Showing posts with label Free Markets. Show all posts
Showing posts with label Free Markets. Show all posts
Friday, August 5, 2011
Wednesday, November 10, 2010
Basic Economics: We're Runnng Out of Chocolate
I don't know how I got to this article at Gizmodo but the author writes:
and quotes John Mason from the Nature Conservation Research Council who says:
I don't expect quality business and economic analysis from Gizmodo but it is representative of much of the thinking that's out there.
Where to begin to unpack all these economic fallacies? Oh yeah, let's start with markets. If demand continues to rise what will farmers do? They will grow more cocoa. Duh! Unless there is cocoa weevil, which destroys the plant world-wide, why would cocoa become rare? As the cost of cocoa increases relative to other crops farmers would rush to cultivate it. Farmers with a choice of growing corn to eat, or cocoa to make a huge return, would grow cocoa and buy corn from someone else.
Let's assume the writer and the quoted expert believe their story. They should then buy cocoa futures and become wealthy. Assuming the price of cocoa is 10% of a dollar chocolate bar (I would guess that it's less than that) then the price of cocoa would have to rise about 100x (10,000%) for the cost of a chocolate bar to be eleven dollars in twenty years.
The current price of cocoa is roughly 2,900 dollars per metric ton, so if they are correct we should see the price of cocoa to rise to 290,000 dollars per metric ton. I'm willing to bet my house to a cup of coffee that cocoa will not be anywhere near 100,000, let alone 300,000 dollars a metric ton - in constant dollars of course.
Yes, the world is much more complicated than I made it out in the above example. If commodity prices rise, especially soft commodities, it won't be simply cocoa. Sugar would rise, as would milk, both components of chocolate bars. IF the US doesn't end its flirtation with socialism commodity prices will soar relative to the dollar.
Still, relating to the thinking behind the statements in the article, how are we to deal with silliness such as the following:
And how do we deal with writers and "experts" making predictions that they obviously don't believe. (Oh they'll scream at that statement.) Examples include the above cocoa expert predicting $11 chocolate bars and those experts and pundits saying that Big Pharma, and Big Oil, and Big Banks are making obscene amounts of money. If they truly believed that they would invest all they have in these markets, become "filthy rich" and redistribute part of their obscene profits to those in need.
EDIT 11/15/2010
Re-reading this I see that I forgot to mention a very important point (price elasticity). There will come a point, long before $12 chocolate bars, where people will refuse to buy chocolate, or will drastically reduce their consumption. At that point demand drops with supply rising (as farmers are planting more and more cocoa). Soon thereafter what do you think will happen to the price of chocolate?
If you have any question look at the price variation of hops over the last few years. First there was a shortage and price rise, then there were increased plantings followed by a price drop. Now there is a glut and it looks as if farmers will plant less hops.
At the rate we're going, chocolate is going to be a rare—and extremely pricey—commodity within the next twenty years. Somebody needs to light a fire under those Oompa-Loompas, stat.
The problem's easy to explain, and much harder to fix. According to the Cocoa Research Association, we're consuming more chocolate than we're producing cocoa. Which means, eventually, we're going to run out. ...
What will the shortage mean? $11 Snickers bars, sooner than you think.
and quotes John Mason from the Nature Conservation Research Council who says:
"In 20 years chocolate will be like caviar. It will become so rare and so expensive that the average Joe just won't be able to afford it."
I don't expect quality business and economic analysis from Gizmodo but it is representative of much of the thinking that's out there.
Where to begin to unpack all these economic fallacies? Oh yeah, let's start with markets. If demand continues to rise what will farmers do? They will grow more cocoa. Duh! Unless there is cocoa weevil, which destroys the plant world-wide, why would cocoa become rare? As the cost of cocoa increases relative to other crops farmers would rush to cultivate it. Farmers with a choice of growing corn to eat, or cocoa to make a huge return, would grow cocoa and buy corn from someone else.
