Fraser Forum

Be nice to the price—be very nice to the price

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Be nice to the price—be very nice to the price

In the Fraser Institute seminars I and some American friends do for Canadian journalists, introducing them to the basic concepts of economics in two-and-a-half days, we have a section called “Be nice to the price.” In it we show how supply and demand determine prices and how prices therefore contain important information about costs and benefits. The supply “curve” is really a cost curve and the demand “curve” is really a curve showing consumers’ benefits. Put the two together and they encapsulate all we know about benefits and costs.

As a rule, you want to be nice to the price—really, the price system—because it is an extremely economical way of using all the information that exists about costs and benefits. Plus (maybe its biggest advantage) so long as you enforce people’s property rights, it operates all on its own, without government having to do much of anything.

Hence the policy recommendation that governments not interfere with prices but let open, competitive markets set them.

But realpolitik suggests there’s another sense in which governments will want to be nice to the price—in this case established prices, even those not set by markets. A couple of things made me think of that this week. First, reading James Woods’ review of Charles Moore’s biography of Margaret Thatcher, the third and final volume of which has just come out. At one stage, Woods reminds us that in March 1990 “some of the worst rioting in modern British history swept through central London, as thousands of citizens protested the new poll tax” (which the government preferred to call the “community charge”). That may be a little reductionist in its explanation of the riots—other things were going on, too—but there’s little doubt that unrest over the tax contributed to the riots and also hastened the parliamentary rebellion that resulted in Mrs. Thatcher’s ouster.

Just after reading that I saw an update on the current unrest in Iran, which doubtless also involves many things but whose proximate cause was the government’s recent decision to raise gasoline prices. In such matters, autocratic governments often don’t mess around. The price hike was 50 per cent. Even after such a big increase Iranian gas prices would still be among the lowest in the world at about 50 cents US. On the other hand, Iranian per capita GDP is only about $US20,000, so a 50 per cent increase will be noticed, even if it’s on a low base.

There’s unrest in a lot of places these days and it often seems to have to do with price changes. In Chile the spark was a relatively small increase (four per cent) in subway fares. After several weeks that has now led the government promising constitutional reform. In Egypt recent protests also had at least partly to do with rising prices. Price hikes in the region’s generally subsidized food sector are also thought to have helped spark the Arab Spring in 2011.

In our own recent history, as well, civil unrest sometimes follows increases in regulated prices. In 2012 Quebec saw prolonged demonstrations in response to the Charest government’s attempt to raise university tuition—from a ridiculously low $2,168 a year to just $3,793 between 2012 and 2018. Though completely justified (in the view of many of us) that was an attention-grabbing 75 per cent increase, albeit from a low base and over six years. In the end, of course, the government bowed to the pressure and withdrew the increase—very likely to the long-term detriment of the province’s universities.

Of course, one of the greatest examples of civil unrest of all times, the French Revolution, was in part sparked by sharp increases in the price of bread, as well as by a widely resented tax on salt. (Hearing about this in high school history class, my peers and I couldn’t understand how a tax on so trivial a thing as salt—so cheap and plentiful in the 20th century that none of us could have told you its price—could spark violent revolo-o-o-tion, as Mick Jagger would pronounce it. But that’s just one more way, among thousands, that modern life is so much better than it was 200 years ago.)

What are the lessons here? First and most obvious, if as a government you are in charge of a price, you need to be very, very careful about raising it in double-digit increments. That may mean, painful as this is for me to say, not listening to your economists when they tell you should move as quickly as possible to market prices. They don’t necessarily lose their jobs if citizens react badly. You could.

In short, and in the short run, you will want to be very nice to the status quo price.

But a second, longer-term lesson is that you also want to be very careful about either taking control of or admitting control over a price. If it’s yours and it goes up, you will take the blame and bear the brunt of people’s anger. Granted, in this day and age, when government is held responsible for just about everything that happens, denying control may not be easy. But if there’s any chance you can, you should deny, deny, deny at any and every opportunity.

In this long-term view, as we emphasize at our journalism seminars, you want to be nice to the price, whatever it may be, that markets produce. If you can successfully blame markets, your life as a politician will be a lot easier. And in addition to greater job security you will have the satisfaction of knowing you are promoting true economic efficiency, to boot.

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