TheMarketForIdeas

The winter holidays is the time for gifts, carols, for meeting with loved ones, for stories near the fireplace and for memories, for mulled wine with cinnamon and warm cake. I propose to you that you read three stories, woven around the teachings of some famous economists from the past centuries. Although they are a product of imagination, the stories describe phenomena that had and continue to have an overwhelming influence on people’s lives. I hope that what you will read further will remind you of the stories you read in childhood, beside the Christmas tree, beyond the economic lessons.

1. The Emperor’s good intentions – the maximum price

During the Third Century crisis of the Roman Empire, a general become a hero in battles and managed to enter Rome with his legions, proclaiming himself Emperor. To legitimize his new status and to be accepted by the masses, he decided to consult with members of the various social categories to decide what steps should be taken to resolve the crisis. He received representatives from the most important social and professional categories. He was most impressed by the delegation of mothers, the women who bore newborns (the future of the great empire).

At their request, who believed that the milk price of about 8 denari / sextarius was very high and thus prevented them from feeding their children, the Emperor decided to act. In order to solve the problem, but also to obtain the political support of the citizens of Rome, he imposed an edict on a maximum price on the market of 3 denari / sextarius of milk, the violation of this rule being punishable by death. A good measure some believed, “a king who thinks of the people” surely said most… Certainly, the citizens of Rome were happy that at the end a cautious ruler sought to solve the needs of the people. A good emperor was the conclusion of all the talks; The “godfather” who would solve all the problems was the title received from the priests of Jupiter. An unprecedented wave of sympathy and optimism, unseen during the great conquests, overtook the inhabitants of the old city. The soldiers of the new Emperor, devoted, enthusiastic, experienced in the heavy battles for the defense of the limes, whom he led so bravely, penalized mercilessly even the slightest deviation from the new rule. The exemplary punishments, permanent controls, and vigilance of the soldiers have discouraged any visible attempt to violate the new rule. But, after a few days, the milk was more and more out of reach. Farmers were no longer allowed to bring the milk to the marketplaces, the daily feed grain of a cattle was more expensive than the income obtained after the sale of all the milk produced by that animal. The cowherds did not sell any milk and decided to sacrifice the cattle to sell the meat, but soon the markets of Rome were overcrowded. Of course, the price of meat collapsed because of the increased supply and many animals died because they could not be properly fed (the grains were expensive, the price of milk and meat was low) and were abandoned in the fields around the eternal city. The image of the hungry cows agonizing in the fields around the city was revealed to those traveling in those days. The decomposing bodies of abandoned animals made the air unbreathable near the gates of the “capital of the world”.

Very few were those who dared to sell milk on the “black market” because of the extremely harsh punishments, the price practiced by those who risked their lives was exorbitant and only the very rich families could afford it; rumors said the price on the black market would have been even around 30 denari. And beef had become a rarity in the coming weeks, the price rising sharply. Those who abandoned their cattle now bitterly regrated it. The Emperor, notified of the absence of milk on the stands and of the emergence of an “underground” market, ordered the tightening of controls. At the slightest suspicion, people were arrested, beaten and tortured, but the only consequence was the price increase on the “black market.” A paranoid atmosphere lay over Rome, denunciations multiplied, everyone suspected their neighbor, some even tried to get revenge on those with whom they had been in conflict in the past, accusing them of being speculators who are hiding milk. Opinions began to arise that the origin of the crisis was, in fact, the creation of an occult cartel that stored all the milk in the catacombs of Rome to sell it secretly at an exorbitant price. Although the soldiers searched everywhere, they did not find any such warehouse or clues of the existence of any cartel. However, the theory of the occult cartel did not seem credible to the Emperor, milk being a highly perishable product. But the tears of the hungry children made their parents go mad. More and more people have begun to go out on the streets and shout their grief. The food crisis, that arose as a result of the Emperor’s measures, caused the revolt of the population, and the unfortunate general had to flee the city with the few soldiers who remained faithful to him.

After this limit was withdrawn, the milk price did not return to the level before the maximum price was set, being now about 18 denari, much higher than before; there were no more cows to produce milk.

This story is a fiction, what really happened was much worse. In 301, Diocletian established, through the Edict of maximum prices, the upper limit of the price not only for one good but for about a thousand products. The next emperor, Constantine, would have to move the capital, a moment considered by many historians to be the end of the Roman Empire.

2. The sailors’ revolt – or how the minimum wage emerged

On a cool day in the autumn of 1651, in an English port, a captain who had just bought a new vessel announced publicly that he was recruiting crew for a trip to America. He needed ten sailors and promised to pay them with food consisting of 500 g of rice per day. The salary (the rice) was tempting and manages to gather his crew pretty soon.

The trip would take 21 days. Because he knows the route very well and knows that he cannot delay more than a day, the speed of the wind and sea currents being constant, he buys from the port approximately 120 kg of rice, to tide him over until the destination where he will sell the merchandise and buy food for return.

Everyone was happy, they were embarking, everybody gets to his post … some of them already know, the spirit of fellowship seems to inspire the seamen. But after three days of travel, a group of the strongest sailors (Sin, Dee, Kat) revolts, being supported more or less by the other crew members. Thus, they enter the captain’s cabin, drag him to the deck and ask him to increase the daily feed ration for each sailor to at least 700 g / day (the minimum wage) until the end of the journey! Of course, threatened with death, having the sword above his head, he promises them what they want to hear! By noon, when the sailors return to their posts, the captain enters with the leader of the uprising into his cabin to discuss the options in which he can secure the promised food. The captain offers to give up some of his daily food, but it is not enough.

