Price gouging in literature: Little House on the Prairie’s “The Long Winter”

Michael Giberson

Jeremy’s Blog at comments on a price gouging episode in The Long Winter, the sixth book in the Little House on the Prairie series by Laura Ingalls Wilder.

Due to a long winter of snow and storms, the people in the town of De Smet are at the point of starving.  Suddenly the shop owner in town has a large supply of wheat at his disposal and rather than selling it for the normal mark-up amount above costs, he decides to sell each bushel for over two times what he paid.

After Loftus, the store owner, states “That wheat’s mine and I’ve got a right to charge any prices I want to for it.”  Pa Ingalls responds:

“That’s so, Loftus, you have,”…”This is a free country and every man’s got a right to do as he pleases with his own property.”  He said to the crowd, “You know that’s a fact, boys”.

… However, Pa decided to use persuasion to get the store owner to lower the price.  In addition to petitioning the humanitarian side of the business owner, Pa also goes on to state:

Don’t forget every one of us is free and independent, Loftus.  This winter won’t last forever and maybe you want us to go on doing business after it’s over…  You’ve got us down now.  That’s your business, as you say.  But your business depends on our good will.  You maybe don’t notice that now, but along next summer you’ll likely notice it.

Loftus decided to sell the wheat at cost, due to persuasion and not force.

I haven’t read the Little House on the Prairie books myself, so I can’t authoritatively comment on what market alternatives the people of De Smet may have the next summer. But the small group scenario posed in the story may reasonably support different conclusions about the prudence of price increases under difficult market conditions than might be reached when considering more anonymous consumer-retailer interactions under typical conditions today.

QUIRKY NOTE: Laura Ingalls Wilder’s daughter Rose, who was born in De Smet in 1886, became a prominent and noted early libertarian.  (Consider this story of a state trooper appearing at Rose Wilder Lane’s door in response to a postcard objecting to Social Security. Not the most significant event, but clearly she was a lively character.)

(HT to my brother Todd for mentioning the price gouging post.)

Nutrition experience, research, and orthodoxy, with some economics parallels

Lynne Kiesling

Last week was our spring break, and I finally took some time to read Gary Taubes’ 2008 book Good Calories, Bad Calories. Taubes is an investigative science journalist who has been writing for years about the science of nutrition and epidemiology, and the book focuses on a long, careful, detailed narrative about how such science has evolved since the mid-19th century. One of the themes that emerges is that some of the most prominent researchers, particularly those advancing the dual hypotheses that fat causes heart disease/overeating causes obesity, did not test their hypotheses for falsification using controlled trials in designing their research, and are also personally invested in doing research that “proves them right”. Thus, Taubes argues, an orthodoxy has formed around these hypotheses when he finds the scientific support for them lacking, and similarly finds support for an alternate hypothesis — refined carbohydrates cause heart disease and obesity. But the orthodoxy resists testing that alternate hypothesis.

I have personal interest in this topic based on my own experience. As a high metabolism athlete for all of my life, I grew up being able to eat almost anything in unrestricted quantities. But when I got my first faculty job out of grad school (at WIlliam & Mary, yay!) in 1992, the combination of teaching and research duties with moving to a swampy climate against which my body rebelled meant a reduction in my activity, bloating because of the humidity, and weight gain. Without really thinking about it (because I hadn’t had to before), I reduced my meat consumption and substituted into (refined and unrefined) carbs. The next two years were right out of Taubes’ book — reduction in calories to manage weight while increasing exercise, but not having enough energy to actually make it meaningful, culminating in what is now known as metabolic syndrome complete with insulin resistance, hormone imbalance, and symptoms of polycystic ovarian syndrome. I then spent two years revamping my diet to reduce refined carbs, include more animal and vegetable protein at every meal, and monitor my hormone and energy levels, and succeeded in reversing all negative symptoms. I returned to the energy levels that have enabled me to do longer and longer distance cycling and triathlon endurance events and the demanding training for them. Even though I don’t eat low-fat, my triglycerides are so low that my doctor marvels at it. Taubes’ argument is consistent with my experience.

Economist Russ Roberts has been experimenting with his diet and exercise for the past six months, following broadly the same principles that I do (including the refined carbs on the weekend), and he reported in on Friday: 20 pounds lost, more energy, feeling of satiation, low triglycerides. Again, consistent with my experience.

