P is for Price

June 13th, 2014 at 4:30 pm by David Farrar

The latest in the alphabet from the NZ Initiative:

From an engineering perspective at least, a good case could be made to use silver for all electric wiring. Silver just makes more sense than, say, copper, steel or aluminium. That is because silver’s specific electrical resistance is the lowest of all metals.

Why we do not use silver for overhead power lines has a lot to do with and the role that prices play.

To most non-economists, prices are just what we pay for the goods and services we buy. To economists, however, prices are much more than that. To them, prices are a marvel, a work of art – or a little less poetically, a very condensed piece of information.

Think about it this way: if the last coffee crop was bad, or if suddenly millions of Chinese developed a craze for double espressos after every meal, the resulting global shortage of coffee beans would not result in rationing. Nor would it require a central planner to tell people to drink more tea instead. What it would do, however, is increase the price of coffee so that coffee drinkers would adjust their consumption accordingly.

Prices bring together everything we know about the supply and demand of any given good. In this way, they help us to decide what to use resources for.

This, then, explains why we do not use silver for all electrical wiring. It is a rare metal with many other potential uses (such as jewellery, in medicine, or in optics). The high price of silver is therefore guiding it towards its highest value use, leaving the job of conducting electricity to other, slightly less suited but much cheaper metals.

In an economy without a functioning price system, we would not be able to make such decisions. We simply would not know which good could be used for what without resorting to trial and error, planning, rationing and waste.

Prices are absolutely crucial for the functioning of the economy. They bring order into a chaotic world of countless goods, services, uses, consumers, suppliers and intermediaries. Without prices, nothing could coordinate all of these.

Politicians play with the price system at their peril. Yet there are minimum wage laws, rent controls, price controls and other ways of distorting prices. Usually introduced with best intentions, these measures prevent markets from working properly.

The price for such interference will be paid by all of us. But that is a price not worth paying.

Next week is quantitative easing, which should be amusing.

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31 Responses to “P is for Price”

  1. wat dabney (3,716 comments) says:

    As Khrushchev said at the time, “When all the world is socialist, Switzerland will have to remain capitalist, so that it can tell us the price of everything.

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  2. Jack5 (4,819 comments) says:

    Yes, but is there a paradox in that many markets need regulation to function both freely and properly?

    As for Twat Dabney’s 4.59 post about Switzerland, the land of binding referendums/referenda: the Swiss are interfering in the currency markets to keep the Swiss franc exchange rate down, and so far interfering successfully.

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  3. wat dabney (3,716 comments) says:

    there a paradox in that many markets need regulation to function both freely and properly

    Not really.

    State regulation typically introduces problems far greater than the ones it purports to correct.

    Take banking. The implicit taxpayer bailout created a huge moral hazard which led directly to the global meltdown.

    Market regulation – the fact that I won’t lend money to you if I don’t think you’ll pay it back – is driven out by government regulation.

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  4. Jack5 (4,819 comments) says:

    Mr Dabney, would you trade on a sharemarket with no rules at all? No stock exchange rules? Beyond that, no Companies Act (or equivalent) rules? No fraud or theft rules? No rules that specified what currency was legal tender?

    Surely there must be some minimum regulation?

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  5. peterwn (3,208 comments) says:

    During WW2, scarcity of copper in USA risked A-bomb development because they could not wire the premises. Some bright spark thought of borrowing some silver from Fort Knox and getting a wire maker to turn it into cable. After the war, they re-wired the premises with copper conductor cables, salvaged the silver and returned it to Fort Knox. In old electromechanical telephone exchanges, contacts, etc were silver plated for better contact (except in Rotorua where they were gold plated for obvious reasons).

    Incidentally, aluminium is generally more cost effective (depending on commodity prices) than copper for electric wires and cables. However it is more tricky to terminate because of an oxide layer that builds up, the usual method being to use compressed sleeves and the compression pressure breaks through the oxide. Virtually all Transpower lines use aluminium conductor and many distribution lines and cables (eg in Hutt Valley and Johnsonville- Pukerua Bay) use aluminium conductors.

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  6. wat dabney (3,716 comments) says:

    Mr Dabney, would you trade on a sharemarket with no rules at all? No stock exchange rules? Beyond that, no Companies Act (or equivalent) rules? No fraud or theft rules?

    Any market is automatically subject to the general laws governing of fraud and theft.

    So that’s clearly not what’s meant when lefties say that such-and-such a market is “unregulated.”

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  7. alwyn (400 comments) says:

    “This, then, explains why we do not use silver for all electrical wiring. It is a rare metal with many other potential uses (such as jewellery, in medicine, or in optics). The high price of silver is therefore guiding it towards its highest value use, leaving the job of conducting electricity to other, slightly less suited but much cheaper metals.”