Let's assume the writer and the quoted expert believe their story. They should then buy cocoa futures and become wealthy. Assuming the price of cocoa is 10% of a dollar chocolate bar (I would guess that it's less than that) then the price of cocoa would have to rise about 100x (10,000%) for the cost of a chocolate bar to be eleven dollars in twenty years.
The current price of cocoa is roughly 2,900 dollars per metric ton, so if they are correct we should see the price of cocoa to rise to 290,000 dollars per metric ton. I'm willing to bet my house to a cup of coffee that cocoa will not be anywhere near 100,000, let alone 300,000 dollars a metric ton - in constant dollars of course.
Yes, the world is much more complicated than I made it out in the above example. If commodity prices rise, especially soft commodities, it won't be simply cocoa. Sugar would rise, as would milk, both components of chocolate bars. IF the US doesn't end its flirtation with socialism commodity prices will soar relative to the dollar.
Still, relating to the thinking behind the statements in the article, how are we to deal with silliness such as the following:
"we're consuming more chocolate than we're producing ... eventually, we're going to run out."
And how do we deal with writers and "experts" making predictions that they obviously don't believe. (Oh they'll scream at that statement.) Examples include the above cocoa expert predicting $11 chocolate bars and those experts and pundits saying that Big Pharma, and Big Oil, and Big Banks are making obscene amounts of money. If they truly believed that they would invest all they have in these markets, become "filthy rich" and redistribute part of their obscene profits to those in need.
EDIT 11/15/2010
Re-reading this I see that I forgot to mention a very important point (price elasticity). There will come a point, long before $12 chocolate bars, where people will refuse to buy chocolate, or will drastically reduce their consumption. At that point demand drops with supply rising (as farmers are planting more and more cocoa). Soon thereafter what do you think will happen to the price of chocolate?
If you have any question look at the price variation of hops over the last few years. First there was a shortage and price rise, then there were increased plantings followed by a price drop. Now there is a glut and it looks as if farmers will plant less hops.
Tuesday, November 17, 2009
The Ditch-Digger's Fallacy
A few generations ago, in order to help during a job shortage our government felt that we could help solve this problem by giving people jobs. If we made jobs for people, they would spend money and make jobs for other people. What sort of work would be made. Well, we couldn't have them building bridges or tunnels as this would take away work from unemployed union members. It was decided that these unemployed men (our society was still sexist at the time) would be sent to work digging ditches. Many brilliant people showed that this was a brilliant idea. And, as one can't have ditches all over the place, other people were given jobs filling them back in. As many people were unemployed, many ditches were dug and filled.
It was a great success. Thousands of diggers and fillers were hired. Shovels, backhoes and dumptrucks were bought, thus giving jobs to shovel, backhoe and truck manufacturers. Supervisors, pension fund administrators and payroll people were hired. Buildings were raised for the new workforce. It was agreed among the consultants, and lauded by progressive academics and congressmen, that this was the best way to put people back to work. Huge circular ditches, miles in diameter, were dug, re-filled and paved before being dug-up again. Economists, academics and news personnel reported on the success of the new plan. Everyone knew that as each new digger was hired and paid, he spent his money on clothes, food and paid taxes. Society benefited greatly from this new public works program.
A few callous, unkind people, probably lackeys of the rich, questioned the value in digging ditches, arguing that the money used to pay for the diggers, fillers and administrators came from the taxpayers. They emphasized that this government program did not create wealth, but instead did nothing more than redistribute it. "What did the taxpayers get for their taxes," they asked? " Nothing but thrice emptied and filled ditches." In response to the criticism the digger's union, academics, administrators and politicians angrily replied that it was "cruel and mean-spirited to give tax-breaks to the rich and throw these good people out of work." "We must think of people first, before profits, before taxes," they said.
Anytime one mentions that a government department ought to be cut or eliminated, the final argument used to combat the cut is that by doing so we would throw people out of work. We would then have to pay unemployment benefits for people who moments before were income earning, tax-paying citizens. Thus we not only would be hurting them, but ourselves as well. This is a faulty argument. Anytime one eliminates a non-productive job one is helping, not hurting society. To argue that eliminating patronage and make-work jobs exacerbates the jobless situation, and injures society, is to fall into "The Ditch-Diggers Fallacy."
