Comments (19)

• Paul Marks

  The late Milton Friedman said that the most frustrating thing for him was the inability of most people to understand a price system.

  Although, I suspect, his thinking of human interaction as a "system" might have been involved in his difficulty in getting people to understand.

  Restrictions on civil (i.e. voluntary) interaction must, by definition, cause economic harm.

  This is a (perhaps the) central insight of economics and helps understand such things as the lack of shortages after the great San Francisco earthquake (whereas far less serious events throw the modern world into chaos) and even the decline of Classical Civilization.

  For, as Ludwig Von Mises was fond of pointing out, first progress is undermined when the state sets prices and orders people about, and then (eventually) civilization actually goes into decline - and becomes vulnerable to the attacks of barbarians who in former times would not have been a fatal threat.

  Published: June 25, 2008 10:04 AM

• fundamentalist

  Excellent analysis. I might add that price controls favor the people who purchase early over the late comers, who get nothing. How fair is that? But most of all, price controls demonstrate the arrogance of state officials who assume they are wiser and know better than the people what is best for people, as if putting on a state hat suddenly makes everyone wiser than they were before.

  Published: June 25, 2008 12:21 PM

• Florida Economist

  Principles of price control aside for the moment:

  I have a hard time believing that short term price control limited to a specific geographic area and limited to specific products and services would create depression type shortages for those products and services, during the short period that price control is in effect; as long as the price control period does not last longer than the time it would take for inventory to be used up.

  I want to believe otherwise, however it just does not sit well with me.

  Does anyone know of a specific event whereas short term price controls for life sustaining products led to severe shortages of those products immediately following a natural disaster, even when inventories were still available?
  

  Published: June 25, 2008 2:11 PM

• Daniel M. Ryan

  Shortages do make for angry grasshoppers, especially if they see an ant profiting from his/her foresight.

  Published: June 25, 2008 2:22 PM

• Yancey Ward

  Price ceilings encourage hoarding in disaster areas, and has the follow on effect of reducing the potential flow of such goods from the outside.

  Published: June 25, 2008 2:22 PM

• fusgerm

  Good article. The very term "price gouging" suggests a quaint medieval conception of a "fair" price.

  There's another reason why post-disaster price controls achieve the opposite of what they are intended to achieve. Why should a shop carry higher stocks of goods which would be in high demand only during an emergency, if it cannot expect to be reimbursed for the holding costs (shelf space, idle capital, etc) in the form of higher prices?

  Thus, when an emergency does strike, shops are ill-equipped, which in turn makes people clamor for government intervention due to market failure.

  Published: June 25, 2008 5:55 PM

• Ian

  Help the novice? From the article:

  "As Michael Munger, chairman of Duke University's political science department, has pointed out, this means that the effective price of a good for which the price has been controlled is infinite: beyond the amount that the market will supply at the controlled price, nothing can be done to call more goods into existence."

  Can someone help me understand what Mr. Carden means by the effective price being infinite in this context? I'm just not grasping it.

  And thanks in advance!

  Published: June 25, 2008 6:17 PM

• scineram

  This means it will be unavailable due to shortage regardless of how much money you have.

  Published: June 25, 2008 6:28 PM

• scineram

  This means it will be unavailable due to shortage regardless of how much money you have.

  Published: June 25, 2008 6:30 PM

• scineram

  This means it will be unavailable due to shortage regardless of how much money you have.

  Published: June 25, 2008 6:31 PM

• Ian

  Scineram, thank you.

  So by an infinite effective price he means that the market price may as well be $infinity (because the control will loosen restraint on demand and exhaust the supply due to the lack of the higher price signal that would encourage more supply).

  Published: June 25, 2008 7:47 PM

• Bruce Koerber

  The socialism is so advanced that there are layers upon layers of interventionists. State attorney generals are pretty much unrestrained interventionists, sticking their hands in any cookie jar they wish.

  That is what needs to be understood: the ego-driven interventionists are thick like ticks, gourging themselves.

  The treatment for these parasites is the inherent moral authority of laissez-faire that is expressed as subjective human action by spiritual beings.

