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    More On David Sloan Wilson And The Invisible Hand Of Evolution
    By Massimo Pigliucci | September 27th 2008 05:52 AM | 40 comments | Print | E-mail | Track Comments
    About Massimo

    Massimo Pigliucci is Professor of Philosophy at the City University of New York.

    His research focuses on the structure of evolutionary

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    David Sloan Wilson, over at the Huffington Post, has replied to my criticism of his previous essay on why the so-called “invisible hand” guiding financial markets is, as he puts it, “morally, ethically, spiritually, physically, positively, absolutely, undeniably and reliably dead.” David and I have a good working relationship (he is one of the infamous “Altenberg 16”) and mutual respect, so the following is meant to be in the spirit of an open minded debate between two scholars. David agrees, contrary to many of our colleagues, that it is good for the public to see scientists honestly argue their diverging positions in public, so here it goes.

    First off, David claims that both conservative commentator Larry Arnhart and I “have objected to [David’s] declaration that the invisible hand is dead.” Arnhart has, I certainly have not. I completely agree that this pernicious idea has gone the way of the dodos in light of the events of recent years (at least from the Enron debacle on). I simply disagree that such a conclusion has anything whatsoever to do with hypotheses on the evolution of human morality and cognitive abilities.

    Wilson challenges my claim that evolutionary psychology cannot tell us much, as a science, about the evolution of social human behavior. He rhetorically asks “Would [Massimo] make the same claim about astronomy, geology, and paleobiology? Past events leave traces in the present that can be pieced together to produce solid knowledge.”



    Of course they do! I, like David, am an evolutionary biologist, and I am perfectly cognizant of the inferential power of historical research. But I am also well aware of its limitations. Astronomy, geology, paleobiology, as well as much of evolutionary biology, have plenty to say about historical events, and they are solid sciences. The case for the evolution of human cognitive (as opposed to physical) traits, however, is much more dicey.

    David wants a full account of the reasons for my skepticism, and he can find them in Chapter 7 of my book with Jonathan Kaplan, Making Sense of Evolution. Briefly, the problem comes down to three accidents of history that make it particularly difficult (though I never used the word impossible) for scientists to test historical hypothesis about cognitive adaptations in humans:



    a) We do not have a fossil record of the relevant behaviors (as opposed to, say, physical attributes like brain size);



    b) we do not have enough closely related species for a statistically sound phylogenetic comparative method to apply;



    c) it is irrelevant to measure natural selection on currently existing populations because the environmental conditions are radically different from those under which the traits of interest evolved.



    These problems do not apply in the case of several other species of living organisms, where one or more of the above conditions are satisfied, and the testing of adaptive hypotheses can therefore proceed on firmer ground. None of this, of course, means that evolutionary psychologists are wrong in their theories, it just means that their suggestions ought to be taken with a huge grain of salt, as arguments from plausibility, not established science.

    Wilson also mentions the fact that there are plenty of peer reviewed papers in evolutionary psychology, but I find this to be by far his weakest argument. Peer review is a necessary component of scientific practice, but it is only the beginning of the critical analysis of scientific claims, not the end. Plenty of wrong ideas (e.g., the ether theory) have succumbed despite once being published in peer reviewed journals, and I’m not even going so far as claiming that evo-psych’s ideas are wrong, just not firmly grounded in historical evidence!

    David’s more interesting point is that “all theories of human behavior require assumptions about an underlying human nature ... asking where the assumed propensities come from, the only plausible answer (barring creationism) is to provide an evolutionary account.” As he knows very well, I do not subscribe to creationist ideas, so why exactly is he bringing this up? I submit that his premise his incorrect: we do not need a theory of the origin of “human nature” (a concept in itself fraught with philosophical and scientific problems) in order to study the behavior of human beings in modern societies.



    I hasten to clarify that I am no simple-minded behaviorist, but I simply do not see what could possibly be added to modern cognitive science by speculations on whether certain behaviors evolved by natural selection. Whether they did or not (and as I pointed out above, it is exceedingly difficult to tell), we can quantify the behaviors, model them, and even make testable predictions about their consequences for individuals and societies.



    Since the issue here, remember, is what one ought to do with respect to market regulation, any scenario based on a possible evolutionary historical path rather than another is simply not that relevant.

    Finally, to the naturalistic fallacy (deriving an ought from an is), which I claimed both Wilson and Arnhart committed in their respective commentaries. David cites the extended comments of thinkmonkey on this blog to exonerate him from having committed the fallacy, stating that “I did not say that sustainable society is good because it evolved in our species.”



    Okay, there clearly is plenty of room for subjective interpretation here, and if David says that’s not what he meant, I’ll take his word for it. But if that is the case, why then does he start his reply to me with “my main argument against the invisible hand is based on fundamental evolutionary principles ... If there is anything that we can say with confidence, it is that individual selfishness does not automatically lead to adaptive societies.”



    Perhaps, but adaptation is a matter of biological fitness (survival and reproduction), which is not at all the same thing as morality and justice. If David doesn’t want to mix the two, why does he build an argument for a particular moral choice (we should regulate the markets so that they don’t wreak havoc on people’s lives) on the basis of a fact about the a-moral concept of biological adaptation? Once again, evolution does not have much to say about the current debate on Capitol Hill, and bringing it up doesn’t help either policy makers or the public at large.

    Comments

    Steve Davis
    Massimo, perhaps evolution does have something to say about the current debate on Capitol Hill. The crisis stems from an excess of individualism that has eroded social stability. The subject of Robert Ardrey's "The Social Contract" was the biological fitness that flows when group stability is balanced with individual creativity, which is basically what David is saying. One of the misconceptions regarding selfishness is that its origin is genetic. It's the survival instinct that's genetic, and the two are often confused. Most of our selfishness is a learned behaviour. A newborn child is so helpless, and its kinfolk are so focused on its needs that it spends the first few months of life under the understandable impression that it is the centre of the universe. As the child matures intellectually it slowly outgrows this learned attitude. A little of it always remains in varying degrees, but you can be sure that an adult displaying noticeable self-interest has not grown up. Perhaps a useful sign of intellectual maturity is a complete absence of selfishness.
    I completely agree that this pernicious idea has gone the way of the dodos in light of the events of recent years (at least from the Enron debacle on).

    If Enron disproves the free market, surely the Iraq War disproves the government? That's the kind of non sequitur reasoning you're using.

    My advice to aspiring economist Pigliucci: don't quit your day job.

    Better than David, at least -- Larry Arnhart's "incoherent" doesn't begin to do David's views justice. "Staggeringly non-sensical" is closer.

    I mean, seriously, don't you academic evolutionists ever stop and think that maybe you should learn the most rudimentary basics of economics before pretending to speak reasonably on the subject? Or could you at the very least e-mail these essays to a real economist before posting them?

    It embarrasses me to be visiting a "scientific" website with this kind of drivel.

    Steve Davis
    I can't agree with that comment. One of the problems we face as a society is that knowledge is becoming ever more specialised, so individuals have to specialise in order to get on top of a subject. The result is that many feel they should not comment outside areas of their expertise. When that becomes the norm we end up with technocrats running the show. When science impacts on social policy we should all get involved, scientists and non-scientists alike. As for the suggestion that economists should be consulted, are these the same economists that remained silent as sub-prime lending became normal investment practice? The same economists that pushed for deregulation of financial markets?
    First, I want to say that the last sentence of my post -- the one about the drivel -- was an accident on my part. I misunderstood how the preview/post thing works. I had actually decided not to post that. It was a little over-the-top. : )

    Anyway-

    One of the problems we face as a society is that knowledge is becoming ever more specialised, so individuals have to specialise in order to get on top of a subject. The result is that many feel they should not comment outside areas of their expertise. When that becomes the norm we end up with technocrats running the show. When science impacts on social policy we should all get involved, scientists and non-scientists alike.

