“Let’s listen to the science!This slogan can be heard in different areas: For example, when it comes to viruses and epidemics, or in connection with climate change. And that’s just as well. Oddly enough, one hardly hears this demand when it comes to economic questions works – and that’s a shame. Because we should also make economic decisions on a scientific basis as much as possible.
Almost conspiracy theory tones can be heard in the discussion about the high energy prices hear: The most expensive power plant that is needed to cover the electricity demand determines the price – how can that be? A scandal! Who came up with such a stupid rule? Public outrage quickly boils up, and that’s understandable. But you could also simply do what you should do in other areas: ask scientists.
The correct price for apple juice
They then explain that this is the basic principle market pricing acts. Let’s imagine we live in a small village and produce apple juice. We happen to have a large orchard, there are masses of apples on the meadow, we just have to collect them and process them into juice in our apple press. 80 liters We can produce apple juice per day if we use it for one euro per litre sell, it’s worth it for us.
Our neighbor also has a fruit press, but he doesn’t have an orchard and has to buy the apples first. Therefore, selling juice is only worthwhile for him when he two euros per liter receives. Suppose the apple juice demand in the village is 100 liters per day (and there are no other suppliers, and there is no difference between different types of apple juice). What will the market price be then?
Of course I can sell for one euro per liter – but I can’t cover the demand on my own. So there will be people who will have to buy the more expensive juice. So I know: I can raise my price to just under the price of the competition and people will still prefer to buy the apple juice from me. Or someone voluntarily offers me a higher price than the euro I’m asking – because he sees that I’ve been in line for a long time and otherwise he would have to buy from the more expensive provider.
The price is where supply and demand meet
The decisive factor for the price of apple juice is also in this simplified model the last liter of apple juiceneeded to meet demand – not the cost I incur per liter in production. That’s not malicious, that’s not a conspiracy, nobody in secret conference rooms has decided that – but that’s the price that logically results in a free market.
Of course, this does not mean that the market is sacred, always right, and must not be influenced. Of course you can change the rules of the market – by government intervention. You can tax certain things, you can pay out grants, you can buy apple juice and allocate apple juice quotas. In the case of electricity and gas, government intervention will probably be necessary to avoid the worst. But one should not pretend that the market mechanisms themselves are malicious or the result of dark machinations.
It’s a bit like that gravity: She’s the reason we can’t fly. We may find that bad, but there’s no point in getting excited about it or assuming the fact that gravity is pulling us towards the center of the earth to be a dark conspiracy.
But we can build airplanes – we don’t override gravity with that, but we intervene in a targeted manner to change its consequences. Similarly, one can also intervene in the market to ensure welfare – not by defying the laws of economics, but by using them wisely.
If we want to know how best to do this, then we should talk to people who deal with it scientifically. Economics often has a lot to do with ideology – that’s a problem and that complicates things. But ideology alone is certainly not a good substitute for economics.