  Published: June 25, 2008 9:41 PM

• jason4liberty

  It is also worth mentioning that this is precisely the kind of government intervention that creates and powers the black market.

  Published: June 25, 2008 11:35 PM

• Michael A. Clem

  [sarcasm]But it's so important that people who desperately need supplies and goods should do without instead of being charged a higher, unfair price![/sarcasm]

  Published: June 26, 2008 4:56 PM

• Daniel Pauni

  Is there any experience of price control and free market policies in the same area (for example , during WWII )?
  

  Published: June 26, 2008 5:34 PM

• Kevin

  Florida Econ

  
  I have a hard time believing that short term price control limited to a specific geographic area and limited to specific products and services would create depression type shortages for those products and services, during the short period that price control is in effect; as long as the price control period does not last longer than the time it would take for inventory to be used up.

  
  Price Controls take the basic incentive away. Fluctuating prices change comparative advantage. If I live in an initially unaffected area and have the availability to purchase 100 generators at my local market price which normally is initially unaffected. I will not do this if price controls are in effect. My time is worth more elsewhere. There is absolutely no reason to expend capital.

  Published: June 27, 2008 7:38 PM

• gene berman

  Florida Economist:

  You're not looking at it completely. In every place prone to recurring interferences with normal supplies, the fact that shortages occur at all is due not only to the short-sightedness of some but also to the very fact that entrepreneurs who might otherwise be inclined to put by stores against such eventuality are precluded from doing so by their commonsense recognition that, come the deluge, they will not be able to cover their investment and an adequate profit simply due to the regularity with which the authorities decree price controls and "gouging" penalties. Not only do such entrepreneurs (who may be just the same everyday businesspeople of the area) not install extra storage and the increased stocking level against the very irregular and uncertain occurrence but are also aware of a fickle feature of human nature: some of their customers will actually resent the guy who relioeves their acute need simply because he charges them more than they believe "fair." This tendency is particularly evident in the beginning of a catastrophe, when the seller must actually raise the price quite steeply, not to make the most money possible from the deprivation of his customers but to tery to preserve the stock for as long as possible--to 'ration" it by price, so that the first customers in need do not buy up so much in their panic as to deprive others in need. Typically, the actual duration of such events is not great but people cannot go long without a certain amount of water, food, and, sometimes, heat.

  One other point. many people make charitable donations in such times of need. Others, both in the area and in other places, may actually go and physically render valuable services of many kinds. But, very often, there is still a shortage of certain types of skilled and semi-skilled labor. There are always people in other areas, some close by and other at some distance, who would travel to be available for necessary work at some height above their accustomed earnings. These people can't afford to donate their services or are disinclined for other reasons of their own. Even when they do go, they are frequently bad-mouthed by local tradesmen, resentful of the competition; in appearing for the emergency work, they are doing their part to "get the job done" and keep the prices as affordable as practical in the circumstances--but they, too, are frequently vilified as "gougers."

  In one way or another, everything has to be paid for and will be. Price controls and rationing merely spread the misery and lengthen its consequences through time.

  Published: June 28, 2008 6:51 PM

• gene berman

  Florida Economist:

  You'd think that authorities in some of these disaster-prone areas might be more given to some forethought.

  I happen to know a guy who has 25 inflatable rafts. Crated, these each weigh about 750 lbs and are in a crate about 3' X 4" X 3-1/2' high. They can be assembled and inflated (9' X 22") in about 30 minutes, even using the (supplied) foot-pump. The US gov't paid over $10,000 apiece. Inflated, each is capable of carrying nearly 12 tons--that's a lot of stuff to be able to save in a flood emergency. He tried offering them to some of those places that had flood problems (Illinois and Missouri, I think) just two or theree years ago. Think he got any takers @ $2500? Seems to me they'd have been pretty handy in this latest round but he couldn't get anywhere with 'em. As far as I know, he tried contacting fire companies, police departments, etc. and didn't find any interest.

  Published: June 28, 2008 7:15 PM

• Outside Observer

  Has a reputable economist ever researched what happened in the event of a disaster before the concept of government price fixing became so prevalent? Comparison of recovery time would be particularly interesting.

  Published: July 2, 2008 4:42 AM