    Yes, but it would be nice if people would take the time to understand social policy before they got involved, don't you think? I have a lot of respect for Kahneman and Tversky... Sloan and Pigliucci, not so much. Not on economic issues, anyway.

    As for the suggestion that economists should be consulted, are these the same economists that remained silent as sub-prime lending became normal investment practice? The same economists that pushed for deregulation of financial markets?

    I'm not sure economists were silent about sub-prime lending. This is not a subject I keep close track of, so you'll have to look up the guys who specialize in this kind of stuff and find out for yourself. (Unless you have a source?)

    But it does help to know that sub-prime lending was caused -- or at least helped along -- by government regulation. (Mankiw) Actually, it looks like Mankiw himself predicted the sub-prime mess. How about that, Steve?

    Also, there is no evidence, as far as I know, that deregulation caused the current mess. In fact, it probably helped. Cowen, Tabarrok

    Economics is not an intuitive subject, so it just doesn't make sense to have someone who hasn't studied it claim to speak scientifically about it.

    Gerhard Adam

    Economics is not an intuitive subject, so it just doesn't make sense to have someone who hasn't studied it claim to speak scientifically about it.

    That's true, but I would also argue that it isn't a scientific subject. It is a field that is so fraught with myths that it bears little resemblance to the reality it purports to model. One of the most obvious problems is the myth of the "free market". Despite the almost overwhelming evidence that markets aren't free and that even if one were to stretch the definitions, their "adjustments" are so extreme as to risk compromising the world economy. These are not the hallmarks of a usable working model. One of the other fallacies that permeates modern economic theory is the idea of virtually unlimited growth. The whole concept of selling debt is based on the fact that no one will ever be "stuck" with a bad debt. It's a form of financial Russian Roulette where no one ever expected there to be a bullet in the chamber. This particular practice is no different than the old days of exploiting the "float" in checking accounts. Until economics stops playing these kinds of games, there is little worthwhile that it can model.
    Mundus vult decipi
    Steve Davis
    Quite so Gerhard, economics is not a science. I think it was Truman who became so frustrated with the inability of economists to give advice without the escape clause of "On the other hand..." that he prayed for a one-armed economist. And when economists misuse science to justify anti-social economic policy, as in free market doctrine based on survival of the fittest, then people like Wilson and Pigliucci have every right to enter the debate, and deserve a pat on the back for doing so.
    Gerhard Adam
    One of the key problems in applying evolution to economic systems is the failure to realize that ALL systems will evolve based on the initial conditions and the inputs to that system. However, it does not follow that such a system is necessarily adaptive nor stable. Every time someone applies evolution to a systems analysis, they invariable gloss over the price of failure. In biological evolution, everyone understands that "failure" is marked by death or extinction. However, in social systems, just as economics, little discussion occurs surrounding this issue. If one wanted to use the biological corollary to today's economic problems, then we could be facing the financial equivalent of a mass extinction. However, unlike biology, there are few people that would be courageous enough to simply let such an event occur without realizing that any "correction" of this magnitude may well be far worse than the problem itself. Once intervention occurs, the model becomes biased and new "inputs" cause the markets to evolve in different directions than they otherwise would have. It is from this perspective that economic theory fails, because it only wants to stick by definitions when things work well, but wants to modify the rules when they don't. In truth, if biology were as subject to the selective application of rules as economics is, there would be no life on the planet.
    Mundus vult decipi
    ... You're both such philistines.

    First, you shouldn't confuse libertarian rhetoric with economics. There are many points where they agree, but there are just as many points where they don't, or where things are much more complicated than the average libertarian suggests. (Example: Paul Krugman)

    I find it ironic that both of you deny that economics is a science, while supporting evolutionary biology as a science. Which group has plenty of current evidence to study, plenty of opportunity to do experiments, basically an entire world of data, and which group is painstakingly piecing their evidence together from bits of bone in the ground?

    Economists are hired by businesses because, since they understand so much about markets, they can often make the business more profitable.

    Where are these amazing evolutionary psychologists who should be getting hired by businesses?

    In short, evolutionary psychology is almost entirely impractical and theoretical. That's not to say I dismiss it; I think it's cool stuff, but you guys have everything backwards.

    Besides, the two fields are similar enough that you can't dismiss economics without dismissing evolutionary biology. Both use game theory. If I'm not mistaken, ecological models use the same thermodynamic equations that make up supply and demand. Are you going to dismiss sociobiology and ecology now?

    Steve: I wonder what practical advice evolutionary biologists were giving at the time of Truman?

    free market doctrine based on survival of the fittest

    If you're talking about social Darwinism, then you've left the realm of economics. If you're talking about evolutionary economics (a la Michael Shermer), then you need to explain what this has to do with "anti-social economic policy". It's totally unrelated, as far as I can tell.

    Gerhard:

    If one wanted to use the biological corollary to today's economic problems, then we could be facing the financial equivalent of a mass extinction. However, unlike biology, there are few people that would be courageous enough to simply let such an event occur without realizing that any "correction" of this magnitude may well be far worse than the problem itself.

    Once intervention occurs, the model becomes biased and new "inputs" cause the markets to evolve in different directions than they otherwise would have.

    It is from this perspective that economic theory fails, because it only wants to stick by definitions when things work well, but wants to modify the rules when they don't.

    What? No, it doesn't.

    Before claiming that you know better than economists when it comes to the economy (with only ten or so minutes of thought), don't you think you should actually take the time to learn what economists think?

    What you've attacked here isn't economics; it's dumb.

    I wrote:

    Where are these amazing evolutionary psychologists who should be getting hired by businesses?

    In short, evolutionary psychology is almost entirely impractical and theoretical.

    Oops, I meant biology, not psychology.

    Gerhard Adam

    I find it ironic that both of you deny that economics is a science, while supporting evolutionary biology as a science. Which group has plenty of current evidence to study, plenty of opportunity to do experiments, basically an entire world of data, and which group is painstakingly piecing their evidence together from bits of bone in the ground?

    I'm sorry but that's even more of an indication of how poorly economics fares as a science. Gambling can quite readily be described by probability and mathematics, but that doesn't make it science. Similarly, with economics, there are certainly many mathematical models that can be employed to make some predictions regarding how trends may play out, but that hardly makes it science.

    Economists are hired by businesses because, since they understand so much about markets, they can often make the business more profitable.

    I would have to disagree since virtually everything in the market is based on individual reactions to events. Once again, there may be some reactions that are more predictable than others, but its still largely governed by happenstance. I will admit that there are some very clever financial people that can figure out unique ways to make money. However, those results have invariably proven to be problematic because they are fundamentally manipulative. Far too much market activity has been based around making money from money. Ultimately every economic model must recognize that some production needs to be present for this to work. It doesn't require much sophistication to appreciate the fact that without actually producing goods or services, economics cannot provide real growth. So what passes for growth was actually an illusion based on cleverness and not substance. This is demonstrated by the fact that illusions must always be adjusted (or corrected).

    Where are these amazing evolutionary biologists who should be getting hired by businesses?

    I modified your quote to include your correction, but it still misses the point. No one has suggested hiring evolutionary biologists for businesses. In fact, it is the exact opposite which has been proposed since evolution is NOT applicable to something as biased as market forces.

    Besides, the two fields are similar enough that you can't dismiss economics without dismissing evolutionary biology. Both use game theory. If I'm not mistaken, ecological models use the same thermodynamic equations that make up supply and demand. Are you going to dismiss sociobiology and ecology now?

    The fields aren't similar at all. All systems evolve over time, however that doesn't make evolutionary biology the model by which they need to be evaluated. Evolutionary biology has very specific mechanisms by which change occurs, and it has very specific parameters around which change can happen. Economics is under no such constraint since it is a purely human invention. Whatever direction is taken, the model can have variables modified that can completely modify outcomes. Therefore, while you might be able to assess various reactions as probabilities, there is little that is predictable since the parameters governing behavior are either unknown or uncontrollable. It would be a stretch to the extreme to apply thermodynamics to economics and game theory is certainly mathematical, but that doesn't mean its subject is.
    Mundus vult decipi
    And each of these criticisms of economics is just as, if not more, applicable to evolutionary biology.

