Posted tagged ‘Production and Consumption’

Reaction To EpiPens Increased Price, Reveals Our Economic Ignorance.

September 1, 2016

SAINT LOUIS, UNITED STATES - AUGUST 25, 2016: Two EpiPen auto-injectors used for treatment of allergic reactions.

The angst over the recent price increase of the product EpiPen, reveals our economic ignorance. This economic ignorance in and of itself wouldn’t be a problem in a free market capitalist system. Unfortunately we live in a crony capitalist economic system, where more and more economic decisions are being made through the political process. Businesses are being forced to obey interventionist laws passed by Congress, on the one hand, and cave in to political shaming by ignorant consumers and politicians on the other.

When this point is reached, companies are incentivized to put their resources toward lobbying Congress to pass laws that favor these incumbent businesses. They also donate money to politicians and political parties which is like paying protection money to the mob.

All of these resources could have been used to satisfy consumer demand. But these companies have decided that these resources can best serve their interest if they are invested in lobbying government. This is not how free market capitalism works. This is how crony capitalism works.

The EpiPen kerfuffle is an example of how our economic ignorance has allowed politicians to place the blame for the price increase on Mylan, the producer of EpiPen. The blame should be placed on the very politicians who are doing the finger-pointing. Government intervention into the healthcare market over the last 75 years, culminating in The Affordable Care Act (aka. Obamacare), is what has caused prices to skyrocket. Let’s take a look.

ECONOMICS 101

EpiPen is a product that delivers a life saving dose of epinephrine to individuals who have severe allergic reactions to food, insect stings, and medicines. Lets look at the economic reality of how EpiPen magically appears to perform its life saving task.

As much as people want to think that healthcare is a right, they are literally dead wrong. Healthcare in general and EpiPen in particular, is an economic good. This means it is subject to the first rule of economics which is scarcity.  EpiPen just doesn’t appear out of thin air as if we lived in the Garden of Eden. In the real world, someone has to produce this product, and you don’t have a right to take what a person produces.

The people who produce this product have to be compensated for the cost of production plus a profit. If they can’t make a profit, they would cut their losses and stop producing the product. This is why prices are so important in a free market economy. Prices send information through the production process. Government intervention increases the cost of production, which in turn sends false information through the pricing system.

CENTRALLY PLANNED HEALTHCARE

The Healthcare system was one of the most regulated industries before the Affordable Care Act (aka Obamacare) was passed six years ago. There is no true price discovery in our current healthcare system. This means information about which healthcare goods and services should be produced and in what quantity they should be produced doesn’t exist.

When third-party pays, whether it’s an insurance company or Government, prices are distorted. If you add the fact that insurance companies have to abide by the rules set by Government it is worse. Take a quick glance at this article, EpiPen Price: What To Know, at webmd.com, to see how much Government intervention there is in the healthcare system. Government intervention is essentially an attempt at price-fixing. Price fixing distorts the information sent through the market.

Government has created the monopoly position that Mylan holds with EpiPen. Government regulations have made it more difficult for competitors to enter the market and produce an EpiPen like product. Scan this short article, Why The EpiPen Has A Monopoly (Hint It Is Not Runaway Capitalism), at thelibertarianrepublic.com, to see how Government planners created the monopoly position for Mylan that allows the price to soar.

Supply and demand chart drawn on a blackboard.

SUPPLY AND DEMAND RULE THE DAY. EVEN IN A HAMPERED MARKET.

At a lower price more is demanded and less is produced. At a higher price more is produced and less is demanded. This is the law of supply and demand.

Government had artificially lowered the price, that people were paying for EpiPen, through Insurance mandates and Government subsidies. Because of the artificially low price, demand increased. When Auvi-Q, one of the other two producers of automatic injection devices for epinephrine, was taken off the market by regulators in October of 2015, overall supply was reduced. What happens when demand is increasing and supply is decreasing? The price has to go up to ration the scarce resource. Is this a good thing? It is neither good nor bad. It is just the reality of prices. Prices discovered through free markets not only coordinate supply and demand. Free market prices also reveal the scarcity that exists. But free market prices don’t create the scarcity.

