Sunday, November 13, 2005

In Defense of High Gas Prices

Last week saw another sad grandstanding display by our elected politicians. Trying to respond to the public clamor over high gas prices, the Senate dragged in executives from five major oil companies to demand answers. These hearings demonstrate a disturbing trend in our polity.

The underlying premise of the entire hearings misconceives the role of corporate employees, like CEO. Simply put, the Senators are calling these executives to task for doing their jobs. Consider the following questions- What exactly should these execs have done in the face of a rise in demand for their product? Do you realize that these people have jobs appointed by the board of directors with the purpose of enhancing shareholder value? Should they have charged less than the market rate (market rate= rate that they could obtain from the market) just because it is in the interests of some Americans? In fact, if oil executives failed to raise gas prices, their board of directors should fire them on the spot, and the company’s shareholders should sue them for breach of fiduciary duty.

If the government wants to subsidize people in their consumption of gas, they should give out a tax break or hand out a voucher for gas. This would be horrible and near-socialist, but it is miles better than calling in private businessmen who are violating no law and doing their jobs, and demanding that they sacrifice the interests of their employers for the sake of the so-called “public interest.”

6 comments:

Anonymous said...

Mish, stick to con law and fantasy football.

The business judgment rule clearly covers price setting. No shareholder would even make it past the demand rules. Further, it is well established that Directors can consider more than short-term value (and even other stakeholders ala other constituency statutes). If there is a case for gouging (I don't know if there is), then violating anti-trust regulations could be a violation of the duty of care. This is the law Mishenka.

I think what you are trying to do is twist the law to produce results with your Laissez-faire beliefs, beliefs which I agree with. But in this case, I think the law hates you.

Anonymous said...

BJR is more than a judicial doctrine not to second guess directors, it is part of a system of rules which MANDATES the seperation of ownership and control.

And as I said before, there is law out there which says Directors can take into account things other than shareholder value, like other constituency statutes, some of which say you can take into account the good of the local community. And as far as I know, there are no exceptions within those laws if a Directors has absolutely no business purpose. And that makes sense simply because in the end, anyting a director does will have an effect on the business.

Anonymous said...

I think BJR is a part of a broader set of rules, that as a whole, made seperation. Think of it this way: in the case of BJR the law mandates seperation even if it is clear that director performance has degraded from shareholder expectations because it was a "business decision". Shareholders control what?!? Their interests matter when?!?!

Anonymous said...

Do you really think the police/military protect the rich man's life and liberty more than ONE THOUSAND times more than they protect the life/liberty of the poor man?

Well, I'm pretty sure $100,000 is one hundred (not ONE THOUSAND) times $1,000. But with that correction, and adding in the fact that the state putatively protects not only life & liberty but also--and primarily--property, the answer to your question is essentially yes, at least in terms of presumable revealed preferences (which is the only way I can think of to measure something like this).

If you change your figures from annual income to net worth to make the illustration simpler, Y should be willing to pay up to $9999.99 to protect his property, and X should be willing to pay up to $999,999.99. Protection of his property, in other words, for X is worth 100 times what it's worth for Y. Fairly basic economics, no?

Anonymous said...

The value of $1 to a person with $10K is much greater than the value of that same $1 to a person with $1M. Hence, the desire for police protection of PROPERTY may be more similar from person to person than you propose.

This is nonesense. By hypothesis, both people are contemplating the loss of their property. The marginal utility of a dollar to two people in contemplation of the eventuality of having their net worth reduced to a dollar is the same.

This is not some theoretical ivory tower example- there was a time when there was no police forces, and no government-controlled armies. The poor were a lot worse off then, and the rich were still very rich.

Right. Which supports my point. The rich value security forces more than the poor do, as evidenced by the fact that they pay for them privately when the state does not provide them. I never suggested the poor would be better off without state-provided protection, merely that it is worth less to them than it is to the rich.

I guess its easier hiding behind marxist theories of government than to confront historical facts.

Huh?

also, how much is a person's life worth to them? I guess its easier if you try to ignore that aspect of what police/military does.

How on earth does that change the economic analysis? Even if you assume the poor and the rich value their lives equally (a dubious assumption on any meaningful measure), that's a wash on the rich vs. poor comparison.

Anonymous said...

You haven't mentioned my car example, which seems apt.

It may seem apt, but it isn't. If were were stipulating that the security apparatus of the state could, at most, potentially protect people at most from car theft, it would be apt, and you'd be closer to correct. But we're not stipulating that. The state potentially protects much more than that, so marginal utility effects vanish at the far extent of the potential protection.

To put it more simply: the rich have more to lose than the poor, and thus they gain more from its protection.

Ok, so since its a wash

Apparently I wasn't clear enough in my last comment. What I thought was clear was that, at best, it's a wash in terms of protection of life (under the dubious assumption that rich and poor value their lives equally). The value of protection of property remains higher for the rich than for the poor, so the overall value of state protection is in no way a wash.