State of Economic Illiteracy

Ronald Bailey | January 30, 2006

If you want a despairing (although admittedly not scientific) indication of just how far from understanding demand and supply Americans are, check out this MSNBC poll. Sigh.

Hat tip to Marc Hodak for the link.

P.S. No oil stocks were flogged in this blog item.

Comments

|1.30.06 @ 12:33PM|#

Could it be that this does not bother me too much because not only do I lean toward free markets, but I am a shareholder of XOM? If you can't beat 'em, invest in 'em.

MP|1.30.06 @ 12:38PM|#

So when an oil company has record losses are they:

A) Engaging in predatory pricing?
B) Suffering from their own business decisions and/or the business climate in general?

I bet the same 95% would answer B without giving a moments thought to their contradictory position.

taktix|1.30.06 @ 12:40PM|#

I'd like to see what constitutes a "fair" price for gas to those who answered "C."

|1.30.06 @ 12:40PM|#

Of course, there's a major component of oil pricing that every consumer is forced to pay and that isn't determined by the free market...
but for some reason, the survey didn't mention taxation.

Mike|1.30.06 @ 12:45PM|#

Yeah, taxation (federal + state) adds something like 40 cents a gallon. I'd love to see a service station show their price on the billboard taxes excluded and then itemize it on the receipt! A good way to start a revolution.

|1.30.06 @ 12:45PM|#

I am not surprised in the least. People form opinions by repeating what they hear everyone else say.

|1.30.06 @ 12:47PM|#

Exxon had an advertisment today in the Wall Street Journal. It showed its net margins, as compared to the net margins of other industries. In that chart, big oil's net margins were nearly the same as the overall economy net margins. Unfortunately, posting something like this in WSJ is like preaching to the choir.

Mike|1.30.06 @ 12:47PM|#

That poll would probably have much different results if it were on foxnews.com or even cnn.com, I think MSNBC is the most liberal of them all.

|1.30.06 @ 12:48PM|#

This should be no surprise for anyone who's seen some poll results regarding attitudes towards free trade.

Still, while I don't think American oil companies are engaging in much price gouging, I think the profit surges they're seeing should act as a wake-up call regarding just how much certain unsavory governments benefit from a boost in oil prices, and how much spare cash it provides them with to stifle reform at home and stir up trouble abroad. The latest case-in-point should come soon, when Iran and Saudi Arabia use some of their excess oil money to help the Hamas-led PA with its funding problem.

|1.30.06 @ 12:49PM|#

I'd love to see a service station show their price on the billboard taxes excluded and then itemize it on the receipt! A good way to start a revolution.

Interesting idea. I wonder if a gas station could list $1.45 on the billboard and just add the tax at the pump, or if such behavior is illegal.

|1.30.06 @ 12:53PM|#

taktix,

i think answer "c" was for those who find the issue to be so confusing (the processes of production, the taxes, the politics, the volume of dis/information) that they aren't sure what a fair price really is.

for most people, i think "c" would be the most honest answer they could give. it was my answer at least, because i have no friggin clue as to what a fair price would/should be.

|1.30.06 @ 12:56PM|#

taktix,

i think answer "c" was for those who find the issue to be so confusing (the processes of production, the taxes, the politics, the volume of dis/information) that they aren't sure what a fair price really is.

for most people, i think "c" would be the most honest answer they could give. it was my answer at least, because i have no friggin clue as to what a fair price would/should be given such a complex situation.

Ed|1.30.06 @ 12:57PM|#

No surprise. The booboisie cheer when prices drop, complain when they rise, and don't understand the mechanism(s) which drives both scenarios. Our economic illiteracy is funny and dangerous and sad. Yeah, sigh.

|1.30.06 @ 12:58PM|#

would/should be given such complexity.

|1.30.06 @ 1:01PM|#

Thank God the survey was unscientific.

|1.30.06 @ 1:03PM|#

Let those people drive down into Mexico. They don`t have Exxon,Shell,Chevron,etc.and they are a net EXPORTER of Oil, however PEMEX (the Mex.national oil co.) charges about 7.5 pesos/liter which relates to about $2.35 a gallon.And consider the wages paid to the average Mexican.

