Archive for the 'Economics' Category

Maximizing Profit

CBC radio news is usually quite impartial but when it comes to the issue of goods costing more in Canada than they do in the United States, especially when the dollar is almost at parity, they go full out populist. The more interesting thing though is that it seems that almost everyone voices that they find it fundamentally unfair that they have to pay more for goods than they would if they lived south of the border. I’m not sure how good the “random sampling” is when it comes to finding clips of people willing to speak into the microphone, but people speak of there being a lack of “fairness” and even that the government should do something about the issue.

The fact that this flies in the face of a free market economy where companies are free to profit maximize anyway they are able to is forgotten. Does this mean that people in general do not believe in letting companies price set? Do they believe that there is some “fair price” that companies should adhere to? Perhaps this is true and stores that persist in pricing items higher than they are deemed worthy are labeled and not bought at again (of course the difficulty here is knowing how much of this lack of consumers to a particular store is based on high prices and those more specifically on an issue of fairness, perhaps a study could be done where a store that has some things priced like other stores but others that are more expensive could be clever enough to figure this out).

In economic theory it’s called Price Discrimination and it is the act of a company pricing the same good or service differently to different groups of people for the purpose of maximizing profit. The term comes across as something bad but it’s very active in pricing that many would find normal such as letting older people and students pay less because they have less money whereas working age people have more and are then asked to pay more. It’s also used with coupons that need to be cut out- if the person can’t be bothered to cut coupons out then they are more than likely willing to pay a bit more so they get charged more. The companies that price differently in one country than another are doing exactly the same thing, the fact that it is found to be unfair probably says more about people’s attitude towards capitalism than anything else.

Unions in the Public Sector

I’ve been thinking quite a bit about the prevalence of unions in the Canadian public sphere and the relative absence in the private one, something that I detailed about in previous post. My comments were unsatisfying and left me wondering if I were simply advocating the usual neoclassical economic ideals of free markets in all parts of life including labour.

See, I think that unions do lots of good in the economy. They are the only way for the majority of the workforce to extract anything from their employers. Economic theory normally gets around this by assuming that firms are owned by the same population of agents that live in the economy and so if the firms make money then it is a plus as that will be distributed via a dividend. Of course the reality is much more complex with most stock owned by the wealthy who benefit from any dividends while there are many companies that refuse to either give out all or any of their profits to their shareholders. In these cases its much more difficult to show that the general good is done by seeing the firms make higher profits by lowering the wages of their employees.

My concern is that because the private sector workers are going to be making less in both wages and benefits that they will turn against their public sector brethren. If they aren’t able to form their own unions and make their own wage increases then it becomes an entrenched two-tier system with the winners working for the government. It may seem extreme, but that route is like India where parents dream of seeing their children work for the government because it pays well and is a steady job while the private sector that has the potential to make the economy grow is starved of talent and productivity. Or a more likely scenario is where a government comes into power with the support of the private workers and a mandate to tear apart public workers like several right wing provincial governments have already done in this country.

I’m not sure the solution but it’s a problem that’s only going to get worse.

Misleading Media Lines

This week on CBC Radio’s The World at Six they ran a sequence of stories about India and how it is now an “economic juggernaut” of the world (Powershift). I think that the series was okay and anything that helps people understand what is going on in other parts of this planet is welcome. However, the first day’s program was fun of example of how certain facts, while completely true, have entirely different meanings when they are placed in different contexts.

In talking about the growing middle class there was a short story about a modest house costing over a million dollars in the middle of the city. Because this story came directly off one of how more people had money it made it seem that the city was perhaps bursting at the seams of people with cash to spare. The truth, which can be found in the fantastic book Triumph of the City by Edward Glaeser, is that India’s cities have fierce laws limiting the heights of buildings which force an expansive population to live at a much lower density that others in the world. This limits the available housing close to the centers and with such a restrictive supply the demand from rich people can be much less to see the same price rises as in other places. It isn’t wrong to cite this as an example of a richer population, but it isn’t being completely honest with those who won’t understand the context.

Another “fact” that was talked about throughout the series was that the English speaking nature of so many in India was bound to be a huge benefit economically. While I have read this many times I have never seen proof that this casual thought was anything but. The Philippines have been saying this for ages and yet are poorer than many of their immediate neighbours. If it were true then how is it that Ghana is not doing better than it is with its English speaking and close proximity to Europe? It would be nice if reporters were able to question just a bit more or at least caution the listeners that these are things that are thought and are not proven facts.