You may know Russ for his outstanding EconTalk podcast series, and in November 2011 he interviewed Gary Taubes. The conversation was interesting and informative, and the podcast page lists lots of resources for further reading. One theme that Russ developed in the discussion was that in both nutrition research and economics research, the issues come up of orthodoxy and structuring research questions in ways that generate falsifiable hypotheses when you are studying such a complex, dynamic system as either the human diet/cardio/endocrine system or the human economy. The human traits that incline us toward orthodoxy, whether it’s wanting to prove ourselves right or appeal to authority or some other trait, have led to models and hypotheses that are not supportable or not even meaningfully testable/falsifiable. So for me reading Taubes’ book was a good cautionary tale of the value of humility beyond the analysis of low-carb/low-fat nutrition.

Another insight that comes up in the book that I would add to Russ’ comparison with macroeconomics is heterogeneity. Taubes is careful to point out that individuals have different metabolic experiences and achieve homeostasis with different combinations of fat, carbs, etc., so while low-carb nutrition may allow some people to strike a healthy heart and weight balance, others may be able to eat more carbs and do the same. Heterogeneity means that there’s no one-size-fits-all hypothesis … and as any Austrian macroeconomist will tell you, that’s the argument they put forth about macroeconomic models and aggregation. Heterogeneity in the capital structure in reality means that models abstracting from such heterogeneity are more likely to mislead.

Bourgeois Virtues in Action

Sarah Skwire

The “most modern man” in Dickens, John Wemmick from Great Expectations, makes much of the importance of separating what Deirdre McCloskey calls the P-values of prudence from the S-values of sociability.  “The office is one thing, and private life is another. When I go into the office, I leave the Castle [his home] behind me, and when I come into the Castle, I leave the office behind me. If it’s not in any way disagreeable to you, you’ll oblige me by doing the same.” As McCloskey’s work suggests, such a division is not only disagreeable, it is deleterious. P values and S values must be mingled in order for our business lives and our social lives to function well.

A fine example of the good results that arise from this kind of mingling is offered in Charles Duhigg’s new book The Power of Habit. The most frequently excerpted chapter of the book seems to be the chapter on Pepsodent that explains how those sneaky advertisers manipulate us to make us think that we have a nasty film on our teeth that requires frequent brushing with Pepsodent to make us socially acceptable. The most McCloskeyan chapter, is the chapter about Alcoa.

Alcoa is an aluminum manufacturing company that has “manufactured everything from the foil that wraps Hershey’s Kisses and the metal in Coca-Cola cans, to the bolts that hold satellites together.” There’s a lot of molten metal involved in what they do, and a lot of heavy machinery, and for a long time, there was a lot of worker injury.

In 1987 Alcoa hired a new CEO named Paul O’Neill who set Alcoa a single goal–No worker injuries. Zero. None. According to Duhigg, everyone thought he was nuts. Alcoa was beleaguered by all kinds of problems with profits and processes, and O’Neill wanted them to ignore all that and focus on worker safety to the exclusion of all else? This was sacrificing all kind of apparent P value stuff on the altar of S values. It was madness. But O’Neill held firm.

Duhigg writes, “In 2010, 82% of Alcoa locations didn’t lose one employee day due to injury…On average, workers are more likely to get injured at a software company, animating cartoons for movie studios, or doing taxes as an accountant than handling molten aluminum at Alcoa.”

Heck, I got a wicked bad paper cut looking for the Dickens quote at the top of this post.

And a funny thing happened on the way to satisfying O’Neill’s S values. A lot of P values got satisfied as well. Aloca’s safety obsession required a way to share real time safety data between offices, so O’Neill had the offices linked up in a computer network. It seemed natural to employees to use that network to share other useful business information, so Alcoa was faster to respond to market demands and price information. Alcoa doubled their profit from aluminum siding because a worker suddenly felt important and “listened to” enough to make a suggestion about the way Alcoa set up the machines that painted the siding. Machines were redesigned to protect worker safety, and their new reliability meant more reliable aluminum and better products. Alcoa’s costs went down. Their stock price went up by 200%.

That’s what happens when you bring your virtues, or your S values, or your good home-training, or whatever you’d like to call it, to the market. That’s what happens when the market is free enough to respond to those virtues. Virtue is its own reward, but when you bring it into the market with you, everybody wins.

