Monday, May 15, 2006

Question

Assume Katrina just hit and you own a delivery truck, and you want to help hurricane victims by trucking the most desperately needed item down to New Orleans. What do you fill your truck with: aspirin, diapers, water, etc? Tough question. How could you discern the correct answer?

One more datum is required: Has government declared so-called price-gouging illegal?

If the answer is, "No," then the solution is to fill your truck with the item that will reap the highest profit. See, the victims know what they need and express that need through their willingness to pay higher-than-normal prices. That is simple economics.

If the answer is, "Yes," then you have no knowledge to solve the delivery problem, and more importantly, you have no way of satisfying the true need of the victims. You may select aspirin when the real need is diapers. Or, you may truck water when aspirin is desired.

Oh, you say that government officials on-site can quickly telegraph the need of the victims and direct you in how to satisfy it. Empirical evaluation shows that this statement is false since FEMA sent needed items to the wrong spots; even wrong states for that matter. And, they directed individuals to deliver items that were not desperately needed.

What about the logical evaluation of the statement. A priori, since the government price-level dictates have created lines for every item, the officials can only attempt to gauge the real need by the size of the line or some other equally invalid method. Maybe an official substitutes his own valuation; since he believes that he would desire aspirin, aspirin is the item in need. Regardless of the method, the government official will be wrong most of the time. When he is right, he is right by pure chance only. A review of the government response to Katrina validates this evaluation.

Funny thing about the unhampered market, it solves the scarcity problem correctly and rapidly. Remember your decision to go for the profit absent price-gouging legislation. Well, you aren't the only profit-seeking individual. Others will also be trucking the most needed item so that scarcity will fall quickly as entrepreneurs bring that item to the victims. The $10 gallon of water will fall rapidly over the next few days as water deliveries throughout the US are redirected to the devastated areas. Profit levels will fall as quickly as the satisfaction of the hurricane victims rises.

Remember the government response to Katrina where no one was satisfied and many went wanting for weeks. Remember this the next time an elected officials tries to "nail the gougers." The officials will solve nothing. Let the entrepreneur and the free market play their role and quickly correct the situation.

In the meantime, read the writings of Ludwig von Mises and the other Austrian Economists at Mises.org in order to understand how the freemarket works for the betterment of man.


Jim Fedako

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