Tuesday, November 01, 2005

Greed Is Not a Sufficient Explanation

Russell Roberts masterfully debunks the greed-based explanation of high gasoline prices:
But isn’t the recent run up of prices just corporate greed run amok? I don’t know. At my local station, prices are down 85 cents per gallon from the peak of a few weeks ago. Did the owner just get nice overnight? Did he forget how to gouge? Did he figure he’d made plenty of money and it was time to give me a break? I actually think he’d still charge $3.50 a gallon if he could. But now that there’s more gasoline on the market, he can’t charge what he did before and still get my business. Too many competitors are charging less.
Couldn’t have said it better myself, but I’ll add my $0.02 anyway. Greed as an explanation for any change in economic outcomes generally fails, because greed is a constant of human nature. If you’re trying to explain why prices are rising, greed’s a lousy explanation unless you think that people suddenly got greedier. Were gas station operators and Exxon executives being altruistic two years ago when they charged us lower prices? I think not.

The even bigger point – which I often try, perhaps unsuccessfully, to impart to my students – is that to explain a change in outcomes, you usually* need to identify a change in underlying fundamentals like preferences, resources, technology, and population. Pointing out something that’s always true, or that didn’t change over the time period in question, just doesn’t provide much traction.

(* Why the weasel word? Because we can identify some equilibria that are inherently unstable. In those situations, even tiny unobservable changes in the fundamentals, or the perception thereof, can lead to dramatic changes in outcomes. Cartels are a nice example. And yes, OPEC is a cartel, so some of those lessons apply to the petroleum industry. But the recent run-up in oil and gas prices is easily explained by changes in the fundamentals, like increasing demand from China and India, civil strife in oil-producing nations, and hurricanes. And OPEC’s members are, I presume, no more or less greedy than they’ve always been.)

5 comments:

Murky Thoughts said...
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Murky Thoughts said...
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Murky Thoughts said...

A more proper reply would be that while greed is a constant, conspiracies are episodic. That conspiracies happen and that they can govern large institions is an established fact of history. Remember the car industry and the LA railway.

Murky Thoughts said...

I don't know why I reached so far back into the past for an example of greed economics. How about Merck and Vioxx and the suppression of data to gain FDA approval? How about Enron's accounting and California power? You don't think greed had anything to do with that?

Murky Thoughts said...

Well, I did it again, didn't I? I guess I actually agree with you completely. Greed is not a sufficient explanation. Necessary to explain many things economic, but not sufficient.