Saturday, 2 November 2013

A conversation with an economist two decades ago

Twenty years ago now I had a conversation with an economist.  Oops.

We were queuing outside a very good, and very cheap restaurant.  Because it was so very good and so very cheap the queues always stretched out the door, but it was worth the wait because it was so very good and so very cheap.

I remarked to this person who shall remain nameless (although his name was Michael) how impressed I was that although people were queuing out the door to eat at this particular restaurant, the owners hadn't put up their prices.

The economist said that it was actually very bad that the restaurant hadn't put up their prices, because they weren't maximising their income, which meant they weren't doing their bit to maximise the nation's income, and they were being equally remiss with regards to the nation's tax receipts.  All those people queuing, also, were standing about not spending any more, whereas some of them might be spending money elsewhere, in bars or cinemas or clubs or some such.

So by not being excessively greedy, the owners of that restaurant were in fact being incredibly selfish.  Not only was greed good but it was a social duty.

Michael told me that the restaurant owed it to society to increase their prices until people stopped queuing, and at that point the price/ demand/ supply equation would have been happily balanced and Michael would have been able to get a good night's sleep once again.  Then the market would be working efficiently.

This kind of thinking seemed counter-intuitive to me, but I thought, hey, this restaurant is incredibly good and incredibly cheap, and I'm hungry.  I've been queuing for ages, let's eat.

I'm sure it was coincidence that Michael would have been able to afford to eat at that restaurant if they put their prices up by ever such a large amount, whereas at the time eating at a restaurant at all was a novelty to me, and if that restaurant had raised their prices it would have been baked beans on toast for me.

However, keeping the prices low had the effect that anyone could eat there, regardless of income.  If you had time to wait you could eat, you didn't need the money.

On the other hand raising the prices would have had the effect that only wealthier people could eat there, but they wouldn't have had to queue.  If you had money you could eat, regardless of time.  Coincidentally if the prices were higher then the wealthier customers wouldn't have had to wait in a queue with less wealthy customers, but I'm sure that was not a consideration.

It did strike me, though, how marvellously convenient it was that Michael had studied economics, which meant he had a high income, and everything he'd learned in his economics classes taught him that if society was arranged for the benefit of those on high incomes, it was for the benefit of everyone.

Whereas at the time I worked in a bar, which paid a pittance, but taught me that if society was arranged for the benefit of everyone then people wouldn't need such high incomes.

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