Monday, February 07, 2011

Time to consider the implications of the $8 floor fan

Stuart Washington's important piece in today's SMH:

A friend pointed out an electric floor fan he bought at Bunnings the other day to beat the recent heat, asking me to guess the price

You know the thing, a fan on a stand with a rotating head, standing about a metre tall with a wire guard to ensure small fingers aren't clipped.

"I don't know, $80? Maybe $90?" was my best guess.

My friend explained the fan's shelf price was $12. But when he got it to the counter, there was a special and it only cost $8.

Now, don't expect from here on a tirade about the perils of discounting for retailers. Nor should you expect a critique of the recent controversy over internet shopping versus the so-called brick-and-mortar retailers.

What I want to explore is a sense of unease about just how a fully functioning electric floor fan lands from China and can be sold for about $8.

The unease I feel about where the profit from an $8 floor fan lies - and don't get me wrong, this is still a column about business and profits - feeds a deeper unease about a broken pricing system.

And I believe failures in pricing are posing grave dangers to what we know as capitalism...
Now it's a long way from a cheapo floor fan to grave misgivings about the future of capitalism itself, so I will try to explain.

How much do you reckon the individual components of a floor fan cost? Let me say from the outset, I have no idea.

However let's say there is some metal in the electric motor and cabling (to my knowledge these things can't be made of plastic yet).

Then there are some petrochemicals necessary to create the polymers for the plastic that cases the motor and makes up the floor stand.

Then, of course, labour is a component, being the price of labour "embedded" in the final product.

What a piece of work is a fan, to badly paraphrase Shakespeare.

Here you have the world's great extraction industries - mining and oil - and the world's largest labour pool. Combined, they give you a fan that sits in the corner of your front room and cools you on a blistering Sydney summer day.

Now let's think what also sits in the fan's price. There is packaging. There is transport from China. There is the cost of the store's advertising. There is the additional cost of the store labour that stacks the shelves and operates the checkouts.

Wow! All this for just $8. It's better than a Demtel advertisement.

Anyone else starting to wonder how this is happening? As a capitalist, I want a profit from the fan for the mining industry, the oil industry, the manufacturer of the plastic, the manufacturer of the motor, the packaging supplier, the distributor and the retailer.

But I just don't see it - unless inputs are being ridiculously cheaply priced.

Now, I understand various arguments can be levelled against my example. For instance, the retailer is "loss leading" with the fan, and therefore there is no profit in the $8 price.

But I think there are enough examples of absurdly low prices around the place to allow me to draft the fan (pun not intended) for my argument.

My argument is that the floor fan is an indicator of a world in which certain inputs are not being accurately priced.

I don't think the metals that went into the fan were priced properly. Nor were the petrochemicals. I will leave labour for another day.

Funny things start to happen when you don't price things properly. For example, the global financial crisis was a great example of what happened when people did not put the right price on money by offering absurdly low interest rates.

The mispricing encouraged short-term behaviours - think of, say, private equity's bid for Qantas - that were not sustainable over the longer term.

Capitalism, incidentally, has never promised to be sustainable. Karl Marx raised fears about the inherent instability of capitalism, long before his shaggy visage was shackled to the baggage of 20th-century communism.

John Maynard Keynes held similar fears about what we all now know as the ups and downs of the business cycle. Indeed, Keynes's great contribution to economic thinking was to encourage government spending to ward off the worst effects of downturns. The goal of the spending was to address fears of capitalism becoming so unstable it would cease to exist.

Despite a lurch towards Keynesian thinking, economics in recent decades has been dominated by the austere belief that markets will generally sort themselves out.

But they don't sort themselves out when prices are wrong in the first place.

Going back to the $8 floor fan, my fear is that there is nothing in the price reflecting the allocation of precious resources. There is nothing in the price reflecting the depletion of those resources.

It's a cheapo throwaway fan, and there's plenty more where that came from, is the current thinking.

Our current economics fail us when it comes to the issue of resource depletion. Our economics also fail us when it comes to the issue of environmental impacts from resource depletion. And yes, those environmental impacts include emissions from the manufacture of the fan.

We are lacking an economic framework that joins Adam Smith's profit maximisers with what we now understand as the broader impacts of our economic endeavours.

Despite the momentary thrill of an $8 floor fan, I believe we are all poorer for failing to recognise its full price.

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