Let’s look at the price of oil to understand what would happen if there were free markets in the healthcare system. When the price of oil was around $120 dollars a barrel, there was talk of oil going to $200 a barrel. But what happened. People started using less, demand started to decrease. At these higher prices fracking became economically viable. The supply of oil started to increase. Frackers started to find more productive methods of extracting oil from the ground. As supply increased and demand decreased the price of oil started to decrease. Because of these more productive methods, fracking wells could keep supplying oil at lower and lower prices. Because supply remains high and demand has just marginally increased, the price has remained low.

Even though Obama’s EPA took government land off-line for fracking, that didn’t keep fracking from happening on privately owned land. The free market pricing system worked to supply more oil to the market at a lower price. Bureaucrats in Government didn’t do this, free markets did. What does this have to do with the price of EpiPen?

In a free market the rise in the price of EpiPen would do two things. People would start using less. And companies would start supplying more. The price would eventually go down.

Because of Government intervention their won’t be new suppliers even at the higher price. They are being restricted from entry into the market by Government rules. Supply won’t increase like supply increased in the oil sector.

If Government and insurance companies subsidize the purchase of EpiPen, and Mylan gets bullied into lowering prices, their will be no true price discovery. False information about production and consumption will be sent through the hampered market. Their will be over consumption and under production of EpiPen. The more the planners plan the more their plans will not work.

CONCLUSION

Central planners, and people who vote for central planning, think that whatever is decreed, will happen. Unfortunately for them economic laws are more powerful than central planners mandates. Unless more companies are allowed to supply EpiPens, the artificially created shortage will continue. If the price is artificially kept below what it would be in a free market, demand will remain high. High demand and short supply means EpiPen will have to be rationed by bureaucrats in Government instead of by prices in a free market. Look at the waiting lines in Venezuela if you want to see what rationing by Government looks like.

The answer? Get rid of Government regulations and let free market prices work. Until people gain understanding about free markets, they will continue to get fooled by slick politicians, and we will remain in this political quagmire.

 

Related ArticleThe Economics of Healthcare vs. The Right to Healthcare, at austrianaddict.com.

Related ArticleLets Look At Government Run Healthcare, at austrianaddict.com.

Related ArticleThe Reality Of Obamacare, at austrianaddict.com.

Related ArticleGruber Tells The Truth About Obamacare, at austrianaddict.com.

Private Property vs. Collective Ownership: One Deals With Scarcity Better Than The Other

November 5, 2015

The first rule of economics is scarcity. There are not enough resources to satisfy peoples desires. Economic systems don’t create this scarcity, it is the natural state of our world. The two questions that economic systems have to answer are, 1) How can limited means satisfy unlimited wants? 2) Which economic system does a better job of dealing with scarcity?

Private ownership of the means of production is the definition of free market capitalism. State ownership of the means of production is the definition of socialism. The economic system that exists in the U.S. today is not free market capitalism. It is a system hampered by Government rules, regulations and taxes. These Government interventions take decisions about the means of production out of the hands of private owners and places them in the hands of bureaucrats.

No economic system that exists today is purely free market or centrally planned. Since change is constant, the direction an economic system is moving is what is important. So economic systems are either moving toward collective ownership or toward private ownership of the means of production. Or as F. A. Hayek said, “moving toward serfdom and poverty or freedom and plenty.”

 

PRIVATE PROPERTY DEALS WITH SCARCE RESOURCES

In this article titled, Why We Need Private Property To Deal With Scarce Resources, Patrick Barron does a great job explaining how private property deals with scarcity better than collective ownership. Here are some excerpts from the article.

The existence of scarcity is true of all resources (such as time, human energy, and natural resources). However, it is not necessarily intuitive that allowing scarce resources to be owned privately is the solution to this problem.

Consequently, socialism appears attractive to many and they turn to having all resources owned collectively for the “common good.” Unfortunately, a society which spurns private property…. often learns the terrible lessons of central planning and the tragedy of the commons (i.e., commonly held resources will be plundered to extinction)

Throughout history, most of mankind has been divided into a hierarchical system of masters and slaves with some gradations between the two extremes. The masters…. devised complex rules-based systems for resource distribution….. And ultimately, these plans depended upon pure terror for enforcement. But this so-called solution to the problem of scarcity — restricting the people’s liberty through the use of force — does not work.”

Problem 1: We Can’t Economize Without Effectively Ordering Our Preferences First

“.… Modern economics explained that without private ownership of resources, there was no mechanism for observing or acting on ordinal preferences in which persons prioritize desires from highest to lowest. Without a way to allocate goods according to ordinal preferences, there is no rational means to economize for the betterment of society.”

