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Flunking Econ 101
May 31, 2002
By Ernest Partridge

"If you got 'em by the balls, their hearts and minds will follow." - Lyndon Baines Johnson

"Conservatives" insist, time and again, that their policies are based upon "sound economic principles." At least as interesting as those "principles" that they cite, are the fundamental economic concepts which, when politically convenient, the "conservatives" choose to ignore -- concepts familiar to any college freshman who has taken an introductory course in Economics. While there are many such concepts, we will deal with just three: "elasticity of demand," "the declining marginal utility of money," and "external costs."

"Elasticity of Demand" is simply the economist's fancy way of stating the obvious: we need ("demand") some goods and services much more than others. Things we can "do without" when the budget is tight, are items for which demand is "elastic." Luxury items and entertainment are typical examples. Demand for things we "can't do without" are said to be "inelastic." The paradigm example is insulin for the diabetic, without which he cannot survive. Commodities for which demand is elastic, are very sensitive to price fluctuations. Double the box office price at the cinema complex, and most folks will stay at home, whereupon the greedy proprietor will either quickly adjust the price back down or else go bust. In contrast, if the price of insulin is doubled, the unfortunate diabetic will drop the "elastically demanded" items from his budget, as he must if he is to stay alive.

Other examples of inelastically demanded commodities? Electricity comes immediately to the mind of this Californian. The supply of electricity not only runs our essential household appliances such as lights, refrigerators and stoves, it is also indispensable to the state economy: no power, then no industry, no retail business, etc. To be sure, there is a very thin edge of "elasticity" -- we can turn off our lights when we leave the room, do our laundry at non-peak hours, and do without our hot tubs. But very soon we reach the bedrock of indispensability. Californians will, as they must, pay almost anything for the electricity required to keep their economy alive. The Enron Corporation was fully aware of this, and ruthlessly used the "inelastic demand" of Californians to the full advantage of Enron.

Presumably President-Select Bush also knows about inelastic demand, though one cannot be sure of what he might have missed as he earned his "gentlemanly C-s" at Yale. But if Bush doesn't comprehend the concept of elasticity, then surely those business folks and economists that surround him are aware of this basic concept. And yet, during the 2001 energy crisis we were told by these Bush-league economists that the California energy market would, if unregulated, find a "natural price level."

Yea, sure!

In the year 2000, the California state tab for electricity was seven billion. In the following year, the state paid more than ten times as much. "Serves you right, California, for not building more power plants," said the critics. But power enough is available from outside the state. And just where did that extra seventy billion go -- cash extracted from the citizens and shopkeepers throughout this state? Largely to Bush's and Cheney's Enron pals in Texas. As their late fellow Texan, LBJ, so indelicately put it, the energy barons had us firmly by the family jewels, and our cash (if not our hearts and minds) accordingly flowed to them, as they curtailed the flow of electricity to our beleaguered state.

When The Mafia behaves like this, it is called "extortion." But when dependable contributors to Republican coffers act similarly, "conservative" economists and commentators call it "the natural fluctuation of the free market."

Are there other essential commodities that might fall into private control, thus further placing the public at large under the extortionate control of the wealthy and privileged few? What could be more indispendible ("inelastic") than electricity?

How about water?

Just imagine having the control of your water supply turned over to a private corporation -- and a foreign corporation at that. Could that corporation, if unregulated, charge you whatever it wished? You'd better believe it! And you would then be left with your "freedom to choose:" pay up or die!

There has, in fact, been a world-wide effort by private corporations, encouraged by the World Bank, to privatize municipal water supplies. Leading players in this effort have been Monsanto, Bechtel, and a firm called "Azurix," a wholly owned subsidiary of our old friends, the Enron Corporation.

The results? In Chochabamba, Bolivia, the price of water multiplied five-fold, until the people of the city threw out the water merchants, the Bechtel Corporation. (Finnegan, New Yorker). In Argentina, Enron's "Azurex" allowed the purchased municipal system of Buenos Aires to deteriorate. Greg Palast reports, "[Azurex] fired all the workers,they let the system go to hell, the pipes cracked. The water's contaminated. It's a complete mess. The ownership of the asets disappeared into one of those soluble offshore accouts which went zip into dust. So what you have now is bad water, devastation, and assets gone." (Palast).

The English faced similar consequences: "After the Thatcher administration privatized the United Kingdom's system in 1989, prices skyrocketed, water quality decreased, jobs were lost, and the number of households disconnected for nonpayment tripled." (Hattam, Sierra).

A century ago, good Republican presidents such as Theodore Roosevelt recognized that private monopoly owners of public utilities could not be allowed to set at will the prices of these essential ("inelastically demanded") commodities, and so they instituted a regulatory regime which has generally served us quite well. The "free market absolutists" (George Soros' felicitous phrase) will have none of it, as they blithely scrap the time-tested and proven regulatory system. And they have the gall to call themselves "conservative." (See my "Kill the Umpire").

