The Price of Everything, Parable of Possibility and Prosperity - Term Paper Example

? Economic Lessons Learnt From The Price of Everything-A Parable of Possibility and Prosperity. College 6 The paper will examine three main economic lessons learnt from the novel The Price of Everything-A Parable of Possibility and Prosperity along with other ideas discussed. Main lessons being Price gouging, creation and sustaining of prosperity and evaluation unseen economic order and harmony that shape our daily lives. Research method used is Internet while study of book available on Google Books and research of online resources through Google and Yahoo search engines. The conclusion of research is that there is an economic order, which exists, run the world markets, and controls it through variation in prices of everything. There is a lesser possibility that one force may control this activity however existence of loose understanding between a group of firms or pressure groups cannot be denied. Keywords : Price, economics, crisis, people, manufacturing, markets, order. The Price of Everything-A Parable of Possibility and Prosperity. Introduction. The Price of Everything-A Parable of Possibility and Prosperity, is a tale of spontaneous, natural, automatic, emergent order and the role prices and markets play in organizing economic activity irrespective of geographical boundaries. The author, Russell Roberts who himself is an economist tells the story of a boy, Ramon Fernandez, a Cuban immigrant tennis player raised in capitalism. The novel is set in the San Francisco Bay area after an earthquake. Ramon, who has since grown into a young man and has become a star tennis player at Stanford, and his girlfriend Amy, a Stanford volleyball player, are trying to buy a flashlight. They visit two large retailers: Home Depot and the fictional Big Box in Hayward. Home Depot is out of flashlights. Big Box, on the other hand, has plenty of flashlights. However, unlike Home Depot, Big Box has announced that they have raised the prices on all of their items because of the earthquake. Is this price gouging? How dare a retailer profit from an emergency and squeeze their customers when they most need the supplies?. This, understandably, has upset many people who think it is unfair that Big Box acted opportunistically by raising its prices, taking advantage of the disaster for personal profit. The other main character in the book is a woman, Professor Ruth Lieber, the provost of Stanford University and Amy's economics teacher. Lieber takes on the role of teacher outside the classroom in order to help Ramon understand the role that markets and prices play in people's lives. In the course of the book, she teaches Ramon to see that prices help coordinate economic activity and they help steer resources to their most-valued use. She also teaches Ramon that much of the economic order we see is of the unplanned variety. At the beginning of the appendix to his new novel, Russell Roberts writes: “This book is my attempt to give the beginner and the expert a better understanding of the role prices play in our lives — how they create harmony between the competing desires of consumers and entrepreneurs, and how they steer resources and knowledge to transform and sustain our standard of living.” The economic lessons that Ruth Lieber tried to pass on to Ramon and Amy The novel discusses at length the role prices play in the life of people. Three most important lessons given in the novel are :- 1. Why raising prices during a crisis (Price gouging) is not a damaging and objectionable matter. 2. How prosperity is created and sustained. 3. Existence of unseen economic order and harmony that shape our daily lives. Price gouging refers to artificially inflated prices on necessities after a disaster, natural or otherwise. Missouri has seen price gouging after the Sept. 11 terrorist attacks, Hurricane Katrina in 2005 and other severe storms in the state. In Missouri-USA, it is against law to take advantage of a desperate situation by drastically increasing prices on merchandise, whether it's gasoline, kerosene after winter storm, hotel rooms, ice, gas-powered generators and other necessities.(Missouri Attorney General ). Economists don’t know the price of everything, and don’t need to know the price of everything. Prices are the information that steer knowledge and resources. In the novel ,Ruth speaks with Ramon about the planned protest against Big Box. Very wisely, Ruth offers Ramon some suggestions about what to do at the protest to make it more effective. But she also warns him that things can go wrong, despite the best-laid plans. The protest goes on as planned, but ends in a riot, with protestors hurling rocks at the Big Box Executive Education Center on the Stanford campus as well as at the Hayward Big Box store at which the opening scenes of the book are set. Public sympathies shift from the protestors to Big Box, a company now seen as the victim of senseless aggression. After the protest Ruth's lesson begins to sink in with Ramon. She teaches him how qualities of human behavior lead to emergent, albeit unplanned, order. In recounting the experience after the earthquake, she argues that Home Depot did not have any flashlights because they kept their prices low. On the other hand, Big Box