|1.30.06 @ 1:12PM|#

Given the experience that California energy buyers (i.e. households connected to the electricity grid) went through in 2001, and the obvious price fixing and market rigging of Enron, and Duke Energy, and the fact that the "oil industry" is controlled by OPEC on the supply side, and by a handful of oil companies on the production side, why would a thoughtful person NOT think that the price of oil and gas is manipulated?

theOneState|1.30.06 @ 1:13PM|#

This reminds me of when all of these people without economic educations thought hilariously that Enron was manipulating the system to inflate...

never mind.

Dave W.|1.30.06 @ 1:14PM|#

I wonder what Exxon Mobil's market share is in the US. That would help tell us if there was a truly competitive market in gasoline or not. How else would you know? Faith? Faith in what exactly?

|1.30.06 @ 1:15PM|#

Kim,

I would love to believe you. Honest. And it is certain that the margin of error is very high on this, but I have a hard time believing its 90 percentage points. One way to tell is to track the poll results over the day to see if there are any spikes among particluar answers. I submitted this to Ron at about 11 am, and so far the results have remained rock steady.

taktix|1.30.06 @ 1:21PM|#

haha! my point was so astute that it required a double post!

|1.30.06 @ 1:23PM|#

I'd like to see what constitutes a "fair" price for gas to those who answered "C."

"Not sure, it's hard to tell what's a fair price for oil."

I answered C. Only because I can't really tell what's an unfair price for oil.

|1.30.06 @ 1:23PM|#

"Repeat after me: self-selecting online polls are meaningless! Self-selecting online polls are meaningless!"

Next you'll be telling us that Hit & Run's best blog award is meaningless....

|1.30.06 @ 1:23PM|#

Ron, since you made fun of a poll on MSNBC, I have to ask: Do you own stock in the News Corporation or Time-Warner?

:)

Ed|1.30.06 @ 1:24PM|#

...why would a thoughtful person NOT think that the price of oil and gas is manipulated?

That's the problem. Big Oil's detractors are not thoughtful people. They're Americans.

|1.30.06 @ 1:24PM|#

Here's a good place to start looking, Dave. There's also this.

|1.30.06 @ 1:27PM|#

According to Public Citizen -- hardly an oil company shill -- XOM is right in the middle of the top 5 in terms of market share.

|1.30.06 @ 1:30PM|#

What would the profits - and the prices - look like if these companies paid for the military bases and other 'national security' initiatives that protect their assets?

I'm guessing that the laws of supply and demand would have me putting solar panels on my roof.

|1.30.06 @ 1:33PM|#

wayne,

If the price of oil is "manipulated", why would it ever go down? The reason that Exxon's record profits are newsworthy is that they are records. In other words, if they could've manipluated oil prices before now, why are they only now having such record profits? And for that matter, why are their profit margins about the same as the rest of the public businesses in the US? Hmmmmm.

The reason oil prices are high can beexplained in one word: China.

The longer answer is that demand is outstripping supply. Therefore the price is rising, and it is this rising price which is necessary to bring about "balance" between supply and demand. The rising price encourages increased exploration, increased conservation on the part of users, increased investment in research and development of alternatives to gasoline, such as solar energy, and coal conversion to an oil substitute, and other ways to extract oil from things like shale. A rising price makes oil fields that were previously not profitable to extract oil from, are now profitable.

In short, markets work. If the US government wants to depend less on foreigners for our supply of oil, then the way to go is to act as a cheerleader for the heroes who are providing more oil outside of OPEC, not to chastise them. And as for that mindblowingly idiotic "windfall profits" tax, that will accomplish the exact opposite of future lower prices, and will increase our dependence on OPEC. Our politicians who would engage in such stupid/demagogic (your choice) behaviour are traitors, pure and simple.

