Monday, May 21, 2007

High Prices

Two related items caught my attention in the news lately. First of all is the issue of gasoline prices. On CNN much was being made of the fact that US prices had passed $3.19 per gallon (for the record, the equivalent current price where I live is about $4.65 per US gallon. The second item that caught my attention was the editorial headline "Cheap rent is not a public right." In the editorial the author was attempting to make a case for preserving the free market in rental accommodation in the face of increasing pressures for rent controls to deal with dramatic inflation in rental costs recently.

Both of these items are related in some way to the free market system. In both cases we are told that the shortage (or apparent shortage) of gasoline and rental accommodation has caused the price increase. We are told that the only thing to do is to maintain the free price system and that the market will eventually correct itself. So, for example, in an ideal system an entrepreneur might find high gasoline prices attractive enough that he would invest in increased refining capacity. This increase in capacity would relieve the shortage and result in a decrease in prices. The same is theoretically true for rental accommodation. So why is this unlikely to happen?

The problem I would suggest is that the capitalist system as it exists now is not the "perfect" system of the theoretical model. Take for example the issue of gasoline prices. I've already said that in the pure system high prices would motivate someone to invest in increased production which would drive down prices. The problem is that this would only happen where there was perfect competition - which we don't have. First of all, the government (for good reasons) imposes lots of regulations on the building of refineries. This decreases the motivation for anyone to want to build these things. This results in a situation where a relatively small number of companies dominate the refining capacity of Canada and the USA. A competitor is unlikely to build a new refinery and the existing few refiners are certainly not going to do so. What this means is that the price issue can only be solved by decreasing demand. As prices escalate some people (the poorest) will eventually withdraw from the market thereby lessening demand. The problem with is is that the sting of high prices falls disproportionately on the poor. The second point about this is that the huge profits that go to the oil companies are truly "windfall" profits. They are unlikely to invest these profits in anything that might alleviate short-term prices. The only thing the average person can do about it is to hope that he has oil company stocks in his retirement portfolio. This is one "flaw" in our current capitalist system.

The second "flaw" has to do with the issue of the pursuit of self-interest that is central to capitalism. This idea comes from Adam Smith who prior early in his career was a lecturer in Moral Philosophy at Glasgow. As such I suspect that Smith would have seen a distinction between the pursuit of self-interest and greed or avarice. This is a central problem that capitalism faces today. At what point does the unrestricted pursuit of self-interest deteriorate into something that harms instead of helps the people and therefore becomes criminal in nature? We know from Enron and the Savings and Loan scandals (among others) that this descent into criminal behavior can happen. Now, I'm not saying that a landlord doubling the rent for a senior citizen living on a pension is engaged in criminal behavior but such an action would certainly seem to be immoral from my point of view. The landlord is entitled to an increase but at some point increasing the rent just because you can is simply greed and the harm that it might to in individual cases is what could make it immoral.

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