    For example:

    "It would be a stretch to the extreme to apply thermodynamics to [ecology] and game theory is certainly mathematical, but that doesn't mean [sociobiology] is."

    "[Economics] has very specific mechanisms by which change occurs, and it has very specific parameters around which change can happen. [Evolutionary biology] is under no such constraint since it is a purely [natural process]."

    I'm sorry, it's pretty obvious that you don't know what you're talking about. Again, economics -- not an intuitive subject. And it's even less intuitive for temperamental socialists.

    So you've got a choice: ditch evolutionary biology or accept economics.

    Gerhard Adam

    "It would be a stretch to the extreme to apply thermodynamics to [ecology] and game theory is certainly mathematical, but that doesn't mean [sociobiology] is."

    Actually you might consider researching negative entropy a bit. I'm not clear on why you're so intent on evolutionary biology, but I feel an agenda coming on.
    Mundus vult decipi
    I'm using evolutionary biology because the theories used by the two fields are very similar.

    Also because most economics-deniers accept evolutionary biology unhesitatingly.

    And also because I think economics has better empirical support than evolutionary biology.

    Thus, evolutionary biology is the ideal example when arguing that economics is a science.

    The easiest way to get rid of economic creationism, IMO, is to show that it's practically the same as -- but even dumber than -- biological creationism.

    And I want to address the thermodynamics issue in more detail.

    It just so happens that I have written an essay that explains the basics of supply and demand, applies it to a popular government policy, and shows why it has detrimental effects, contrary to common sense. The essay is here.

    This is a pretty basic application, as far as economics goes. It's freshman introductory course kind of stuff.

    Now I want you to read through this a few times (it's pretty short), get a good sense of what I'm saying, and then come back and tell me how this is unscientific. Except this time you'll have a better sense of the subject, so hopefully your critiques will be more relevant.

    Gerhard Adam
    I'm sorry, but it's not only unscientific, its downright parochial. You are right about one thing .... it most definitely is freshman economics, as is the example you're using. It's also pretty clear that you don't know what thermodynamics is about, since you failed to show any connection beyond mentioning it in your first sentence. I also found your understanding of emergencies quaint. So let's see if I understand this properly. Your solution to handling natural emergencies, like hurricanes, is to let a couple of guys in pick-up trucks deliver goods because, in the absence of "price-gouging laws", they would be motivated to make a profit and thereby eliminate the need for government assistance. Of course, I'm not sure how people would pay for such goods since they probably don't have much cash on hand. Since banking services aren't available they can't get money, so unless these guys are traveling around with their portable Visa/MC machines, there won't be many sales (oh forgot... there's no power). Since you've extended this argument to include basics, such as food and water, perhaps you could answer the question of what happens to people that can't afford them? Oh, I know ... that's my bleeding-heart socialist mind at work, but somehow I think that when taxpayers support a government there is a reasonable expectation that same government should respond during emergencies, but then again, that's just me. I'm also quite curious as to how you thought search and rescue, as well as body recovery would be conducted in a "free market" system. The problem with such simplistic supply and demand models is that it is usually based on the most trivial types of examples, and draws the most unsubstantiated sweeping conclusions from them. As an example, in the paper you had written, you drew only a singular conclusion regarding gas supplies. No alternate explanations were offered (as if none could exist), and no review of claims that may have been made and why they had no credence. You also failed to indicate where the incentive was for profit if suppliers had larger unfettered markets that weren't hit by the disaster. In such scenarios, there is a compelling argument that can be made to avoid such areas, since the profitability isn't nearly as large as that available elsewhere. In this situation, the stricken area would have no supplies available. As I mentioned earlier, there is no mention about managing access to food and water, beyond overly simplistic pronouncements that somehow the free market would handle this (once again without evidence). There is no question that there is plenty of anecdotal evidence of individuals that can make money in specific niches and specific circumstances, however this does not make an economic model, nor does it provide insight into disaster management. In short, this simplistic concept of supply and demand only applies to village economies and doesn't even come close to addressing the real world. In other words, your graph isn't even a reasonable approximation since it shows the entire supply/demand relationship as a simplistic linear one.
    Mundus vult decipi
    Gerhard Adam
    In your paper you cite gas shortages in Tennessee, Arkansas, and North Caroline as if these are totally inexplicable events that couldn't possibly have an alternative explanation beyond price gouging laws. You even go so far as to suggest that any alternative explanation is nearly "impossible" to achieve. However, let's consider that the pipelines supplying Tennessee (just as one example) were only operating at 25% capacity. There were 15 Gulf Coast refineries closed because of the hurricanes, and a shortfall in gas inventories because of back-to-back hurricanes. Do you really mean to suggest that there are no plausible explanations for why a shortage may have occurred? When you couple this with the practice of hoarding which can contribute to shortages it isn't a difficult scenario to envision. However, I will concede that higher prices may inhibit some of the hoarding practices, but it was hardly the primary factor in why there were shortages as described above. Of course, the ultimate problem is that the market can't react nearly fast enough to have much influence in actual behaviors. The real issue with price gouging is that it does nothing to control the supply side and is simply an attempt at profiting over an unfortunate circumstance. This is simply unacceptable for a commodity that is still being subsidized by taxpayers. Also the simplistic model of supply and demand presumes that demand is adjustable simply by the price. However, this isn't true. If an individual needs 10 gallons of gasoline to drive back and forth to work for a week, then the demand is constant and will be largely unaffected by the price in terms of curbing demand. If price goes sufficiently high to where it can influence behaviors, it will also tend to have numerous unforeseen consequences. For example, the simple supply/demand graph suggests that it is easy to remove our dependence on foreign oil .... all it would take is raising the price of oil to an astronomical level that would make it largely unaffordable. There's absolutely no question that demand would diminish. However, in pursuing the path of less oil dependence in this fashion, we will have decimated our economy and taken many hard years to reach such an accommodation. It could certainly be done, however, this is where economics always gets into trouble. It can offer a simplistic explanation for certain phenomenon, but once things begin to change radically it cannot predict any outcomes and it always fails to take into account the non-financial costs of "adjustments" and "corrections". One of the primary problems with the supply/demand graph is that is assumes a starting point of 0 for demand, which is impossible except for luxury items. In addition, there are no caps for demand or supply (which there clearly is). There is a fundamental failure to take into account the smallest unit of demand which is plausible for a given supply (ie. I can't buy just one drop of gasoline). The graph also presumes that there is an explicit relationship between the supply/demand of a particular commodity instead of recognizing that there may be multiple markets that influence both and therefore no linear projection is possible. There is also no indication of when a demand may be transferred to a different supply (or even action). For example, you may raise prices to ruinous levels, but at some point you have to consider what happens if people simply decided to take your goods from you (like in a revolution). In short, economics doesn't lend itself to such simple pronouncements.
    Mundus vult decipi
    In your paper you cite gas shortages in Tennessee, Arkansas, and North Caroline as if these are totally inexplicable events that couldn't possibly have an alternative explanation beyond price gouging laws. You even go so far as to suggest that any alternative explanation is nearly "impossible" to achieve.

    However, let's consider that the pipelines supplying Tennessee (just as one example) were only operating at 25% capacity. There were 15 Gulf Coast refineries closed because of the hurricanes, and a shortfall in gas inventories because of back-to-back hurricanes.

    Do you really mean to suggest that there are no plausible explanations for why a shortage may have occurred?

    When you couple this with the practice of hoarding which can contribute to shortages it isn't a difficult scenario to envision. However, I will concede that higher prices may inhibit some of the hoarding practices, but it was hardly the primary factor in why there were shortages as described above.

    Do you deny that prices could have risen high enough to stave off shortages? That seems to be what you're arguing. Let's imagine the price of gas is infinitely high. Will there still be shortages? If not, then my argument stands -- the shortage was the result of prices being too low. Maybe a hurricane indirectly caused it, but the low price is the direct cause.

