Monday, July 16, 2012

A journalist gets it about 'fair' prices

I've long been staggered by the economic illiteracy displayed all too publicly by many journalists (some of them allegedly eminent economists as well . . . *coughPaulKrugmancough*).  However, one member of the species (who, to be fair, isn't exactly your average member of the species) has just displayed some uncommonly common sense about profit, prices and fairness.  Here's an excerpt.

I'm sorry to have to tell you this, but it is simply necessary: we should pay more for our banking services. And for our consumption of Lefty newspapers. That, at least, is the implication of this interesting new definition of profit being floated by the Guardian on the "fair price" of milk:

How much is a fair price for a pint of milk? The answer is: whatever price allows everyone in the supply chain – farmer, dairy, supermarket – to turn an honest profit.

You can see what they're saying there. Farmers are not making a profit producing milk and thus we the consumers should be paying more so that they do. A very silly mockery of the entire free market argument but one that is being seriously advanced.

The stupidity of this argument becomes apparent when we apply it to other producers of various things. Royal Bank of Scotland is still making losses. By definition this means that we are paying less than the cost of production for the banking services we get from RBS. If we apply the same logic for farmers, then we should all pay more for our banking services.

The Guardian is also making losses, as it has been for years. So is the Independent. Clearly this means that we are not paying enough for all involved in the supply chain to make an honest profit: we must agree to pay more. We can extend this insanity out to any producer that is making a loss.

Which is, as I say, a mockery of the entire free market argument. Producers care about whether they make a profit, but we the consumer do not. Furthermore, profit is not something we owe the producer: it is the signal that tells them that they are producing something we want at a price we want to pay. Losses are the universe's method of telling the producer to quit and do something else.

Another way of putting this is that profit is the sign that you are adding value. That is – the consumer puts more value on the cost of production than the cost of input (the cost of production). That's simply what profit is, the difference between costs and revenues. When it exists it shows that you are adding value to this world, making it a richer place. When profits do not exist (those sad losses), then equally your input costs must be higher than your revenues. This is subtracting value from the world, making everyone poorer. We'd really rather like you to stop doing that. The loss is your hint.

There's more at the link.

How refreshing to read an economic column that makes sense!  Now, if we could just get certain politicians to stop chuntering on about 'fairness' and 'fair shares' . . .


1 comment:

AJ said...

fair comment in a truly level playing field where end users get to determine the value of an item or service.

falls apart a bit when a competitor has an advantage like foreign government subsidies or slave labour wages, and compounded when one or two retailers have such a stranglehold on the market that they can dictate prices paid to suppliers.