Capitalism can help avoid another tragedy

America is currently enduring one of the worst tragedies in American history. The images that are coming out of New Orleans are some of the most harrowing that I have ever seen. I am a big fan of Zombie movies, those movies are supposed to depict the end of the world. Directors pay a lot of money to shock and disturb us with images of “hell on earth”. Nothing that any director, of even the most terrifying of horror moves, has ever made comes close to being as distressing and horrifying as the images that I am watching on TV at this very moment. It is counterintuitive to think that something so horrible could happen in a major metropolitan city and not affect the rest of the country, and in fact this tragedy will affect the life of every citizen in America.

It is impossible not to have noticed that gas prices have risen even more sharply than usual in the last few days. The disaster that struck New Orleans has forced a significant numbers of the United States’ refineries to shut down. Therefore there is less usable gasoline available in the US. As anyone who has taken the most basic of economics classes can tell you, if supply decreases and demand remains constant price will increase. It is such an obvious rule that I almost didn’t think it was necessary to write it here. This is a problem, it will hurt millions of Americans but the unfortunate truth is that there is little we can do to solve the problem. The President made an effort by releasing 6 million barrels of oil from the federal reserve but that will only soften the blow, not avoid it. While we cannot fix the problem, there is something that we can do which would make the problem much worse.

There are lots of people, even some very smart people, who are calling for price cap to be put on gasoline. When I heard this on television I was almost shocked. At this time of crisis it is out obligation to think clearly and rationally and to avoid doing things which would only exacerbate the problem. President Nixon tried to solve a problem of high gas prices by instituting price controls and met with absolute disaster. According to the Wall Street Journal Nixon’s policy of price controls led to “shortages, rationing, inflation and an economic crisis” Is that what we really the response that we want to promote in response to our current problems? The late 70s were marked by long lines to get whatever gas was available and gas stations closed because they had simply run out of gas. Does anyone seriously think that the laws of economics have changed in the last 30 years?

It doesn’t take an economic genius to know that an artificially low price will lead to
shortages. This idea is stated on Wikipeida “if the price is set too low, then too little will be produced to meet demand at that price. This will cause an undersupply problem (also called a shortage).” This is a graph that illustrates the law of supply and demand.

The market will always try to force production to the intersection of the lines because that is the point where the highest profit is obtained. If the price is too high the demand will go up and pull the supply with it, dragging both to a lower price. If the price is too low the demand would normally rise forcing the supply to rise and meet that new demand dragging the price to a higher point on the graph. However, if the government artificially holds down the price the lines will not be able to move to a new point. The demand at the new price will be higher than the supply at that price and we will be faced with shortages.

Its basic economics, really very simple. It is impossible for me to understand how any intelligent person could be urging price controls.

Is there any reason to think that we are any more capable of managing the free market today then we were in the 1970s? If the answer to that question was yes we would quickly act to eliminate all of those little messy economic problems like scarcity, poverty, and hunger. Free markets aren’t perfect but they have made America the wealthiest and most prosperous nation on earth. Our understanding of why free markets are always superior to controlled markets led us to victory from the darkest days of depression and even cold war. There is absolutely no valid reason to betray those principals today.