Posted by: Dirk | March 29, 2008

Atlas Shrugged – text excerpt (2)

This is a follow-up on my idea of presenting passages of Atlas Shrugged by Ayn Rand in order to discuss its economic implications.

The second excerpt I present is from page 662 (Ellis Wyatt is the speaker):

He chuckled. “Market? I now work for use, not for profit – my use, not the looter’s profit. Only those who add to my life, not those who devour it, are my market. Only those who produce, not those who consume, can ever be anybody’s market. I deal with the lifegivers, not with the cannibals. If my oil takes less effort to produce, I ask less of the men to whom I trade it for the things I need. I add an extra span of time to their lives with every gallon of my oil that they burn. And since they’re man like me, they keep inventing faster ways to make the things they make – so every one of them grants me an added minute, hour or day with the bread I buy from them, with the clothes, the lumber, the metal” …

It is a little strange if you compare this passage with reality. The oil price these days is defined by scarcity, not by the effort needed to extract it. Scarcity depends on supply and demand, with the latter being higher than the former. But even apart from that, the oil market is not a perfectly competitive market. There are few suppliers, and some of the biggest form the OPEC cartel. Surely a drop in extraction costs of oil would translate into higher profits of oil producers, not into lower oil prices. Then, oil is a limited resource. There might be a point when supply cannot be increased (even in the long run). A last point concerns externalities from oil consumption: as we are all aware, burning oil creates air pollution and global warming. This calls for (internationally coordinated) government action, which probably would affect the oil price.

So, Ayn Rand makes a point that is OK, if you assume perfect competition, unlimited resources and no external effects. However, in reality things are different, especially in the oil sector. Implementing Ayn Rand’s ideas in today’s world would lead us to believe in cheap oil, no negative external effects and no case for government intervention (like taxes on petrol). I think I heard that somewhere.

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Responses

  1. […] Atlas Shrugged – text excerpt (2) « econ101.de blog on March 29, 2008 at 5:52 […]

  2. A few comments:

    The OPEC cartel is the opposite of a free market, it represents the only type of true monopoly (that is, a government-backed monopoly that stays in power not because of a superior product, but because of physical force and government coercion). In contrast, Ellis Wyatt appeals to voluntary trade, not force, in his dealings with customers. The two are polar opposites.

    As for “perfect competition”, the concept doesn’t make sense. It confuses market power with government power, the two are different. Miss Rand writes about this extensively, I encourage you (if interested) to research it.

    I do agree that oil is a limited resource, but oil is not off in some segregated realm where it doesn’t have to compete with anything. Oil must compete with every single other source of energy. In a free market, an oil company would quickly fail if it decided to charge prices way above costs, even if it was the ONLY supplier of oil (assuming no government interference, new competitors would be able to enter the oil businesses, and other energy suppliers would be left free to provide their product).

    The effort needed to extract oil does play a role though. As an example: oil shales.

  3. Ayn Rand is not an economist and Atlas Shrugged is not a textbook. But, you knew that.

  4. On OIL:

    Yes, the price of oil is not determined by Marx’s (long discredited by all sane and thinking people) “Labor Theory of Value”. If it were, we would quickly run out of oil, since there would be no consideration of the scarcity of oil *reserves*. We’d pay a dollar a gallon — for a while — and then we would go back to the Stone Age when we ran out.

    A market which does not consider the value of land (including the mineral and other resources) is doomed to failure. This is why the USSR and Communist China are the worst environmental disasters in history.

    —————————

    By the way, we have no idea how scarce oil is on earth. We only know what we’ve found. Since most of the *known* reserves in America have been declared government property, and therefore worthless, I doubt anybody is out looking for more, so they can again by prevented from exploiting their finds.


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