Learn Liberty

Category Archive: Profits and Prices

  1. How Much Immigration Is Too Much Immigration?

    6 Comments

    The United States has laws in place to limit the number of immigrants granted entry. How many immigrants should be allowed to call America home? Bryan Caplan, professor of economics at George Mason University, argues that the United States should have open borders. Jan Ting, professor of law at Temple University, argues that there need to be limits on the number of immigrants.

    In this clip from the debate, Prof. Ting argues that the risks of trying an open border policy are too great. He points out that the U.S. population is estimated to grow at a fast rate in the next 50 years and through the end of the century if we do nothing. He is concerned that allowing free immigration will overwhelm U.S. infrastructure and cause too much environmental damage.

    Prof. Caplan responds by arguing that the market will ration immigration just as it rations anything else. Indeed, the idea of immigration without quotas is overwhelming if we do not consider how market forces will play a role. He argues that we can have open borders without fear because of the power of the market.

  2. Digging Out of Debt | Life of Debt Episode 3

    5 Comments

    They have your name, your number, and your credit card records.  Debt collectors have a funny way of tracking you down and can take people to court. What can we do? For Lee Campbell, he can rely on keg colleague and college professor Peter Jaworski to magically appear and teach him a few tricks to negotiating with collectors over the phone.  Watch as Peter guides Lee through the debt battlefield – you might learn a thing or two.

    Check out the whole series!

    Episode One: Brave New World (of Debt)

    Episode Two: The Debt Luck Club

  3. What Is a Gold Standard?

    6 Comments

    The United States abandoned the gold standard completely in 1974. Professor Lawrence H. White discusses what the gold standard was, why it was abandoned, and whether abandoning it was a good idea. The gold standard meant that currency could be redeemed by banks for gold. The dollar had a set value that it retained. If you went to the bank in the gold-standard era before World War I, for example, you could trade $20.67 at the counter for an ounce of gold. Because the currency was guaranteed in gold, paper money based on gold had a set value. Now that we do not have a gold standard, paper money does not have a set value and the purchasing power of a dollar can fluctuate pretty dramatically. This is called fiat currency.

    The gold standard really constrained the federal government, Prof. White says. The obligation to redeem dollars for gold limited money printing at times when the federal government thought printing money might be a good idea. As a result of ending the gold standard, the U.S. Federal Reserve can print as much money as it decides to print. This can be problematic, however, and many countries without a value standard have seen high inflation because of it.

    Under our current standard the supply of money is up to the decision of the Federal Open Market Committee. “The fate of the dollar rests with a handful of political appointees,” Prof. White says. Is this a good idea? Is fiat currency a better choice than gold-backed currency? This begs a practical question: Which system better limits inflation? Historically, gold (and silver) standards have dramatically outperformed fiat standards around the world in providing stable, low-inflation currency.

  4. Why Are Gas Prices So High?

    12 Comments

    Rising gas prices fuel public outrage, and the popular explanation is that unscrupulous oil companies are taking advantage of helpless consumers. This makes a good story but, as Professor Art Carden explains, it’s not accurate. Instead, gas prices can be explained by the laws of supply and demand. Supply shifts occur when it becomes easier or more difficult to bring oil to the market.

    So what about exorbitant oil company profits? Profits and losses send important signals to the market, attract entry to a market, and ensure resources are allocated effectively. They also can encourage more research and development in alternative energies. Taxing or otherwise curtailing oil industry profits will actually reduce those key market signals and won’t lead to any reduction in prices at the pump.

    Many of the barriers to entry in the market are actually the result of political problems. Gas prices would be lower if there weren’t barriers to drilling for new sources and barriers to the development of new energy, like nuclear power. They would also be lower if demand were not artificially increased through war and other wasteful expenditures.

  5. What Do Prices “Know” That You Don’t?

    7 Comments

    According to Prof. Michael Munger, prices (as in, the price of a carton of milk, or a new car) are akin to magic. Prices “magically” convert countless pieces of dispersed, complex information into a single signal that conveys to sellers what they should do to best benefit society. By ignoring the price system, you’re really ignoring the needs of those whom you want to serve.

    Prof. Munger illustrates this through an example of two farmers trying to decide whether to plant corn or soybeans. One farmer is purely altruistic; he refuses to acknowledge the role of prices and instead sets about to determine which crop would help society most. He pores over data but finds himself overwhelmed with his impossible task. He makes a guess and plants corn. Unfortunately, there is already too much corn on the market. Not only is society not much better off, but his business fails.

