If we don’t understand it maybe it’ll go away

Posted by – August 28, 2008

The concept of a market economy is central to the way the world works, so it would probably be a good idea for everyone to have an understanding of it. Nevertheless I was never taught anything meaningful about it at school, and it looks like nobody else was either.

It certainly gets talked about a lot: some people hate it, some people love it. Some people who hate it know that a market is a political system designed to control & oppress the poor using the power of money, ie. a plutocracy. Some people who love it know that it automatically makes the world work in the best possible way: not only is it fair, but it maximises everyone’s happiness, even of those who struggle financially and say that they are unhappy. This follows logically from the fact that people’s lives are determined principally by their free choices, and when people make choices that place them in the gutter, this is because those choices maximise their happiness.

While both the supporters and the critics of markets have ignoramuses in their ranks, I feel that it’s the critics who have a greater responsibility of understanding it. If you want to effectively criticise something, you must first understand it at least at a basic level (this does not apply to continental philosophy).

A couple of months ago there was a reader’s letter in HS on the topic of electrical power capacity. The reader, an engineer no less, was pointing out that the price of heating oil had risen almost to the point where it would be cheaper to heat homes with electricity rather than oil. Since domestic oil-fired boilers also have electrical heating resistors as a backup, he was worried that at the instant that oil becomes more expensive, all those heaters will get switched on, Finland’s supply of electrical power will run out and we’ll be reduced to rationing electricity. His suggestion was that some kind of subsidy be introduced for heating oil to safeguard against this. I leave the question of why this is complete nonsense as an exercise to the reader. If you’re not completely sure, ask about it in the comments and we’ll discuss it. It’s not trivial but certainly worth understanding, so do discuss if you’re interested.

But ponder this: not only did the engineer make the mistake of raising this point, but the people at HS considered it to be a reasonable enough argument to print. These are journalists, people whose job it is to understand and explain the world to us. They are supposed to have greater expertise on almost everything than people like me, but I often feel that the reverse is true. Market-related mistakes like this also occur in articles proper, but I can’t recall a good enough example right now. Of course more pedestrian occurrences of innumeracy like confusing percentages with percentage points or just plain faulty logic also appear all the time.

Here’s another one, also related to the energy market. I’ve often read that electricity is priced according to the most expensive means of production. At any moment, electricity is being produced by hydroelectric dams, nuclear plants, windmills, cogenerating and regular fossil fuel plants etc. These cost widely different amounts of money to run, but the power is all priced at the most expensive type of power, typically non-cogenerating coal plants. Why? This fact is usually given without explanation, which appears to have caused people to believe that

a) some kind of big business legislation is forcing everyone to pay extortionate amounts of money for no good reason
b) there is a conspiracy/cartel on the part of energy producers causing this situation
c) it’s a mystery, scientists are working on it

To clarify this conundrum, consider what would happen if there were a law mandating the price of electricity to be the cost of the average kilowatt hour produced. To clarify further, consider that you want to hire two guys to paint a fence. There’s one guy who wouldn’t work for under five euros an hour and another who wouldn’t work for under ten euros an hour. What salary should you set to get the job done on time?

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