had them because they had raised their prices. Their motivation was not to make sure that flashlights got into the hands of people that valued them the most. Their motivation was simple profit. But their actions forced people to determine whether or not they really needed a flashlight. But in acting, some may say, greedily, they solved an important problem that every society faces: how does output get rationed among the citizenry .As quoted in The American Interest Online (Tyler Cowen)“ in the United States, most economic resentment is not directed toward billionaires or high-roller financiers—not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise.” The following passage ( Russel P137) gives the most important lesson of the book. Ruth says: "It's hard to imagine the invisible hand. After all, it's invisible. Leaving things alone, leaving people to their own desires and dreams would seem like the last way to make the world a better place. So most people have a natural disposition for using the government to make things better. It would seem that managing something is always better than leaving something unmanaged. But it's not true. I think the world would be a better place if more people understood the virtues of unmanaged, uncoordinated, unorganized, undersigned actions." The case for a better understanding of how prosperity is actually won and sustained in a globalizing world is well argued in a new book “Making It In America” by Andrew Liveris. His thesis is that innovation alone is not sufficient as a basis for a durable leading-edge economy and that the American economy cannot be lifted out of decline by innovation alone. As Liveris explains it, the U.S. has an underlying problem -- the crisis in its manufacturing sector that means, practically speaking, that America does not make things anymore. Beyond the obvious truism that a country cannot increase exports if it does not make things to export, Liveris argues a less well-understood dimension of the challenge, explaining that a country that innovates products and then hands off the production to another country to manufacture will wind up seeing the next generation of innovation come from the country that does the manufacturing. In his words, neither innovation nor exports cannot be sustained for long by a country such as the U.S. that “does innovation and then off-shores the actual production process.”( Andrew Lewis). Novel by Russel explains the logic of economics, but without the technicalities of modern economics. Specifically the story of how people, acting in their own self-interest, improve the lives of others within society, even though this is not their aim. Economic growth and the unseen forces create and sustain economic harmony all around us. Main idea of economic activity is spontaneous order. That order can emerge without human design, which is a difficult concept. Schools of fish, flocks of birds, and language as readily observable examples of emergent order. The novel illustrates artifacts from a visit to a pencil factory to show how manufacturing pencils illustrates emergent order. Planning is often useful in conducting our daily lives, however prices play an automatic but un- planned role in conveying “the particular circumstances of time and place” and coordinating the disparate plans of individuals. An especially clever analogy is between ant pheromones and prices as efficient mechanisms for disseminating information among beings that cannot possibly acquire or process all available knowledge. Just as prices are fundamental to the market process, the dynamism and entrepreneurial discovery embodied in emergent order are necessary for increasing human productivity and prosperity. On a micro level, productivity enhancements such as gravity-fed food and watering systems have made it possible for the average worker on an egg farm to produce a staggering 120 million eggs per year. On a macro level, the standard of living of a typical person today compares to even the wealthiest people who lived a century ago. Even people of modest means now have running water, modern appliances, and vastly improved medical care relative to yesterday’s richest people testifies to the wealth-generating capability of the market process. The most important fact for a voter or politician to know is: No single person can make or dominate the pencil manufacturing industry, which is a small item in daily life. To make pencils , loggers felled the cedar trees, truckers hauled them, manufacturers built the machines that cut the wood into five-sided portions to hold graphite mined in Sri Lanka, Mexico, China and Brazil. Miners and smelters produced the aluminum that holds the rubber eraser, produced far away, as were the machines that stamp pencil name in green paint, made somewhere else, on the finished pencil. Producing this simple, small device is a big achievement. Markets allow order to emerge without anyone imposing it. The "poetry of the possible" is that things are organized without an organizer. The graphite miner in Sri Lanka does not realize he is cooperating with the cedar farmer in California to serve the pencil customer in Maine. The boss of the pencil factory does not boss very much: He does not decide the prices of the elements of his product—or of his product. No one