A Price is a Signal Wrapped Up in an Incentive

by on February 14, 2017 at 5:40 am in Economics, Education, Film, Uncategorized | Permalink

The world’s largest exporter of roses is an Indian firm, Karuturi Global, which has leased 3,000 square kilometers of land in Ethiopia.

I talked today about globalization and the price system using Valentine’s Day and the rose market as a jumping off point. I spoke at the Sarla Anil Modi School of Economics at NMIMS in Mumbai. The students were excellent. Lots of well informed, enthusiastic questions, and debate.

Here is a bit of what I said:

1 anon February 14, 2017 at 6:18 am

Very nice, even if coffee lost ground to roses.

2 Axa February 14, 2017 at 7:23 am

Great video, a complex concept in simple terms =)

I know the example is just to illustrate an idea, I don’t want to be an **shole but……oil may not be the best example: the fraction of crude oil used for plastics can’t be used for kerosene. The outputs of oil refining process are determined by the input (light or heavy crude oil), i.e. 45% of a barrel of West Texas oil can be converted to gasoline. If gasoline demands increases the only option to have more gas is to refine more crude oil. Perhaps add this info as footnote.

3 dearieme February 14, 2017 at 7:32 am

That would be true if cat crackers and the like couldn’t be bought.

4 Axa February 14, 2017 at 7:54 am

I didn’t know about that, thanks. I learned something today http://pubs.rsc.org/en/content/articlehtml/2015/cs/c5cs00376h

5 dearieme February 14, 2017 at 7:30 am

“an Indian firm, Karuturi Global, which has leased 3,000 square kilometers of land in Ethiopia”. Imperialist bastards. That’s how the East India Company started.

6 Anonymous February 14, 2017 at 8:23 am

They seem to have scaled down. Not quite the way the East India company went..

https://www.bloomberg.com/news/articles/2016-01-11/karuturi-challenges-ethiopian-decision-to-cancel-farming-project

7 Thiago Ribeiro February 14, 2017 at 7:41 am

To be frank, I find the gold chain a little excessive.

8 anon February 14, 2017 at 8:32 am

As someone who saw America in the 70s, it’s legit.

9 Thiago Ribeiro February 14, 2017 at 10:01 am

Is it? The green shirt looks nice, but I can not imagine someone thinking a thick gold chain is in good taste. Maybe it was some proto-hipster irony?!

10 David R. Henderson February 14, 2017 at 9:08 am

Excellent, Alex. This will be great to use the next time I teach Hayek’s “Use of Knowledge in Society.” My one disagreement: even though I highly respect Vernon Smith, I don’t think the price system is a mystery. It might be so to many people who have never read you, Hayek, Vernon Smith, Leonard Read, Milton Friedman, etc., or people who have never taken a well-taught intro micro course. But it’s precisely the understanding that these various venues convey that makes the price system understandable.

11 Alex Tabarrok February 14, 2017 at 9:51 am

Thanks David. As I like to put it, “it’s called the invisible hand because most people can’t see it!”

12 Todd Kreider February 14, 2017 at 6:34 pm

I thought the same thing as David Henderson but a few seconds later remembered that there is mystery to the deeper levels of the price system as aspects micro assumptions have been up for debate for decades. Oh, great clip! That much is set in stone.

13 Jack February 14, 2017 at 10:26 am

Nicely done. Thank you.

14 athEIst February 14, 2017 at 1:41 pm

So in the next Ethiopian famine(pop 74,000,000 birth rate very high) will we see food shipped in and roses shipped out?

15 Wayne Wolfe February 15, 2017 at 1:56 am

This video underscores the delicate and robust natures of the price system and all that it can do when there is freedom for people to act in their own best interest!

16 Seeing February 15, 2017 at 11:28 am

This is a very simplistic description. It alludes as though small scale Kenyan or Ethiopian farmer grows roses and sell to the market. The reality is the Ethiopian farmer’s land is taken so the corporate lords from New Jersey or their subsidiaries grow roses in Ethiopia. The Ethiopian farmer is left without his land, and no incentives to make optimal production decisions on his land (to grow food or coffee or roses). But he has to eat or put his children to school so he works as an underpaid laborer in the flower industry, inhaling industry chemicals that are used for pest and disease control, which will deteriorate his health and eventually kill him (not to mention the impact on the overall environment). The bottomline is, the price signal is half the story because not everything everywhere in the world has a price signal. While the price system and invisible hand are impressive and unmatched in regulating the visible market, there needs to be a visible hand to regulate the “invisible” repercussions of the market system.

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