    During WW2 Silver was used on an enormous scale in the Manhattan Project, which was the building of the Atomic Bomb.
    One method of separating the Uranium isotopes was by electromagnetic separation in things called calutrons. Copper, required to manufacture many other things for the war effort, was in short supply whereas the US had large quantities of silver reserves.
    The used about 15,000 tons of the stuff for electrical wiring. It was all recovered after the war when the plant was demolished.
    In this case it didn’t matter at all what the supposed price of silver was. It was there and copper wasn’t.

    I’m surprised they didn’t just use the gold from Fort Knox.

    Snap. I see peterwn posted the same thing while I was typing this.

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  8. mikenmild (11,246 comments) says:

    These articles from the New Zealand Initiative read like the work of an intelligent 12-year-old.

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  9. wat dabney (3,716 comments) says:

    So you agree with them, milky?

    Of course, the free market doesn’t provide for you and your state employee pals to engage in your corrupt rent-seeking.

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  10. mikenmild (11,246 comments) says:

    I find them a bit insipid, wat.
    ‘Politicians play with the price system at their peril. Yet there are minimum wage laws, rent controls, price controls and other ways of distorting prices. Usually introduced with best intentions, these measures prevent markets from working properly.’
    Not exactly profound.

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  11. wat dabney (3,716 comments) says:

    ‘Politicians play with the price system at their peril. Yet there are minimum wage laws, rent controls, price controls and other ways of distorting prices. Usually introduced with best intentions, these measures prevent markets from working properly.’

    Actually, it is very profound.

    But you represent corrupt big-labour cartels. In which case defeating pricing is your very objective.

    In any other context you and your corrupt mates would be in prison.

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  12. mikenmild (11,246 comments) says:

    What labour cartel do you imagine I represent?

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  13. hj (6,697 comments) says:

    if the last coffee crop was bad, or if suddenly millions of Chinese developed a craze for double espressos after every meal, the resulting global shortage of coffee beans would not result in rationing. Nor would it require a central planner to tell people to drink more tea instead. What it would do, however, is increase the price of coffee so that coffee drinkers would adjust their consumption accordingly.
    …..
    That doesn’t apply to O = oil. When the easy oil becomes scarce the drillers have to look for oil in less accessible situations. If the companies can’t make a profit they give up, because whatever use that oil was (at that rate of production) isn’t worth the expenditure of energy. The economy has to contract and we are B = buggered (despite A= agglomeration effects).
    http://www.resilience.org/stories/2014-06-11/the-inevitable-demise-of-the-fossil-fuel-empire

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  14. wat dabney (3,716 comments) says:

    What labour cartel do you imagine I represent?

    State sector employees.

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  15. mikenmild (11,246 comments) says:

    But i don’t represent any state sector employees.

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  16. wat dabney (3,716 comments) says:

    Yeah, milky, you kinda do.

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  17. mikenmild (11,246 comments) says:

    I don’t see how. I’m not even a union member.

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  18. wat dabney (3,716 comments) says:

    But are you, or were you, a beneficiary, milky?

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  19. mikenmild (11,246 comments) says:

    As if that is any way relevant, but no.

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  20. wat dabney (3,716 comments) says:

    “As if that is any way relevant, but no.”

    It sort of is relevant, milky.

    But I’m happy to hear that you will join the rest of us in acknowledging that today’s action by MBIE employee’s, for example, is but the merest tip of political corruption.

    These crooks are for sale to the highest bidder.

    State-sector employees should be prohibited from unionising, in order to prevent this special-interest corruption which underpins the Labour Party.

    The motion is passed.

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  21. mikenmild (11,246 comments) says:

    Yes, transport them to Australia for forming an ‘illegal combination’.

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  22. wat dabney (3,716 comments) says:

    Wall Street bankers who received taxpayer handouts are no different from state-sector employees organising to plunder the same taxpayers.

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  23. Ed Snack (1,793 comments) says:

    hj, are you trying to claim that oil does not change in price based on demand ? there is a great deal of attempted manipulation of the price of oil, for largely political reasons, but as a commodity it still exhibits fluctuations based on demand.

    Mikenmild, it is profound precisely because you scorn it so, it is a deep truth that for purely political reasons you are unwilling to accept.

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  24. mikenmild (11,246 comments) says:

    You sincerely believe it should be illegal for employees to negotiate wages and conditions collectively?

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  25. itstricky (1,693 comments) says:

    Or for them to have fair and even legal representation that doesn’t cost the earth?

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  26. wat dabney (3,716 comments) says:

    You sincerely believe it should be illegal for employees to negotiate wages and conditions collectively?

    Ah, milky. You do so misrepresent the situation.

    You are so corrupt.