    The other farmer cares only about profits. A variety of world events have driven up the need for soy, so the price is higher. He sees the increased price and produces soybeans in order to maximize his profits. He doesn’t care why the price is high, and he doesn’t need to know. All that matters is that he was motivated to produce exactly what humanity wanted. This is the “magic” of the price system – it merges the needs of society with each seller’s desire for profit.

     

  6. Are Low Interest Rates Good?

    8 Comments

    The cost of borrowing money is at a record low. Low interest rates and cheap credit encourage people to spend more, and to save less. Is this good or bad?

    Many argue that we need low interest rates to encourage spending. But low interest rates don’t actually encourage people to spend more money. Low interest rates simply encourage people to spend more money now, and less in the future. The opposite is true for high interest rates.

    So what interest rate is best overall? Professor Davies says the best interest rate is the one that comes about naturally, without government intervention. Individuals know better than the Federal Reserve how and when to spend their money. Decisions on whether to consume more or save more is best left to individuals, not government officials.

  7. Are Corporations People?

    6 Comments

    Are corporations people, or are they something else? Corporations are made up of people – including employees, shareholders, and executives. So, are corporations distinct from the people that comprise them? Economics professor Steven Horwitz addresses this question.

    Today, many people say we should raise the corporate income tax as a way to tax the rich, or the so-called “1%”. But according to Professor Horwitz, taxes on corporations don’t just tax rich executives, but also average workers and consumers.

    So who ends up paying when corporate taxes are raised?

    • Workers pay in the form of lower wages
    • Consumers pay in the form of higher prices
    • Americans saving for retirement pay in the form of lower stock prices and a less valuable retirement portfolio

    Professor Horwitz shows that a tax on corporations is not the equivalent of a tax on the wealthy; instead individual people will pay these taxes, regardless of wealth. Working people bear the costs of the corporate income tax.

  8. Is Price Gouging Immoral? Should It Be Illegal?

    2 Comments

    Price gouging is usually defined as raising prices on certain kinds of goods to an unfair or excessively high level during an emergency. Although price gouging is illegal in 34 states, economics professor Matt Zwolinski asks whether price gouging should be illegal. He uses an example to examine the moral status of price gouging.

    The following points suggest that price gouging may not be immoral after all:

    • Consumers do not have to buy products for the higher price. If they decide to pay, it is likely because they are getting more from the product then they’re paying.
    • If the prices for important goods do not go up, it is likely that scarce resources will not be available for those who need them most.
    • For buyers, high prices reduce demand and encourage conservation. People who may need something more are likely to pay more. For sellers, being able to charge higher prices creates a profit incentive to encourage more sellers to bring products to the market.
    • The profit motive will increase competition and eventually drive down the price.

    What alternative institutions would do better? When price gouging is prohibited goods go to whoever shows up first. Even if we assume that price gouging is immoral, it almost certainly should not be illegal. The only reason price gouging occurs is because demand is high and supply is low. Professor Zwolinski argues that even if you think that price gouging is morally wrong, making it illegal doesn’t make sense. It hurts the very people who need our help most.

  9. The Price System, Part 2: Profits & Losses

    2 Comments

    What is the social function of profits and losses? As Prof. Daniel J. Smith of Troy University describes, they provide an incentive for people to follow the information provided by the price system. By pursing profits and avoiding losses, producers and consumers use scarce resources in effective ways. In anticipation of being rewarded with profit, people and businesses are encouraged to undertake activity that will create valuable outputs. At the same time, the potential for losses encourages them to avoid excessive risks and wasteful activity. Policies that reduce profits, such as taxation, or reduce losses, such as bailouts, disrupt this function of prices and lead to inefficient uses of resources.

  10. The Price System, Part 1: Information

    3 Comments

    Why are prices important? Prof. Daniel J. Smith of Troy University describes the role that prices play in generating, gathering, and transmitting information throughout the economy. Information about the supply and demand of different goods are dispersed among different buyers and sellers in an economy. Nobody has to know all this dispersed information; individuals only need to know the relative prices. Based on the simple information contained in a price, people adjust their behavior to account for conditions in supply and demand, even if they are unaware of that information.

  11. Profit, Loss, and Discovery

    1 Comment

    From the IHS Vault: Economics professor Howie Baetjer of Towson University explains how the market process generates improvements in the human condition. In particular, he highlights how profit & loss serve to help people channel their activities in creative and socially useful directions. Filmed at the 2006 IHS seminar “Exploring Liberty” at Princeton University. Produced by Inextinguishable Productions.