Bad economics in the media

[ClaytonB]

Here's a whopper from Business Insider:

BI: CEOs bragged for months about how they could charge higher prices. Customers are now pushing back.

Now, this is a tired old trope that has been around forever and the media will never tire of using it, any more than soap operas will ever tire of using infidelity as a pretext for murder. It's "a story" and that's why it plays, and it will always sell copy (or clicks) and writers will always use it. But it has no substance or rationale whatsoever.

Let's start with the idea of CEO's bragging. It doesn't even make sense. Why would a CEO brag about raising the price, why wouldn't they just raise the price? Surely, if they have so much power over their customers, they would just wield it, instead of threatening to wield it. So the headline is self-refuting in that sense.

But there is a deeper popular economic fallacy that the headline is playing to. Because it is so plausible to our story-telling brains, I suppose that every fresh generation of humans will be duped by this fallacy until they grow up enough to learn better. This is the fallacy of "price-setting". The idea of "price-setting" is the idea that businesses "just choose" what price they will sell items at. "Hmm, how much will I charge for milk this week? I know, I'll charge $6!" The problem with the idea that the grocer sits in his office and just dreams up numbers to stick on items is that it ignores the fact that customers are highly responsive to prices. Raise the price just 10% and customers will notice, and they will respond by purchasing fewer of that item. Some customers who would have bought two, will buy only one, and some customers who would have bought one, will forego it completely. Or, they will walk a few blocks to the next grocery market it and buy it there. And so on.

Market prices are not the result of businesses "deciding" what to charge their customers. Any one business can choose to set any price they want, but they cannot compel other businesses to follow suit. If you want to sell gas at $10/gallon, suit yourself, but no one is going to frequent your gas station since they can just drive a quarter-mile further down the road and purchase the same product for less than half the price.

Another popular economic fallacy in this article is the idea of the "greedy businessmen refusing to pass on savings to the customer". This fallacy is a complete failure to think clearly about what businesses really do. The fallacy only works if you've never owned, operated or worked in the back office of a business.

Let's walk through it:

The business cannot unilaterally set prices... it can raise its prices above market, but this will necessarily come at the cost of reduced sales quantity.

The business owner can pay its employees more and it can reduce its prices below market, but this will reduce profits.

"Aha! We got you! See, the greedy businessmen just refuse to cut their profits, and so they use their power to abuse their employees and customers!" Hold on -- the CEO of a corporation is legally obligated to maximize the profits of the corporation. A CEO can be sued and potentially even face jail time if they intentionally make decisions that harm the interests of the corporation itself (as measured by its profitability). And for good reason -- if a CEO could legally act in ways that reduce the profitability of the corporation, they could make sweetheart deals that would basically just channel the profits of the corporation directly into their own private pockets. In law, that is embezzling and can result in serious consequences, even jail time.

Let's strip away the BS -- this argument is not really about profitability, it is about how the profits generated by corporations are used. In particular, it is about how much of the profit-stream the State is able to capture for itself. In public discussion, tax revenues are treated axiomatically as beneficial to society, generally. The private profits of a corporation (which, for public corporations, are shared to stockholders through dividends, stock valuation, and so on) are treated as a manifestation of "greed". No doubt, many who are in business are driven by plain old fleshly greed. But we must not confuse the heart with the hand -- you can plow a field in order to sow seed or you can plow it in order to sow it with salt and make it infertile. So, it is the intention that determines whether a thing is greed or not.

The real problem, here, is that tax revenues are treated axiomatically as "for the public good". But are they, really? How is the greedy lobbyist any different from a greedy corporate stock shareholder? From the standpoint of "Number Go Up" thinking, both are equally greedy. But at least the greedy corporate stock shareholder is not using the violent force of the State in order to increase the contents of his wallet -- the greedy lobbyist, however, is. And that's the real problem. Everything that is connected to the political grift-machine is just legalized racketeering. It is industrialized bribery. When you eliminate the bribery built into this system, the conflict between private and public interests disappears, and the entire narrative of "greedy businessmen charging exorbitant prices to maximize their profits" collapses.

To clarify, I think that there is a serious moral rot in our current business practices. The idea that profit, in itself, is the sole aim of business is flawed, because it ignores a spiritual principle we find in the Bible: "When you reap the harvest of your land, do not reap to the very edges of your field or gather the gleanings of your harvest. Leave them for the poor and for the foreigner residing among you. I am the Lord your God." (Leviticus 23:22) Yes, even private businessmen (including CEOs) have a moral duty to leave space at the edges for the poor. And our failure to comply with this obligation is part of the reason that the machinery of bribery exists and has become so powerful. It is the spiritual equivalent of a mass-and-spring system... if you pull the spring, it's going to pull back, if you push on it, it's going to push back.

Notice that the gleaning principle isn't about "philanthropy" or "giving to charity". In fact, the current practice of giving to charity from corporate profits that have been reaped to the very edges of the field is precisely what the Bible is sanctioning against. The reason is very simple -- in the process of collecting the gleanings, and then handing them back out to the poor, you make them into charity-cases and you take away their dignity and self-determination. It's a spiritual insult and the entire process is an abuse of the gift of inheritance for the purpose of self-aggrandizement.

In addition, "cut-a-check" philanthropy permits those of us who are blessed with material wealth to wash our hands of our brothers and sisters who were not -- we know as a spiritual matter, that they are in every way our equal in the sight of God, and so having to cope and wrestle with their material difficulties, along with them, is part of God's will for us. The whole point is don't just cut a check, wash your hands, and walk away. But we're afraid of the disease of poverty as though it could somehow infect us through transmission, and so we want to look for ways to make a purely clinical offer of help in order to assuage our conscience without having to actually engage with the world-as-it-is, the world as God has decreed it to be.

Anyway, I don't really have a summary beyond saying that this kind of nonsense will never completely disappear until the end of all things. People who care about liberty and justice, the principles of private property, free exchange and lawful society, have to commit to re-educate each generation as they arise, because these simple economic fallacies will always appeal to the monkey-mind inside of us until we mature enough to understand why it's utter gibberish. And the simple, obvious solutions which have been prepared for you by the bribery-class are always incorrect. "Blame CEOs!" "Tax the rich!" These slogans have no intellectual content whatsoever, they are just operational propaganda designed to colonize the minds of the ignorant (usually, the youth) and motivate them to hold protest signs. This allows the monarch (the State) to wield the club of popular opinion over the lower nobility (businessmen), who are then forced to offer up a larger cut to the boss in exchange for the privilege of being permitted to do business.

Relentless, gentle, inviting economic education is the first step in stemming the tide so that the youth are armed with the mental weaponry required to understand why headlines like this are utter nonsense, without falling over the cliff into R-Swamp jingoism. The Left is wrong on purely intellectual grounds, there is no need to go out with counter-protest signs and have a chest-pounding contest with them in the street. They are fighting gravity and they lose by default. Patience, kindness and truth are the path to victory...

[Brian4Liberty]

the CEO of a corporation is legally obligated to maximize the profits of the corporation. A CEO can be sued and potentially even face jail time if they intentionally make decisions that harm the interests of the corporation itself (as measured by its profitability)

*with the glaring exception of going woke and ruining the business.