In other words, without markets and prices, there is no way to know what people really want or need, so the masters never really knew what to order the slaves to produce, what technical means to use, what alternative materials to use, the quality desired, or how much to produce. Thus, the commissars of the Soviet Union ordered the production of inefficiently produced, shoddy goods. The Soviet empire collapsed, despite the fact that Russia is blessed with vast natural resources and an industrious population.”

Problem 2: Few Raw Materials Are Ready To Consume

A second fatal problem with common/government ownership of resources is that few readily available, consumable resources actually exist. There are no resources on the planet that do not require at least a minimum of effort to transform into a consumable product……Of course, most natural resources require much more effort to convert to consumable products, passing through many stages of production.”

…. Consider a hiker lost in the wild. It matters not at all to him that great stands of timber lie within easy reach or that valuable minerals lie under foot. These natural resources require great effort over very long time periods to be converted into something consumable….. A lost hiker does not have the knowledge, time, or previously produced means to convert these basic resources into consumable products to ensure his survival. All this is far beyond anyone’s autarkic abilities.

Now let us assume that someone did harvest trees by felling them, transporting them to a lumber mill, milling them, storing them in a ventilated and dry place for many months before kiln-drying them….. advertising their availability to contractors, keeping sales records, sending out bills, and collecting the bills, only to have a socialist call him a plunderer and confiscate his lumber for free distribution to whomever the masters deemed to be politically advantageous to their continued privileged position. No one other than the favored cronies of government would ever harvest another tree….. production of usable lumber would be monopolized…. prices would increase and quality would decline. Moreover, with no voluntary market at work…. there would be no means of knowing if these resources were being used in a way valued by those who valued them most.”

Problem 3: We Need Private Property To Build Capital

Without the ability to profit from privately owned property, there would be no incentive to provide or withhold capital for any endeavor. Also, a system of private ownership is necessary to determine if that capital is being used in a way the consumers value. The consequences of ignoring this fact of economic science is most evident today in China’s ghost cities, where resources, both natural and human, have been expended for no observable benefit except to advance the careers of politicians….”

The opposite case of resource waste comes from special interest groups…use the state and prohibit exploitation of resources by private individuals…. modern environmentalists have convinced the political class that most progress is unsustainable, dangerous to our health, etc… Society is prevented from benefiting from their conversion to consumable products. The poor suffer the most from these policies as the prices of raw materials — and thus finished consumer goods — are driven up.”

“Private ownership insures that valuable resources will never be plundered to extinction, because their value will have been capitalized. Instead, private owners will seek to make resources as widely available as possible without endangering the long-term prospects for future harvesting of resources. The process of determining a resource’s capitalized value is impossible absent free-market capitalism with strict defenses of property rights.”

Despite both the theoretical and empirical evidence to the contrary, socialists tell us the opposite; i.e., that state ownership of all resources will prevent their plunder and ensure prosperity for all. As Ludwig von Mises explained, though, socialism is not an alternative economic system of production. It is a system of consumption only, and a system of economic ignorance and economic plunder.”

Related ArticleMilton Friedman -Socialism Is Force!, at austrianaddict.com.

Related ArticleWhy Socialism Won’t Work? Human Nature, at austrianaddict.com.

Related ArticleWealth Can’t Be Redistributed If It Doesn’t Exist, at austrianaddict.com.

The Model For Obama And The Pope? North Korea

October 2, 2015

The Burning Platform (click here) shows us that the Pope and President Obama would consider North Korea a perfect model for every nation to follow if we want to stop global warming. Electrical usage in North Korea has decreased since 1980, while South Korea’s electrical usage since 1980 is 14 times greater. We all know that electric power is produced by carbon based fuels, which emit CO2, which is used by plants along with water and sun light to make sugar for the plants and oxygen for us. Wait a second! Does using electricity produce oxygen?

 

DO AS I SAY, NOT AS I DO

I have a question for the Pope and the President. If everyone followed your examples and spent their days pontificating or bloviating about poverty; Who would produce all the stuff that you want us to give to the down trodden? It’s hard to give something away that doesn’t exist. Production comes before consumption. The Pope should know this from reading Genesis 4:19 “By the sweat of your brow you shall eat bread.” And President Obama should know this from reading Karl Marx, “From each according to his abilities, to each according to his needs“.

