Hacker News Reader

Comment by PaulDavisThe1st | Hacker News Reader

> Unfortunately the party in charge right now is trumpeting the idea that inflation must be because companies are price gouging customers rather than trying to slow down domestic spending.

What is the scope of the evidence that proves that this claim (which, btw, is really not being trumpeted by anyone "in charge") is false?

View on HN

The law of supply and demand is what sets prices across an entire economy, not some grand conspiracy by every company to overcharge consumers. Greedy companies might collude in an industry here and there, but that doesn’t cause across the board inflation.

And this grand conspiracy argument is the position, at least in part, being pushed by the Democratic Party in the US. It’s actually similar to what flailing governments in third world inflationary economies say too. It’s always the evil capitalists raising prices for no reason but to line their pockets. Ignorant drivel meant to appease ignorant people and deflect blame.

> The law of supply and demand is what sets prices across an entire economy, not some grand conspiracy by every company to overcharge consumers.

Nope. Prices are set by what the market is willing to bear. Supply and demand are loosely correlated with the final retail price of things.

Demand for a good is based on its current asking price and how the consumer values that good. If the asking price ends up pricing the good out of the market's ability to pay for it the demand will drop irrespective of the supply.

As for conspiracies to increase prices, that's just a ludicrous position. All players in the market with the same incentives can move in lockstep with zero coordination. There doesn't need to be a conspiracy when every company basically lives by "make the most money".

If you see a competitor raising prices it's the perfect time to raise your own prices irrespective of your costs. If your costs haven't increased then you get better margins for free. There's no need for direct collusion when competitors are looking at the same news and have the same overall playbook.

>Nope. Prices are set by what the market is willing to bear.

Only when supply is constrained, for example housing in leading cities. Otherwise prices tend to fall to the marginal cost of the item you are buying.

Supply of tangible goods is always constrained, if by nothing else by physical limitations of the earth and our ability to exploit it.

Except that ignores the innovation we bring to manufacturing. If a car manufacturer finds a way to use less material in a component or a furniture maker finds a way to use more of the tree in their products then that lowers the marginal cost. Their competitors will adopt the same idea or else risk going out of business.

Housing however is constrained by the price of land, outside of a few small regions like the Netherlands there is no amount of innovation that will create more of it. Hence the price of housing is set by what the market will bear.

I've heard the "it's a conspiracy to raise prices!!" point of view too. It's a very simplistic way to think about the inflation, and I wish there were a little more critical thinking around it.

However, some of the inflation is being caused by companies just being comfortable raising their prices. They are comfortable because so many companies are monopolies, and as soon as there's any slight pressure in the direction of inflation, they immediately pass it onto their customers without any punishment. The anger against companies for gouging consumers is placed correctly, but of course it's with the wrong explanations.

There is no need whatsoever for a conspiracy. The interests of those who (a) own capital and (b) sell stuff naturally align without much need for coordination.

You seem to be claiming that the price increases seen over the last (pick a number) 10 months are all driven by "actual inflation", and that the instances of companies raising prices to increase their profit margins are rare.

I haven't seen good evidence for this claim. I have seen reasonable evidence that it's the other way around: a few limited sectors have experienced "actual inflation", but most of the price increases are arbitrary and imposed by sellers.

Note: we do not have "across the board inflation" either. Quite a few things have continued to drop in price across the pandemic.

Inflation is not just driven by changes in the supply curve. It can also happen due to shifts in the demand curve. If you pump money into the elite class by printing money, they can drive the prices of education, housing, etc. higher. Eventually, those increased prices work their way down to the middle and lower classes.

The word "can" is doing a lot of work here. Real-world economics is almost infinitely more complex than this sort of simplistic analysis.

Just as one example: housing prices often rise in response to a process frequently referred to as "gentrification" (often with a somewhat disparaging tone, to put it mildly). But that process tends to start when people with very little income to spend on housing move into low cost of living neighborhoods and subtly shift their demographics and nature. So is gentrification a process driven by the "poor" (the initial influx of new tenants) or by the "rich" (developers who can carry out significant remodelling and/or new construction) ? The answer is clearly both, yet even that doesn't really cover the whole mechanism. For a start, for gentrification to become significant in driving up housing costs, existing owners need to sell. These are often neither the newcomers nor the developers. Gentrification also requires a modest but distinct influx of businesses into an area, which in turn requires businesses to either start or expand.

I'm citing this as just one single example of where bullshit simplifications drawn from "basic" economics fail to describe the real world. There are so, so many more.

Gentrification is a classic example of supply and demand from microecon. As an area becomes nicer to live in it gains more and more demand with people with high willingness and ability to pay. Supply remains fixed, because of US zoning laws, or grows more slowly than people come into the neighborhood. The price goes up because of _demand_ going up without supply going up.

Why does it gentrify in the first place? Because the initial group of "gentrifiers" took the time and money to develop the area to make it more appealing, thus increasing demand.

Economics says you can't fix it no matter how much regulation you impose because at some point all the surrounding businesses, etc. will be gentrified too and force out poor people. Even if you freeze rent, ban new businesses from coming in, etc. the existing business owners will start to cater to their new clientele simply because the demand from those customers is much higher. The only thing you _can_ do is ban people from moving to the neighborhood, at which point you've turned into the worst parts of the Soviet Union.

> Why does it gentrify in the first place? Because the initial group of "gentrifiers" took the time and money to develop the area to make it more appealing, thus increasing demand.

Wildly simplistic. The first stage of gentrification involves almost no money and almost no development. It doesn't even really involve much time. It's the result of a demographic shift (and often not a very big one at at that) between the existing residents and newcomers who are willing to trade currently less-than-ideal living conditions for lower costs.

Also, more money in the hands of the elite class(es) does not inevitably drive prices of anything other than the few goods & services for which prices are actively negotiated. The fact that your rich clientele have more money does not, in and of itself, require you to raise your prices. That's a choice you make, which is dependent upon but also independent of their disposable wealth.

Reply on news.ycombinator.com