No, I don't have a financial stake in oil or other energy companies, or a stake in a rising oil price. Just the opposite, I own a car and very much want lower gasoline prices. I also hope to live long enough to see thelong run, and therefore I am appalled at those politicians who can't or won't see beyond the next election. I do wish I was foresightful enough to have invested in oil or oil companies a few years ago though. I wouldn't dream of investing in oil in the current punitive environment however.

|1.30.06 @ 1:41PM|#

THERE IS NO SUCH THING AS A FAIR PRICE!

(Sorry, couldn't help myself.)

|1.30.06 @ 1:42PM|#

I was tempted to clear my cookies, and vote again for b, and clear my cookies and keep doing it again and again, but then I saw it had 72000+ votes. Oh well, I won't waste my time. What are the odds that demagogic politicans won't see this poll and act accordingly?

Kim Scarborough|1.30.06 @ 1:46PM|#

h-dawg:

The margin of error isn't 90%. It's 100%. This "poll" should be taken as seriously as somebody who said they could determine the public's committment to free markets by examining chicken entrails.

Don't get me wrong-my point isn't that there's less statists out there than this thing indicates; hell, for all we know, MSNBC's widget is skewed toward our side, due to everyone reading this blog post going there and voting "This is the way the market works".

|1.30.06 @ 1:47PM|#

No, everyone else is wrong and I'm right. The reasons the poll came out the way it did are as follows:

1) As Adam Smith tells us, people are self-centered. (I'd worry more about the loss of my little finger than the death of the entire population of China, remember?)

2) People do not think that demand defines value. Instead, they think in terms of "essences." For every product, especially a necessity, there is a "fair price." It is wrong to sell bottled water for $20 a bottle on a scalding hot day, just as it is wrong to charge $100 an hour to mow someone's lawn, even though under certain circumstances, these prices would be more than reasonable. (You're about to dehydrate; you're desperate to sell your home and a potential buyer is coming by in three or four hours.) People only "believe" in capitalism when they benefit from it every day. Under stress, they return to medieval (really Aristotelian) thinking. And so you get the French Revolution.

|1.30.06 @ 1:51PM|#

Happyjuggs,

Thanks for the economics explanation. I understand that stuff fairly well to begin with. I agree that "free" markets work. My question had little to do with economics though. My point was that, given the recent history with energy and market theivery, why would a rational person NOT be distrustful here? If you touch a hot stove, is it irrational to be reluctant to lay your hand on that stove a second time?

I live in California and I remember some discussions on the Liberzine (now defunct) chat board about the "energy crisis" that developed in 2001. Just like here, that was a Libertarian enclave, and they all yukked it up about how "stupid Californians are, and they are just getting what they deserve, etc". It turns out that, in hindsight, guess what, it was a rigged market and Enron, et al, were deep into the pockets of Californians. It had little to do with supply and demand.

My point is that a blind belief that "it's all just supply and demand" is dumb. It IS sometimes theft.

|1.30.06 @ 1:51PM|#

Anyone who's a parent of a high-schooler (or two) is not surprised by these results. My kids have had to learn: the year of the Louisiana Purchase; how to derive various geometric theorems; where Lesotho can be found on an Atlas (with me assuring them that this will all somehow pay off for them). But they don't have a single requirement to learn basic econ. None. I have offered to teach a class in it (these are private schools where this is at at least possible in theory), and heard them say they don't want to "indoctrinate" their kids in capitalism. So, no, I'm not surprised by this result.

|1.30.06 @ 1:52PM|#

Why freedom is doomed and we are all screwed - in free verse:

Waa! I want free oil!


Waa! I want free medicine!


Market failure! Market Failure!

Dave W.|1.30.06 @ 1:53PM|#

Gosh, Phil. Looking at your stats, it looks like those oil companies have awfully big profits relative to the number of players in the business. Yet capitalism requires numerous suppliers acting independently. Your numbers make it look likely that there is a competitiveness problem in this industry. certainly the Exxon-Mobil and Chevron-Texaco mergers explained at your cited page didn't help.

I beleive under economic theory the fair price is the one that obtains when there are an infinite number of suppliers acting independently. Since Phil's numbers show that this isn't at all what the US gasoline market looks like, it stands to reason that the prices probably are not fair.

|1.30.06 @ 1:57PM|#

Self-selecting online polls are meaningless! They're not simply �unscientific�. They tell you absolutely nothing.