    You are so thoroughly dishonest.

    You are such a liar.

    In a free market workers may choose to negotiate or even entirely withdraw their labour. They can find other jobs.

    But when it comes to the state sector we are not talking about the free market are we. We are talking about a political constituency. We are talking about politicians buying votes by taking taxpayers’ money and giving it to their self-interest supporters.

    We are talking about corruption pure and simple.

    You know this.

    I know this.

    Yet still with the pretence about ‘employees negotiating collectively’.

    You are such a lying crook, milky.

    Trying to pretend that vote-selling state-sector employees are no different from cooperative-sector workers.

    Roosevelt may have been a villain but at least he recognised the danger to democracy of state-sector unions:

    All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service…. The very nature and purposes of government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with government employee organizations

    So fuck off with your faux naivety milky.

    Your fake wide-wide innocence when what you’re describing is pure corruption at the expense of the workers.

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  27. Jack5 (4,819 comments) says:

    This NZ Initiative article makes a few assumptions.

    Prices bring together everything we know about the supply and demand of any given good. In this way, they help us to decide what to use resources for.

    “Everything we know.” It assumes that knowledge is universal and universally available to all.

    There have been cases where markets have been cornered by a few who exclusively had information about a commodity.

    The spread of information takes time. It is not necessarily available to all market participants simultaneously. That’s why sharemarkets, for example, have rigid regulations about release of information.

    Markets are useful devices, not infallible devices.

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  28. slijmbal (1,223 comments) says:

    It’s easy to confuse ensuring law and order with regulation.

    Regulation is predominantly about driving market behaviour. Ensuring law and order is about prosecuting and deterring those who break the law. The biggest issue I have with the finance and investment world is that fraudulent\illegal behaviour is so rarely prosecuted. But it’s also fair to say the largest financial booms, busts and rent seeking activities owe a great deal to the meddling of governments on behalf of their constituents or corporates or both, via regulations.

    Only the most purist of market believers don’t admit that certain market outcomes are not desirable e.g. establishment of monopolies or cartels, people dying if we don’t have a welfare state etc.

    In these types of circumstance having government intervention is a desired social outcome but inefficient from an economic/monetary sense. It’s certainly more profitable to let old people die, for instance, but not a socially acceptable outcome.

    The majority of what is loosely called regulation is actually about making specific fraudulent behaviours less likely. Ensuring banks have a minimum capitalisation is regulation, prosecuting finance companies for lying in their prospectus and effectively running a ponzi scheme is about fraud.

    Widespread regulation is dangerous as it requires the government to effectively drive the economy. Regulation is best used as a backstop to prevent excessive behaviour in stringent circumstances even though such behaviour may be theoretically illegal. A bank is, in theory, prosecutable if they take an excessively risky loans behaviour, for instance, and display negligent behaviour. Such a prosecution is unlikely to work as it’s a bugger to prove. Best to be pragmatic and regulate certain restrictions because of the calamitous effects of a bank failing, as an example.

    The danger is when regulation is used, typically by the left, against ‘undesirable outcomes’ as opposed to unacceptable ones. This effectively causes market forces to fail in a widespread fashion with all the huge negative consequences attached.

    Markets work exceptionally well except in specific circumstances – we should limit interference to those few circumstances.

    Throwing around generic statements about markets requiring regulation without properly qualifying them to how such regulation should itself be limited is misleading and provides an excuse to the left or governments to interfere and manipulate as opposed to protect.

    Markets are very, very effective – they need limited and targeted assistance.

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  29. hj (6,697 comments) says:

    Ed Snack (1,674 comments) says:
    June 13th, 2014 at 8:34 pm

    hj, are you trying to claim that oil does not change in price based on demand ?
    ……
    no, I’m saying we have a need hierarchy and a lot of our economic activity is superfluous to our basic needs. If the energy needed to extract energy gets beyond a certain point it kills demand for unessential economic activity (eg tourism).

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  30. mikenmild (11,246 comments) says:

    What wat dabney really wants is to destroy the freedom of association, where worker can voluntarily combine to negotiate terms and conditions. He overlooks the fact that this activity is usually of benfit for both employers and workers. Why he sees something particularly dangerous in the spectre of state sector workers acting collectively remains beyond my limited comprehension.

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  31. Yoza (1,667 comments) says:

    Price as a short term measure of value versus cost is responsible for just about all past and impending social and environmental disasters. The price of slaves relative to the return received from the cotton fields or sugar plantations was a favorable comparison, but it never took into account the future costs that form of servitude would impose on society, all that mattered were the short to medium term goals of the plantation owner.
    In a similar vein, the cheap price we pay for oil and coal now will be compensated for by future generations who will be forced to pay the full cost of our short term gratification.

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