Book review: A Genius For Money

Lynne Kiesling

Today’s Wall Street Journal has a review, King of the Shopkeepers, of a new biography from Caroline Dakers. A Genius For Money tells of the rags-to-riches life of James Morrison, a Victorian innovator of retailing and banking in England. I can already tell that I am going to order the book as soon as I’m done writing this post:

Morrison was not an inventor-capitalist but a retailing genius, more Sam Walton than Steve Jobs. He catered to England’s growing consumer class by diversifying his wares and, in his ever-growing network of shops, introducing luxurious showrooms. He was a disciple of volume, seeking “high turnover, small profits, and quick returns.” He sent his traveling men not to find buyers, as was typical, but to find the best suppliers. Advantageously purchased in bulk, goods would sell themselves. Morrison’s buyers were specialists, anticipating the practices of later department stores. He kept his finger on the pulse of fashion and on “market making” events. Legendarily, he was never caught short of black crepe when a member of the royal family was ill. “The Duke of York has died most conveniently,” he once quipped while tallying profits.

Entrepreneurs like Morrison and Josiah Wedgwood transformed the everyday lives of so many people, and changed how we view work, consumption, and beauty. They also made markets work more efficiently, Morrison through banking and Wedgwood through infrastructure investment (he was a driving pioneer in the construction of canals in England). In that sense, innovators like Morrison and Wedgwood are equilibrating entrepreneurs in the way that Kirzner describes. The review of Dakers’ book also suggests that it raises themes that Deirdre McCloskey raises in The Bourgeois Virtues and Bourgeois Dignity, and that we have discussed here in the past.

I have not talked here much about Wedgwood, but I have had plans to for a long time, so this book may be the catalyst.

Leisure reading while sick

Lynne Kiesling

I have the first really bad cold, complete with ear infection, that I’ve had in almost two years. Other than the throat and ear pain, the coughing, and the congestion, I can tell it’s bad because I’ve stayed home from work for two days, and rather than being my usual Energizer bunny self I have little energy for anything other than light reading …

… which means I am about 40 percent through Neal Stephenson’s new book Reamde, but don’t have the cognitive energy to use this time to dig in! Too bad, because so far I am enjoying it a lot, but in a different way from either Anathem or the Baroque Cycle trilogy. Those two works were intellectually and historically meatier, but Reamde shares with them Stephenson’s telltale characteristic weaving of multiple stories into a witty, wry, and intentionally slightly opaque narrative. It’s definitely primarily a technology thriller along the lines of Zodiac and Snow Crash, and so far I’m enjoying it as a well-told set of interwoven stories with compelling character development.

So this afternoon instead I will couple my Cepacol lozenges and hot tea with Wives and Daughters by Elizabeth Gaskell; isn’t Victorian fiction a more suitable companion in the sickroom anyway?

Book review: Mark Pennington’s Robust Political Economy

Lynne Kiesling

There’s a lot of exciting work right now in political economy at the intersection of academic scholarship and application to public policy, ranging from law to public finance to regulation to development and beyond. Mark Pennington’s Robust Political Economy is one of the most exciting, thoughtful, and valuable of the recent work in political economy (it’s been out of stock in the US, but now it’s back and you can get yourself a copy!). Whether you are a scholar working in this area, a policymaker interested in thinking more deeply about what you do, or someone who works in an area where you engage with public policy, you will find lots if ideas here worth considering, presented in a clear, scholarly narrative.

He begins by drawing some stylized categories of ideas that will provide the context for his analysis, and the main contrast he draws is between classical liberalism and ideas critiquing classical liberalism from several directions, such as communitarianism, egalitarianism and, even, neoclassical economics. A lot of political economy analysis takes place in the realm of these theoretical archetypes — people formulate their positions in opposition to these theoretical archetypes, and often simplify or mischaracterize them. One of the intellectual, analytical, and rhetorical strengths of Mark’s work is that he really fleshes out those archetypes so they are not simplistic straw men. I think he reads the various critiques of classical liberalism fairly and in an open-minded manner, and describes their analyses and positions in ways that I find quite reasonable (I say that, though, acknowledging my confirmation bias and my agreement with and sympathy with his own argument).

Mark’s emphasis is on creating an analytical classical liberal framework for examining and understanding issues in public policy. To do so he tackles several tasks in this work: he lays out his conception of classical liberalism, he uses that conception to contrast with a range of ideas critiquing classical liberalism, and he then applies that framework to analyze some selected public policy issues. His contextual lens is primarily British and European, so for readers in other areas some of the specifics of the intellectual debates may be unfamiliar, but the general ideas and principles still translate clearly.

