Smithian Economic Change is Not Instantaneous

Barbara Gomolski, a vice president at Gartner (“the world’s largest Information Technology research and advisory company”), where she focuses on IT financial management, writes in Computer World (New Zealand) that “the rising price of oil may impact IT budgets” (“Oil and IT recovery) 5 December:

“You may think I’m waxing environmental here; I’m not. In fact, I’m a pretty fervent capitalist and Adam Smith economist, believing that a free market economy is inherently self-correcting, and that minimal government intervention in business matters is best. I don’t drive a hybrid car and one of my vehicles gets downright atrocious mileage."

Reading Adam Smith on markets she should know that the ‘self-correcting’ markets do not do so instantaneously. The adjustment process is not at the speed of infinite velocity, though much comment on markets seems to assume such ‘self-correcting’ velocities operate. Adjustment takes finite time, weeks or months, not days of minutes.

Smith’s example in “Wealth of Nations” (WN I.vii) takes a season or more as labourers withdraw or cut their hours from the venture that cannot pay their wages, landlords withdraw from or cut their land committed to the venture that cannot earn their rent and stockholders hold back their stock or cut their commitments to ventures that do not earn prices sufficient to meet the natural distribution of revenues to those complicit in the venture; the opposite occurs when market prices rise above natural prices.

“Still, this oil issue is turning me into an environmental pragmatist. Simply put, the imbalance in oil prices disturbs my economic sensibilities. I’d rather see the discretionary dollars of individuals and companies going into new IT initiatives (or even capital equipment) than into the pockets of the oil companies. I’d rather see IT organisations take on more staffers than watch the pay of oil industry executives climb.”

How quickly does she think the process would self-correct itself? We are only into the early months of the price signals. It is too early to say where the discretionary dollars of individuals and corporations will go, or are going. And remember, for every dollar going into the “pockets of the oil companies”. More dollars are pouring into the coffers of governments in oil taxation – what are they doing with these windfalls?

It is already claimed by BP that it is increasing by substantial amounts expenditures on non-oil energies, funded no doubt by increased flows of revenue from the current oil shortages, themselves occasioned, not by oil company ‘greed’, but by the booming demand for oil to fuel the rapid expansion of Indian and Chinese economic growth.

To miss these simple facts is to misread an elementary conclusion surely appropriate for the “the world’s largest Information Technology research and advisory company” and for someone who claims to be “a pretty fervent capitalist and Adam Smith economist, believing that a free market economy is inherently self-correcting, and that minimal government intervention in business matters is best.”