During the week of 9/11/2001 I wrote an editorial about the gas spikes taking place in a few towns in the Mid-West. Panicked individuals, shaken by the attacks, were swarming the gas stations for fuel. Gas station owners responded by raising the prices. My point was that this action — usually called profiteering — was not immoral, and indeed, was an example of what was, is and hopefully will always be right with America.
A controversial idea, at least in this day and age. I expected some sort of response and I got one, from Mr. Daniel Bishop. (Read the letter). As for my thoughts on his letter…
Mr. Bishop points out that I make no distinction between short-term price controls (such as temporarily setting a price for gas) and long-term ones (like setting prices for electricity in California). He’s right — and I did that on purpose. The effect of price controls in each case is exactly the same: by interfering with normal market mechanisms, it generates unnatural and unwelcome scarcity of whatever resource is controlled. They cause exactly what they are supposed to prevent: shortages of that resource.
Now before we go any further, the question is often asked what is the acceptable price for a given product? My answer (and the answer of the Founders of this country, although I won’t make a “plea to authority”) is this: whatever price, devoid of the threat of force, the buyer and seller agree on. Mr. Bishop responded to this point by saying that the gas station owners did use a threat of force — they took advantage of the threat posed by the terrorists to jack up their prices. But this is not the same as the gas station owners hiring someone to point a gun at a person’s head and demand that they pay $5 a gallon. Individuals were under no compulsion to buy the gas — they could have opted to buy gas the next day. Or wait until prices went down. Or conserve their own gas by carpooling. Or whatever — the point is that the transaction isn’t backed up by the threat of real force, such as when the government demands tax money (just try not paying the IRS…) And let’s also not forget the gas station owners are working under exactly the same ‘threat of force’ that their customers are under. The customers didn’t know if they’ll be able to buy gas the next day, but the same goes for the owners. Given that the terrorists were Arabic and that a war in the Middle East would play havoc with oil prices, it’s not unrealistic to expect that gas prices would spike (as they did during the Gulf War). If the gas station owners did not raise their prices, there’s nothing to say that they’d be able to buy an equal amount of gas the following week.
In dismissing my arguments in favor of the free-market, Mr. Bishop points to what he sees as benefits of price controls — preventing panic among the masses, and preventing profiteering.
The strikes on the World Trade Center and the Pentagon inspired panic among a few individuals. Well, more than a few — enough to inspire a run on the gas stations. This created a spike in demand for an existing supply of gasoline. The gas station responded — correctly — by raising prices. Imposing price controls in an attempt to control the panic calls to mind sayings involving barn doors and escaped horses.
The panic already exists — imposing price controls will only make matters worse by reinforcing the idea that things are out of control. To understand why it makes matters worse, read my original editorial and pay particular attention to the bits about price spikes helping to ration supplies naturally. Alternatively, you can check out this piece by the Cato Institute. In a nutshell, my point was this: rising prices helps conserve resources.
As for the second, price controls definitely cut into profits. But that’s not a good thing. Customers are only part of the supply chain. Just as they have to buy gas, so do the gas station owners (and the oil companies, etc.) If prices are fixed at the gas station level, and prices spike further up the supply chain, the gas station won’t be able to buy as much gas as it needs. That in turn means less gas for the community, which in turn increases demand. It just makes matters worse.
Of course, it’s possible that that gas prices won’t rise (in fact, they’ve declined considerably). So the gas stations will have turned a quick profit, hell, maybe even a really huge profit. I’ll even go as far as to say that some of those gas stations were hoping to profit off of people’s panic. Now undoubtedly some might see this as evil profiteering. Fortunately, if they feel this way the free market offers them an option: don’t shop there. They can go someplace that didn’t spike their prices. Or if all of them spiked their prices, then make an effort to buy nothing but gas there — no fountain drinks, no milk, no bread. Or they can buy one of those neat electric cars.
The thing is, that even at $5 a gallon folks got something thing they needed, when they needed it. Short-term price spikes inspired by sudden demand keeps the gas flowing. It’s in the “public good”, but more importantly it’s in the “individual good”.
But the reason I wrote what I wrote is that economic freedom — the ability to raise or lower prices, even if it’s a dumb ass thing to do — is just as much a part of what makes America great as intellectual freedom. People don’t seem to have a problem with slapping restrictions on economic freedom in the name preventing a panic, but imagine the uproar that would be raised if the government decided to muzzle newspapers, television stations and web sites on the same grounds. Imagine if they banned the 24-hour coverage of the events of 9/11/01 from CNN or MSNBC because the networks were profiting from the catastrophe.
The uproar would have been deafening.
The freedom of speech is a fundamental right in America — so is economic freedom, even if it doesn’t get its own line in the Bill of Rights. America’s founders — like Revolutionary War writer Thomas Paine, innovator and writer Benjamin Franklin, President Thomas Jefferson — understood this, and it’s my hope that more modern day Americans will remember it.
In another editorial, I fought for maintaining civil liberties in the face of war. I think it’s just as important to maintain economic liberties, both in times of peace and in times of war. This is why I’ll always fight for free market economics, whether its seesawing prices at the gas pump, Microsoft’s market practices, or the school choice. It may not be popular, but hey, I’m a geek — being popular isn’t something I’m worried about.