Unfortunately, polls, self-selecting or unscientific or not, are increasingly used to "prove" points, as if enough people believe something it becomes true. Reality and truth don't matter, it's what people believe.

I saw O'Really the other week stating an *opinion* he had, then claiming that he was right becuase a survey that showed that 60 or 70 percent of Americans agreed with him.

THERE IS NO SUCH THING AS A FAIR PRICE!

Thank you, that is the first thing I thought when I read the answer choices, which were poorly chosen because in order to say that there is no such thing as a "fair" price, you have to first say you don't know.

|1.30.06 @ 2:00PM|#

Dave,

You missed big time on basic econ. Capitalism doesn't require "numerous suppliers acting independently." If they're independent, you only need two. If they aren't, you might need a handful doing repeat business over time under reasonable transparency (their self-interest will eventually force their independence). When was the last time you were on E-bay? I have never seen an "infinite" number of bidders for even the most efficient market of Ayn Rand memoribilia.

|1.30.06 @ 2:01PM|#

I picked "c"; in other words, I'm admitting my ignorance in this matter rather than taking a side one way or the other.

|1.30.06 @ 2:03PM|#

Point of order, One-Trick Pony: They are neither "my numbers" nor "my stats." They are links to things you were too fucking lazy to Google yourself. Oh, and you're welcome.

|1.30.06 @ 2:06PM|#

Do you think dairies are price gouging?

Yes, Big Milk is taking advantage of cereal consumers. (92%)

No, this is the way cows work. (6%)

Not sure, but we must end our reliance on foreign milk cartels. (2%)

|1.30.06 @ 2:08PM|#

I've decided to start here. Considering the subject matter, it's quite possible that my eyes may start to glaze over.

If I need help from those of you better versed in these matters, I'll be back.

Dave W.|1.30.06 @ 2:08PM|#

You missed big time on basic econ. Capitalism doesn't require "numerous suppliers acting independently." If they're independent, you only need two.

This is not true. Neither is the rest of the stuff you said, but this is egregiously not true.

|1.30.06 @ 2:11PM|#

I guess you think E-bay is grossly inefficient, Dave.

|1.30.06 @ 2:16PM|#

Oh, and h-dawg is correct. I work in an industry in which there are, essentially, two large suppliers sharing some 90+% of the market, which two or three small suppliers sharing the other 10%. It's been that way for more than 40 years, and the industry seems to be working just fine.

|1.30.06 @ 2:17PM|#

Dave, I think you made that up. There is a fair value or fair price, but it not much to do with quantity of suppliers, just overall supply:

http://en.wikipedia.org/wiki/Fair_price

|1.30.06 @ 2:22PM|#

A market with a bazillion suppliers where 3 could provide better service is not a rational market, and it certainly isn't to be defined as 'real' capitalism.

The characteristic that matters is whether competition can arise, not how many current players are on the field.

Pooh|1.30.06 @ 2:33PM|#

Wayne, you are right to be skeptical (considering that Enron is 2 items above on the H&R page), but giving profits as a raw number is somewhat meaningless. Oil companies are big. Really big. So when they have a good quarter the dollar amount of profits are going to be big. Really big. Though their margins, as has been pointed out, are certainly not ludicrous.

Now the numbers could be massaged to hell, and they could be making a whole lot more money than they claim, but even then, so what? It's hard for me to imagine better market conditions for a supplier of a product than BigOil faces now.

|1.30.06 @ 3:00PM|#

So, what if the oil companies decide to start making biofuels out of corn...

|1.30.06 @ 3:06PM|#

Jason's got it figured out: the barriers to entry are what's important, not the actual number of entrants. If Dave were correct, we would all be obligated to start some kind of company tomorrow in order to maintain the requisite number of infinite suppliers. But we don't. There's good money in oil, and a lot of people with capital think about getting into it but, at the end of the day, as Jozef pointed out, the money isn't that much better in oil than anything else.

