May 13, 2008
Thomas Sowell, Caplanian

Thomas Sowell gets in touch with his inner Bryan Caplan. My favorite passage:

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

Oil companies enjoying record or even obscene profits while we watch the price of gas go up and up and up and up makes for a great morality tale. But Sowell asks an important question about the supposed obscenity of those profits: compared to what? Sure, $40 billion is an enormous chunk of money relative to most sums with which I deal on a daily basis, but Exxon/Mobil's profit margin is 10.82%, which compares favorably with long-run average market returns. By comparison, Google's profit margin is on the order of 25%. Exxon's profit margins are higher than profit margins for most of the firms I looked at on the Business Ethics 100 Best Corporate Citizens 2007 List, but profits as such are nothing to get upset about; if anything, they should be celebrated because they show that the profitable firm is using resources to create something people value.

This comes with obvious caveats about the political economy and public choice considerations in oil markets. However, I'm skeptical of the view that oil companies are manipulating the marketplace. In its "Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases," the FTC found that firms up and down the gasoline supply chain are price-takers rather than market manipulators. Conspiracy theories can be fun and international political instability definitely plays a role in determining oil market conditions, but I'm not convinced that there's anything more fundamentally nefarious than the normal operations of supply and demand driving up oil prices, all other things equal.

HT: Greg Mankiw.

Posted by Art Carden at 05:24 PM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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