Private control of indispensable commodities such as electricity and water amounts to private control of the population. Time and again, experience has shown that private corporations can not be relied upon to safeguard the public interest. As railroad baron Cornelius Vanderbilt famously remarked, "the public be damned -- I work for my stockholders." In legitimate democratic societies, there is an institution authorized to act in behalf of the public at large. It is called "government." And it is the proper function of government either to own or to stringently regulate public necessities. This subversive notion is promulgated by such left-wing radicals as those who wrote and signed the Declaration of Independence and the Preamble to the U. S. Constitution. "To secure these rights," wrote Thomas Jefferson, "governments are instituted among men."

"The Declining Marginal Utility of Money" is another high-fallutin' term for a phenomenon recognizable to all. The value to an individual of a constant sum of money (say $1,000) gained or lost is inversely proportional to that individual's wealth. Still too academic for you? It comes to this: because that one grand is about a month's salary to a single mother working at Wal-Mart at minimum wage, a loss to her of that thousand is a disaster. In contrast, when Microsoft zillionaires Bill Gates, Paul Allen and their wives enjoy a night on the town, it is a matter of complete indifference to either who picks up the thousand dollar tab.

In a single day on Wall Street, Bill Gates can lose (and presumably has lost) a billion dollars of his gross wealth. Such a loss would no doubt perturb Gates somewhat less than would the above-noted hypothetical loss of one thousand dollars to the Wal-Mart mom. This means that the marginal value of a thousand dollars to Gates is considerably less than a millionth of the marginal value of the same amount to an individual working at minimum wage. Ninety-nine plus percent of us are found within those extremes, though the marginal value of cash to the vast majority of us is much closer to that of the Wal-Mart mom.

You know this, I know this -- and so too does Steve Forbes. Yet he mounted a credible Presidential campaign on essentially a single issue: "The flat tax." "Its only fair," he tells us, "that we all pay the same rate of income tax." The same rate, mind you, not the same amount. Even Forbes acknowledges that a dollar to him is not worth as much as it is to the rest of us. But neither is the same percentage: a tax liability of ten percent of Forbes' eight-figure income is far less painful to him than the same ten percent of the five figure income is to the rest of us.

Surely Steve Forbes, and his friends now in effective control of the White House and the House of Representatives, are quite familiar with the concept of "the declining marginal utility of money;" it is, after all, the foundation of the traditional notion of "progressive taxation." However, the "conservatives" would much prefer that we not be aware of this concept and this tradition.

Those of us who have the temerity to mention "marginal utility" and to defend progressive taxation are condemned for fomenting "class warfare."

And finally, "External Costs." We hear this so often these days: "What business is it of the government, or anyone else, if I choose to buy and use an SUV?"

If your purchase and use of an SUV has no consequences to anyone other than you, your family and the auto dealer, then it is truly "no business of the government or anyone else" if you buy and use an SUV.

Unfortunately for this argument, that purchase bears serious consequences, now and into the remote future, to countless unconsenting "others." Included among those "others" are all those who happen to breath the common air. Included also are those who are fed by the grain and produce from the Great Plains, fated to become deserts, and those who live in coastal cities, fated to be flooded, if the scientists' predictions about global warming prove to be true. Patriotic Americans should also be concerned about the consequent loss of national autonomy to foreign despots upon whom we depend to feed our gluttonous appetite for petroleum.

"External costs" (or "externalities") are costs paid by usually unconsenting individuals, in addition to and apart from the primary parties of a transaction: the buyer and seller. In industrial economies, the list of "external costs" is virtually endless. For example, water and air pollution, downstream and downwind of factories are "externalities." So too are the loss of song birds and "keystone" species, among other ecological "side effects" of pesticides, or the decreased property values of homes underneath approaches to air terminals.

After decades of failed attempts to sue the tobacco companies for loss of individual life and health, the "externality argument" prevailed, as state governments proved in court that among the "external costs" of the sale of tobacco products to private individuals were the increased costs of health care -- costs that were borne by the taxpayers at large. The courts ordered the tobacco companies to "internalize the externalities" to the tune of hundreds of billions of dollars in payments to the states. (See the movie, "The Insider")

The "unconsenting others" forced to pay "external costs" play no part in free market transactions. If they are to be protected, it must be by laws and regulations enacted and enforced in behalf of the public at large. And once again, that means (gasp!) Government.

To conclude: "conservatives," it seems, use economic principles and concepts the same way the preacher uses his Bible: these principles and concetps are cited in order to shore up foregone conclusions, and they are ignored when they confound and contradict preferred policy. We can report that in all that we have heard and read from "official sources" about the California energy crisis and the Bush tax, energy and environmental policies, the concepts "inelastic demand," "marginal utility of cash," and "external costs" and their paraphrases have been conspicuous in their absence.

William Finnegan, "Leasing the Rain," The New Yorker, April 8, 2002.
Jennifer Hattam, "Who Owns Water?" Sierra, Sept.-Oct., 2001.
Greg Palast, Guerrila of the Year: An Interview with Greg Palast, Guerilla News Network


Copyright 2002 by Ernest Partridge. Ernest Partridge is a consultant, writer and lecturer in the field of Environmental Ethics. He publishes the website, The Online Gadfly.

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