Monday, June 23, 2008

The Price Will Come Down

Back in the 1990's I had an argument with a coworker about the price of computers. I had just paid something like $3,000 for my computer, monitor and printer. I argued that the price would come down dramatically in the coming years. My coworker scoffed because, you see, the corporations would never allow the price to go down because they're greedy.

It is true that they are greedy, and there is nothing wrong with that. IBM wants to make every penny of profit it can; that is their purpose as a business. Unfortunately, Dell, Compaq, Apple and a host of other computer manufacturers also want to make a profit. Each manufacturer will do what it can to win market share from its competitors, such as undercutting their price.

Prices always come down in a free market. At first only the rich can afford new gadgets. The first transistor radio was $150. The first ball-point pen was $25. This was back when $150 was real money. The profits from all those disgusting rich people engaging in an orgy of conspicuous consumption and "keeping up with the Joneses" was reinvested into the production of more radios and pens. Production became more efficient and the price plummeted. Now you can buy cheap pens for pennies.

Moog Music has just released a new guitar that has infinite sustain. You can check out their promotional video here. The price? $6,495. Lou Reed can afford one, but most people will pass. The price will come down big time, especially when other guitar makers produce guitars that do the same thing but don't have the prestigious Moog name attached. Pretty soon any garage band will have a guitar with infinite sustain if they want it.

I bring this up because I see today that Dell has a desktop that starts at $269; IBM's start at $409. You can get the whole set-up with monitor and printer for well under $1,000 with a processor and hard drive memory that make what I bought in the '90s look like a Model T. (To carry this analogy farther, the electric typewriter is the horse and buggy.)

When you consider that inflation has devalued the dollar at least by half in the last 10 years, not to mention all the other economic distortions caused by government intervention in the economy, it's clear that I won the argument.

Some people might object that this economic principle does not apply to gas. The price of gas is artificially high because of government intervention. Factor in inflation and take away all taxes and the price goes way down. Another complication is the restriction on production caused by the environmentalist movement. As I recall reading, there have been no new refineries built in the USA in the last 30 years. The environmentalists are capitalism's (and freedom's) greatest enemy because they don't want prosperity, they want deprivation.


Stephen Bourque said...

Excellent points. It should be so obvious, yet somehow the majority of people seem not to notice this.

Jim May said...

there is also the fact that the "greedy" oil companies saw fit to let oil prices drop after the 1970's, and stay low for two decades. I could still buy gas for $1.xx in Vegas around the year 1999.

Rather an odd thing for such "greedy" companies to do, given that they could simply have left the prices where they were for all that time.

Jim May said...

strike the above "oil prices" to "gas prices".