Maybe that is just political pragmatism, but if so, it looks like pragmatism become spinelessness. No wonder France’s newspapers feature an article along the lines of ‘Does France need a Margaret Thatcher’ every summer for the last several years!!

You’re now implying that people can’t forecast short term price movments and what markets are going to do next. Yea, but that’s hardly new.

It seems you’re trying your best to argue markets aren’t perfect. That’s true they aren’t. The only thing is Don, there isn’t anything better that offers allocative efficiency. However I am happy to admit I’m wrong. So if you can think of a better way I’d be happy to hear it.

2) The distribution of market incomes mirrors the distribution of talent.

Arguing about (2) is pointless for exactly the same reason

I really don’t get your point, Don.

And what do you mean that supermarkets in France arent allowed to compete?

They aren’t allowed to sell below cost, they aren’t to allowed to negotiate favourable pricing from suppliers (ie the price at which Danone sells to Carrefour must be the same as the price at which it sells to the Petit Casino) they aren’t allowed to have sales without prefectural approval they aren’t allowed to practice ‘predatory pricing’ (to the extent not already covered) which basically means in practice they must sell each item at an absorbed cost.

And, OK, prices might be cheaper than London, although I don’t know if you converted both into AUD or simply ‘felt’ the differences. I am very sure that they are much higher than here, and much higher than Spain, and much higher than Germany, and higher than Holland, and many items are higher than in Switzerland (although that one cuts both ways).

***

THE VILLAGE FRUIT SHOP

I’m having some friends over to dinner tonight so I walk down to the fruit shop to buy some strawberries for dessert. But when I pick up a punnet and look at the price I’m enraged:

ME: How can these strawberries be worth $8 a punnet?

FRUIT SHOP OWNER: They’re very good tasting strawberries.

ME: This doesn’t seem fair.

FSO: My prices are always fair. All things being equal, better tasting fruit costs more than worse tasting fruit. Otherwise why would farmers bother growing good tasting fruit?

ME: But the strawberries cost 12 times as much as the grapes. You’re not telling me that they taste 12 times as good are you?

FSO: Fine. How many kilos of grapes do you want?

ME: I don’t want grapes. I want strawberries.

FSO: There you go.

ME: Look. Three months ago you were selling a punnet of strawberries for $4. Are you saying they taste twice as good now?

FSO: I said ‘all things being equal’. This isn’t an exact thing.

ME: So how come they’re more expensive now?

FSO: Strawberries are seasonal. Did you want some?

***

Arguing about (2) is pointless for exactly the same reason.

Of course, for pricier goods, this is quite different, and I’d agree that for, e.g. cars, competition would be expected to have fairly dramatic effects on price.
It’s worth spending the day driving around to find the best bargain when it could save you $5000 or more.

And what do you mean that supermarkets in France aren’t allowed to compete?

But if the average consumer judges a magazine to have a utility of around $5, then retailers will sell it for that, even if they could make a good profit selling it at $3 – doing so wont increase sales*

Your toothbrush may be one example – but generally, competition does reduce prices, and significantly. The best example is Wal-mart, who have made billions simply by focusing on being the cheapest, the best counter-example is France and Belgium, where they aren’t allowed to compete (in theory, partly because prices should be lower if there are lots of options, which options are sustained by, mmm, artificially high prices – go figure). Supermarket prices there are horrendously expensive.

This effect is not attributable, as you imply, to people’s changing perception of utility, except in that people’s perception of utility changes as a result of competition lowering prices.

* I was reading yesterday that supermarkets sell toothbrushes that wholesale around 20c each for upwards of $5. Presumably retailers have determined that consumers are happy enough to pay this much that there’s no competitive benefit in selling them for much cheaper.

The distribution of market income does not mirror the distribution of talent. That we can agree on. Everything else being equal the correlation between the two is statistically significantly greater than zero, but (always) less than one. It is also economically significant (in the Dierdre McCloskey sense) but still less than one. Useful debate revolves around how much less than one. My view is that the greater the level of economic freedom the more likely that correlation will be closer to one. The important point is that the correlation is ot zero or negative (in that type of economy there would be very perverse incentives – historically that may have been the case).

Hayek’s point is that even if one had a (marketable) skill and you worked hard at developing/maintaining/improving that skill there is still no guarantee of success.

As for talent, there are at least three separate claims in play here:

(1) If an individual improves their skills they will be able to command a higher income.

(2) The distribution of market incomes mirrors the distribution of talent.

