The Moneyball Method - Excerpt 2A

The Nature of Prices

In a free society, pricing power belongs to producers with the ability to raise prices without losing customers or lower prices without losing profits. But it doesn’t last forever – this kind of flexibility is temporary because prices are information and new sellers will continuously enter the marketplace to capture some of that business.

With that in mind, “price gouging” is a bogus concept — raising prices during shortages is a healthy phenomenon. Shortages always signal the need for new supply from alternate and competing sources. This makes the most efficient production and distribution of goods possible. More broadly, producers must keep investing and innovating to maintain the growth and profitability of their businesses.

In that one paragraph, pricing power, price information and price “gouging” were introduced as separate, but related concepts. And it was done in the context of sellers, buyers, alternatives, values, time, demand and supply. There is a great deal of complexity there and a vast number of mental integrations are needed to fully comprehend the possibilities. Of course, most people do not fully understand price discovery, but every conscious adult uses that process whenever they shop online.

Like driving a car, we automatically calculate the speed, direction and acceleration of a handful of vehicles in our immediate vicinity. Most people can’t explain it, but the most powerful and energy efficient computer in the world — the subconscious human mind, performs differential calculus as each vehicle changes speed and direction — and rapidly. To do this safely and reach one’s destination is to be perfectly objective. In the similar ways, experienced drivers and shoppers identify the facts of reality and act accordingly.

Whenever we think of the cost to make a purchase, it is in terms of the money being used in the respective marketplace. More than any other, the value of the US dollar is known in terms of the goods and services that each consumer prizes the most. Related to that, “everyone has their price” is not a cynical catchphrase. It means that there may be higher priorities given that person’s circumstances and available options.

To appreciate this, consider what author John Tamny wrote, “No one works for money; they work for what money can become.” Clearly, people don’t accept money for its “intrinsic value,” but for the products and services for which it can be exchanged. Given the choices available, prices are essential for deciding what to trade — and when.

When it comes to the selection of inputs by manufacturers (a commodity, product, tool, machine, skilled labor, or energy source) for their finished goods, no one knows more than the local talent about their specific needs, resources and time constraints. This means the best decisions are made in the here-and-now by experienced managers. Multiply that by countless market participants, each one making decisions that send price signals up and down their chain — and you get an amazingly complex and efficient supply network.

The only constant is change – and it takes experienced managers with specialized knowledge to react nimbly to new conditions. Whether it is changes to vendor supplies, customer demands, price adjustments, manpower issues, equipment repairs, natural disaster or other events, their combined competence far exceeds any centralized group of credentialed experts. As with money, prices might say, “leave me alone and get out of my way!”

In the history of economics, the most widely read white paper on the subject is Friedrich Hayek’s The Use of Knowledge in Society where he laments the central planner’s hubris:

“It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates.”

Confounding the “experts,” prices will change for a multitude of reasons including scientific discoveries, new technologies, severe weather events, epidemic disease, cultural shifts, the force of new regulations, social demonstrations or the threat of war.

Despite the impossibility of improving on the price discovery mechanism, the macroeconomic statistic favored by the State’s central planning authorities is “aggregate demand.” To objective investors, macroeconomics is a fallacy — only the desires and actions of individuals and private businesses are what matter. On Austrian economist Carl Menger, Rob Tarr writes: “The concept of a good, for Menger, denotes a concrete unit of something, serving a specific conceived goal, as judged by the individual in question.” They are the ones who send signals through supply networks, which is far different than State spending that confiscates wealth from money in circulation.

Regardless, State planning authorities measure economic health with spending data to justify “stimulus” programs for chosen special interest groups. When that fails, it is followed by interest rate increases for reducing the price inflation they blame on consumer demand. Naturally, this deflects attention from the true nature and cause of monetary debasement: central bank manipulation.

Heads they win, tails you lose. In direct opposition to the voluntary power of freely trading people, bank interest rate price fixing is the kind of pricing power demanded by authoritarian government.

The Moneyball Method: A Middle-Class Manifesto for Objective Investing: Shupe, Mark: 9781696009119: Amazon.com: Books