decides. Everyone buying and selling things does so as prices steer resources hither and yon, harmonizing supplies and demands. Goods and services, like languages, result from innumerable human actions—but not from any human design. The lesson learnt is that we create many economic activities like manufacturing pencils, with our actions, but not intentionally. They are tapestries we weave unknowingly. They are emergent phenomena, the results of human action but not of human design. Other Economic Lessons Learnt While explaining prices, emergent order, and prosperity, the novel gives many other economic lessons. These are summarized as following 1. Price gouging means increase in price of items at the time of urgent need or crisis. There is no conclusion whether it is fair or unfair; however, the novel says it helps to reduce un necessary demand. The question that was not asked by the author is – If what Big Box did was price gouging, would it be okay if someone picked up all the flashlights from the Home Depot and sold them right outside Big Box for a price just below twice the regular price Big Box was charging. 2. Alleged exploitation of workers by Wal-Mart, and the fallacy that labor markets share the zero-sum nature of a game of musical chairs (the fixed-number-of-jobs fallacy). 3. Common caricatures that economists are “pro-business” and people care only about money. 4. There is criticism of the current state of economics instruction. Supply and demand curves look like an “X” and government can improve on “market failure” arising from pollution. 5. Many questions have been raised for further study like:- i. What is the source of America's high standard of living? ii. What drives entrepreneurs and innovation? iii. What upholds the hidden order that allows us to choose our careers and pursue our passions with so little conflict? iv. How does economic order emerge without anyone being in charge? v. How our economy works ? vi. What drives innovation? vii. What drives entrepreneurs? viii. What guides prices, and how does economic order emerge without anyone being in charge? ix. What are the theories of emergence and complexity?. 6. The market makes people pay more than the law requires to certain class of workers because they have alternatives. 7. Capitalism is a profit and loss system. Corfam—Du Pont's fake leather that made awful shoes in the 1960s—and the Edsel quickly vanished. But the post office and ethanol subsidies and agricultural price supports and mediocre public schools live forever. They are insulated from market forces; they are created, in defiance of those forces, by government, which can disregard prices, which means disregarding the rational allocation of resources. 8. To disrupt markets is to tamper with the unseen source of the harmony that is all around us. 9. The spontaneous emergence of social cooperation—the emergence of a system vastly more complex, responsive and efficient than any government could organize—is not universally acknowledged or appreciated. It discomforts a certain political sensibility, the one that exaggerates the importance of government and the competence of the political class. 10. Government is important in establishing the legal framework for markets to function. The most competent political class allows markets to work wonders that government cannot replicate. 11. People, and especially political people, are rarely grateful to be taught their limits. That is why economics is called the dismal science. 12. The core economic principle is how price and price alone serves as all the information that is needed to orchestrate the complex and distributed ecosystem that has no central authority and no other channels of information. 13. The novel does not ask or explain why some are willing to pay $4 per pencil when Target and Walmart sell a box of two dozen pencils for 25 cents. What is missing is that while price alone serves as the signal, it is not something decided purely by supply and demand equilibrium. A marketer has control over the price they charge and improving customer willingness to pay. 14. The novel touches on economics topics like game theoretic thinking and choosing a dominating strategy. 15. Market is the institution best suited to meeting the myriad desires of people, rich, poor, and in between actions of the market may seem unruly, and at times unfair, but that order emerges naturally. 16. Fruits of the market are “the result of human action but not the result of human design”. 17. Economics is about greed and economists treat people as cold, calculating, and seemingly uncaring individuals. References Tyler Cowen (January - February 2011 issue) The American interest Online. Retrieved from http://www.the-american-interest.com/article-bd.cfm?piece=90730 may 2011 Chris Koster .Missouri Attorney General Consumer Encyclopedia Price gouging Retrieved from http://ago.mo.gov/ConsumerCorner/encyclopedia/price-gouging.htm Andrew Liveris. The European Institute “Make It In America” How Can the U.S. Come Back as an Exporting Power?( February 2011) Retrieved from http://www.europeaninstitute.org/EA-February-2011/make-it-in-america-by-andrew-liveris.html Russell Roberts (2008) The Price of Everything: A Parable of Possibility and Prosperity. Retrieved from. http://books.google.com.pk/books Read More