Wednesday, November 09, 2005

Redundant Rambling about Price "Gouging" and "Windfall" Profits

Seems to me that those are two terms that we've read a lot recently.

I remember reading in Thomas Sowell's Basic Economics an example he gave about price "gouging." I believe it was about the scarcity of hotel rooms and flashlights following a disaster like a tornado or hurricane. By "gouging," retailers and hotels actually more efficiently allocate resources by forcing the first family to reach the hotel or the flashlight store to think twice before taking more than they might really need: two rooms for the family of four at the hotel or four flashlights rather than just one. Thus, there is a room and flashlight available for the next family because the first family was priced out of the second room and a second, third or fourth flashlight.

He reiterated the argument after the 2004 hurricanes in Florida here at Jewish World Review.

The argument certainly made sense intellectually, but somehow still seemed wrong. My first thought was that the millionaire would still be able to take all the rooms and flashlights but, on further reflection, that would be an anomaly indeed, most millionaires having bolted for safer climes long before the tragedy struck.

So take most millionaires out of the equation.

Most of the people bolting Houston in those 20 hour traffic jams were pretty much regular folks. My friends who came to Austin were in fact relieved when they could purchase gasoline at "outrageous" prices. They didn't like it but were relieved to get the gas.

I remember hearing about a guy gassing up his 200 gallon cigarette boat before heading to Lake Travis and thought, "What a selfish S.O.B. All these folks up from Houston and he's sucking up 200 gallons." He is my millionaire. Fortunately, there were not too many of those and I think Houston was completely back in business in about a week.

I've seen the free market model work and still it seemed somehow wrong. Then it hit me: the model didn't seem wrong; it felt wrong. If I've learned anything in forty-five years, I've learned that feelings (mine, at least) are notoriously unreliable.

Walter Williams and John Stossel have also written about this recently and have helped me put things in perspective.

What are the alternatives to the "market" or Smith's "Invisible Hand?"

First, there is government. Katrina efforts don't speak too well for governmental efforts, but assume that, practically speaking, government works as it did in Texas. Williams, elsewhere in JWR, would call the taxation aspect of government assistance "theft" and Stossel implies that without the taxation, the government's alternative is "totalitarianism." (Both positions sound extreme here but Williams just means that government taxing us for altruistic purposes is both unconstitutional and forcing us to contribute to charity that we might or might not support. Stossel just means that the government could just order people to to the needed work).

By the way, it has always seemed to me that the idea of one or a hundred making making a million economic decisions rather than millions making dozens of economic decisions that affect them directly is inherently illogical...maybe it worked in feudal times when there were far fewer decisions to be made, but not today. A subject for later.

Second, there is altruism. This is what gets me beyond the "feeling" that the market should be forced to work differently. Whatever we have seen in government efforts over the last year (disgraces in Tsunami and Katrina and, in my view, triumphs in Texas and Florida), we have seen people, especially Americans, shine with their generosity. Generosity of Amerians goes a long way to lessen my concerns about Williams' $20.00 loaf of bread or Stossel's $20.00 bottle of water, too.

But Stossel is right that we cannot rely on Blanche's "kindness of strangers" to get us through more than the short term. It may even get us a great deal of the way through the mid-term, but it seems to me it is the market upon which we must ultimately rely because, as much as we might like to do require otherwise, we have to let the people decide what to do with their own assets of time, talent and treasure.

Basic Economics should be must reading for every American high school student...ok, maybe college student. My biggest gripe as I read it was that Sowell repeated too many of his points. In hindsight, he was just teaching. One can actually read the book once and learn the basics of economics, funny how he picked the title. The man knows his audience and what his audience needs.

I learned in one week reading Sowell more about economics more than I did in two semesters at my beloved University. (I rationalize that by telling myself that as a sophomore, I wasn't really paying attention. College, like youth, is too often wasted on the young.)

Ok, I'm going to bed.

No comments: