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Leithner Letter No. 70
October 26, 2005

The larger the mob, the harder the test. In small areas, before small electorates, a first-rate man occasionally fights his way through. ... But when the field is nationwide, and the fight must be waged chiefly at second and third hand, ... then all the odds are on the man who is, intrinsically, the most devious and mediocre – the man who can most adeptly disperse the notion that his mind is a virtual vacuum.

The Presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron.

H.L. Mencken
Baltimore Evening Sun (26 July 1920)

I told some world leaders, through our tears we see opportunity; that we’re sad and angry, but we’ve got a clear vision of the world; that this is a remarkable moment in history which our nation will seize. We’ll act boldly at home to encourage economic growth. We’ll take care of people who hurt. We will comfort those who lost lives. ... And we’ll be tough and resolute as we unite. ... And there’s no doubt in my mind, not one doubt in my mind, that we will fail. ...

George W. Bush
Speech at the U.S. Department of Labor (4 October 2001)

We decided we had to save ourselves. So we pooled our money and came up with $25,000 to have ten buses come and take us out of the [flooded] city [of New Orleans]. Those who did not have the requisite $45 for a ticket were subsidised by those who did have extra money. We waited for 48 hours for the buses, spending the last 12 hours standing outside, sharing the limited water, food and clothes we had. We created a priority boarding area for the sick, elderly and some newborn babies. We waited until late into the night for the “imminent” arrival of the buses. The buses never arrived. We later learned that the minute they arrived [at] the city limits, they were commandeered by the military.

Katrina and the Never-Ending Scandal of State Management
(13 September 2005)

In the Storms’ Wake: the Bad, the Good, the Noble and the Evil

A contributor to The Wall Street Journal (“Knowledge Deficit,” 21 September) “break[s] economic literacy into two components – factual and conceptual. Alas, most well-educated Americans are illiterate in both areas.” According to this contributor, “conceptual literacy means mastering the economic way of thinking – understanding tradeoffs, market forces and the full effects of a proposed public policy.” What is the essence of economic literacy? “A good starting point is Frédéric Bastiat’s idea that what is seen, the direct effect of a policy, is often just the beginning of its impact. Equally or more important is what is not seen. The world would be a better place if people understood that the intention of a policy ... does not capture the full effect on our well-being.”

From this insight, and in Katrina’s and Rita’s wakes, four conclusions for investors emerge:

  1. Like plagues and pestilence, hurricanes are always bad and never good. The greater the number of people they kill and the greater the value of the property they destroy, the worse are their economic impacts.

  2. Because they point people and property to their most urgent and valued uses, and help consumers to economise, “profiteering” and “price gouging” by individuals and private businesses are always beneficial.

  3. Man does not live upon bread alone, and people do not respond solely (or perhaps even primarily) to commercial incentives. In response to others’ misfortune, people gladly donate money, food, clothing and housing; they eagerly contribute their time and expertise; and in order to assist others, particularly noble people willingly put themselves in harm’s way.

  4. Like hurricanes, plagues and pestilence, politicians are destructive. Because their price gouging and profiteering distorts and bastardises price signals, and because they otherwise lie, cheat, steal and kill, they are malign (and in extreme instances even evil) forces.

Broken Windows and Busted Economists

Hurricanes Katrina and Rita are not just humanitarian tragedies: they are also economic disasters. They will, relative to the standards that would have prevailed in their absence, cause Americans’ standards of living to fall. Why? Three reasons. First, consumers will suffer: the goods that these storms destroyed cannot now be consumed. Producers, too, will suffer: some goods and services cannot now – and perhaps for a long time – be produced and distributed in the same amounts prevailing before the storms. Katrina ruined one of the world’s greatest (in terms of tonnage) ports; it and Rita damaged infrastructure that produces, refines and distributes oil and gas (indeed, and as The Financial Times reported on 28 September, Rita caused more damage to oil rigs than any other storm in American history); and, one after the other, they forced millions of residents to flee their homes. Katrina in particular not only destroyed physical capital; it permanently dispersed much human capital. People have not just lost jobs: years will pass until many again earn the salaries they commanded before the winds blew and levies broke. They must start different careers in new places – and probably at lower standards of living.

Thirdly, and no thanks to a spendthrift Congress utterly bereft of adult supervision, American taxpayers from the North Slope to the Florida Keys will suffer. Pity the Americans: in no country is the gulf between the rhetoric of prudence and the reality of recklessness so vast. Accordingly, as a result of the hurricanes more of Americans’ future earnings – indeed, of their children’s and grandchildren’s earnings – will be taxed to finance the billions of unscheduled expenditures by local, state and national governments.

