A Lesson in Greed

This is really a response to the likes of John McCain and Mike Huckabee when they attack companies and CEO’s as “greedy”.  When it comes to our economy or any capitalist economy the term greed gets thrown around a lot.  It gets thrown around by the masses.  I can forgive that because many haven’t studied some very basic economics.  What’s more troubling is when a politician uses the term.  This, of course, is a term most used by liberals.  To be honest I’ve come to a cross in the road.  On the one hand I would like to believe that these people are just ignorant.  I would feel better about them being ignorant, but that’s still a scary thought considering they are our leaders.  On the other hand they know better yet are CHOOSING to be ignorant.  As a good friend of mine says “willful ignorance is not a badge of honor”.

However, I want to get back to the meaning of greed.  Everytime prices go up many assume it’s greed by the company.  I heard on Sean Hannity’s show a caller call in to say “the economy is so bad because of food prices rising” and I got an email from a family member saying something to the effect of “if companies were less greedy our economy would be stronger”.  It then started to hit me that I wanted to write a piece about some foundational concepts of a free market economy.  The basic foundations of a free market economy are prices and supply and demand.  It’s as simple as that.  However, first I think Thomas Sowell best describes the fear of greed when he says

Just as primitive peoples tended to attribute such things as the swaying of trees in the wind to some intentional action by an invisible spirit, rather than to such systemic causes as variations in atmospheric pressure, so there is a tendency toward intentional explanations of systemic events in the economy, when people are unaware of basic economic principles.

What this means is that people automatically assume it must be some unprovable factor of greed as an intention for higher prices rather than changes either in government law or else supply and demand.  In a competitive free market it’s very, very difficult to be greedy as far as prices go because someone WILL find a way to undercut your prices or else people will leave on their own and find some alternative.  People’s responses to prices are what create both shortages and surpluses.  When a price is high on a product then people are less likely to buy that item and that will create a surplus of said item.  As the surplus grows the price goes down and then people become more attracted to the purchase.  As more people buy this item at the lower price it creates a shortage.  This the role of prices, but it goes even deeper.

We have to remember that every cost of doing business is pushed to the consumer.  That’s just common business principle.  Whatever the add on to the individual product is the profit.  I mention that because the prices that we see at the store aren’t the only prices that are a factor.  Assuming there is no government mandated price controls we have to figure in certain costs such as: labor; bills to run machinery, electricity, water etc etc; maintenance; transportation; in the case of food there’s ingredients; and of course taxes.  These prices are all subject to change that will affect the cost of the final product we see on the shelf.

For instance with the prices of energy going up as well as gas prices it’s no surprise that transportation and common bill prices would go up.  The consumer will see this change in the final product.  Of course as we know energy is also a world commodity subject to price change based on supply and demand.  As these rules affect the underlying costs it will directly effect the cost of production which causes prices to go up and down on the final product.  This is called fluctuating prices.  Fluctuating prices based on supply and demand which as I mentioned earlier is determined by the public response to prices help the producer determine what society wants and needs.  There are other variables that I haven’t gone into in this piece(such as the evil known as government controlled prices), but I wanted to cover some very basic fundamental economics.  If you still want to believe it’s greed then that’s your right, but I would encourage those people to consider that there are many underlying variables that effect the prices that we see on a daily basis.