Addendum – 23 February 2023: Nobody say “super-normal profits”: https://www.rnz.co.nz/news/business/484767/how-air-new-zealand-went-from-crash-landing-to-stratospheric
And still nothing was said about monopoly pricing by the mainstream media.
Let’s assume nothing in this world comes for free.
If you want something – food / shelter / your hip fixed / your water drinkable – these things are available, but they involve a “cost”.
Madness, I know, but if things do involve costs, what do we know about how these “costs” are created, and how they might change?
Economics tells us, they might change for two reasons:
On the “Customer Demand” side
On the demand side, how much something is wanted, relative to its availability, may affect its price. High demand (or its absence) might make things more (or less) expensive, when nothing fundamentally changes its costs.
For example, could you ever imagine now paying US$12.50 for the cheapest available ball point pen when now, they’re so plentiful, consumers pay NZ$8.2 for a pack of 10.
Conversely, if the demand for pens suddenly increased from zero to infinity, things that used to be quite cheap might become more expensive.
Economists call this the Paradox of Value (or the Diamond Water paradox): despite water being the stuff of life, with very high human value, ornamental diamonds command a higher market price.
Explaining this paradox was the triumph of marginalist economics.
From the “Producer Supply” side
Making things requires inputs, which mostly are not for free. Pens need plastic, molding machines, and people to run the machines, each of which commands an “input price”.
As input prices change, so do production costs. Lots of inputs go into making things, but essentially there are three input groups: human labour time, intermediate material capital, and fixed capital “stock”.
And when economists think about how production costs have changed “on the supply side”, we’re thinking about how the price of each of these things have changed.
Its currently fashionable to blame intermediate material cost increases on Vladimir Putin.
And some producers think high accumulated capital depreciation on their capital stock makes their products cheaper.
Or globalisation is the death sentence for high-paying jobs.
But even these three inputs derive from markets where producers of outputs become “customers” with their own demands in the input markets.
But there is a third source of price change which (usually and sadly) goes unreported and is quite overlooked…
Market/Industry Structure
Naive Economics 101 media reporting normally stops at thinking about price change as only supply/demand related.
The “invisible” aspect of change (because its almost never reported), is more subtle and relates to changes in market or the industry structure: what’s happened to all suppliers/consumers collectively that may be systematically influencing costs.
The above linked Newshub article is a classic example of where this hidden third element is exerting a systematic effect on price.
On the demand side, moving from covid-19 to free travel meant demand for air travel went from an artificially restricted zero level, to a pent-up demand high level. That change created demand pressure for flight capacity. Air New Zealand claimed they deliberately increased price to ensure those who urgently needed to fly (and presumably would pay through the nose for the last remaining seat on a plane) could buy that seat if they spent that price.
In Air New Zealand’s defense, it claimed, it’s cost increased because of supply side factors: “… a shortage of some aircraft, rising fuel prices, and inflation had forced the airline to review and increase its prices.” – capital stock shortages and intermediate material cost increases.
The bit that’s missing was the reduction in the number of airline players in the New Zealand market, which gave Air New Zealand a temporary air travel monopoly: the number of providers contracted, which meant Air New Zealand experienced (briefly), virtually the entire consumer demand for air travel.
And it priced its services monopolistically.
As a result, people who wanted to travel more, didn’t. And people who did travel, paid “too much”.
In economics, these are “Deadweight Costs” – higher than normal charged prices, and lower than typical consumed volumes.
LABOUR GOVERNMENTS MARKET POLICY: MONOPOLY “GOOD”, COMPETITION “BAD”
The above, by way of a gentle and intuitive outline of “market forces” is intended to highlight the elephant-in-the-room around much of the governments recent reforms, which have ALMOST EXCLUSIVELY been about creating monopolistic market/industry structures and, in the process, conditions to monopolistically extract value from New Zealanders and business.
Have you wondered what are the cost implications of:
- Having a single polytech provider
- Having a single health provider
- Reducing the number of water providers
On top of this, we have other reforms which have ossified their own markets. These include:
4. More rigid transport markets
5. A less flexible and smaller labour market
6. More rigid urban planning
WHAT DO MARKET REFORM DRIVEN DEADWEIGHT COSTS LOOK LIKE?
Each one of these reforms will result in price pressures which aren’t “supply” driven, nor “demand” driven, but are instead “market structure” driven, and create deadweight costs: higher than normal price charged (less call these Budget Votes, or taxation) and lower then typical consumption levels.
In education, it might be more expensive courses, and less students, and courses offering less choice in what’s taught.
In health it might be a faster and faster growing Vote Health, and longer and longer waiting times or few services.
In water, it might be the introduction of water pricing, and the restriction of water usage compared to existing usages.
In road transport, it might be faster growing local government rates-based funding of public transport, with fewer and fewer people actually using the public transport service.
In the labour market, it might be accelerating wage inflation, and more and more “workers needed” vacancy signs.
In urban planning, it might be higher and higher consenting costs, and fewer houses / buildings being created.
SURELY DEADWEIGHT COSTS ARE BAD, RIGHT?
Each of the above 6 market reforms (and that’s just off the top of my head) will, or has, conferred monopoly provider powers onto some organisation, each of whom will use those powers to boast their own interests.
And at the top of the food chain, each of these organisations has a single (or single + group of associated ministers) minister who gets to command the shots for what each of their monopolistic organisations gets to do with the extracted surplus it commands from its market structure.
And that minister got there because they represent some interest group: be it unions / ethnic interests / ideological interests / industry.
And now, that interest group is in a position to be rewarded, either through:
- Less productivity-based wage focus for unionised workforces,
- More “governance” in the control of the industry/collective asset, including appointment (as opposed to elected) to governance boards, or
- More “direction” to controlled industry on non-economic foci, like climate change behaviour, or delivering services to non-economically viable communities.
Lies? Never happen? There’s a whole literature called Public Choice which shows this frequently happens.
And now, we in New Zealand are watching it happen right before our eyes…roll on election time…!