The monetary emperor has no clothes
Simple propositions, repeated often enough become accepted wisdom. I have never found a better example of this than the nonsense of “you get what you pay for” (let’s call it YGWYPF for short ). It will induce some bad-ish personal decisions, which is unfortunate enough, but what if our collective delusion caused by this catchy little slogan does damage much further up the chain? What if even the setting of interest rates, and therefore the most powerful governing factor of all economic activity is also partly resting on this demonstrably faulty idea?
Firstly, let us be clear: YGWYPF is wrong. We can’t know what the right price is if we can pay different prices for the same product or service. If convincing is needed, here are three examples I have prepared earlier:
1) A concert promoter may decide to increase advertising spend, which will raise demand, which will enable him to fill the concert hall at higher prices. As long as the increase in prices outweigh the increased costs of advertising, he is making a smart business move. But is the concertgoer going to get a better concert as a result? That is a hard no. So which price is the right price for the concert?
2) In fact, the seller’s cost do not even have to come into the equation. I remember when a very large (but quite low quality, at best we can call it “cheap and cheerful”) Italian car brand got an importer to distribute their passenger cars in the other side of the world. The importer/distributor, using the fact that many locals didn’t have any information on the brand apart from its “European” shine, decided to “position” the brand more in keeping with the premium German car price bracket, and sold the cars for about a quarter more than business-as-usual would. It didn’t matter they sold 90% less units than would have been possible — the profits increasing from hundreds of dollars to thousands on each car more than compensated the importer, so smart business move then. Just that one marketing term “positioning” should immediately put to bed the whole YGWYPF slogan.
3) In fact, even the amount of work the seller needs to do has nothing to do with the price. Consider the oil shock of the 70s. When the oil producer cartel realised how inelastic the demand for oil is (when you got to fill up, you just got to fill up), they started raising prices. As long as each 1% price rise didn’t collapse the price by about 1%, their sales increased even as the amount of oil traded decreased — more money for LESS work (this trick is called “riding a backward bending supply curve”, one of my favourite lessons in all of my studies of economy). When did you get the right amount of oil for your money, before the cartel realised the inelasticity of demand or after?
As the examples show, demand can be manipulated (say, using advertisement in example 1, or information-asymmetry in example 2), supply can be manipulated (say, by monopolistic practices in example 3), and since both will influence the price, price can very much be manipulated. But how does this relate to monetary governance (specifically the setting of interest rates)?
Central banks have a very simple view of the world: if prices rise, demand must be exceeding supply. We have just listed a few scenarios where prices can be manipulated by the supply side, but that never worries central bankers (they openly and arrogantly call ignorance of supply problems as “seeing through” them) — the dispensing of their venom is aimed at managing demand only. The textbook cycle always quoted plays out only like this: if at a given settings the tempo of say, house building exceeds the rate at which material manufacturers are willing or able to supply materials, either there will be shortages and rationing, or increase in price rises will do the rationing — and economists will always argue for the latter on grounds of hallowed efficiency. Price rises like this means inflation ticks up (increased profits are not mentioned in the venerable textbook). At this stage, interest rates need to be raised, largely for psychological reasons (expectation management). As money is drained through interest payments from people and businesses that have debts, they have less to spend on all products and services, and voila, their demand is reduced (people who own these debts have more to spend, but the textbook doesn’t mention them because they tend to squirrel away their windfalls and don’t add to the pesky “demand”). This overall lowering of demand will eventually force the sellers to lower their prices, just like the increasing demand allowed them to raise them, which sedates the dragon of inflation until the next business cycle. Notice how we are only talking about the trend-setting “demand-pull” inflation-starter here and not the uncontroversial “cost-push” component, where businesses simply pass on increases in inputs.
Prices (and therefore profits, therefore inflation) do rise and fall over time for any standard product. Under all the invented and manufactured variations in demand and supply, what is the “right” price of concerts, building materials, or anything economists would agree on? No-one knows. But despite this uncertainty, economists are cock-sure that all demand-driven raise in prices is never “undesirable price gouging”, but is “desirable price rationing”. YGWYPF. Must be nice for the economists to have this much confidence and cheek. Also, must be nice for businesses to have so much cheek and theory to back them up.
Marketing people may be the primary pushers of the YGWYPF myth, but economists and central banks are their willing allies and powerful enablers because it helps their narrative about the primacy of market. They will produce endless reports showing that profits have NOT increased even when it takes 10 seconds to find out how ever growing percentage of the GDP ends up as profit. “Price gouging” and “profiteering”? No, no, no, those are dirty words, you potty-mouth — how can they when YGWYPF? Increased market concentration over decades? Nope, you uninformed dope, the restricted supply by the monopoles formed did not increase prices, therefore profits. Previous low interest rates did increase demand, but profits? Somehow not. Emergency government budget handout largess did increase demand, but somehow… not profits. The predominant story around 2024 should be that wages are going backwards and profits are going gangbusters, but reading the economics columns, you’d swear it is still businesses that are doing it tough and somehow it is the backward-going wages that need to be further reigned in. The mainstream platformed economists, I mean the brazen lying sacks of potatoes know not to bite the hand that feeds them and will keep the game going, spewing bare-faced lies that takes ten seconds to disprove:
Finally, to the glaring flaw in the highfalutin monetary theory. Using the central banks’ own insights, the recent, extraordinary episode goes like this: COVID price rationing (obviously meaning extra profits, but somehow also no — see YGWYPF) kicked the inflation into high gear. Interest rates had to be raised to force businesses into discounting and competing the super-profits away. Except they never profiteered — how could they when YGWYPF? This is the story of the profit that is, to borrow a term from quantum theory, in “superposition”, i.e. simultaneously exists and doesn’t — so, you never know, we may come to call this thought experiment “Schrödinger’s profit”.
Extraordinary. If you believe all that, then you’ll also know the only word that rhymes with “congruent” is “gullible” — but only if you say it very slowly.