Price-fixing requires more than mere collusion between the companies. It also requires that there be no one to enter the market and upset the apple cart. There may be only a handful of big oil companies in the US, but if you analyze the balance sheets, you'll find that those big profits come from pumping the oil out of the ground, not distributing it. That means Exxon-Mobil would have made just as much money selling it to China or Brazil. They're paying what we're paying. Everybody's paying the same, and it's not just the five or so companies "gouging" in the US. All the little companies, all the little distributors, all the producing countries, Chinese drilling companies none of us have ever heard of, all of them in it together.

Dave, you're postulating a gigantic conspiracy theory in which half the world is screwing the other half with no paper trail.

|1.30.06 @ 3:09PM|#

"So, what if the oil companies decide to start making biofuels out of corn..."

Then driving a car everywhere will have two ways to make you fat.

|1.30.06 @ 3:23PM|#

i know we can find alternate sources of fuel that are both cheaper and better for the environment.
why doesnt anyone give a fuck?

R C Dean|1.30.06 @ 3:24PM|#

I beleive under economic theory the fair price is the one that obtains when there are an infinite number of suppliers acting independently.

Requiring that there be an infinite number of suppliers means that you have defined away the possiblity of any market ever being functional.

|1.30.06 @ 3:42PM|#

"Yes, Big Milk is taking advantage of cereal consumers. (92%)..."

I think we should just get to the source of the problem. I prefer to be taken advantage of by big tits.

MP|1.30.06 @ 3:46PM|#

i know we can find alternate sources of fuel that are both cheaper and better for the environment.

I know we can invent a warp drive and cheaply mine the Universe for resources.

|1.30.06 @ 4:04PM|#

I beleive under economic theory the fair price is the one that obtains when there are an infinite number of suppliers acting independently.

Hmmm, interesting statement. Especially in a thread about economic illiteracy.

|1.30.06 @ 4:09PM|#

MP,
I sense sarcasm in that warp drive statement.

I personally think that if the government would stop subsidizing the oil companies and the farmers we might actually see a more realistic playing field when it comes to bio-fuel. Instead of paying "no-grow" subsidies, let farmers produce all the corn they can grow, price drops to a level where ethanol becomes a viable alternative to un-subidized oil. If it can compete then we have another market choice, what's so bad about that?

Again, get the governments out of fixing the markets and things tend to right themselves.

|1.30.06 @ 6:35PM|#

Ummm....
Fair price?
OPEC?
Geopolitics?

The cost of military action to guard access is/is not figured into market price?

The cost of environmental degradation is/is not figured into market price?

The cost of human rights abuses by supplier nations is/is not figured into the market price?

Fair price? I think the prices are probably low if they are skewed.

rainbowsally|1.30.06 @ 9:02PM|#

We're overlooking the obvious.

The oil companies are essentially a monopoly. They artificially created this addiction to fossile fuels and now that we're running out, piracy seems like the logical solution. (Iran is running out in about 20 years and we have denied them the second most monopolizable energy source--uranium.)

Meanwhile, and while the solution to energy independence remains illegal (http://jackherer.com) or off-topic, remember...

If you vote for politicians that think you belong in jail, you probably do.

The free market is a deadly fantasy, by the way. At least if you believe Adam Smith on the subject. Let me explain the "combinations" or tacit "unions" of the wealthy and put trickle down and the rest of the broken American Dream into perspective.

http://en.wikipedia.org/wiki/Labor_union
The 18th century capitalist economist Adam Smith noted the imbalance in the rights of workers in regards to owners (or "masters") in The Wealth of Nations, chapter 8, Smith wrote:

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate�

[When workers combine,] masters� never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen.

As indicated in the preceding quotation, unions were illegal for many years in most countries. There were severe penalties for attempting to organise unions, up to and including execution.
----

Could the Masters in the New World have found race to be a convenient way to divide the poor against the poor?

Nevermind.

Now that China is the envy of the free world, when we descend into revolt against the illegal redistribution of waning wealth (already a negative figure if wealth is in terms of dollars), no hypocrisy this time.

