THE DEMAND WIZARD

(How Free Trade Increases Value)

by James Craig Green


My friends Paul Prentice and Penn Pfiffner are professional economists and Senior Fellows at Colorado's Independence Institute who teach their Free People, Free Markets courses from time to time. Paul, in Colorado Springs, teaches a three hour version of the course, and Penn, in the Denver metro area, teaches a longer version.

I have taken both courses twice now, and learned some new things every time. I last took Penn's course on two consecutive Saturdays in Longmont, Colorado several months ago, and originally took his 4-week course in 2007. I have also gone to Colorado Springs twice now to see Paul's "Three Hour Tour" (Jon Caldara calls it the "One Night Stand").

One of the most interesting features of their courses is a segment called the Demand Wizard. It reveals an elegant insight into market economics most people never think about, even longtime advocates of free market economics. It can be a struggle to explain how markets work, especially to those who think government should heavily regulate them. The Demand Wizard makes it easier.

As shown in the following YouTube video (Introduced by Jon Caldara), Penn Pfiffner plays the part of the omniscient (all-knowing) Demand Wizard who attempts to allocate wealth to improve the economy. The demonstration begins with four food products (diet coke, chips, cookies and yogurt), each of which sells in the store for about 60 cents. However, this unique demonstration illustrates the variation and importance of each person's subjective opinion of value:

DEMAND WIZARD VIDEO   (click BACK button to return here)

As the famous Austrian economist Ludwig von Mises pointed out in Human Action, each person places a subjective value on everything he wants or uses, which is unique to him and varies with time, place and conditions. For example, when you are at home, a glass of water costs you practically nothing, because your monthly water bill may be less than a penny per gallon. However, if you are at a ball game or concert, you may pay two or three dollars for a small bottle of water. If you were extremely thirsty and a store was not convenient, you would gladly pay more. This concept is at the heart of billions of sales and purchases each day that comprise the American economy.

Demand Wizard Results

As you can see from Penn's video, when the Demand Wizard selects which products each member of the class received, the total value of this mini-economy was 25 units, based on each class member assigning a relative value from 1 (least preferable) to 4 (most preferable) for each product. This was done prior to the re-allocation of the same products based on free trade among class members.

After class members were allowed to trade the items, the total value of the class economy doubled to 47 units. This is but a small example of the awesome power of markets to satisfy people's desires without forcing other people to pay for them.


Paul Prentice also presents the Demand Wizard exercise in his classes, with similar results, though the numbers vary from class to class. Please note this simple example involves only four products, constrasted to the large number of economic decisions people make every day. In fact, it was Paul who first brought the Demand Wizard concept to the FPFM classes. Also, the increased wealth from this example does not consider increased production and innovation from profit incentives and the freedom to pursue them.

In this THREE MINUTE EXCERPT from a presentation at the Independence Institute, Dr. Prentice explains the connection between property rights and human liberty, which counters popular arguments that they are contrary to each other.

The following articles by Dr. Prentice further explain the benefits of free markets for three current issues. They are posted on the Pikes Peak Economics Club website (he is a founding member), which you can further access by clicking the "Home" tab on any one of them:


MYTH OF THE ENERGY CRISIS

A STIMULUS IN NAME ONLY

ECONOMIC LITERACY


From Subjective Values Comes Objective (Market) Value

The Demand Wizard demonstrates an important principle that few people understand. From the subjective, individual, whimsical choices by many people, a market develops - a voluntary collective in which each person trades by his own whims and temporary choices. But, the collective action of many such choices produces an objective value that is measurable and produces a permanent record that can be seen by anyone. That is the "market price" of any given product, service or commodity at any given time. The stock market is an example. So is a store that sells anything. When demand falls off, the store owner may lower the price, even below his cost if necessary to get rid of inventory that is not moving. When demand picks up, he may raise prices again. These prices are the objective value of some thing or things in a market, integrating hundreds or thousands of subjective individual decisions. They may remain constant for long periods of time, or they may vary each hour or day, depending on the supplies and demands that produce changing prices. Ebay auctions are an excellent example of rapidly changing prices among many different bidders.

This is something no Commissar or other pretend Demand Wizard can possibly do, because no one has the complete knowledge necessary to make self-interested decisions for someone else. However, politicians, lobbyists, and special interest groups daily make deals, supposedly in your interest, but always in their own. This process cannot possibly produce a better outcome than having individuals or voluntary groups make their own decisions each day about what to buy and what not to buy.

Unfortunately, this choice is denied by government for its services, imposed on society by force of law and the threat of jail for non-compliance.

It is this denial of choice that creates most damage government does to economies in the name of the "public interest." It is naive to believe that 1) politicians have your best interest as their primary goal and 2) that they and their so-called "experts" armed with KEYNESIAN ECONOMICS can know how to allocate goods and services. A lifetime of applied Keynesian theory has resulted in unprecedented, unsustainable public debt (including unfunded liabilities) between 45 and 104 Trillion Dollars, as discussed in a recent CATO INSTITUTE study (Table 1 on Page 7).