Thursday, May 22, 2008

The story of Farmer John and why the government doesn't like him

Farmer John is a hard worker. He raises milk cows and sells milk in his area. Farmer John sets the price of his milk and also decides how much milk will be produced on his farm. He determines milk production based on his estimate of the demand and how much milk he can sell. Farmer John is lucky that there are only a few milk producers in his area selling milk and their cost of production is all about the same as his.

Farmer John's profit for his investment in the farm and his hard work depends on how much money he makes selling milk above his costs. If Farmer John decides to produce more milk, he can only sell the additional milk by pricing it below his competitors. If he sells more milk at a lower price it is possible that though he sells more milk, his profit does not increase. In fact, if he lowers the price of his milk to sell more, his competitors will also have to lower their prices to sell their milk and everyone's profits will decline.

If Farmer John miscalculates the demand for his milk and produces too much or too little, his profit will be lower. If he produces too little milk and the demand is greater than he expected, the price of milk will go up because demand exceeds supply but only his competitors will benefit. If Farmer John produces too much milk for the demand, much of the milk will not be sold and/or the price will come down; in either case Farmer John will earn less money. So, for Farmer John the best of all worlds is that he judges the market correctly, doesn't produce too little so he can't supply the demand, or to much so there is excess supply and the price and his profit goes down.

As the demand for milk goes up milk producers' increase their production and the profits go up. Eventually as the profits increase and grow larger, customers complain that Farmer John and other milk producers are making too much money. Because milk customers have a lot of votes, politicians in government believe they have to do something to make the milk customers happy so they also complain about what greedy profiteers milk producers are and they demand that milk prices be lowered. In fact, those politicians having a basic bias against business anyway, call for congressional hearings and investigations into the milk industry; they are sure something illegal is being done by the milk producers, they're not sure what but they are determined to find out what that is. Some in government go so far as to say a limit should be placed on how much profit Farmer John should be entitled to earn.

To show whose boss, congressional committees require Farmer John and other milk producers to come before congress and explain why he and the others are so profitable when those buying milk are having a hard time of coming up with money to pay the higher price of milk. Some of the members of congress get pretty nasty and really complain to Farmer John. It's only a good thing lynching was outlawed a few years ago or Farmer John would have a right to fear for his life, the anger is so great. It doesn't matter that the congress people are only making a show so that the voters who elect them will be happy with their choice and will keep them in office; the important thing is that the congress people show everyone "they feel their pain."

Farmer John tells the congress people that things would get better for all if they were allowed to raise more cows and build farms in areas inhabited by insects, rodents and birds but congress would have none of it; after all some of the people that vote for them love insects, rodents and birds and don't want their loved ones to be inconvenienced (and those that love insects, rodents and birds may not vote for them in the next election).

Farmer John also points out that it has been over thirty years since the government let milk producers build a milk processing plant and shortage of processing facilities also affect the amount of milk available to customers and thus the supply and thus the price. But once again their plea falls on deaf ears because the people who like insects, rodents and birds have plugged the ears of the politicians so they can't hear or think.

Well that's the story of Farmer John; next time I will tell the story of Oliver Oily, the oil man.

1 comment:

JLHunter said...

Kudos on your clever story and its primer on Economics!

Disguising oil as milk surely will allow a few more discerning minds to cut through the rhetoric and to examine the merits (and demerits) of the various people (Congress!) and situations (no new wells nor any new production facilities!) which have brought us to this near state of emergency as regards oil production and usage.