I find the most valuable contribution of Mark’s work to be the conceptual framework for classical liberalism as “robust political economy” that he provides in Chapter 1, and then elaborates on in contrast to other sets of ideas in the ensuing 4 chapters. Why is this idea of robust political economy so important? Robustness is like resilience; it’s a performance criterion by which we can evaluate a set of institutions to see how well they perform in real-world situations across time and space. Robust social institutions take into account the cognitive, psychological, and strategic realities of being human and trying to live together in civil society, rather than being based on some mythical, hypothetical individuals who are either entirely Cartesian-rational, entirely Hobbesian-rapacious, or possessing full foresight. Mark takes on all of these traits of real humans, and a lot of his argument is grounded in the reality of the knowledge problem (a topic near and dear to my heart and brain).

Human beings are limited in their cognitive capacities and as a consequence even the most intelligent and far-sighted people are relatively ignorant of the society in which they are situated (Hayek, 1948a; Simon, 1957). Given the imperfections of human knowledge, the consequences of any particular action, either for the actors concerned or for the wider society, will at any given time remain uncertain. Robust institutions should therefore allow people to adapt to circumstances and conditions of which they are not directly aware, and under conditions of ‘bounded rationality’ must enable them to learn from mistakes and to improve the quality of their decisions over time. (pp. 2-3)

Taking into account the knowledge problem, what are institutional traits that enable heterogeneous self-interested individuals, for whom self-interest usually takes many different forms, to live together and hopefully to thrive in civil society? Mark’s primary argument throughout the work is institutions reflecting classical liberal ideas and principles are best situated to do so. He synthesizes Scottish Enlightenment political economy, Austrian economics, pubic choice economics, and new institutional economics into a classical liberal framework that qualifies as robust political economy. These institutions focus on “private or severally owned property, a market economy, and a limited government confined to the resolution of disputes between private parties” (p. 3). The synthesis across these areas is a substantial original contribution of this work, because he provides the clearest articulation I’ve seen thus far of how the ideas arising from these various strands of thought complement and reinforce each other. Mark melds the complexity and emergent order approaches of the Scottish Enlightenment and of the knowledge-problem-focused Austrian economics with the ideas of adaptation and evolution in those traditions as well as in new institutional economics. He blends the polycentric and locally-driven approach to institutional design from NIE with the “model men as if they are knaves” to constrain selfish minorities that we see in David Hume, James Madison, and modern public choice economics. He further combines all of the above with the idea that processes that enable emergent, decentralized, polycentric institutions will do a better job of enabling people to thrive in civil society (i.e., be robust) precisely because they allow for trial and error, for experimental evolution, and that the combination of community processes of consent with real options for both voice and exit are a crucial component of creating this robustness. I have never read a more compelling or uplifting account of this argument, which regular KP readers will recognize as resonating strongly with the approach to regulatory policy that I have advocated here and in my own book in 2008.

Taking this framework, Mark then confronts the challenges to classical liberalism that neoclassical economics (focusing on “market failure”), communitarianism, and egalitarianism provide. He also argues that none of these three sets of ideas qualify as foundations for robust political economy. His analysis of neoclassical economics includes a strong critique of the theoretical emphasis on equilibrium outcomes and the existence of equilibria, and his discussion of how such arguments misunderstand the nature of competition do a good job of making that Hayekian point more clear and relevant to modern policy debates. I recommend this chapter in particular to all graduate students in economics, as a spur to think more deeply and critically about our models and how we use them. I am less familiar with the communitarian and egalitarian literatures in political science and philosophy with which Mark then engages, but what I found most interesting in those chapters was how he showed that classical liberal ideas and institutions do address many of the issues and concerns of those scholars, contrary to their beliefs.

In the final section of the book Mark applies classical liberalism as robust political economy to three policy areas: poverty relief and public services, international development, and environmental protection. In each chapter he provides an in-depth discussion of the policy implications of the four main sets of ideas (classical liberalism, neoclassical economics, communitarianism, and egalitarianism), again consistently anchored in the complexity and knowledge problem traits of reality, which lead him to conclude that institutions grounded in classical liberal principles are the most likely to qualify as “robust” and to thus be the most likely to enable people to thrive in civil society in each of the three areas.

An enthusiastic must-read, from which I learned a lot and which has changed and refined my thinking about some of my own work.

