The elasticty of petrol demand: Boy (and Girl) Racers

But most of the time we assume (or have evidence that? -Matt?) petrol demand is fairly inelastic (hence the proposals to vary GST on petrol). With this in mind I was quite intrigued to see this article about Nikki who switched to driving her van when petrol prices soared and has since switched back to her EVO VII now that prices have fallen.

Her demand for being able to drive everywhere is inelastic, but her derived demand for petrol appears to be quite elastic:)

A critique of the Austrian and Chicago schools?

Over at Economist’s View there is an interesting piece from a book named “History of Economic Thought: A Critical Perspective”.

Now I don’t disagree with large parts of this. It is indeed fallacious to state that any CONCLUSION is value free – as it never is.

However, I feel that the piece mixes up its attack on the conclusions of the Austrian and Chicago school with the general neo-classical method – which is, in itself, closer to value free and objective. As the actual article says:

Their science applies everywhere because it applies nowhere. Most theorizing by these schools is purely tautological.

Now this may make the descriptions “unscientific”, but conveniently it also makes them value free.  Remember, the purpose of these “tautologies” is to create statements that we can use to show relationships between things in logical terms – they create a framework that allows us to then apply value judgments and reach conclusions.  Currently, this is one of the main roles of economists – to create a framework that can have value judgments added to it to create descriptions and predictions.  Economists often move a step further and create testable hypotheses, hypotheses that are supposed to describe, or possibly even predict what is going on.  However, another set of value judgments is then required to “prescribe” policy given these descriptions or predictions – this is a bigger step than some economists realise.

Still, for now let us take the implied “argument” that Austrian and Chicago economists are said to use in the above linked article, and see if we can adjust it to suit the way I see things :P

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Paymark and December shopping

In an article filled with interesting facts, James Weir from the Dominion Post looks at the Paymark data.  This data gives a strong indicator of what happened to eftpos sales over a month – which is probably relatively similar to what happened to retail sales itself.

Now, I agree with them that these numbers indicate relatively flat volumes – as even with the collapse in petrol prices, total retail prices are up by at least 3% on a year earlier.

Furthermore, their point about the excessively strong appliance sales figure is very apt.  Prices are down but values are up 15% – that is some strong volume growth.  The reason for this is probably precautionary – all the statistics suggest that people believe now is a good time to buy appliances, but in a few months it won’t be.  Interestingly, this is not what we would normally expect during a recession – especially a credit driven one!

One thing I want to point out in the article though is the perceived “strength” of food and grocery sales.  Sure the value is up 10% – but so are the prices!  As a result, volumes would have been flat.

Still, these are some interesting numbers – and they are extremely timely!

What happened with Boxing day?

The news stories all seem to indicate that Boxing day was a huge success for retailers (*,*).  If this is the case, then the rapid slowdown in retail spending recorded over November and early December may have been the result of timing issues and price expectations, rather than poor consumer sentiment.

What do I mean?  Well, it is possible to delay transactions – buying the same thing tomorrow is a substitute for buying it today.  As a result, if consumers thought that there would be big sales on boxing day, they may have put off purchases earlier in the month.

Now, if this is the case, retailers appear to have caught the consumers here.  When I went shopping, the sales appeared to be little different to the sales available prior the Christmas.

Even with the lack of cut price deals, people obviously still went out and bought things – I couldn’t even find monopoly at the Warehouse :(

What was your impression of the boxing day sales?

Are we overplaying the crisis

I noticed that there were some end of 2008 articles by Michael Laws and Fiona MacDonald.

Both take economists to task, one for doomsaying and one for obsessing about growth. Fundamentally, both articles have one theme in common – economists are exaggerating the impact of the crisis for the man on the street.

Sure, there is always some truth in this. Not everyone will be made worse off – in fact, many people will actually end up better off as a result of the recession (namely those that can keep their jobs and elevated wages). Anyone that reads this blog can tell that the authors here do not feel that the impact on New Zealand will be as severe as it will be for the US or UK. However, New Zealand is not immune to the gyrations of the international economy!

A collapse in the price New Zealand receives for the things it sells overseas is now a distant possibility (infact, in some respect it has already happened). Furthermore, New Zealand has borrowed a lot – with overseas investors now more nervous about lending this is bound to lead to some hardship.

Stating that things will be fine, or that we need further increases in real wages to remove our debt (which have been rising strongly in New Zealand, contrary to the authors statements), illustrates either a misunderstanding of what is going on or a blatant disregard for the risks we face. I would rather listen to the educated panic of the Bernard Hickey’s and Gareth Morgan’s then the arbitrary rambling provided by Michael Laws. Of course, I am an economist :P

Technology as king?

Over the holidays I had a little peek at “the Universe in a nutshell” by Stephen Hawking.  Early on in the book he states that it is technology, not political systems or economic dogma, that has led to the vast improvement in living standards in modern times.

Now to a large degree, economists agree with this idea (here, and here).  Technological progress increases the usability and availability of resources, expanding choice and satiating desires.

However, the creation of technology also relies on the political and economic system of the day.  An environment that rewards and promotes progress is likely to experience more “technological advancement” than one that doesn’t.  As a result, there is a trade-off between technology and types of social structures – and issue that does involve political science and “economic dogma”.  Just because technology is a closer link in the chain towards higher living standards does not mean that other elements are inconsequential.

Furthermore, the social structure of a group does influence living standards – in so far as it influences happiness.  The belief that better technology will increase happiness is just that – a belief.