As ridiculous as it sounds, many people hold strongly to the Ditch-Diggers Fallacy. In doing so they make it nearly impossible to alter the status quo. Programs and old job descriptions become entrenched, even when better ways are available. There are many examples to choose from. A simple example concerns highway and bridge toll booths. We could raise money for our bridges and roads solely from a gas tax and eliminate toll booths, thus saving motorists time and headaches; saving truckers and consumers money; as well as reducing air pollution by eliminating congestion. In addition we would save taxpayers hundred of millions of dollars a year by eliminating toll booth collection.
One of the key reasons that we don't eliminate toll booths is that many people believe that by doing so we would cost toll collectors, supervisors, accountants, and auditors their jobs. "What about all those people being thrown out of work?" "We wouldn't save any money," people would say. "All the savings would go towards paying them unemployment and welfare." "Not only that," others would say, "but it would be cruel to throw good people out of work to save a few dollars." These people have fallen for The Ditch-Digger's Fallacy. If it makes sense to keep toll booth collectors and their supervisors, doing an unnecessary, wasteful job then it makes sense to give people jobs to dig and fill ditches.
There are only two ways of creating wealth: producing something or increasing the efficiency of the economic system: distribution, administration, and finance. Labor is not the source of wealth. If it was then digging huge ditches and filling them back in would be the panacea so many are looking for. All over the world people would be digging and filling ditches, and we would all have everything we need
It was a great success. Thousands of diggers and fillers were hired. Shovels, backhoes and dumptrucks were bought, thus giving jobs to shovel, backhoe and truck manufacturers. Supervisors, pension fund administrators and payroll people were hired. Buildings were raised for the new workforce. It was agreed among the consultants, and lauded by progressive academics and congressmen, that this was the best way to put people back to work. Huge circular ditches, miles in diameter, were dug, re-filled and paved before being dug-up again. Economists, academics and news personnel reported on the success of the new plan. Everyone knew that as each new digger was hired and paid, he spent his money on clothes, food and paid taxes. Society benefited greatly from this new public works program.
A few callous, unkind people, probably lackeys of the rich, questioned the value in digging ditches, arguing that the money used to pay for the diggers, fillers and administrators came from the taxpayers. They emphasized that this government program did not create wealth, but instead did nothing more than redistribute it. "What did the taxpayers get for their taxes," they asked? " Nothing but thrice emptied and filled ditches." In response to the criticism the digger's union, academics, administrators and politicians angrily replied that it was "cruel and mean-spirited to give tax-breaks to the rich and throw these good people out of work." "We must think of people first, before profits, before taxes," they said.
Anytime one mentions that a government department ought to be cut or eliminated, the final argument used to combat the cut is that by doing so we would throw people out of work. We would then have to pay unemployment benefits for people who moments before were income earning, tax-paying citizens. Thus we not only would be hurting them, but ourselves as well. This is a faulty argument. Anytime one eliminates a non-productive job one is helping, not hurting society. To argue that eliminating patronage and make-work jobs exacerbates the jobless situation, and injures society, is to fall into "The Ditch-Diggers Fallacy."
As ridiculous as it sounds, many people hold strongly to the Ditch-Diggers Fallacy. In doing so they make it nearly impossible to alter the status quo. Programs and old job descriptions become entrenched, even when better ways are available. There are many examples to choose from. A simple example concerns highway and bridge toll booths. We could raise money for our bridges and roads solely from a gas tax and eliminate toll booths, thus saving motorists time and headaches; saving truckers and consumers money; as well as reducing air pollution by eliminating congestion. In addition we would save taxpayers hundred of millions of dollars a year by eliminating toll booth collection.
