Obamacare and the Laws of Supply and Demand

Posted by PITHOCRATES - September 30th, 2013

Economics 101

A Scarce Thing has a Higher Price because Everyone that Wants One can’t Have One

Economics is the study of the use of scarce resources.  Scarce resources that have alternative uses.  For example, we can use corn for human food.  Animal feed.  We can make bourbon from it.  And we can even use it for fuel to power our cars.  So there are alternative uses for corn.

And corn is scarce.  There is not an unlimited supply of it.  During the drought the United States suffered in 2012 farmers brought in a greatly reduced corn harvest.  Which caused corn prices to rise.  Per the laws of supply and demand.  If demand remains relatively constant while the supply falls the price of corn rises.  Why?

Scarce things always have a higher price.  A painting by Vincent van Gogh has a very high price because each painting is a one of a kind.  And only one person can own it.  So those who want to own it bid against each other.  And the person who places the greatest value on the painting will get the painting.  Because they will pay more for it than anyone else.  Whereas no one would pay for a cartoon in a newspaper.  Because they are not scarce.  As they appear in every newspaper.  Newspapers we throw away or put in the recycling tub every week.  Something that would never happen with a Vincent van Gogh painting.

Price Controls fail because People won’t Change their Purchasing Habits when Buying Scarce Resources

Government spending exploded during the late Sixties and early Seventies.  Paid for with printed money.  A lot of it.  Igniting inflation.  Causing a great outflow of gold from the country.  And with inflation spiking prices soared.  Rising prices reduced the purchasing power of American paychecks.  Add in an oil shock and the people were reeling.  Demanding relief from the government.

With the price of gasoline going through the stratosphere President Nixon stepped in to fix that problem.  Or so he thought.  First he decoupled the dollar from gold.  So they could print more dollars.  Causing even more inflation.  And even higher prices.  Then to solve the high prices Nixon implemented price controls.  Setting a maximum price for gasoline.  Among other things.  Sounds nice.  Wouldn’t you like to see gas prices held down to a maximum price so it consumed less of your paycheck?  But there is only one problem when you do this.    People won’t change their purchasing habits when it comes to buying scarce resources.

Why is this a problem?  Because the oil shock caused a reduction in supply.  With the same amount of gas purchasing with a reduced supply the supply will run out.  Which is what happened.  Gas stations ran out of gas.  Which they addressed with gas rationing.  Which led to long gas lines at gas stations.  With people pushing their cars to the pump as they ran out of gas in line.

Obamacare will Fail because no matter how Good the Intentions you cannot Change the Laws of Supply and Demand

Obamacare is increasing the demand for health care.  By providing health care for millions who didn’t have health insurance before.  So demand is increasing while supply remains the same.  There is only one problem with this.  With more people consuming the supply of health care resources those health care resources will run out.  Leading to rationing.  And longer wait-times for health care resources.  Just like gasoline in the Seventies.

One of the stated goals of Obamacare was to lower health care costs.  But what happens when you increase demand while supply remains relatively constant?  Prices rise.  Because more people are bidding up the price of those scarce resources.  Obamacare may try to limit what doctors and hospitals can charge like they do in Medicare, but everything feeding into the health care industry will feel that demand.  And raise their prices.  Which will trickle down to the doctors and hospitals.  And if they can’t pass on those higher prices to whoever pays their bills they will have to cut costs.  Which means fewer doctors, fewer nurses, fewer technicians and fewer tests and procedures.  Which means rationing.  And longer wait-times for scarce health care resources.

President Obama may say he’s going to provide health care to more people while cutting health care costs but the laws of supply and demand say otherwise.  In fact the laws of supply and demand say Obamacare will do the exact opposite.  So whatever rosy picture they paint no one will be linking arms and singing Kumbaya.  Unless they like paying higher taxes, waiting longer and traveling farther to see a doctor.  Which is what is happening in the United Kingdom.  And in Canada.  Which is why Obamacare will fail. Because no matter how good the intentions you cannot change the laws of supply and demand.



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Labor Theory of Value and Prices

Posted by PITHOCRATES - May 13th, 2013

Economics 101

“Do you know how many men you and that machine are putting out of a job?”

Ditch digging is back-breaking work.  Often under a blistering sun.  Where laborers swing picks into the hard soil.  Breaking the compacted soil and rock into loose chunks.  Then another laborer thrusts his shovel into the loosened soil.  Scoops up a load and transfers it to a large bucket.  When full other laborers topside heave the bucket up from the trench.  And empties it onto a cart.  Then returns the bucket to the bottom of the trench.  Then laborers swing their picks.  And scoop up more soil.

