The bad economist only notices what is seen. The good economist sees what is unseen. Bastiat’s timeless observation of the problem with popular economic reasoning is sadly still so very relevant today. This point can best be illustrated by presenting a most extreme example where nearly everyone only saw what was seen and fatally missed the unseen.
Hurricane Katrina was a devastating moment for all Americans. We saw one of our most beloved cities suddenly underwater, with our fellow compatriots struggling and suffering. We sympathized with the stragglers who failed to leave the town in time and all the anarchy that ensued. Many of us sent charity and many even volunteered to try to help mitigate the crisis.
None were probably more disdained than the individuals that sold water to these helpless refugees for obscene prices; sometimes 10 to 20 dollars a bottle. Many wanted them arrested. Many called for laws to prevent this sort of price gouging in a time of crisis. How in a just society, these well-intentioned individuals ask, can we allow this to happen?
My question: How in a just society can we not allow this to happen and indeed encourage it?
My first question I would ask to these well-intentioned kind hearted individuals would be: How much money would I have to pay you to drive to New Orleans to deliver water? Say you from Arizona. That is some 2000 mile more or less. How much would it take you to load your car up with water and deliver it to the people most desperate? Perhaps $1,000, maybe $2000, maybe even $10,000?
Perhaps they would respond nothing, I would do it out of my own good will. Ok fair enough, then I might ask, did you? The answer 99.999% will be no, they didn’t.
As any economist will tell you as the price of a good rises it attract suppliers into the market. When the prices raise fast and high, it attracts many suppliers into the market.
Given the market circumstances of the New Orleans during this time, the price was high enough to attract individuals from Alabama and other bordering states to load up their pickups and deliver a good that was in extraordinarily desperate need. The sufferers of Katrina were not concerned with paying $15 dollars a bottle, their mind was much more preoccupied with survival. These evil price gougers provided water in area where charity and government failed. After all, logically, if the people had a choice between $15 bottles and the free water given out by charities and the government why would they choose to pay $15? The answer is simply that they didn’t have that option. The charities and government had failed to reach everyone in need of this good. Therefore the sad reality is that these people would not have had water had these evil price gougers not contributed to the desperate demand.
Price signal demand. They allow suppliers to know how much and where a product should be supplied. Furthermore, they ration goods. Suppose a law was imposed to limit the price of water to $2.00. What type of incentives does that create? What are the possible unintended consequences? What would the rational individual do? I know what I would do: buy up the shop. I would purchase as many as I could possible afford and carry. I would buy more than I could possible need as a precaution. Many might say that “no no people will realize this and only take what they need”. But this statement is a truly ignorant understanding of human nature. The tragedy of the commons is true everywhere: where there are fixed prices, there are invariably shortages. Thus in a short amount of time only the first few consumers have purchased all the available water leaving nothing available for the others.
The high prices of water motivated individuals to action, to supply a good desperately shortage and allowed that good to rationed to the most amount of people.
Its easy to sit back and criticize but I wonder how many of you actually did anything to alleviate the suffering. The evil price gougers provided a service that was desperately demanded. The price gouger benefited as well as the hurricane victim. It was mutually beneficial. I can assume that is more than you did.