One of the key reasons that we don't eliminate toll booths is that many people believe that by doing so we would cost toll collectors, supervisors, accountants, and auditors their jobs. "What about all those people being thrown out of work?" "We wouldn't save any money," people would say. "All the savings would go towards paying them unemployment and welfare." "Not only that," others would say, "but it would be cruel to throw good people out of work to save a few dollars." These people have fallen for The Ditch-Digger's Fallacy. If it makes sense to keep toll booth collectors and their supervisors, doing an unnecessary, wasteful job then it makes sense to give people jobs to dig and fill ditches.
There are only two ways of creating wealth: producing something or increasing the efficiency of the economic system: distribution, administration, and finance. Labor is not the source of wealth. If it was then digging huge ditches and filling them back in would be the panacea so many are looking for. All over the world people would be digging and filling ditches, and we would all have everything we need
Mr. BrewMaster
Imagine that you invent a process similar to the Mr. Coffeemaker that allows people to brew beer at home for pennies a glass. Who would benefit? You certainly would. I would, and so too would millions of other beer drinkers. It would save beer drinkers money, and save the environment. Cans and bottles wouldn't have to be transported (saving gas). Cans and bottles wouldn't have to be made (smoke stack pollution); and the aluminum wouldn't have to be mined and smelted. On the surface it kappears to be a great invention, helping the poor and middle class and saving the environment. Unfortunately that is not the case. Budweiser would lose most of its business and people would be laid off. Union brewers would have to be let go, so too would the workers making the aluminum cans. Teamsters would lose their jobs. All these people would have to go on unemployment, at the taxpayer's expense.
What seemed to have been a delightful invention, has turned out instead to throw people out of work and increase the inequity in America. You, and your investors, would become wealthy and great numbers of workers, ordinary Americans, would become poorer. Once again we would see capitalism in action -- the rich get richer, and the poor get poorer. America would have been better off if Mr. Brewmaster had not been invented.
The Mr. Brewmaster is a rhetorical device, but it is representative of the type of thinking common in America's universities and newsrooms. What should be realized is that society would be better off if a Mr. Brewmaster was invented. What was wrong with the objections presented against the Mr. Brewmaster? Why do so many people make those mistakes? The problem is that concrete bound minds focus upon the lost job, not realizing that new jobs have been created. The job to be is an abstraction. The job that exists in the here and now is concrete. New jobs would be created by the Mr. Brewmaster. Somebody would have to make these Brewmasters. While not every brewing, smelting, mining, and teamster job would be replaced by a job in the Brewmaster facility, the money saved by beer drinkers would be saved, thus lessening credit costs for everyone, or spent on clothes, car, travel, movies, buying a house. Thus creating new jobs and opportunities in those industries.
All inventions and processes aid some more than others, and rightly so. Should not those that invent a device, those that recognize its worth, benefit from their work and foresight? There are some who are offended by this proposition. It is this hostility to the products of the human mind and human effort, that has hamstrung mankind since the beginning of human society. They are the true conservatives. Keep things the same, is the unstated argument behind there ry slogans. Change brings problems.
Others fear that the new jobs are never as good as the previous. If this were correct then innovation, by and of itself, would be harmful to society. Society would be better off if it stayed the same, generation after generation after generation after generation after generation after generation after generation after generation after generation after generation after generation. However, many of these same people now consider education to be the key issue in America. It makes one wonder what they mean by education. Certainly it is not the absorption of empirical facts and concepts based upon these facts. If too many people become educated in such a manner who knows how many technological advances there will be. And technological advances leads to change, and that we can't have.
The unstated argument against change, against innovation, is that it leads away from the egalitarian ideal, where each person is materially, spiritually and politically equal. Education leads, by necessity, to innovation and change. The more highly educated the society the more new jobs will be created and old jobs be eliminated, the more innovative it will be, the more society will be unequal. This is considered evil, and the sign of a dysfunctional society. However we can easily picture the day that even the poorest among us will have a roof over his head, food in the cupboard, running water, electricity, and communication and entertainment opportunities unimaginable a generation ago. Egalitarians will not cheer and have inner happiness at the fact that all humans beings have achieved unprecedented prosperity. They will bemoan the fact that the gap between rich and poor has grown to historical levels.