The people who rail against capitalism, do it under all the comforts that capitalism has produced. They are ignorant of the processes that allows them to do what they do, because they’re born in the middle of the story.

Political Cartoons by Nate Beeler

Here is a great article by Mark J. Perry at Carpe Diem Blog titled What Four Previous Popes Had To Say About Socialism. Needless to say they didn’t give socialism glowing reviews.

Related ArticleWhat Comes First Production Or Consumption, at austrianaddict.com.

Related ArticleWe’re All Born In The Middle Of The Story, at austrianaddict.com.

Must Reads For The Week 3/1/14

March 1, 2014
The pen is mightier than the sword...

The pen is mightier than the sword… (Photo credit: mbshane)

How To Identify Economic Zombies, at economicnoise.com. This is a short article with a great explanation about producing, consuming and borrowing. Here is an excerpt, “Income for a period determines the amount you can spend that period…But borrowing is nothing but advancing consumption that otherwise would occur in a later period. Whatever is borrowed raises consumption this period but reduces it next period when some of the income earned then cannot be spent because it must be used to service the prior debt. Total consumption for both periods is lower than it would have been without the borrowing. That is due to the paying the carrying cost of debt, interest.”

Mortgage Applications Plunge Most In 3 Months Purchases Collapse To 19 Year Low, at zerohedge.com. We still haven’t recovered from the 08 housing bust. The Fed and the Governments policies  created the housing bubble which produced a much bigger supply of housing than demand will support. Since the collapse they have been trying keep the market from bringing supply in line with demand, because they don’t want the price of housing to collapse any farther. Do they understand the simple law of supply and demand which is, more will be consumed at a lower price than a higher price and more will be produced at a higher price than a lower price. By keeping the price artificially higher they are working in reverse of the law of supply and demand. Related article, A Housing Recovery, Or Just Another Bubble?

Government Lies About The IRS Scandal, at economicnoise.com. Government bureaucrats and politicians use their power to target and intimidate opponents. These abuses are never seriously investigated and hardly ever prosecuted. The IRS is the most intimidating agency in the Government because everyone deals with them. When you get a letter from the IRS you don’t open it like a kid opening a present on Christmas morning.

Senator Rubio Responds To Senator Harkin Praising Cuba’s Socialist Health Care System, by Jason Howerton, at theblaze.com. Senator Harkin must have been taken to Cuba’s version of a Potemkin village. Who do you trust to tell the truth, Senator Harkin who is a true believer in socialized medicine, or Senator Rubio whose parents came from Cuba. Both may have a degree of conformation bias, but whose side does history support?

Surgeons Reconstruct Baby’s Skull With 3D Printing Technology, by Loren Grush, at foxnews.com. and Shale Boon Is Only In The First Inning, at bizjournals.com. I say these at aei-ideas.org. Even though Government tries to control health care and stop carbon based fuel production, technology combined with whats left of the free market is finding new, better, and less expensive ways of doing everything. What would exist today if Government had stayed inside of its Constitutional restraints?

Trouble In Paradise? …Fed’s Fisher Blames Congress And Voters, by Chris Rossini, at economicpolicyjournal.com. Here’s an excerpt from the article, “Bottom line? We don’t need the elected “regulatory authorities”. The free market is the ultimate regulator It plays no favorites, bails out o one, and tilts in no one’s direction. There is no tougher regulator than the free market. We also don’t need the non-elected central planners at The Federal Reserve. What we need is Liberty.”

Revised Q4 GDP Tumbles 26% From Initial Estimate To 2.4%; Personal Consumption Hit, by economicpolicyjournal.com. The 2013 4th Quarter GDP was cut from 3.2% to 2.6% because,  “the consumer was not as strong as had been initially expected”. I’m sorry but the truth is production was not as strong, because you can only consume what has been produced. Keynesian indoctrination has us believing that consumption drives the economy when in reality production is what drives the economy and allows us to consume.

This is from a site called thisisindexed.com, by Jessica Hagy. She uses charts to, as she says, “make fun of some things and sense of others.”

Her graph below tells me that people who receive largess from Government, whether it’s a welfare recipient or a crony capitalist, are more willing to give up their freedom and be a slave of the State. They have less of a desire for individual freedom as their needs are increasingly met by Government. It’s sad but true.