A ditch digger may hate his job.  The immense physical requirements wearing him down.  Working in unbearable heat.  And the monotony.  Just dig, dig, dig.  Pausing to wipe the sweat rolling off his face with his shirt sleeve.  To grab a deep breath.  Or a swig of water.  Then back to the pick.  Or shovel.  Calloused hands gripping a splintered handle.  As his burning muscles drive it back into the earth.  All the while thinking that there must be a better way.

Then the day comes when a truck pulls onto site.  Pulling a trailer.  And on that trailer is the future.  A mechanical excavator.  With a 44″-wide bucket on it that can move more soil with one swipe than a laborer can dig in a day.  A machine that would revolutionize ditch digging.  As one machine and a crew of a few men could do the work of 100 ditch diggers in far less time.  As the machine operator prepares to drive the mechanical excavator off the trailer a grizzled ditch digger walks up to him and says, “Do you know how many men you and that machine are putting out of a job?”

Something is Worth what Someone is Willing to Pay for it Regardless of the Quantity of Labor

The labor theory of value would say this ditch is very valuable.  Before the future arrived on that trailer.  For this theory states that value is proportional to the quantity of labor it takes to make or do something.  The more labor hours required the more valuable it is.  It’s not the market that determines value via the laws of supply and demand.  As happens under capitalism.  No.  It’s labor that determines value.  A theory championed by labor movements.  And Karl Marx.  The father of communism.  The greatest anti-capitalist of them all.  Which reveals the true motive behind the labor theory of value.  To give more political power to labor.  While having nothing to do with economics.

To illustrate this let’s look at ditch digging.  The way it was.  And the way it is.  For this exercise let’s consider a ditch for a 60″ storm drain.  Which requires a deep, long trench.  Let’s say it takes a crew of 100 laborers to hand-dig the trench in 6 weeks.  While a crew of 10 laborers and a machine can do the job in 1 week.  Each laborer has $25 worth of tools.  And the mechanical excavator costs $25,000 to rent for one week.  Now let’s assume two construction companies put a bid together for this work.  One bases their estimate on the way it was.  Men digging by hand.  The other bases their estimate on the way it is.  Using a machine.  The value of this trench is the cost of their estimates.  That is, the value of the trench is the cost to dig it.  Which is the price someone must pay to have this ditch.  We summarize these two estimates in the following table.

Ditch Digging

The bottom line in the table is the value of the dug trench.  Which you will notice has two different values.  Even though both methods result in an identical thing.  A trench the same length, width and depth.  Yet if dug by hand the price is $1.8 million.  But if we dig it with a machine the price is $55,250.  How can this be?  How can two identical things have two different prices?  Well, they can’t.  What we have is two prices.  But only one price someone will pay.  The low price.  Because that’s all the trench is worth.  The price someone is willing to pay.  Regardless of the quantity of labor used to dig it.

The Labor Theory of Value is a Flawed Economic Theory used more to Attack Capitalism

So Karl Marx was wrong.  As are those in the labor movement.  While the capitalists were/are right.  Labor does NOT determine value.  The market does.  Something is only worth what someone is willing to pay for it.  Based on the laws of supply and demand.

For example, a lot of labor hours go into building a caboose.  The last car on a train before FRED (flashing rear-end device).  The steel wheels, the brakes, the enclosure, the wood burning stove for the brakeman to warm up by, etc.  Which gives it great value based on the labor theory of value.  And a high selling price.  But trains today don’t use cabooses.  For they have no brakemen running along the top of moving trains to turn the brake wheels to stop the train.  Thanks to George Westinghouse and his air brake.  So there is very little if any demand for cabooses by today’s railroads.  Making it all but worthless.  Despite the high price tag based on the quantity of labor used to build it.

Again, supply and demand determine prices.  Not the quantity of labor.  And you can see this anywhere you look.  Another good example is housing.  You can build identical houses in two different locations and they can sell for two different prices.  Despite being built with the exact same amount of labor.  That house on the beach in Malibu will have a far higher price than the same house in Detroit.  For when it comes to real estate three things determine the price of a house.  Location, location and location.  Regardless of the quantity of labor used to build it.  Whether 100 workers build it using nothing but hand tools.  Or a crew of 10 using the latest in power tools and equipment.  It will cost more to pay 100 men to build it using nothing but hand tools.  But it won’t sell for any more than the one built by the crew of 10 using the latest in power tools and equipment.  Because the labor theory of value is a flawed economic theory.  Used more to attack capitalism.  To transfer power from the capitalists to the labor movement.  And the unions that represent them.  As well as the government officials that protect the unions in exchange for campaign contributions.



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