(3) The distribution of market incomes mirrors the distribution of moral merit (ie the market gives people the income they deserve).

With the right caveats claim (1) is hard to dispute. If an individual is able to develop skills for which there is unmet demand and reach a marketable standard then, all things being equal, they are likely to earn a higher income.

Claim (2) is a lot more difficult to defend. To start with we need a single metric for talent. To test the claim we’d need to be able to compare and rank talents for painting, teaching, plumbing, computer game playing, torture, doing Meatloaf impersonations etc.

I’m guessing that a mediocre plumber will generally earn more than an excellent Meatloaf impersonator or Tetris player.

It seems to me that claim (2) requires you to defend something that looks a lot like the labour theory of value.

Claim (3) seems just preposterous. Again we need a common metric — this time for moral merit. To test it you’ll need to rank school teachers, nurses, hedge fund managers, drug dealers, television personalities, Meatloaf impersonators etc.

And it seems to me that the claim that markets give people the incomes they deserve requires something more than having the rankings of merit and income match up. If one person earns 1000 times what another person does then we’d expect them to be 1000 times more deserving.

***

So just to be clear, we’re not arguing about whether markets encourage people to develop skills that lead to results other people find useful.

Prices are typically set by supply and demand although utility will obviously have an effect on demand.

For example, for a product with no limits to supply the price will be roughly cost-of-production + profit, regardless of the utility to buyers.

This is a big part of the reason that demand for oil has been relatively inelastic. For most of the past century, for most users, the utility obtained from oil has been much, much higher than the utility of the money needed to purchase that oil. Now that supply is limited, the price has had to rise until the utility of money required to purchase outweighs the utility of oil for marginal users.

Consider your good self, if there were no relationship (at all) between effort and reward why would you ever hone any skills that you may have? Why try to write better? Why undertake a PhD? Why read widely? Why think carefully?

The fact is the talented are rewarded. Not ‘always’, and not ‘never’, but somewhere in between that is enough to encourage people with varying talents to try harder, to do better, to strive to improve themselves.

What’s the purpose of deriving average utility? What are you trying to get to?

Why on earth would want to know the “average utility” of water in the Gobi desert and water in Canada?

Scarcity is not an obvious factor in Don’s example because he’s not comparing the same product across two different scenarios, in one of which the product was scarce, whereas in the other it was not.

If we change the example to, say, the fact that Don suddenly came down with a life-threatening fever, while living next door to a bottled water superstore, he would still value a life-saving bottle of water at much greater than the $5 charged for it.

But Im not sure I see how scarcity was a big factor in Dons example

Sure is in the desert. He didn’t have any until he arrived at the raodhouse when it became relatively abundant.

water has a very high utility because its scarcity means that the body needs it more.

What’s the point of this comment, N? I don’t see the context.

value or price = “average utility” * scarcity

would work as a general rule, with of course various exceptions. And it’s unlikely to be a strict multiplication, just some sort of function where increases in either value increase the total.

But I’m not sure I see how scarcity was a big factor in Don’s example, other than the fact that for the desert trekker, water has a very high utility because it’s scarcity means that the body needs it more.

Im still not sure I understand what utility is and how it differs from value (whatever that is) and how all this relates to prices.

1.Utility is basically usefulness.

2. Value – eg…. diamonds are valuable primarily because of their rarity while their utility is limited.

3. Prices and the price mechanism help us sort all this out.

Can’t recall who said this… but used the example of two blades.

one blade was utility while another blade was scarity.Their intersection is prices.

.one other thing that needs clarification.

—————————

N.

Don presents a very good topic which I believe confuses lots of people. It’s the interplay of utility and scarcity and how these two concepts inter-relate to form prices.

If my memory of economic history subjects serves me there were lots of discussions about this subject a few hundred years ago.

I think there was some Italian monk who brought up the subject of scarcity/ utility and prices.

He used the argument that a bag of Japanese sand would have been the only japanese sand in all of Italy at the time. However it’s utility was about as uselful as other sand and hence its price was about zero.

Forget his name.

But as it is the water only cost me $5. Now I’ve read the magazine and I’m bored again. So I ask the roadhouse guy if he can lend me a pair of scissors so I can cut out some pictures from the magazine and make a collage.

He rummages around in a drawer and pulls out one half of a pair of scissors. He hands them to me and I say “That’s not a pair of scissors, it’s a knife.”

“But it’s sharp,” he says.

I’m still not sure I understand what utility is and how it differs from value (whatever that is) and how all this relates to prices.

Can anyone explain this for me?