They say that being an economist is the least satisfying job available. The economist spends his entire life refuting economic fallacies and attempting to educate the public about the wonders of the price system, and then, in the hospital, when they're about to die, he hears a pair of nurses talking about the need for a higher minimum wage. Additionally, one of my former students has told me that his knowledge of economics has made him quite a cynic. Economists have the rare ability to see what is unseen; they see how everything could work out if everyone cooperated with each other and if the government didn’t interfere with the market process, and they see that this is never the course chosen in real life. They begin to lose faith in people.
I’ve managed to avoid these depressing attitudes, for the most part. My knowledge of economics has, instead, given me a profound sense of wonder. When I walk through the streets of New York City, my mouth is usually agape, not because I’ve never seen so many people, or buildings so big, or prices so high, but because I am staggered by the amount of wealth that surrounds me. I marvel at the fact that more people than the population of the entire Roman Empire can fit into one city, and that they all get fed. Who built this monument to humanity’s triumph over scarcity? Private savings, entrepreneurs, the market. Instead of seeing all that we do wrong, like my student, I see all that we’ve done right. It makes me happy, and hopeful.
Except during natural disasters. Then I become a cynic. I get angry. I begin to feel hopeless. Because it’s during disasters when markets are the most needed, and during disasters when markets are most resisted. And I don’t need the ability to see the unseen to see the real, human costs of this resistance.
I am speaking, of course, about “price gouging” and the public’s widespread vilification of it.
I’ve already written extensively on the functioning of the price system in my first Self-Designed Assignment, so I won’t go into too many details here. But there are two very important things that high prices accomplish in emergencies: they cause people to conserve the scarce resources, and they cause further production of the scarce resources. When a resource is scarce, its price rises, which tells market participants that only their most valuable ends can be satisfied with this good. In other words, as the price of water rises, less water is purchased to boil pasta, so more water is available for drinking; as the price of plywood rises, less plywood is purchased for building doghouses, so more plywood is available for covering windows.
The other thing high prices during emergencies do is attract resources from the rest of the country. Here in New York the price of gas rose almost 40 cents in just a few days after Hurricane Harvey hit Texas. Some people complained, because it wasn’t like the hurricane had affected our supply of gasoline. And that’s true. But what was happening was that the people in Texas, having lost their supply of gasoline, were now competing for our supply, and outbidding us. The high prices in Texas attracted gasoline and water and plywood away from the rest of the country and towards Texas. Yes, this occurred because businesses and individual arbiters wanted to make money off the high prices in Texas. But they made money by bringing people the supplies they so desperately needed. The market makes sure that these money-makers earn their reward, but it does reward them, and by doing so it creates the incentive needed to attract the help that is needed.
Furthermore, the high prices provide useful information about what exactly is needed, and where. If you look at the prices in Texas, the price of water has multiplied many times over. The price of clothing has not risen much; the price of stuffed animals not at all. And yet, many people are donating clothing and stuffed animals. This is not what people need. They need money and water and construction materials. Market prices communicate valuable, real-time information about what is needed and where and how badly.
By allowing prices to rise during disasters, more resources are drawn to the areas where they are needed the most. The people in those areas naturally conserve their use of that resource, allowing their fellows an opportunity to obtain part of the supply. And the rest of the market can see where exactly help is most needed and what form that help should take. If we prevent prices from fulfilling their function, we cripple ourselves, and our relief efforts, and the social order’s ability to deal with the crises. People die as a result. And yet, because these voluntary transactions seems “unfair,” people condemn and actively squash the price gouging, a system that does far more good than any government response ever could.
And as an economist, as someone who understands what these prices mean and what they’re doing to help people, the ignorant cries to put a stop to them are infuriating.
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