These governments initially told their subjects that the repair bill would be approximately $60-$100 billion. This figure resembles the one originally – and very haughtily – cited by proponents of the invasion of Iraq. The direct financial costs of the invasion and occupation are presently closer to $400 billion – and constantly rising. Only the most naïve lovers of big government (of which there are many) believe that what politicians ultimately waste will correspond even roughly to their initial estimates. The most fanatic defenders of big government programmes, who in America stridently and sometimes aggressively call themselves “conservative Republicans,” also forget that debt-financed expenditure today means higher taxes tomorrow. What today’s Republicans are moving heaven and earth to conserve and extend is the legacy of FDR’s New Deal: socialism at home and perpetual war abroad. If only they would acquaint themselves with the ideals of their forebears like Howard Buffett (Rep-Nebraska); see also The Foreign Policy of the Old Right.

On Boxing Day 2004, people around the world correctly perceived that the Great Tsunami was primarily a humanitarian but also an economic disaster. They understood that when a major storm strikes a developing but still relatively poor people, kills many of them, damages and destroys the property of many more and causes still others to disperse, then all livelihoods are severely disrupted. They therefore recognised that the tsunami’s survivors had become poorer and less productive. Why should Katrina and Rita not be viewed through the same lens (see On the Alert for a Category-1 Recession by Gary North)? Does some other principle apply when Americans die?

Some influential people apparently think so. Whilst decrying Katrina’s human toll, they welcomed its economic consequences: more “stimulus” and therefore – they alleged – more growth. According to a senior economist at J.P. Morgan (Gas Crisis Looms), “preliminary estimates indicate 60% damage to downtown New Orleans. Plenty of cleanup work and rebuilding will follow in all the areas. That means over the next 12 months, there will be lots of job creation which is good for the economy.” A business school academic concurs: “on a personal level, the loss of life is tragic. But looking at the economic impact, our research shows that hurricanes tend to become god-given work projects.” He “expects to see a construction boom and job creation offset the short-term negatives such as loss of business activity, loss of wealth in the form of housing, infrastructure, agriculture and tourism revenue in the Gulf Coast states.”

A major ratings agency also finds good among the bad. It estimates that Katrina could “shave a few points off our forecast of 3.7% growth. At the same time, repairs to hurricane-related damage in Florida, Mississippi, Louisiana, and other regions affected by the storm should boost GDP in subsequent quarters. Natural disasters bring in a lot of money from the outside to help in the rebuilding. ... The rebuilding boom will generate incomes. Insurance money and federal relief money will pour in. This happened very quickly in Florida last year. ... We’ll see positive economy results maybe by the third-quarter of next year.”

A properly trained economist, Walter Williams, knows better. In Economic Lunacy, he mockingly asked whether even greater opportunities would have occurred had Katrina devastated not only New Orleans, Biloxi and Gulfport, but also Pittsburgh and Cincinnati. And by the mainstream’s twisted logic, why stop there? Would it not be a godsend, in terms of job creation and building booms, if another category-3 sister joins Katrina and Rita? If Dresden were again razed and Hiroshima once more incinerated? How would you like it if your home and business were wrecked and your friends and neighbours killed? Only a fool – or somebody who has never been personally affected by such calamities – would answer affirmatively.

The fallacy that Williams rightly deplores, the Broken Windows Fallacy, seems to rear its ugly head whenever a huge storm hits, a major bushfire rages or planes topple skyscrapers (see also Is Terrorism Good for the Economy? and Letter 38). In Henry Hazlitt’s words, uttered in Economics in One Lesson (see in particular chapters 2-3), “under a hundred guises, it is the most persistent [fallacy] in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, chambers of commerce, labour union leaders, editorial writers and newspaper columnists and radio and television commentators, learned statisticians using the most refined techniques, and by professors of economics in our best universities. In their various ways, they all dilate upon the advantages of destruction.”

Frédéric Bastiat was among the first to identify this fallacy (see in particular his classic That Which Is Seen and That Which Is Not Seen). Katrina and Rita broke many windows – literally and figuratively – and their aftermath will alter the amount and timing of certain kinds of expenditure. Massive reconstruction will indeed occur in the areas they devastated. Critically, however, the labour and materials used to reconstruct a house in New Orleans (that which is seen) are resources that cannot simultaneously be used to construct a new house in an unaffected area (that which is not seen). Given the unavoidability of trade-offs, there will be more of some types of economic activity in some places, but less of other types of activity elsewhere.

The reconstruction that occurs in these storms’ wake, in other words, cannot cause the total supply of American houses to increase: at best and over an extended period of time, it can revert to that which existed before the storms. More generally, reconstruction can at most replace capital; it cannot increase the quantity and quality of capital above that which previously existed. Even The Wall Street Journal – which reliably harbours and actively promotes many economic fallacies – agrees. On 21 September it observed: “there will be a period of disruption, followed by a burst of spending, likely followed by a return to slower spending later. ... So over the long haul, it’s not much of a boost at all.” 