I proclaim that an egalitarian society is not desirable. It is either a technologically stagnant society, or a repressive society. Live in an agriculturally based, pre-industrial commune if one wants. One may do so, quite easily, within the structure of a laissez-faire society. However, don't force egalitarian ideals upon those that don't subscribe to them. But egalitarians are not, for the most part, content in living a simple, egalitarian life, among people with a similar outlook on life. They want to ensure that all are equal. However, when one promotes a repressive, top-down society in which the government is used to enforce equality, not only is one making a lie of ones claim of ones love for freedom and education but it implies that one wants, or is deliberately ignoring, the only possible result of ones stated ideas -- dictatorship.
What seemed to have been a delightful invention, has turned out instead to throw people out of work and increase the inequity in America. You, and your investors, would become wealthy and great numbers of workers, ordinary Americans, would become poorer. Once again we would see capitalism in action -- the rich get richer, and the poor get poorer. America would have been better off if Mr. Brewmaster had not been invented.
The Mr. Brewmaster is a rhetorical device, but it is representative of the type of thinking common in America's universities and newsrooms. What should be realized is that society would be better off if a Mr. Brewmaster was invented. What was wrong with the objections presented against the Mr. Brewmaster? Why do so many people make those mistakes? The problem is that concrete bound minds focus upon the lost job, not realizing that new jobs have been created. The job to be is an abstraction. The job that exists in the here and now is concrete. New jobs would be created by the Mr. Brewmaster. Somebody would have to make these Brewmasters. While not every brewing, smelting, mining, and teamster job would be replaced by a job in the Brewmaster facility, the money saved by beer drinkers would be saved, thus lessening credit costs for everyone, or spent on clothes, car, travel, movies, buying a house. Thus creating new jobs and opportunities in those industries.
All inventions and processes aid some more than others, and rightly so. Should not those that invent a device, those that recognize its worth, benefit from their work and foresight? There are some who are offended by this proposition. It is this hostility to the products of the human mind and human effort, that has hamstrung mankind since the beginning of human society. They are the true conservatives. Keep things the same, is the unstated argument behind there ry slogans. Change brings problems.
Others fear that the new jobs are never as good as the previous. If this were correct then innovation, by and of itself, would be harmful to society. Society would be better off if it stayed the same, generation after generation after generation after generation after generation after generation after generation after generation after generation after generation after generation. However, many of these same people now consider education to be the key issue in America. It makes one wonder what they mean by education. Certainly it is not the absorption of empirical facts and concepts based upon these facts. If too many people become educated in such a manner who knows how many technological advances there will be. And technological advances leads to change, and that we can't have.
The unstated argument against change, against innovation, is that it leads away from the egalitarian ideal, where each person is materially, spiritually and politically equal. Education leads, by necessity, to innovation and change. The more highly educated the society the more new jobs will be created and old jobs be eliminated, the more innovative it will be, the more society will be unequal. This is considered evil, and the sign of a dysfunctional society. However we can easily picture the day that even the poorest among us will have a roof over his head, food in the cupboard, running water, electricity, and communication and entertainment opportunities unimaginable a generation ago. Egalitarians will not cheer and have inner happiness at the fact that all humans beings have achieved unprecedented prosperity. They will bemoan the fact that the gap between rich and poor has grown to historical levels.
I proclaim that an egalitarian society is not desirable. It is either a technologically stagnant society, or a repressive society. Live in an agriculturally based, pre-industrial commune if one wants. One may do so, quite easily, within the structure of a laissez-faire society. However, don't force egalitarian ideals upon those that don't subscribe to them. But egalitarians are not, for the most part, content in living a simple, egalitarian life, among people with a similar outlook on life. They want to ensure that all are equal. However, when one promotes a repressive, top-down society in which the government is used to enforce equality, not only is one making a lie of ones claim of ones love for freedom and education but it implies that one wants, or is deliberately ignoring, the only possible result of ones stated ideas -- dictatorship.
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