    Of course, the ultimate problem is that the market can't react nearly fast enough to have much influence in actual behaviors.

    Economists provide evidence when they make empirical statements like these. That's why they're scientists, and you aren't.

    The real issue with price gouging is that it does nothing to control the supply side

    Again, a scientist would provide evidence for this empirical claim.

    and is simply an attempt at profiting over an unfortunate circumstance. This is simply unacceptable for a commodity that is still being subsidized by taxpayers.

    Far from being subsidized, there's actually a hefty tax on gasoline. But really, this is irrelevant. Do you want shortages or not?

    Also the simplistic model of supply and demand presumes that demand is adjustable simply by the price. However, this isn't true. If an individual needs 10 gallons of gasoline to drive back and forth to work for a week, then the demand is constant and will be largely unaffected by the price in terms of curbing demand.

    The model is of AGGREGATE demand. This means, while Joe Worker might not decrease his consumption of gas, you've still got plenty of other people who will. Susie Shopper might not take a trip to the mall this week. Bob Worker might decide to move closer to his job.

    But what if the demand doesn't decrease? (The technical term here is "inelastic".) Now Fred Gasman gets worried -- it looks like he's going to run out of gas, and that means he's losing money. So he increases the price once again. This goes on until supply = demand.

    Once again, what you are critcizing isn't economics; it's dumb. Economists are four steps ahead of you.

    the simple supply/demand graph suggests that it is easy to remove our dependence on foreign oil .... all it would take is raising the price of oil to an astronomical level that would make it largely unaffordable. There's absolutely no question that demand would diminish. However, in pursuing the path of less oil dependence in this fashion, we will have decimated our economy and taken many hard years to reach such an accommodation.

    I don't see why this is relevant. If, say, the government implements an alternate plan that makes us use less gas, we'll suffer the same decimation, except it'll be distributed differently.

    Also, most economists support higher gas taxes for exactly this reason, and for curbing global warming (technical term: Pigovian taxes).

    It could certainly be done, however, this is where economics always gets into trouble. It can offer a simplistic explanation for certain phenomenon, but once things begin to change radically it cannot predict any outcomes and it always fails to take into account the non-financial costs of "adjustments" and "corrections".

    Are you talking about menu costs? If so, economists are, again, way ahead of you.

    If not, if you're talking about, say, macroeconomic changes, then, once again, you're criticizing dumbness, not economics.

    Wait -- I think I'm misunderstanding you. What "non-financial costs" are you talking about, and what do they have to do with economics models?

    One of the primary problems with the supply/demand graph is that is assumes a starting point of 0 for demand, which is impossible except for luxury items.

    If the price is infinite, how can there be a non-zero demand? I think you're misreading the graph.

    In addition, there are no caps for demand or supply (which there clearly is).

    There's no reason that couldn't be represented on the graph. The graph is there to be used, you know?
    Also, I'm not sure "cap" is the word you want. Is there a government-enforced cap on how much gas you can buy? Or how much you can sell? You're probably trying to say that supply can be inelastic. I don't know what you mean about demand.

    But that doesn't effect my conclusions.

    There is a fundamental failure to take into account the smallest unit of demand which is plausible for a given supply (ie. I can't buy just one drop of gasoline).

    That might be important if I were talking about drops of gasoline.

    The graph also presumes that there is an explicit relationship between the supply/demand of a particular commodity instead of recognizing that there may be multiple markets that influence both and therefore no linear projection is possible.

    No, the substitution effect and the income effect don't disprove supply and demand. At the most, it affects the demand curve.

    Economists are still way ahead of you.

    And it's a good thing too -- if economics were as impossibly complex as you suggest, humanity would be doomed. The market crashes: what do you do? Might as well just commit suicide now; mere mortals can't fix something that complex.

    For example, you may raise prices to ruinous levels, but at some point you have to consider what happens if people simply decided to take your goods from you (like in a revolution).

    At that point, you go out of business.

    Simple, right?

    In short, economics doesn't lend itself to such simple pronouncements.

    Which is why economists don't make them. Smart, don't you think?

    Seriously, talk to an economist about this stupid stuff before assuming that they're all simple-minded fools. The economist will surprise you.

    Steve Davis
    For all the many faults of the classical economists, they at least had the honesty to refer to their craft (that's all it was) as Political Economy. Their program was a political program. They were attempting to stay in control of the new political realities that emerged from the Industrial Revolution. That program is still in place as technology introduces new realities in a seemingly unending stream. The claim that economics is a science is a part of that program, an attempt to give the impression of impartiality, of compliance with natural laws. But the intimate relationship between economics and politics can be seen still in the ideological push for the sale of public assets that has destabilised so many societies around the world, public assets providing some of the balance needed between social goods and individual creativity. I was intrigued by the reference to Paul Krugman. Was he given as an example of a libertarian or an economist? It doesn't really matter, as Krugman has done a turnaround, from cheerleader for globalisation to critic. Was he correct as a cheerleader, or is he correct now? Maybe economic science has the answer.
    Steve Davis
    Skeptikos, I've just read your article on supply and demand, and while it's quite well written it basically amounts to the simplistic argument "Let the laws of economics work and we'll all be happy." And all the while I was thinking "this bloke's just a whisker away from being an economic extremist." Then I read your profile in which you included your favourite authors, and it all became clear. Bastiat? Milton Friedman? Ayn Rand? Herbert Spencer? Mate, you gotta get out more!
    Let's see if I can fit all of my responses into one comment-

    The thermodynamics is in the supply and demand graph at the bottom. You're right, thermodynamics isn't my forte, I just know that's where the model came from.

    In my experience (I ran a small, inconspicuous price-gouging/ice-selling operation for a day), people weren't short of cash. But you could always use checks. But even if you couldn't, price-gouging laws still aren't justified.

    To clear up the government assistance issue: I wasn't attempting to argue that there shouldn't be government assistance, only that anti-price-gouging laws should be repealed. It just so happens that I think government suppliers would feel useless if we did this, but that's beside the point. That's not what I'm trying to argue.

    I didn't review competing claims (except the poorly-thought-out "extreme circumstances" view) because, as far as I know, there aren't any.

    You (Gerhard) claim that suppliers would avoid the crisis area. This is EXACTLY what I'm saying. This is why it's GOOD for the price to increase -- it's attracts the supply that would otherwise never come.

    "there is no mention about managing access to food and water, beyond overly simplistic pronouncements that somehow the free market would handle this (once again without evidence)."

    The free (more or less) market does just that every day. Then, coincidentally, it fails on days where gouging laws come into effect. Doesn't that strike you as strange? I know correlation doesn't imply causation, but according to the best economic models around today, it IS causation.

    "In short, this simplistic concept of supply and demand only applies to village economies and doesn't even come close to addressing the real world."

    Was America a village economy in 1973 when Nixon implemented price ceilings on gas, and shortages resulted?

    Steve:
    "For all the many faults of the classical economists, they at least had the honesty to refer to their craft (that's all it was) as Political Economy. Their program was a political program."

    They weren't more honest, the two terms mean the same thing.

    "But the intimate relationship between economics and politics can be seen still in the ideological push for the sale of public assets that has destabilised so many societies around the world, public assets providing some of the balance needed between social goods and individual creativity."

    I'm not sure you're making sense.

    "I was intrigued by the reference to Paul Krugman. Was he given as an example of a libertarian or an economist? It doesn't really matter, as Krugman has done a turnaround, from cheerleader for globalisation to critic. Was he correct as a cheerleader, or is he correct now? Maybe economic science has the answer."

    Krugman was an example of a non-libertarian economist. Joseph Stiglitz is another example. Brad DeLong is a third. I could go on; it's a long list.

    The average economist is not a pro-market ideologue, he is a slightly libertarian Democrat. He's voting for Obama, while secretly hoping that Obama passes NAFTA. He thinks Clinton was a swell guy.

