Friday, 30 March 2012

Throwing fuel on the fire

The petrol panic is a useful experiment in how markets work. I don't suppose it was intended as an experiment, and I'm sceptical about claims that it was deliberately engineered for ulterior motives, from distracting attention on the budget fallout to accelerating spending at the pumps to avoid the 1st quarter falling into recession. The affair smacks less of Machiavelli and more of Charlie Cairoli.

A market is conceptually defined as a mechanism for allocating scare resources. The price represents the balance between supply and demand. By their intervention, the Tories have compromised the market by creating a temporary scarcity. In theory, this should result in an increase in price, which would "clear the market" and restore equilibrium, though in the event the price has remained "sticky", presumably because suppliers don't expect the panic to last much longer. The government could have bypassed the suppliers and simply mandated a 24-hour doubling in fuel duty to quell the panic-buying, though this might have led to riots as it would penalise those with genuine need (an empty tank) rather than those whose atypical demand caused the shortage (a half-full tank).

Rationing was never on the cards, though that would be a logical consideration for a "strategic resource" such as petrol. However, the whiff of it has been enough to ignite many old tropes, such as the claim that during WW2 people would join queues without knowing what was at the end of them. Presumably they couldn't see the shop-front and were unfamiliar with the area; and presumably they were so reserved and diffident they couldn't bring themselves the ask the person ahead of them in the queue; and they were also so time-rich (despite the constant queueing) that they thought nothing of joining a queue purely on spec.

The panic highlights the problem with homo economicus and rational choice theory, which broadly holds that when everyone pursues their self-interest the aggregate result is optimal. Clearly an action that appears to be in the interest of an individual can, if extended to a large number of people, become sub-optimal for all. This is the premise at the core of the paradox of thrift, which is the key argument against the policy of austerity, namely that if we all cut our expenditure at the same time, the economy suffers a collapse in demand.

In reality, even the individual has failed to achieve a net gain considered in objective terms. At the additional cost of time wasted queueing, he has merely advanced a purchase that he would have made in the future. One could even argue that he is a financial loser because of the time value of money. The situation is even bleaker for the motorist who had a near empty tank, and thus a real need to visit the petrol station, as she has suffered the inconvenience of queueing for no additional gain. I'm assuming she didn't happen to have a jerry can with her and didn't take the opportunity to fill up on hot pasties.

What's of more strategic interest is the willingness of the Tories to interfere with the workings of the market. This should really be anathema to them, if you assume they really do believe in free markets. Perhaps this is further evidence of the death throes of neoliberalism following the 2008 crash.

Alternatively, this could be seen as evidence of the fundamental tension within the Tories between authoritarians and libertarians. It is ironic that it is Labour who are adopting the most "liberal" stance in regard to the tanker drivers' dispute, refusing to demand that Unite don't strike and backing the use of ACAS, i.e. treating this as a matter of negotiation between employers and workers. It is the Tories (and Lib Dems) who insist on poking their noses in and taking sides, with predictably negative results.

1 comment:

  1. Hi Dave,

    Great post, I doubt anyone could find fault with your analysis, although I do firmly believe we live in a 3-headed one party state. The 'left', 'right', 'liberal' stuff belongs to a bygone age.

    I really dispair at the public reaction to this issue. It is no wonder we are burdened by an idiot political class seemingly obsessed by the need for media attention and their 15 minute quota of 'fame' if the people (or is it sheeple?) act in this way. One has to wonder what goes through their heads in the ballot box.

    God forbid we ever have a real crisis!

    Keep on truckin' (assuming you have your jerry cans stashed! )