Congress to repeal law of supply and demand, film at 11!

Megan McArdle recaps some pretty basic economic facts for the benefit of congressional head-in-the-sand types who seem to have dangerous misconceptions:

Let's look at the basic economics here. I agree that there is a "speculative premium" in the market — the price changes obviously do not simply reflect change in demand conditions or other new information. They're too volatile.

That doesn't mean that this speculative premium is wrong. Speculation is not a synonym for "gambling"; it's a synonym for "guessing". The speculative premium reflects people guessing that the mismatch between supply and demand will be even greater in the future than it is now.

Sometimes speculators are wrong, of course — just ask my classmates who took out $100,000 worth of student loans for business school so that they could hold onto that valuable Webvan stock. But sometimes they're right — the Confederate speculators who made a fortune buying and holding staples in the Civil War guessed, correctly, that the South would be getting a little hungry by and by.

Of course, this makes people angry who want to consume cheaply now, which is why you hear so much talk about war profiteers. But in fact, the speculators were providing a very valuable service. Without them, the confederacy would have consumed those staples early in the war at an artificially low price, and been even hungrier later.

Nobody likes paying higher prices today than they did last week, last month, or last year. But the price reflects a huge mass of information on supply and demand, in a neat little numerical form. Prices rise when supply is lower than demand, signalling that the product is becoming harder to find/manufacture/harvest, and the rational response on the part of the consumer is to use less of the item or to look for substitutes.

Prices work better than anything else we've ever invented for regulating supply and demand . . . far, far better than installing philosopher kings, commisars, or regulatory bodies to determine "fair" or "equitable" value for any given item. Trying to impose conscious human control over a process will only make the situation worse both in the short term and over the long haul.

But politicians aren't elected because of their economical insight . . . and they are always impelled to be seen to be doing something. This is never a good thing.