    I wasn't aware that Krugman had done a turnaround. I've read a few of his older books and have been impressed. I have a very difficult time imagining him defending the anti-globalization position, after writing such scathing critiques of it. See Pop Internationalism, The Accidental Theorist, or this essay or this essay. His view is (was?) basically that international trade is usually a good thing, though it's not important enough to deserve all the attention it gets from the press. Since this is his area of expertise, I suspect he's right.

    By the way, I think this essay of his would clear a lot up for you (and Pigliucci) -- the position he attacks is similar to your own. Also this one.

    I'm a big fan of Paul Krugman.

    "Skeptikos, I've just read your article on supply and demand, and while it's quite well written it basically amounts to the simplistic argument "Let the laws of economics work and we'll all be happy." And all the while I was thinking "this bloke's just a whisker away from being an economic extremist.""

    That's fine, but I was looking for an actual critique. You know, WHY is it simplistic or unscientific?

    "Then I read your profile in which you included your favourite authors, and it all became clear. Bastiat? Milton Friedman? Ayn Rand? Herbert Spencer? Mate, you gotta get out more!"

    I AM very libertarian, but that's beside the point. All I'm arguing here is that economics is a science. If you accept that, you'll still have plenty of opportunity to argue against libertarianism.

    By the way, have you ever read anything by Bastiat? His book Economic Sophisms is very entertaining, and most of it is still valid today. It's very sarcastic and well written, much like Krugman's work. It's online here.

    Gerhard Adam

    You (Gerhard) claim that suppliers would avoid the crisis area. This is EXACTLY what I'm saying. This is why it's GOOD for the price to increase -- it's attracts the supply that would otherwise never come.

    There is NO supply. That's the point. The shortage was due to pipelines running well below capacity and not price gouging. The shortage didn't occur because of prices.

    The free (more or less) market does just that every day. Then, coincidentally, it fails on days where gouging laws come into effect. Doesn't that strike you as strange? I know correlation doesn't imply causation, but according to the best economic models around today, it IS causation.

    Where do you think that anti-gouging laws are responsible for any of this? In cases of shortages, it is usually a combination of hoarding and shipment schedules.

    Was America a village economy in 1973 when Nixon implemented price ceilings on gas, and shortages resulted?

    You're placing far too much value on single causes. The 1973 shortage was driven by the oil embargo which was exacerbated by the price controls. This is what I mean by overly simplistic.
    Mundus vult decipi
    You're completely misunderstanding me. (Frustrating!)

    Of course hurricanes and such indirectly cause shortages, but that's beside the point.

    The point is, if the price were raised high enough, there would be no shortage, REGARDLESS.

    Ultimately, shortages are caused by overly low prices.

    The claim that there was no supply is untenable. Gas stations, at least in the northwest Houston area (where I'm living), would get a gas shipment, and run out a few hours later. Then a day or two later, they'd get a gas shipment, and run out a few hours later.

    There IS a supply, it's just being distributed inefficiently (whoever gets there first or can afford to wait in line for hours gets the gas, as opposed to whoever is willing to pay a high price for it), and the price signal has been disengaged from the economic realities -- so those money-loving folk in the better-off surrounding areas don't have an incentive to bring supplies to be sold where they are most needed. They just sit around and watch the news all day. (This is also from personal experience -- I ditched my electricity-deprived home for a relative's house, then sat and watched the news all day. If it weren't for the gouging laws, I most definitely would have been delivering supplies all day; I could have used the money.)

    I'm pretty sure what I just wrote was the same thing I wrote in the essay. Bah!

    Gerhard Adam

    There IS a supply, it's just being distributed inefficiently (whoever gets there first or can afford to wait in line for hours gets the gas, as opposed to whoever is willing to pay a high price for it), and the price signal has been disengaged from the economic realities -- so those money-loving folk in the better-off surrounding areas don't have an incentive to bring supplies to be sold where they are most needed.

    You seem to have overlooked the simple fact that the pipeline was operating at 25% capacity. While there is a supply, it is a limited supply and as such there is a shortage. Now you can argue that you don't like the means of distribution, but then the issue of higher prices is simply attempting to shift the distribution using a different set of parameters. Currently distribution was determined by those that had the patience to wait for hours in line. You simply want to change that equation to those that have the financial means to secure the limited supply. Neither of these methods increases supply they simply change the bottleneck points based on individual preferences. Like it or not, an individual that can't get gas whether its because he's too late, or doesn't want to wait in line, or can't afford the price .... in the end it's still a shortage and no amount of manipulation will change that. One of the problems is that if price alone could be used to create such incentives, then you have a high probability that you will artificially induce shortages in areas that were not originally experiencing a problem. While prices can certainly be employed when it's necessary to create incentives, your suggestion that people had plenty of gas but were simply too lazy to deliver it isn't borne out by the facts. Another point to consider is that the transportation of fuel is not simply a casual enterprise that one ventures into on a whim. Therefore even if prices were to follow whatever trend you elected, the supply would still be down and delivery would still be spotty or non-existent.
    Mundus vult decipi
    "You seem to have overlooked the simple fact that the pipeline was operating at 25% capacity. While there is a supply, it is a limited supply and as such there is a shortage."

    For some reason you're being incredibly dense on this topic, Gerhard. So let me state this logically:

    A limited supply is not sufficient for a shortage. In fact, it's not even necessary.

    Overly low prices are both necessary and sufficient conditions for shortages.

    Shortages logically CANNOT occur if the price responds normally to consumers' demand. Decreased supply is both unnecessary and insufficient for a shortage.

    This is something that, in order to deny, you'd have to make a lunatic assumptions about reality- that people would be spending infinite amounts to buy gas, because demand is perfectly inelastic.

    In normal terms, no matter how tight the supply is, prices can always go up to compensate-- all the way up to infinite, if they have to. Therefore shortages are always the result of overly low prices. It doesn't matter what the indirect cause is, the only thing that can create a shortage is a price that isn't high enough to make people conserve resources. You can have a booming gas industry, but if you create a price ceiling below the market price, there will be shortages. Contrariwise, you can have a decimated gas industry, but without a price ceiling, high prices will prevent shortages. So changes in supply and demand are irrelevant, except as indirect causes of shortages. The important thing is the price.

    Having said that, if you continue to deny this, I'm not bothering to respond.

    As far as distribution goes, you make a good point. The price method works well in the rest of the economy, and that seems like good prima facie evidence in favor of my view, but maybe a Soviet-style distribution would be fairer.

    You say neither method will increase the supply. You are partially right. If you look at the aggregate supply, in the short term, the supply won't change. But if you look at the local supply, it WOULD change. The entire world is not experiencing a crisis. The supplies can still be redistributed from the non-crisis to the crisis areas, and this is easiest done with price signals.

    It's unlikely that this would cause shortages -- shortages? I mean raise the price by a lot -- in non-crisis areas. Let me demonstrate why with an example:

    Let's say something improbable happens -- all the people who want to deliver supplies live in the same area. They all go to the same local stores to buy supplies, and prices rise in response to the demand. Suddenly, prices are the same in both areas (their area and the crisis area), and the profit motive disappears! But these would-be deliverers are crafty, and they find a way around this -- they drive to a different area, where prices are lower, buy the supplies, and THEN they deliver them, still making a nice profit.

    The end result of this incentive to buy where the prices are low and sell where they're high is that prices are evened out. The prices in crisis areas go down because more supply is brought in; the prices in non-crisis areas go up because more is being bought there. The technical term for this is arbitrage. It's usually used in financial contexts, but this is a valid example as well.

    Now it's hard to tell if the area my relatives were in was better supplied than the one I was in, because they were having shortages as well. I got the impression that the shortages weren't as bad there, so, without gouging laws, the prices would have been lower than in my area. But that's not reliable data, so let's assume they would have been the same.

