Chalkboard economics—creating mathematical models to represent the whole of the economy—is tempting stuff. Mathematics is predictable, absolute and straightforward. The old joke that if you get two economists in a room you’ll get three opinions becomes obsolete. Chalkboard economics is made all the most tempting because it subtlety says that the economy is predictable and therefore controllable.
Mathematical models in economics really are useful (with the added bonus that professors never have to leave the safe confines of academia), but it has a habit of being taken too literally. Cafe Hayek’s Don Boudreaux posted this article, responding to a New York Times article by another economist. The article charged that price-gouging in the wake of Hurricane Charley was monopolist (so it really was gouging), because there was no perfect competition.
Perfect competition is an assumption necessary for mathematical modeling, equilibrium analysis economist. It says that there are a large number of firms producing identical goods for a large number of consumers. It never happens, but it’s useful sometimes to assume it does, so economists can take a look at the ideal.
This is when we hear the Siren’s Call. Perfect competition creates a neat and clean framework for analysis so some economists actually believe the world works this way. It does away with adaptation, entrepreneurs, innovation, uncertainty and a host of other real world phenomenon (Austrian economics does away with this and other conventional assumptions: it lets us look at the real world but it prevents us—in principle—from doing straightforward analyses).
The fact of the matter is, there is no such thing as perfect competition and “price-gouging” is a fantastic thing for the people of Florida. It creates incentive for new suppliers, allows for an economic triage, speeds rebuilding because workers can be paid to work longer hours and the while not costing the taxpayer a cent.
The rise of popularity of unrealistic assumptions being superimposed on the world correlates with the rise of government meddling in the economy. On the plus side, it adds to the number of economist jokes:
An economist, a chemist and a physicist wash up on an island after their boat sinks. Along side them is a crate of canned beans. Sadly, they lack the means to open it. The chemist claims he can find the right compounds among the wreckage to create an explosive substance to blow the cans open. The economist says that’s way too dangerous. The physicist suggests he climbs to the top of a palm tree and drop the cans on a rock at the perfect angle, breaking them open. The economist argues that’s way too complicated. The two scientists stare at him and demand his input. The economist looks proudly and says, “First, we assume a can opener.”