Earlier this year Mark did a book event at Cato, complete with a companion podcast and a video of the event:

He also occasionally blogs at Pileus, always informatively and eloquently.

A Wal-Mart long-haul truck has more intelligence in it than a typical water system

Michael Giberson

At the Freakonomics blog, guest Charles Fishman explains “Why water will never be the next oil.” A sample:

If you leave aside the somewhat silly world of bottled water, there has been almost no innovation in the industry of water for decades. A water facility today uses the exact same technology it did in 1973. In what other industry is that the case? The typical Wal-Mart long-haul truck has more intelligence in it than the typical water system.

The technological revolution has completely bypassed the world of water, mostly because of the strange nature of the market for it. Water has almost no pricing signals. You can’t trade it. And while in the developed world you don’t typically run out, if serious scarcity develops, you can’t just buy more, no matter how much you’re willing to pay. The most liquid and plentiful natural resource on the planet is almost completely illiquid as an asset.

Actually, I’d be surprised if many water systems are not using microprocessors, for example, or other technologies in their systems. The “exact same technology [as] 1973″ sounds a little over dramatic. But “strange nature of the market for it” is right.

Fishman has a new book out on water supply, The Big Thirst. (More: A WSJ review of The Big Thirst, the book’s website: Fishman’s prior book was The Wal-Mart Effect, so perhaps he really knows something about how smart those long haul trucks are.

Review of Kiesling and Kleit (eds.) Electricity Restructuring: The Texas Story

Michael Giberson

In the current issue of Regulation, Tim Brennan reviews Electricity Restructuring: The Texas Story, edited by Andrew Kleit and our own Lynne Kiesling. After a lengthy introduction discussing how deregulation came to the electric power business (mostly it hasn’t, but parts of the industry have been reorganized), Brennan gets down to the book at hand.  He tells us, “The subject of their important book is why Texas appears to have succeeded where the rest of the country has failed.”

Electric Restructuring: The Texas StoryBrennan finds the book useful as a guide to what Texas has been doing with its electric power market and how they got to where they are today. He finds the book a bit full of “inside baseball,” stocked as it is with contributions from many of the state commissioners, regulatory staff and other folks who were front-line participants in the developments discussed. Brennan would have liked to see more external evaluations of market performance to complement the insider views.  He also found that the book missed opportunities to convey some of the lessons learned in the Texas experience, as with Texas’s initial choice of a zonal market design and subsequent switch to a nodal market design. Finally, with the book’s heavy focus on the Texas experience, it neglects discussion of developing issues of interest.

Overall, despite the mild criticism, Brennan finds the book a valuable contribution on a subject of importance. I’ll endorse that view. Anyone who wishes to be up-to-speed on electric power restructuring policies in the United States should read this book.



Booker Prize shortlist announced

Lynne Kiesling

Having a bookish day here at KP … just heard a news story that reminded me that the shortlist for the Booker Prize was announced earlier this week, and here’s a brief synopsis of each of the six novels. Last year two of the shortlisted books, Wolf Hall (the ultimate winner of the prize) and The Children’s Book, were easily the two best novels I read. Out of this list, the one that seems to fit my tastes best is Peter Carey’s Parrot and Olivier in America, a tale based on a fictionalized version of Alexis de Tocqueville and his manservant on their voyage to the young United States.

And, because I appreciate witty, ironic, comic writing, I really enjoyed Harry Mount’s Telegraph column on serious comic writing from earlier this week. If you are a fan of Austen, Wodehouse, and/or Waugh, you’ll appreciate his observations, and, like me, you’ll probably appreciate his closing Walpole quote:

Horace Walpole, the 18th-century writer, said: “This world is a comedy to those that think, a tragedy to those that feel.”

The Mongoliad

Lynne Kiesling

Speaking of Neal Stephenson, he’s involved in a new, online, serialized novel called The Mongoliad. Set in 1241, it’s an adventure journey story with the Mongol invasions of Europe as a backdrop. There are some stories you can read on the site for free, but to receive the weekly chapters you have to subscribe. So it’s an interesting venture both in a literary sense and as a new online business model (which hearkens back to the early 19th century in a way that I find charming).

Happy reading! What are you planning to read this weekend? I am finishing up Deirdre McCloskey’s The Bourgeois Virtues and Paul Seabright’s The Company of Strangers, and will probably have some things to say about both of them.