Native Americans have been waiting in line their fair share longest. They've been waiting for a piece of their own pie the longest.

So if taxation is unfair wealth distribution, what is invasion and taking over lands granted in treaties simply because they had... uranium underground.

Are Libertarians mental invalids?

Maybe, maybe not. But let's let them decide for themselves.

Five percent growth per year. Start with a family owned factory producing one gram of paper the year Jesus was born. How much would the be producing today?

1 gm x 1.05^2006 = ?

The mass of the earth is 5.97x30

How did you do?

[Hint: the paper would weigh about as much as the milky way...]

|1.30.06 @ 9:22PM|#

It is indeed a deep pity that most Americans are so economically illiterate, but then again, I bet that most of them can answer their cell phones without falling out of their chairs, unlike some superior types who shall remain unnamed.

Windypundit|1.30.06 @ 9:35PM|#

I'd like to see what constitutes a "fair" price for gas to those who answered "C."

I answered "C". The only fair price is the free market price. I don't know enough about the energy market to know if it's really free. It's such a political product that I can't believe the market is very free.

|1.30.06 @ 10:27PM|#

This thread achieved critical mass at 9:02PM on Jan 30, 2006. It is my understanding that kookdom is self sustaining once critical mass has been reached.

|1.30.06 @ 11:29PM|#

I blame Bill O'Reilly and Lou Dobbs. But mostly O'Reilly, 'cause he's an arse. His waxing about "the guy" that sets gasoline prices is worth paying the cable bill for.

|1.30.06 @ 11:34PM|#

I think we should just get to the source of the problem. I prefer to be taken advantage of by big tits.

I agree!

If I must be taken advantage of this is the way.

amazingdrx|1.31.06 @ 10:45AM|#

How about charging exxonmob and fellow oil monopoly gamers 2 dollars per gallon to pay for these oil wars? The latest estimate is 2 trillion for Iraq.

Oh you say..they will just pass it on to consumers?

Well I would then have to point out that the equivalent transportation energy to a gallon of fuel in an electric car costs 1 dollar at the current price of 10 cents per kwh.

If anything like a free market existed we would all be driving electric cars and global climate disaster would not be a problem.

When monopoly capitalists like exxonmob and OPEC reap huge windfall profits it comes out of the blood of soldiers and civilians killed in oil wars and out of the pockets of we the people in the form of high energy prices, pollution of the public trust, and trillions borrowed for oil war contractors with america, like Halliburton.

|1.31.06 @ 12:15PM|#

And speaking of economic illiterates.

|1.31.06 @ 1:29PM|#

Sorry, I had to bite.
"Well I would then have to point out that the equivalent transportation energy to a gallon of fuel in an electric car costs 1 dollar at the current price of 10 cents per kwh."

Where do you think the bulk of electricity used in the US comes from?
a) fossil fuels
b) nuclear fission
c) solar panels and wind farms
d) lots of people riding exercise bicycles hooked up to dynamos, all connected to the grid

Hint: the answer isn't b, c or d. A big spike in oil and gas prices would most likely lead to a big spike in power prices too (depending on where you live to some extent).

|1.31.06 @ 4:10PM|#

This poll is invalid. "Big Oil is taking advantage of consumers" is a values statement. "That's the way the market works" is a value-neutral statement of fact. They are not mutually exclusive statements.

Big Oil takes advantage of consumers by jacking up its prices during times of scarcity. That's the way the market works.

The belief that one must be an economic illiterate to believe that there can be something untoward about maximizing profits in the face of human need, rather than admitting that one can have a set of values in addition to a working knowledge of the demand curve, is the central intellectual failure of free market conservatism.

|1.31.06 @ 6:37PM|#

Joe: I think you're misrepresenting what is actually happening in the marketplace. In trading pits all over the world, the oil is being auctioned to the highest bidder. The suppliers aren't "jacking up the prices;" the consumers are. The situation is admittedly muddled because some of the oil companies are producers, refiners, and retailers all at once and many have long-term contracts based on spot prices in markets all over the world but the essential point is that the oil companies aren't setting prices. They are stuck with the prices the market sets.