    I still could have used some money, so I would have been wiling to travel (also, I was pretty bored watching the news). Now, if I thought I could make a decent profit buying supplies somewhere within a 100 mile radius, I probably would have. It's seems improbable that I wouldn't be able to find lower prices within that distance. (If they were as desperate 100 miles away, why wasn't FEMA helping them as well?)

    Gas, in my hypothetical situation without unnecessary restrictions on sellers, is something that definitely could be delivered on a casual whim. You buy some 5-gallon containers, fill them up with gas, stuff them in the back of your truck (I would have used a minivan, but whatever), and drive them down to Houston. Just as I described in the essay.

    You see how creative people can get when money is at stake? I don't think FEMA would ever have thought of it.

    Anyway, congratulations, you're starting to think like an economist. That "artificially induce shortages" bit was pretty perceptive, and the "supply is inelastic" [my terms] argument is probably the strongest one for gouging laws -- unfortunately for you, it's not true in this case, at least not at the local level where it matters. But it was a respectable attempt. If it were true, I'd be reduced to arguing that price rationing is better than line rationing, which I would guess is practically always true, but I would have been in a much more vulnerable position, debate-wise.

    You almost had me.

    Gerhard Adam

    Shortages logically CANNOT occur if the price responds normally to consumers' demand. Decreased supply is both unnecessary and insufficient for a shortage.

    Sorry but that's the definition of a shortage. However, I understand that your point is that, in total, the supply can be sufficiently "diluted" to avoid specific shortages by redistribution driven by prices. There are a couple of different scenarios which need to be examined to see how this would actually work. In the simple case, of a guy just loading up a truck with some gas cans for resale, there is no problem since the localized effect you're referring to could work. Without meaning anything derogatory, this is analogous to the scalper for concert tickets. A small but finite resource is sold competitively to whoever wants the resource bad enough. However this doesn't occur on a large enough scale to effect the outcome, so it doesn't really count for much. Another case that becomes problematic is that the distributors have contractual obligations to gas stations that must be honored and those independents that are looking for deliveries are already competing based on price. Once such deals are in place, they can't simply be broken by the "profit motive" regardless of how lucrative it might be. There is nothing illegal about adding costs to an existing price based on market demand so that wouldn't fall into the price gouging argument. However, let's consider what would happen if this were driven solely by price (without contractual considerations). In this case a 3000 gallon delivery slated for one gas station goes to one where the prices are higher. If a sufficiently large enough price differential existed, then it would simply create a shortage in the original gas station. Prices would have to rise there to remain competitive on the delivery schedule. This would occur because there is a real shortage of resource, and there are no competitors that could undercut the demand. For prices to stabilize, there would have to be a surplus in one location that could be redistributed to another for profit, so that overall they would tend to return to "normal" eventually. However, what determines "normal"? This would be determined by enough competitors having access to sufficient resource to meet the demand so that resellers have a real choice in who to do business with. However, let's look at the issue of price gouging itself. Part of the question, of course, is who is being accused of being guilty of it? Throughout the supply chain there are many factors that can influence costs, however, as you said, they are "smoothed" out by operating in more than just the distressed area, so there is no compelling reason to selectively raise prices (except where additional expenses are actually incurred). This leaves the most noticeable part of the supply chain .... the gas station. The gas station cannot influence distribution and there are no profits made here that make their way back up the supply chain. Therefore price gouging doesn't do anything except provide profits for the reseller. It doesn't affect supply, except by redistributing it to the highest bidder. It doesn't shift supplies. Suppose we took two gas stations using extreme examples. Each with 3000 gallons of gas, where one charges $100/gallon, while the other gives it away for free. In the latter case, it is obvious that the 3000 gallons would be given away on a first come, first serve basis and eventually the station would run out. If we include hoarding, then it may run out sooner, but eventually the 3000 gallons would be gone to "X" number of people. If we look at the other gas station, only one of two things can happen. Either people will willingly pay the $100 per gallon, in which case the distribution will be identical to that of the free station, albeit with people that have more money. However, if there aren't enough people that can or will pay that price, the gas will simply sit in the underground tanks. In other words, it might as well not exist. You could argue that pricing has produced a "shortage", or a "surplus" depending on your perspective, but it would be perverting the meaning of the words to apply it in this situation. If people can't afford to buy it, then its a "shortage", however if you wait long enough for people to pay for it, then it's a "surplus". The first case is simply redistribution and does nothing regarding any "shortage" beyond changing who actually receives the goods. In the latter case, the supply is actually being hoarded, in effect, since the market won't accept the price. As I'm sure you'll point out, the price could then be dropped until the market responds at which point the sales would continue. The point remains the same, since in neither instance is there any effect on the supply available from the perspective of gas station pricing. So for your argument regarding price gouging to hold true, you would have to show that such laws were influencing the suppliers and distributors in their decisions, since the gas station owners couldn't affect the outcomes. Remember it isn't illegal to set prices according to real business costs, expenses, or damages (or even what the market will bear as long as it's not discriminatory).
    Mundus vult decipi
    Skeptikos
    When suppliers run out, that is a shortage. By that definition, the economics argument is necessarily true. I'm not going to say anything else on this subject. What matters for market prices is not the costs of doing business, but supply and demand. If a law dictates price based on anything other than this, it can result in shortages or surpluses. You say it's not illegal to set prices according to what the market will bear, but this is flat wrong. Gouging laws would serve no purpose if that were true. But I'm getting tired of your apologetics. When you get a school of economic thought to agree with you, maybe I'll take you seriously. Until then, I just provided a link to Greg Mankiw's textbook in response to Steve. Textbooks have more patience than I do; you should go through that if you're really THAT convinced that you're right.
    Gerhard Adam

    You say it's not illegal to set prices according to what the market will bear, but this is flat wrong. Gouging laws would serve no purpose if that were true.

    Most gouging laws only come into effect when the governor has declared a state of emergency. Secondly, don't confuse the laws with price gouging and those with monopolistic practices (i.e. price fixing).
    Mundus vult decipi
    Skeptikos
    Emergency: That doesn't change anything. The only time they're actually relevant is during emergencies. When we get hit by hurricanes, that's when gouging laws do harm; that's also when they're in effect. Monopolies: I'm not seeing the connection. Gouging laws don't allow sellers to charge what the market will bear. If monopoly laws do the same thing, that's redundant. I guess I would argue that they should be abandoned during times of emergency, as well.
    Gerhard Adam

    When suppliers run out, that is a shortage.

    No .. that is nothing, since there is literally no supply.
    Mundus vult decipi
    Skeptikos
    That's how the word shortage is used by economists. Just like in the graph- when demand is greater than supply, there is a shortage, i.e., sellers run out. I'd prefer you use the word the same way. Or, if that's asking too much, you can go back through my posts and replace "shortage" with whatever word you think is better. Economists tend to use "scarcity" the same way you appear to be using "shortage". Maybe you could replace it with that. Either way, I'm not going to debate definitions with you (this looks a lot like a stalling tactic to me), so you need to find some way around this.
    Skeptikos
    Out of curiosity, Gerhard, do you still think economics isn't a science, or are you only arguing against my gouging essay? Ignoring the "shortage" confusion, I think we've argued that subject as far as we can go, without doing real-world research. I think individuals delivering supplies in the back of their trucks would be a significant factor in the supply; you seem to be less than impressed with that. Assuming inelastic supply, I'd prefer price rationing, while you'd prefer people wait in line. These are legitimate disagreements-- though I can't imagine why you think it isn't worth paying money to get rid of the lines. : ) If you've come to terms with economics as a science and if we can get the shortage stuff straightened out, I'd be fine leaving the discussion here.
    Gerhard Adam

    If you've come to terms with economics as a science and if we can get the shortage stuff straightened out, I'd be fine leaving the discussion here.

