Re: iSteve on California gas prices, output quotas, and cartel pricing controls

Steve Sailer is a great blogger. But he tends to be very circumspect, so sometimes you need an interpreter. Here he’s responding to some poor liberal trying to make sense of a world where people sometimes say things they don’t mean.

First, I’ll supply the necessary theoretical context for understanding the story:

Conspiracy among the many: the mafia in legitimate industries
DIEGO GAMBETTA and PETER REUTER

This paper considers the modes by which the mafia exercises its influence on a number of legitimate industries in both Sicily and the United States. In particular, it discusses the kinds of service the mafia provides, the economic consequences of its influence, the conditions that induce the entry of the mafia in specific industries, and the conditions and policies that make it disappear. We share the view that mafia protection in legitimate industries, although occasionally rapacious and unreliable, is frequently neither bogus nor limited to intimidating new entrants. Under some (perhaps most) circumstances, the primary beneficiaries are the owners of the firms being coerced.

[…]

Although- in particular circumstances collusion is self-enforcing (Friedman, 1983, pp. 65, 132ff), whenever cartels rely on agreements, defection is a potential hazard and a genuine demand for protection may develop. Each partner must feel confident that all other partners will comply with the pact; otherwise the cartel collapses and competition creeps back in. Furthermore, even though anti-competitive outcomes can emerge without cooperation among firms — a large firm may independently decide to exclude new entrants even if rival firms share the advantages but not the cost — whenever restrictive practices require the contribution of all firms, an enforcing agency may be necessary to deter members from free-riding. There is therefore no theoretical reason to expect that the role of the mafia will be one of extortion rather than authentic protection. (Whether the price of protection is `extortionate’ is a separate question to which we return later in Section 8.)

Our argument is that the mafia solves a problem of potential cartels. It may be invited in by entrepreneurs themselves looking to organise some agreement or may initiate the activity itself, we have examples of both. Its comparative advantage is likely to be in organising cartel agreements for large number industries, as well as making cartels more stable; success, however, requires a number of other conditions, that we spell out in the course of the paper. Moreover, the mafia has a unique asset in this capacity, namely its reputation for effective execution of threats of violence; this creates a reputational barrier to entry.

[…]

Output quotas are another important alternative. The little available evidence suggests that quota agreements require extensive and intrusive inspection for their maintenance, and these are not attractive for an illegal market. The only known case of regulating output quotas involving the mafia dates back to the nineteenth century. Franchetti, an early and insightful scholar of the phenomenon, reports the existence of two `societies’ based near Palermo: one of millers — lasocietà Mulini— which we would call a cartel, and the other — la societidella Posa— a union of cart-drivers and apprentice-millers. Both these societies are said by Franchetti to have been under the protection of `powerful mafiosi’. Members paid a fee to the society and agreed not to compete. They kept the price of flour high by regulating output, taking turns to restrict production and receiving appropriate compensation. (Note that current EU agricultural policies are not too dissimilar.) The capo-mafia ensured that everybody paid their dues, that the miller whose turn it was to under-produce did not free-ride on his fellows by producing more than he was supposed to; and that the others did not free-ride on him, by failing either to pay the agreed compensation or to restrict production when their turn came (Franchetti, [1876] 1974, pp. 6-7 and 96).

Emphases mine. To sum up, one of the primary functions of organized crime is to punish defection from cartels in businesses selling ordinary products. One method of price fixing is to restrict production. If one of the members of the cartel decides they want to break the price fixing agreement, the other members ask their friendly neighborhood wiseguy to go remind the errant soul that they belong to a high-trust criminal brotherhood…and that membership carries responsibilities to offset the perks of teaming up to screw over all the civilians citizens customers. (Sorry, my autism reductionism libertarianism was acting up for a second.)

Now that you’ve completed your 600-word education explaining how everything in human society works, here’s the specific situation:

The Mystery of the California Gasoline Premium Deepens
Kevin Drum

This is nuts. If you put everything together—taxes, smog rules, cap-and-trade, etc.—gasoline in California should cost maybe 40-50 cents more than it does in Virginia and North Carolina. Why is it nearly a dollar more than that?

[…]

I’ve noted several times that every year, around the time we switch to summer formulations of gasoline, a number of refineries in California seem to mysteriously shut down due to “maintenance” or “accidents” or “labor issues” or some other reason. This causes the price of gasoline to spike, and outside sources usually can’t replace it quickly.

Sailer explains: “California uses special formulations of gasoline to fight smog, so if the refineries happen to have little ‘accidents,’ the market can’t legally rush in gasoline from Texas or wherever right away.” Back to Kevin Drum:

But at least this time they’re starting off with the idea that market manipulation might—just might—be part of the problem. And why not? After all, Californians proved long ago that we were suckers for market manipulation by energy companies.

And Sailer again:

This is a reference to the ridiculous Enron electricity deregulation fiasco of the early 2000s that causes self-inflicted brownouts.

I suspect that part of the problem is that most of the politicians, bureaucrats, and newspapers in California think higher gasoline prices are a Good Thing because they cut carbon emissions and force people to take mass transit instead of driving, but there is only so much they can do publicly to raise taxes. So the oil companies are stepping up and, you know, uh, dropping wrenches into the works that take two months to find, meanwhile causing high prices, but nobody in power calls them on this weird incompetence collusion because they like the results.

Luckily for you, I have autism and never tire of explicating the implicit, because this one is a doozy. Basically, all of environmentalism is an output quota price-fixing scheme. It doesn’t hurt that this artificial scarcity of American reserves maintains our financial interest in the Middle East*, but that scale of manipulation has to run at a sustainable profit or else nobody’s gonna sign up to peddle your drugs.

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*Freemasonry = Keep America Nuking Greater Zion