An idea sprang to them: the only realistic solution, in the limited food supply situation, is to give up some of the crew. Returning was not an option, since the shipped goods have to reach the set date. The captain has to give up two sailors. He cannot give up any member of the rebellious group, because they were “in solidarity” with the others and will not accept, he cannot also give up even the very good sailors, who are the most needed… in a little while, decides to give up the younger and oldest member. The leader of the rebels agrees and proposes to throw them overboard, but the captain, not being a murderer, decides to throw them into the ship hold and feed them with the food scraps from the other sailors (unemployment benefits)! 

3. Adventures of the cloth merchant – about work, needs and value

A cloth merchant was preparing to unload his merchandise in the harbor of a colony whose shore was famous for the pearls growing in the deep, highly valued in the merchant’s home. While the sailors were carrying the boats on the ship, a young native came out with a canoe to catch a few pearls. The effort made by this young man to sink and hold his breath for a long time attracted the attention of the sailors who had begun to discuss about the activity of the pearl diver. After the initial discussion about his ability to hold his breath while swimming, a fiercer discussion divided the sailors into two camps. Some argued that the high value of the pearls was the result of the intense work of the young natives, the others claimed that the man worked because the pearls were of high value. The crew was in the face of an aporia: does the pearl diver work because the pearls are of great value or do the pearls have a great value because he dives and makes an intense effort? They will get the answer only at noon when the cloth merchant will tell them the conversation he witnessed between that young pearl diver and jeweler who buys pearls.

After the merchandise was delivered and the money was collected, the merchant turned to the shops and warehouses near the port to buy goods he could sell in the capital at a higher price. One of the most profitable activities was without a doubt the trade in pearls. So, he entered the store of an old friend who was also a famous jeweler buying pearls. In the store he had to wait for the jeweler to finish negotiating with the young diver who offered him two identical, white, perfectly spherical pearls of the same size but wished for the first pearl to receive a higher price than the second , because for the first pearl he spent half a day diving several times, swimming to exhaustion and only after the eighth attempt had he managed to find a shell containing a pearl and the second one was found on a beach, in a shell that had been brought up by the waves. Obviously, the jeweler paid him the same amount of money for the two identical pearls, since his efforts were not relevant to him, but only the attributes of the goods he offered.

After purchasing hundreds of pearls and other materials that were sought after in the capital of the country of origin, the merchant gave the order for raising the anchor. The ship was heading for the native land of the sailors. After two days at sea, a strong storm enveloped the ship, breaking the mast and tearing the sails. The ship had started to tilt strongly and the water flooded the hold, the sailors being forced to unload the boats and jump into the water. The merchant remained captive in his cabin, while the vessel twisted, thus becoming unable to get out because the door was now underwater, and the water flooded in. For a few hours, he managed to survive by breathing the remaining air of an air pocket that formed above him. But the merchant knew that the air would soon become unbreathable. At that moment, he would have paid everything for as little air, would have given away the hundreds of pearls and the whole load for some fresh air without remorse. Air, a vital element that under normal circumstances has no value as long as the need for air is satisfied today and in the foreseeable future, had become the most valuable thing in return for which he would have paid his entire fortune when he was faced with insufficient quantities of it. A strong strike followed by the lateral inclination of the ship allowed the poor merchant to leave the room. The ship was struck by a rock near an island. He was saved! Only a few dozen meters separated him from the shore. With his last effort, he managed to save five wheat bags to transport on land as the ship disintegrated under the action of strong waves.

The next morning, the merchant decided to organize his resources to survive on this unknown island. He decided to determine how each bag will be used (the bags were identical):

– the first bag will serve him for the preparation of the bread which will ensure the survival for one year;

– the second bag for feeding birds and small animals that will provide him with a balanced diet, an intake of eggs and meat which will keep his vitality and health;

– the third bag as a planting material so as to obtain a crop that will allow him to survive another year;

– the fourth bag will be used to make an alcoholic drink that will keep his morale high;

– and the fifth bag for food to domesticate animals that will keep him company.

After only two days, since the bags were not properly stored, a few rodents ate the grains from the first bag. Will the wandering merchant give up the bread, give up feeding? Definitely, he will choose to live by renouncing the satisfaction of the least important need (domestication of animals that will become pets). Whatever bag was lost, the merchant lost the satisfaction he would have obtained by fulfilling the last important wish. If he were left with only three bags, he would have given up on meeting the least important immediate need, and so forth. The value of any wheat bag is equal to the intensity of satisfaction obtained by covering the least important need. If he owned a hundred wheat bags, the value of any wheat bag would have been very small, because all the needs, which depended on the possession and use of this good, would have been completely satisfied. As the quantity of a good increases, its value decreases, because the marginal utility decreases. The fewer the goods, the greater the utility and the value of those goods.

Perhaps the greatest economic myth: the value created by the quantity used by production factors (or just labor), originates in an error of classical liberals, especially David Ricardo. This mistake has resulted in the emergence of “scientific socialism”, making possible the most aberrant economic system: communism, but it also gives us a good example showing that value is not created by the factors of production.

In Romania, in the 1980s, blocks of flats were constructed according to the same project, in new neighborhoods, on agricultural land, in different towns, for which the same quantities of materials, energy, machinery and labor were used, but the present value of an apartment in such a block is much higher in the capital than in the cities of the mining region of Jiu Valley (although the same amount of work, materials etc.) was used. What is the difference? The explanation is that there are more people who want (for various reasons) an apartment in such a block in Bucharest than those who want an identical apartment in a city in the Jiu Valley.

Value is created by the intensity with which people want a good, not the effort they have put into transforming that object. For this reason, the right allocation of resources to society must be done by value (as much as others want the result of a man’s action), not by merit (the effort of the producer of that good).