    OK .. I'm prepared to concede that your argument about economics as a "science" has merit. Let me explain my problem with the pricing scenario though. Since we're dealing with large corporations and multiple layers in the supply chain, this has some bearing on your scenario. Presumably (just as your example of supply and shortage), the business of the corporation is spread out over a sufficiently large area, so that a decline in one area is offset by normal (or better) business elsewhere. Therefore, there is really no compelling reason to raise prices beyond those that cover incurred expenses for the problem. Similarly once the distributors get their gas supplies, then it's pretty much business as usual, except for the expenses (or losses) that may have been incurred which will be recovered by price adjustments. At every step of the process, this would be the situation, since once each layer was satisfied, it becomes business as usual. The "shortage" only occurs at the consumer level, so the gas station owner has no legitimate reason to raise prices beyond those that have been passed on to him unless he's engaging in "social engineering". In other words, using prices to elicit a certain behavior. It certainly doesn't matter to the gas station owner whether he sells gas to the guys waiting in line, or to people with money, or to one individual. At the end of the day it's all one and the same. However, if the station owner elects to arbitrarily raise prices, he will certainly affect behavior but he will have no real effect in the market since he isn't responsible for distributing the resource. My point is that contrary to the market forces which would influence the distribution of resources based on price, the actions of the station owner would have no such effect. In a way, he could actually be hurting those farther up the supply chain by selling less gas and therefore distributing less revenue up the chain. The actual consequences beyond simply "engineering" behavior are to create the illusion that demand has been satisfied (since presumably his supply is lasting longer because of the higher prices). In fact, one could argue that he has virtually no incentive to lower prices, since by keeping the supply under such control, the feedback to those higher in the supply chain is that there is no difficulty, so therefore less fuel would be distributed to that location. I agree that prices will certainly affect behaviors, and by those changes, the "demand" for resources will change. However, if that information is never fed back to the actual suppliers, then the market will fail to react since the "shortage" or "surplus" is never reflected back.
    Mundus vult decipi
    Skeptikos
    I agree with you up to here:
    The "shortage" only occurs at the consumer level, so the gas station owner has no legitimate reason to raise prices beyond those that have been passed on to him unless he's engaging in "social engineering". In other words, using prices to elicit a certain behavior. It certainly doesn't matter to the gas station owner whether he sells gas to the guys waiting in line, or to people with money, or to one individual. At the end of the day it's all one and the same.
    Presumably, it does matter very much to him, since each of these scenarios brings a different amount of profit. It seems likely that he wants to make as much money as possible -- maybe he's saving up for his kid's college, a new car, he needs money to pay bills, whatever -- and to do this he needs to raise the price to the point where supply = demand. If the supply is less than the demand, he can raise the price and still sell everything, but make a bigger profit. Basically he's being paid to increase the price. If he has the price too high, then he won't sell everything, and he loses money. It's not like there's any reason he wants to have extra gas sitting around, what he wants is money. So instead of letting the gas sit there, he lowers the price a bit and sells it off. Again, he's basically being paid to decrease the price. Wait, there is a bit I disagree with before that quote. You say "Therefore, there is really no compelling reason to raise prices beyond those that cover incurred expenses for the problem." It doesn't really matter if there's a compelling reason to raise prices, in the end what determines the price is supply and demand. It's not that the people in charge are evil (well, I guess they could be, ha), it's just that they have a financial incentive to change the price in response to that, regardless of their incurred expenses. There may even be times when they don't make up for their expenses, and they keep the price low anyway, because they would lose even more money if they raised the price. So incurred expenses don't factor into the price at all -- at least, not in this kind of direct way. This is what most of economics is -- figuring out the incentives a situation creates, and predicting behavior from that. If someone tried to predict the behavior of one person in particular with these kinds of models, he'd probably fail miserably, but it works pretty well for larger groups of people. It turns out that in a system of property rights and trade, the simple supply-and-demand model predicts that each individual will have an incentive to serve society, by pleasing customers. There are actually mathematical proofs of this, though I don't know them off the top of my head. (I'm sure the reasoning is explained in Mankiw's textbook, if you're curious.) These incentives are what Adam Smith was referring to when he talked about the invisible hand. Obviously, that's a simplistic model -- it doesn't take into account menu costs, imperfect competition, public goods, and so on -- but it still has relevance for much of our economy. Think of all the industries that you take for granted where the government isn't heavily involved (health care doesn't count, because the government's very involved in that). They almost always work pretty well, because that's what the incentives lead them to do. This is why the USSR and communist China failed miserably. The guys in charge thought that the property rights system led to results that were essentially random, or, like Pigliucci says in another essay, that it is "essentially a pyramid scheme, [that] makes a very small number of people very rich, but is built on the sweat and lack of a social net for the majority." Then, without any understanding of incentives, they went about creating creating a new system. They ended up with a tangled mess. There were constant shortages of everything, and many people were slacking off at jobs that didn't serve any social purpose in the first place. So we have pretty decent evidence about the results of replacing the invisible hand with something more visible. Hopefully you can see why I'm not happy with Pigliucci for casually dismissing the invisible hand as "a pernicious idea". Sure, there may occasionally be spectacular failures in our freer markets, but that's much better than the persistent failures that arise from bad incentives. At least on the market, these companies go out of business, and other companies do their best not to copy them. Pigliucci's basically attacking economics head-on with that statement. The funny thing is, I don't think he knows. : )
    Steve Davis
    Skeptikos, if you can't make sense of my comment that public assets provide some of the balance needed between social goods and individual creativity then you've entered the debate unprepared, the very accusation you put to Gerhard. I'll put the argument to you in libertarian terms to make it easy. This is from Hayek, keeping in mind that Hayek was one of those rare creatures, an honest libertarian. From The Fatal Conceit 1988, “To understand our civilization, one must appreciate that the extended order resulted not from human design or intention but spontaneously: it arose from unintentionally conforming to certain traditional and largely moral practices, many of which men tend to dislike, whose significance they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread by means of an evolutionary selection - the comparative increase of population and wealth - of those groups that happened to follow them. The unwitting, reluctant, even painful adoption of these practices kept these groups together, increased their access to valuable information of all sorts, and enabled them to be 'fruitful, and multiply, and replenish the earth, and subdue it' (Genesis 1:28). This process is perhaps the least appreciated facet of human evolution.” Unappreciated by libertarians that is. For a non-biologist that was a pretty good account of group selection. Group ethics and practices was the parcel of techniques used by our ancestors to defy the invisible hand of natural selection. Libertarians, unaware of this or choosing to ignore it, are denying biological realities from which there is no escape. Which is possibly why Hayek, regarded by many as the quintessential libertarian, is despised by the extremists of this extreme movement. I notice you did not include him in your list of favourite authors. I'm disappointed.
    Haha. I didn't include Hayek in my authors because I'm not a big fan of his writing style. That, and I haven't read anything outside of The Road to Serfdom. Not that I have anything against him, just haven't felt the need to. Right now, I'm mostly interested in public choice theory and behavioral economics; I think he stuck more to macroeconomics and law. And to be honest, I prefer Krugman. I haven't kept my Blogger profile up to date- I actually have Krugman on my authors list on MySpace. No, I'm serious, Krugman's a BAMF. When he sticks to economics, at least. He's like Batman.

    Anyway, let me explain why the phrase "public assets provide some of the balance needed between social goods and individual creativity" doesn't make sense to me:

    1) What do you mean by social goods? Do you mean public goods?
    2) What do you mean by individual creativity? Like, entrepreneurship creativity, artistic creativity, scientific creativity, what?
    3) What does it mean to have a balance of these two?
    4) What in the world can public assets possibly have to do with this? Seriously! They're all completely unrelated!

    On to the Hayek quote-
    I'm going to take a wild guess and assume that your "group selection" theme is meant to imply that government today evolved to serve human needs. You only need to read a bit of public choice theory -- or look at, say, Venezuela or Russia -- to realize that this is nonsense. There are reasons for this -- basically government selection is such a weak process that there's no possible way it could have evolved to serve us already.