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A Keynesians Dream, Cruise Missile Strikes In Syria.

September 6, 2013
A Raytheon Tomahawk Block IV cruise missile du...

A Raytheon Tomahawk Block IV cruise missile during a U.S. Navy flight test at NAWS China Lake, California (Nov. 10, 2002) (Photo credit: Wikipedia)

THE KEYNESIAN MAGIC OF GOVERNMENT SPENDING

If we believe Keynesian economics, cruise missile strikes will help our economy, and the Syrian economy. First let’s look at how it is supposed to help our economy. By launching a couple hundred cruise missiles at roughly $1 million a pop, the Government will have to spend over $200 million to replace the missiles that are consumed in the attacks. Cruise missile maker Raytheon will be the beneficiary of the spending as they will get paid to produce at least 200 cruise missiles. Raytheon’s employees, stock holders, and the companies who supply parts to Raytheon, for these missiles, will have more money to spend, and as the money circulates through the economy it will stimulate even more consumption. As we all know consumption drives the economy, and if we can stimulate consumption through government spending there will be never-ending economic growth.

The same basic principle is in play as we look at how the Syrian economy will be helped by our cruise missile strikes. What ever our cruise missiles destroy, has to be replaced, whether it is buildings, vehicles, military equipment, and yes even the chemical weapons. Part of the collateral damage will be people, but if you look at it unemotionally, employment will improve because unemployed people will have to take the place of the employed who died. Employment will also improve as people will have to be employed to rebuild what was destroyed by the cruise missile strikes. Since Government only spends on important projects, for the common good, and the private sector spending is for frivolous things that individuals desire, our targeting of Government property will have an optimal stimulative effect for the Syrian economy.

We are consuming missiles when we launch them, and as we know consumption grows the economy. We could be selfish and create a stimulative effect for our economy only, if we launched these missiles into the ocean or a deserted place on the globe, but we are creating a secondary stimulative effect by dropping these missiles on real things. Fortunately for the Syrians we are targeting them, we could have chosen numerous other countries to stimulate with our cruise missile strikes. (more…)

Is The Economy Improving? It Depends On How You Define Improving.

August 20, 2013
Real GDP Contracts Most in 27 Years

Real GDP Contracts Most in 27 Years (Photo credit: inspecie.co.uk)

QUANTITATIVE VS. QUALITATIVE ANALYSIS

We keep hearing  from the administration, and the media, that the economy is slowly improving. They cite unemployment data and GDP data to back this assertion, hoping we won’t dig below the surface in search of the truth hidden in the numbers. How you arrive at the specific numbers, is more important than the numbers themselves. Here’s an example. The environmentalists try to prove global warming by using a vaguely defined  point in the past, and comparing it to this years, or this decades, temperature. If you let me pick the year to be used in the comparison, I could prove global cooling. All I’d have to do is pick a year that was hotter than this year. If you can pick the starting point in a  comparison, you can make the data say whatever you want it to say. This is just one sleight of hand trick that politicians, the elites, and the media use in an attempt to shape our opinion, and move it toward their desired outcome. You have to have a definable standard for a comparison to be made. If the standard can be manipulated, comparisons are meaningless. When they say the economy is improving, we have to ask, “compared to what”. Normally the economy is judged to be improving if (more…)

Too Big To Fail GM vs. Too Small To Save Hostess

August 8, 2013
Box of Twinkies

Box of Twinkies (Photo credit: Wikipedia)

FREE MARKET CAPITALISM OR CRONY CAPITALISM

I noticed Hostess products are back on the shelves again in grocery stores. It leaves me scratching my head about how this could possibly have happened because I thought they went bankrupt. I remember when GM was going to go bankrupt we were told that GM needed to be bailed out to save the company and all the jobs, because we couldn’t see an America without GM. The politicians and the media were banging this drum as loudly as they could, leaving the impression that if Government (using yours and my money) didn’t step in to help, GM would go under and cease to exist. When Hostess declared bankruptcy, the politicians and the  media weren’t beating the same drums, in fact the drums were silent. I guess if GM was “too big to fail”, and Hostess was “too small to save”! Apparently the only thing that saved GM from going extinct, was the rigged crony capitalist bankruptcy set up (more…)