There are two aspects of our economy, and of any capitalist economy, that affect the price of an item: supply and demand. If few items are available and the demand is high, as with Cabbage Patch dolls in the early ’80s, then the price of the item will be high. But if items are plentiful and the demand is low, as with Cabbage Patch dolls now, then the price will be low.
But what about prices in the aftermath of a disaster? Simple logic would tell us that goods and services would be scarce and the demand for them high, resulting in the rise of prices. This is simply economic realities at work, but whenever it happens, certain people start to shout about price gouging. Walter Williams, economics professor at George Mason University, has written a great deal about scarcity and price gouging. The following is from his article published after Hurricane Katrina:
The fallout from Hurricane Katrina has featured a lot of ignorance and demagoguery about prices. Let’s look at some of it. One undeniable fact is that the hurricane disaster changed scarcity conditions. There are fewer stores, fewer units of housing, less gasoline and a shortage of many other goods and services used daily. Rising prices not only manifest these changed scarcity conditions, they help us cope, adjust and get us on the road to recovery.
Here’s a which-is-better question for you. Suppose a hotel room rented for $79 a night prior to Hurricane Katrina’s devastation. Based on that price, an evacuating family of four might rent two adjoining rooms. When they arrive at the hotel, they find the rooms rent for $200; they decide to make do with one room. In my book, that’s wonderful. The family voluntarily opted to make a room available for another family who had to evacuate or whose home was destroyed. Demagogues will call this price-gouging, but I ask you, which is preferable: a room available at $200 or a room unavailable at $79? Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster.
It’s easy to cast aspersions upon people who charge gobs of money for some good or service in the wake of a disaster, but think of it this way: if the power goes out in a city, who will be in greatest need of a generator? Will it be the father who wants to supply the power for his kid to play his Xbox game, or the grocery store owner who wants to preserve his refrigerated and frozen foods until the power comes back on? Actually, this is a trick question because there is no way to measure their needs. However, I can measure the cost of their needs based on the price they are willing to pay to satisfy their needs. At $50 a night, the father might be willing to rent that generator just to keep the whiney brat from complaining. But at $500 a night, he’ll probably tell the kid to shut up and go read a book if he’s bored. The grocery store owner, on the other hand, may be willing to pay the $500 price to keep his food intact. The result is unspoiled food for the people in the town. If the cost of some good, such as a generator, is kept artificially low in a time of scarcity or high demand, the good will quickly run out as people avail themselves of it. But if the cost is high, they will either limit their own use or do without it entirely. In either case, their decision to limit their own use makes it possible for others to have access to the generator–or the hotel room, as in Williams’ example above.
In my last article, I mentioned the quote in Adam Smith’s The Wealth of Nations that explains it is self-interest and not altruism that inspires people to labor in their professions for others. Williams confirmed this as he wrote about the aftermath of another hurricane:
In Isabel’s wake, private contractors from nearby states brought their heavy equipment to Virginia to clear fallen trees from people’s houses. Producers and shippers of generators, plywood and other vital supplies worked overtime to increase the flow of these goods to Virginians. What was it that got these people and millions of others to help their fellow man in time of need? Was it admonitions from George Bush? Was it conscience or love for one’s fellow man?
I’ll tell you what it was. It was rising prices and the opportunity for people to cash in on windfall profits. Windfall profits are one of the vital signals of the marketplace. It’s a signal saying that there are unmet human wants, leading people to strive to meet those wants. It stimulates the supply response to a disaster.
I started off saying that supply and demand are the two aspects of our economy which dictate prices. But there is another heavy-handed price changer which almost always drives prices up: our government. The introduction of government rules, restrictions, and regulations almost always distorts the cost of a good to higher levels. Don’t believe me? Compare the cost of medical attention now that Medicaid, Medicare, and the bazillions of other government programs have meddled with the health care industry with the costs 20 and 30 years ago. Now compare the relatively unmeddled Lasik eye surgery costs of today with those a mere decade ago. Williams has written about the heavy hand of government interference as well:
Economic ignorance, misconceptions and superstition drive us toward totalitarianism because they make us more willing to hand over greater control of our lives to politicians. That results in a diminution of our liberties. Think back to the gasoline price controls during the 1970s.
The price controls caused shortages. To deal with the shortages, restrictions were imposed on purchases. Then national highway speed limits were enacted. Then there were more calls for smaller and less crashworthy cars. With the recent gasoline supply shocks, we didn’t experience the shortages, long lines and closed gas stations seen during the 1970s. Why?
Prices were allowed to perform their allocative function — get people to use less gas and get suppliers to supply more. Economic ignorance is to politicians what idle hands are to the devil. Both provide the workshop for the creation of evil.
It may be painful to have to pay $6 a gallon for gas as you flee an approaching disaster, but if you really need that gas, you will be willing to pay for it. If you don’t really need it, your willingness to drive another 100 miles down the road before filling up makes those pricey gallons of gas available for people who are riding on fumes and who are willing to pay the price for a few gallons.
If you don’t like what the gas station did in a time of need, nothing says you need to buy anything from them ever again after the emergency has passed. That’s the free choice of capitalism, too.