Saturday, October 19, 2013

Musings Over a Martini

The old Islander Beach Hotel, a sprawling, massive hulk on Galveston Island, was owned by a large family, who lived in a suite of rooms there.  While I ran the hotel itself, the owner requested that I allow his aging mother to "manage" the many snack vending machines on the property.  He wanted to keep her busy and out of his hair, while at the same time giving her the illusion of being useful.

Having to collect the money, periodically restock the machines, and order the assorted chips, pretzels, and cookies was a job that I thought was a pain in the ass, so, if the 80-year old grandmother wanted to play with the machines, I thought it was a great idea.

To be fair, the elderly woman really worked at the job.  As fast as someone bought a bag of peanuts, she restocked that machine and removed the coins.  And she kept meticulous records--how much of each item was sold per day by each machine.  After about a month of this, she told me (confidentially) that Lays Plain Potato Chips were our best sellers.  I tried to look pleased, even though I couldn't have cared less.  I think that was the same week I learned that one of the engineers "thought" he saw a coral snake in the basement.  I would rather have had 50 "real snakes" than one "maybe snake"--if for no other reason that eventually you will find all the real ones.

Almost immediately, I forgot about the potato chips--at least until the morning, when I walked by one of the machines and stopped and stared: It was filled with Lays Plain Potato Chips--and nothing but Lays Plain Potato Chips.  A quick search of the other machines revealed that they, too, all were stocked exclusively with Lays Plain Potato Chips!

Obviously, my helpful granny had decided that since those chips were the best seller, they were all we needed to sell.  Two weeks later, she was completely mystified because sales had all but stopped.  Not only were total sales down, but we were actually selling fewer Lays Plain Potato Chips than we had before.    Granny could not (and never did) understand that it was the variety of snacks available that attracted customers, even if they eventually usually settled for just plain chips.

Lately, it seems that government doesn't understand a free market any better than Granny understood about those chips.  You cannot lower prices by controlling a market.  While this has been tried many times, the inevitable results are higher prices and shortages.  Whether you call government controls "price freezes" or a "socialized market", they never work.

The only arrangement in history that has consistently led to lower prices and improved quality at the same time is an open and free competitive market.

Competition and innovation--not government intervention--bring down prices.  Brain power--innovation prompted by the opportunity to be amply rewarded--coupled with competition will always lower prices.  Force--and that is the nature of all government intervention--invariably fails at this.

A sad corollary of this rule is that innovation occurs where it is most rewarded.  Free markets prompt innovation, while a centrally-planned economy is slow to reward innovation and is therefore slow to change.  It is for this reason that here in the United States, Hewlett-Packard files more patent applications a week than some countries will see filed in their stagnant patent offices in a year.  Over half the patents in the world last year came from either the United States or Japan.  And no one in the world is reading this on a new computer developed in Saudi Arabia.

Remember the Space Race?  Did NASA put a man on the moon?  Or was it thousands of contractors bent on profit, each designing and competing for the contract to build the lunar lander and other components?  If I remember right, it was North American Aviation that built that landing module, after a competition with every other aviation company in America.  Exactly what has the US Government designed?  Tax forms?

The urge to have a centrally-planned economy is understandable.  The free market sometimes appears to have incredible waste and duplication, and is by its very nature chaotic.  For every winner, there are a dozen losers.  It would seem so much simpler and more efficient to have the government take over all planning and enforce low cost standardization.

For example, the next time you are in a grocery store, find the condiment section and look at all the kinds of olives for sale.  There are cheap olives, some expensive brands, so many kinds and varieties, and so many different sizes of jars and cans.  The temptation to lower cost and preserve quality by imposing a government standard is very real and understandable.   Couldn't we just lower the cost for all consumers by limiting the selection and standardizing production, thus maintaining the highest quality for the price?

No!  Every time in history this has been tried, sales go down because some people don't want plain potato chips. (Or plain olives).  And as sales go down, eventually the cost will go up and quality will drop.

No matter how much we desire to control a market, even supposedly for the sake of the consumer--the surest road to a fair price and high quality is to leave the market alone.  Besides, I like anchovy-stuffed olives in my martinis.

No comments:

Post a Comment