    You also say "Group ethics and practices was the parcel of techniques used by our ancestors to defy the invisible hand of natural selection." But this doesn't defy the natural selection at all-- how can you have group selection if there's nothing selecting??

    All in all, I'm still not seeing how this makes sense. What does group selection have to do with economics? What do public assets have to do with social goods (whatever those are)?

    PS: I can't say I appreciate how you keep referring to libertarians. I have not said a word to defend libertarianism -- you brought it up yourself. (In fact, I've said some words critical of libertarians.) If you want to talk about economics, let's talk about economics. I WILL NOT be dragged into a debate about libertarianism here.

    Steve Davis
    A social good is any attribute of society that gives benefit or advantage. If you have come this far in your study of economics without coming across this concept then not only have your teachers failed you, but you have failed as a student and I have failed by not waking up sooner to the fact that I'm wasting my time in this discussion.
    Skeptikos
    That's a pretty vague concept. I could argue that capitalism is a social good using that definition, but that wouldn't make any sense in the context of your sentence. Clearly, you have something else in mind. And I still don't see any connection to public assets. ... Or economics as a science, for that matter. But whatever you say, man. Your completely ambiguous pronouncement about public assets disproves economics. All the way. Without a doubt. I mean, all this time -- I've been living a lie! Public assets?! Oh God, how did I miss that?! Haha. Well it's a nice fantasy world you live in, Steve, where nothing can be know about economics (except that the Democrats are always right) and public assets balance out social goods and creativity. If I didn't think it was important that I understand this I would probably join you in your delusions. BTW-- I'm not a student. : ) Oh -- also -- coincidentally, I just found Greg Mankiw's introductory extbook online here. I also found Paul Krugman's international trade textbook here. According to the textbook, he still generally supports free trade as of 2003. And here is what Greg Mankiw has to say about economics as a science:
    Economists try to address their subject with a scientist’s objectivity. They approach the study of the economy in much the same way as a physicist approaches the study of matter and a biologist approaches the study of life: They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. To beginners, it can seem odd to claim that economics is a science. After all, economists do not work with test tubes or telescopes. The essence of science, however, is the scientific method—the dispassionate development and testing of theories about how the world works. This method of inquiry is as applicable to studying a nation’s economy as it is to studying the earth’s gravity or a species’ evolution. As Albert Einstein once put it, “The whole of science is nothing more than the refinement of everyday thinking.” Although Einstein’s comment is as true for social sciences such as economics as it is for natural sciences such as physics, most people are not accustomed to looking at society through the eyes of a scientist. Let’s therefore discuss some of the ways in which economists apply the logic of science to examine how an economy works. The Scientific Method: Observation, Theory, and More Observation Isaac Newton, the famous seventeenth-century scientist and mathematician, allegedly became intrigued one day when he saw an apple fall from an apple tree. This observation motivated Newton to develop a theory of gravity that applies not only to an apple falling to the earth but to any two objects in the universe. Subsequent testing of Newton’s theory has shown that it works well in many circumstances (although, as Einstein would later emphasize, not in all circumstances). Because Newton’s theory has been so successful at explaining observation, it is still taught today in undergraduate physics courses around the world. This interplay between theory and observation also occurs in the field of economics. An economist might live in a country experiencing rapid increases in prices and be moved by this observation to develop a theory of inflation. The theory might assert that high inflation arises when the government prints too much money. (As you may recall, this was one of the Ten Principles of Economics in Chapter 1.) To test this theory, the economist could collect and analyze data on prices and money from many different countries. If growth in the quantity of money were not at all related to the rate at which prices are rising, the economist would start to doubt the validity of his theory of inflation. If money growth and inflation were strongly correlated in international data, as in fact they are, the economist would become more confident in his theory. Although economists use theory and observation like other scientists, they do face an obstacle that makes their task especially challenging: Experiments are often difficult in economics. Physicists studying gravity can drop many objects in their laboratories to generate data to test their theories. By contrast, economists studying inflation are not allowed to manipulate a nation’s monetary policy simply to generate useful data. Economists, like astronomers and evolutionary biologists [sound familiar? -Skep], usually have to make do with whatever data the world happens to give them. To find a substitute for laboratory experiments, economists pay close attention to the natural experiments offered by history. When a war in the Middle East interrupts the flow of crude oil, for instance, oil prices skyrocket around the world. For consumers of oil and oil products, such an event depresses living standards. For economic policymakers, it poses a difficult choice about how best to respond. But for economic scientists, it provides an opportunity to study the effects of a key natural resource on the world’s economies, and this opportunity persists long after the wartime increase in oil prices is over. Throughout this book, therefore, we consider many historical episodes. These episodes are valuable to study because they give us insight into the economy of the past and, more important, because they allow us to illustrate and evaluate economic theories of the present. The Role of Assumptions If you ask a physicist how long it would take for a marble to fall from the top of a ten-story building, she will answer the question by assuming that the marble falls in a vacuum. Of course, this assumption is false. In fact, the building is surrounded by air, which exerts friction on the falling marble and slows it down. Yet the physicist will correctly point out that friction on the marble is so small that its effect is negligible. Assuming the marble falls in a vacuum greatly simplifies the problem without substantially affecting the answer. Economists make assumptions for the same reason: Assumptions can make the world easier to understand. To study the effects of international trade, for example, we may assume that the world consists of only two countries and that each country produces only two goods. Of course, the real world consists of dozens of countries, each of which produces thousands of different types of goods. But by assuming two countries and two goods, we can focus our thinking. Once we understand international trade in an imaginary world with two countries and two goods, we are in a better position to understand international trade in the more complex world in which we live. The art in scientific thinking—whether in physics, biology, or economics—is deciding which assumptions to make. Suppose, for instance, that we were dropping a beach ball rather than a marble from the top of the building. Our physicist would realize that the assumption of no friction is far less accurate in this case: Friction exerts a greater force on a beach ball than on a marble. The assumption that gravity works in a vacuum is reasonable for studying a falling marble but not for studying a falling beach ball. Similarly, economists use different assumptions to answer different questions. Suppose that we want to study what happens to the economy when the government changes the number of dollars in circulation. An important piece of this analysis, it turns out, is how prices respond. Many prices in the economy change infrequently; the newsstand prices of magazines, for instance, are changed only every few years. Knowing this fact may lead us to make different assumptions when studying the effects of the policy change over different time horizons. For studying the short-run effects of the policy, we may assume that prices do not change much. We may even make the extreme and artificial assumption that all prices are completely fixed. For studying the long-run effects of the policy, however, we may assume that all prices are completely flexible. Just as a physicist uses different assumptions when studying falling marbles and falling beach balls, economists use different assumptions when studying the short-run and long-run effects of a change in the quantity of money. Economic Models High school biology teachers teach basic anatomy with plastic replicas of the human body. These models have all the major organs—the heart, the liver, the kidneys, and so on. The models allow teachers to show their students in a simple way how the important parts of the body fit together. Of course, these plastic models are not actual human bodies, and no one would mistake the model for a real person. These models are stylized, and they omit many details. Yet despite this lack of realism—indeed, because of this lack of realism—studying these models is useful for learning how the human body works. Economists also use models to learn about the world, but instead of being made of plastic, they are most often composed of diagrams and equations. Like a biology teacher’s plastic model, economic models omit many details to allow us to see what is truly important. Just as the biology teacher’s model does not include all of the body’s muscles and capillaries, an economist’s model does not include every feature of the economy. As we use models to examine various economic issues throughout this book, you will see that all the models are built with assumptions. Just as a physicist begins the analysis of a falling marble by assuming away the existence of friction, economists assume away many of the details of the economy that are irrelevant for studying the question at hand. All models—in physics, biology, or economics—simplify reality in order to improve our understanding of it.
    ... I win. : )
    Steve Davis
    Oh, I'm sorry, I forgot. Libertarians don't do social.
    Skeptikos
    Ha. No, but seriously, I have no interest in debating with someone so blinded by ideology that they can't stick to the topic at hand. See ya. : )