a choice.”
The funny thing here is that many political figures decide that they will not allow the prices to go up during the aftermath of a hurricane. Somehow the drama of the disaster makes them feel sad, and seeing people floating in the streets makes them rethink market decisions. Unfortunately, the political figures do not realize that the market works like this ALL THE TIME, prices are always acting and reacting to demand- such as the demand for plywood, milk and gas that is illustrated above. So instead of changing the way things work, they label the price changes during a disaster as “Price Gouging“. The rest of us refer to it as the “market system;” it’s just that during a hurricane, the victims of the market system are much more publicized and concentrated.
I am not suggesting that the modern Neoclassical economics approach should be tossed away. Dr. Browne makes a good point that it works extremely well for poor countries. In a sense, for the very poor, consumption and money DOES create happiness. However, once we have satiated our basic needs, perhaps we need to look to a different model.
-Tom
September 17th, 2007 at 4:31 pm
What is wrong is that there is ALWAYS a choice, the only question is who’s choice, it is either market’s choice (your choice) or somebody’s choice, and it is very idealistic to think that somebody will decide in your best interest in mind, in reality it NEVER works.
Now “Hurricane illustration ”
Why? Plywood is needed to cover glass windows, safety issue, gasoline to get out, the safety issue, but milk? You could drink water and eat candy, but milk? You need milk to have strong bones when you are old, you have to give people some credit to think 50 years ahead, this is precisely the argument for market wisdom.
September 17th, 2007 at 9:49 pm
I think I may have been unclear when I wrote about the econ view of CHOICE. The distinction being made is not about whether choice exists- it is about the amount of choice available. In economics, abundance of choice can only be good. For instance: if rather then 2 brands of beans, there were to be 6000 brands to choose from, GREAT!
Essentially, in Neo-classical economics, more possibilities to choose from are ALWAYS WELCOME.
A counter to that example would be found in sociology; such as in the book “The Paradox of Choice” by Barry Schwartz- a professor of social theory and social action. The book argues that less diversity of choice can actually be better in many cases then an extremely large amount of choices. I have not read the book, nor do I say the book is “right”, I’m just pointing out the existance of other theories about choice (theories that Neo-classical economics does not acknowledge).
A link to the book:
http://books.google.com/books?id=ElQVdxAipZ0C&dq=&sa=X&oi=print&ct=book-thumbnail
Ian, the question of who or what makes decisions is a difficult one, but it was not the question that I was addressing in the excerpt you noted. I am sorry if I was unclear.
As far as the hurricane illustration: It is not very important what the items (plywood, gas, milk and so forth) actually are. They were simply used as an anecdotal means of portraying the idea of “price gouging”. I have done no research in how the demand of those particular items is affected by a hurricane, but I do not find them to be vital to the argument. Replace the three items with the word “stuff” and the hurricane illustration still functions as it is meant to.
If you are arguing that the market encourages people to make decisions based on long term benefits then I am afraid you have alot more proof to procure. Perhaps you are right, but in that case why is obesity a problem in the U.S.? Why are fast food restaurants successful? Why would anyone choose a brownie or fried chicken over broccolli?
I hope I have made my notes a bit clearer. Thank you for the helpful criticisms.
-Tom