posted Jun 25, 2008

in Politics

One of the things I sometimes fiddle with in the back of my head is how to fix school curricula to better serve students and society. One of the stronger ideas I have is that economics (and ideally, game theory) should be taught, replacing a lot of really dumb mathematical holdovers like trigonometric identities for a semester or two.

And over the last few weeks, I've been really wishing that we'd been teaching economics for the past fifty years instead of other silly things, because the blinding stupidity on exhibit in the recent oil debates is really starting to get to me.

Economics is a complicated and rich subject, but you can get a lot of mileage out of just understanding the basics, which can be condensed down to:

Money is real - it may be a consensual societal hallucination but it is also real. Money buys real energy, buys real goods, buys real time and human labor; it is therefore something real and not entirely subject to the vagaries of human desire. The cost of a good is an effect of the difficulty of making it, not a cause. All else being held equal... Increases in supply will result in lower prices .

in will result in . Decreases in supply will result in higher prices .

in will result in . Increases in demand will result in higher prices .

in will result in . Decreases in demand will result in lower prices. All else not being equal, the market will tend to find an equilibrium point naturally. Fiddling with the natural market equilibrium by... artificially raising prices , or equivalently, artificially reducing supplier costs will cause an artificial surplus , as suppliers are encouraged to produce beyond demand.

, or equivalently, will cause an artificial , as suppliers are encouraged to produce beyond demand. artificially lowering prices, or equivalently, artificially raising supplier's costs will cause an artificial shortage, as suppliers can't provide the same amount of goods economically and will turn their attention elsewhere. It's worth saying this again: Money is real. That's why these are the "laws" of economics. These laws represent real people, real value, and real transactions. Attempts to break the laws of economics can be easily translated to showing that you are trying to get something for nothing, or believing that you can come out ahead by expending more resources that you are bringing in. No exceptions.

That's it, that's economics in a nutshell. Learning about all the other fun stuff can be useful and even important, but this simple set of statements can take you a long way.

So, tell me: Why are do many of the solutions to high gas prices being proposed in Congress involve reducing supply? Why? Why?!? Thinking that reducing supply will reduce prices is objectively stupid.

And similarly, why is raising supply considered anathema? Why do Democrats basically accuse it of being political razzle-dazzle? The political razzle-dazzle is being performed by those who are convincing people that raising supply won't affect prices!

Taxing gas companies for their "excessive profits" is artificially raising their cost for extracting oil. This will reduce supply and raise prices. Any other attempts to penalize the oil companies will have the same effect.

The only solutions are to directly reduce demand, which isn't possible, or raise supply. You can indirectly end up with demand reduced in a new equilibrium involving higher prices, but that's not the same thing. Raising supply is the only way to go.

Please note I'm deliberately ignoring the complicated issue of whether we should reduce gas prices. That's a separate issue from the question of how we would go about getting lower prices if that's what we decide we want. I'm just talking about the blinding incompetence being demonstrated with regard to the question of how one reduces prices.