Sunday, 21 October 2012
Number six, hitherto unused and unpublished...
I know that economics is having a bit of a rough time at the moment, what with having been utterly unable to predict the great crash of 2007/8, and having not the first clue about how to get us out of this mess, nor knowing when – if ever – we’ll get back to “normal”, and being in large part unable (or perhaps I’m thinking of economists now…) to have the humility to acknowledge that the entire notion of ‘normal’ needs overhauling anyway, and – now that I’m thinking about it – having hijacked the entire discipline of national management so that it’s probably possible to blame economics for the whole problem in the first place… but it has over the years got a few things right, including the basics of supply, demand, and price.
There are relatively few examples that illustrate the underlying principle to perfection, but here’s one I’ve just discovered. The chart below shows, for the five years 2004 to 2008 (it’s only just been published by DECC, but it’s the last year for which data were presented) the residential demand for gas (represented by the median gas consumption by households) and the price paid for gas (represented by the average household gas bill).
In theory, as the price of a good or service increases, the demand for that good or service, other things being equal (or, as we say in economics, ceteris paribus) declines. In this practical, real world example, with real data from a real government department, and as you can easily see from the chart, the price of gas (the red line) increased and the demand for gas (the blue bars) declined.
As you can’t see so easily from the chart, however, these two variables are negatively correlated with a coefficient of 0.995.
Now it’s possible to quibble here: the consumption data are for England and the price data for England and Wales; and the consumption is a median figure and the price is a mean; and there are only five years’ worth of data; and there may be all sorts of other and important things going on for rich and poor households, or among high gas users and low gas users… but you’d be hard-pressed, looking at this, not to conclude that there is a near-perfect relationship between gas price and gas demand.
Which makes you wonder: if you wanted to decrease gas consumption (for the purposes, say, of reducing CO2 emissions, or because you just didn’t like relying on Johnny foreigner) then all you’d need to do would be to increase the price; and since (if you’re a government) you don’t want to have to take the blame for something like that, it would be better if, oh I don’t know, there was some sort of oligopolistic market that could do the dirty work for you. Then all you’d have to do (for your side of the bargain, as it were) would be to pronounce fervently in public that you were doing something to sort it out by passing a law or something, and apart from a few million people on middling incomes and a few million more on low incomes and a few million more on top of that who are surviving on amounts of money that you simply cannot believe is really true, everyone would be happy.
But I've headed back into the politics of it again. Oops.