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« From the Annals of Bad Economics | Main | Reward Value Creation »

14 May 2006

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John Cooke

If you're looking for the correct link to "How Capitalism Saved the Whales", you can follow the URL above.

John Cooke

Sorry, about the earlier entry. Just click on my name to go to the correct link.

Troy

Steve,
I enjoyed your post and the link to Stossel. It reminded me of a blog entry from the Acton Institute (click on my name below for the link), which also has a link to a good column that appeared in mises.org.

Another benefit from allowing prices to fluctuate relates to pricing during periods without high demand. Take hotel rooms, for example. Hotel operators with the ability to price their rooms as they see fit during periods of high demand, whether due to crisis (e.g., hurricanes) or other events (e.g., football game weekends), will cause additional supply to be brought to market vs. if an artificial price ceiling were in place. This additional supply may result in lower prices for consumers during low-demand periods.

George Orwell

>>Some companies do not raise their prices in the aftermath of disasters. They naively believe they are helping people.

Does this mean that GP will now increase prices for lumber and other building products after a disaster (despite the "feel good" TV ad about trucks headed to the area after Mother Nature runs amok)?

John Cooke

George - Your comment about companies who 'naively believe they are helping people' is thought provoking. Care to expound more on your meaning?

George Orwell

Not my words, John - I was quoting from the original post.

Ben, I completely understand that this is not a forum to comment on specific policies of companies that are owned by Koch Industries, so I'll pose the question in a different way: Is it ethical for a company that makes commodity products that are typically in high demand after a natural disaster to raise their prices far above normal in order to increase their profit, assuming production costs remain stable?

Ben

George:

The short answer to your question is, yes - as far as I am concerned.

My more detailed noisy answer is:

Assuming it is legal (e.g. not violating an existing "price-gouging" law no matter how goofy I might think those laws are - we don't get to choose which laws we follow), I personally think it is ethical for a company to raise prices after a natural disaster for commodities that are in high demand.

But I'll go a step farther: I think it is immoral for a company NOT to raise prices. To fail to raise prices in the hopes of making a profit is to fail to meet the minimum expectations of a business' role in society.

Most importantly, when it isn't fulfilling its role, those vital resources that are currently available have almost certainly been misallocated among those people who are in desparate need. New supply will not get to that market as soon as it could have because high prices didn't signal out-of-region producers to quickly push their supply towards the disaster area. Regional producers aren't induced to do whatever is necessary to create more supply.

For brevity's sake (I can already hear my teenagers sighing, "ya right")... I will ignore issues like sunk cost thinking (i.e. cost-to-produce), and fairness (both parties in an exchange benefit "fairly" - as defined by them - otherwise they wouldn't exchange) and focus on the role of prices.

Prices serve a vital function by sending signals that can coordinate all the dispersed knowledge across a market to guide effective behavior. Without that signal, consumers don't know whether to consume or conserve, producers don't know if they should produce or lay fallow. Neither side can make the proper economic calculations.

Prices reflect relative scarcities. A market price is not a moral compass to be adjusted if it is out of sync with reality - it IS reality (or at least reality's messenger). We can shoot the messenger if we want, but the reality doesn't go away. People shoot the messenger all the time - it's right up there with sticking a thermometer into an ice bucket when you decide it's too hot out and then expecting things to cool down.

If you are really interested in this, I would strongly suggest reading those who are more learned and eloquent than I am on this topic -- try, for instance, Paul Heyne's The Economic Way of Thinking; Thomas Sowell's Basic Economics; Wheelan's Naked Economics; Alchian's University Economics; Hazlitt's Economics in One Lesson.

There will always be those who cannot afford the absolute basics for survival - water, safe shelter, food, clothing, etc. These are a small minority and we are required in a civilized society to take care of them. That is fundamentally different, in my opinion, from "helping" those who CAN afford it but are upset about the drastically increased price of any particular item.

Consider examples of where price wasn't allowed to reflect reality (either because a business voluntarily refused to play its role or gov't interfered): families buy two hotel rooms - one for the parents and one for the kids -- and others go without who could afford it, but didn't get there soon enough. Emergency vehicles [can't] get fuel because at the "normal low price" everyone wants to top off their tank just in case. I could go on a long time.

A business that wants to benefit a community in a disaster should charge the highest price it can for its products and then turn around and donate whatever portion of its resulting profits it deems right to those it perceives will benefit the most.

Obviously these are my (passionate) opinions and they might be wrong. But I'm holding my position until a better argument comes down the path.

Ben

Kevin

Ben,

I've been reading this page for months now, and the information provided is superb. It is one of my favorite pages on the web, and your links are informative and on point.

Regarding this particular argument, I think your Market Perspective entitled "Flu Shot Shortages" brings into sharp relief the point of raising prices when demand increases. If companies are constrained from making a profit, they will leave the market, and then there will be none of the necessary products after such disasters. Since being exposed to MBM, I have noticed that many people associate being a consumer with being a victim and a producer with being a culprit. It is a dangerous state of mind that leads to an equally dangerously simple solution: make the government fix it.

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