Why have so many succumbed so long to this fallacy? The standard methods used to measure economic activity, and the Keynesian assumptions that underlie them, are major culprits. National income statistics such as GDP are flows of expenditure – that is, measures of activity during some duration of time. Like Keynesian economics writ large, they tell us nothing that is useful about stocks of capital –  that is, the types, amounts and values of the many and varied capital goods that exist at a given instant in time. Accordingly, the mainstream’s data will count the goods and services purchased after the storms to rebuild the Gulf, but will simply ignore the destruction of a significant portion of America’s capital base that occurred during the storms.

Gary North adds that most participants in financial markets unthinkingly accept – indeed, they unconsciously worship – Keynesian nostrums. Among the most pernicious, and the one that seems to underlie much current thinking about mammoth storms’ economic consequences, is the contention that the Second World War delivered the world economy from the Great Depression. “As for the 50 million people who died – mostly civilians – well, that’s ‘collateral damage.’” Keynesians teach that the dispatch of men to kill one another creates employment. Unemployment falls because what is visible (i.e., the women who now produce guns and caskets) is counted and what is not visible (i.e., the men who no longer produce food and cars) is not counted. If this is not lunacy, then what is it?

Yes, unemployment fell in Anglo-American countries during the war. But how and why did it decrease? Just as they virtually always do, central banks massively inflated the supply of money. The New Dealers’ War also provided the diversionary cloak that allowed politicians to impose even more extensive controls upon prices and profits than they did during the 1930s. The public accepted queues, ration books and the deaths of husbands, fathers and sons; real income fell; and lower real wages increased the quantity of labour demanded by the government. “Prosperity through war” sounds – because it is – Orwellian. “The essence of so-called war prosperity,” said Ludwig von Mises, is that “it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income.” Alas, for more than half a century we have inhabited a world in which the sudden and violent redistribution of wealth trumps its gradual and peaceful creation.

North concludes “it took a war to get the voters to accept government destruction of their wealth. [Survivors] hailed their good fortune: so many deaths, so little unemployment. World War II convinced many Ph.D.-holding economists of the productivity of large-scale organised destruction. They are now applying their logic to large-scale unorganised destruction. Like a broken levee that formerly restrained economic ignorance, Keynesian error has now flooded our society with stagnant economic theory. The stench is getting worse. Walter Williams is correct: ‘Katrina-induced growth’ doesn’t pass the smell test.”

The Hills Are Alive With the Sounds of Drongos

Not only are the economic consequences of major storms typically misconceived: so too are the policy proposals they often unleash. An American Senator, Maria Cantwell (Dem-Washington), expresses what many people are thinking. According to an article in The Midland Reporter Telegram (11 September), “she will introduce legislation ... that would grant President Bush broad new powers to investigate whether oil companies are gouging consumers and to impose price controls if necessary.” She is unsure at what juncture price control should occur. Her attitude towards it is akin to Justice Potter Stewart’s attitude towards pornography: they can’t define these things in abstract, but they can recognise them in the flesh: “I don’t know what the level should be. But I know consumers should not be paying $5 a gallon for [petrol].”

“Price gouging,” says Governor Matt Blunt (Rep-Missouri), “is unconscionable and illegal ... and should be rooted out and punished.” According to The Wall Street Journal (7 September), twenty American states have “anti-gouging” laws and some of their governors have recently declared emergencies in order to invoke them. New York ’s statute says that price gouging occurs if a “gross disparity” exists between the price a customer pays and the “actual value” of the good or service being bought. Its Attorney General, Eliot Spitzer, has created a telephone hotline and urges that state’s residents to report any suspected disparities. Florida’s statute requires that after a major storm the price of food, shelter and other unspecified necessities must remain at the average price that prevailed during the 30-day period before the storm. Silly, absurd and downright idiotic statements have also polluted Australian airwaves and column inches. These statements fall into four categories:

  1. the allegation that oil companies “[appear] to be profiteering at the bowser in many parts of Australia” (The Australian, 27 September);
  2. the claim that “oil company profits [are] driving up petrol prices” (news.com.au, 27 September);
  3. the contention that “price monitoring is needed to help keep the fuel industry honest ... quite clearly you cannot trust these people to play fairly and give motorists a fair go”; and the demand that “the [Australian Consumer and Competition Commission] should act immediately to monitor rising petrol prices and ensure motorists are not being exploited” (news.com.au, 22 September);
  4. the plea that “Canberra should impose a limit on what Australians pay at the pump” (news.com.au, 5 September).

Now we will hear the truth: freely fluctuating prices and inviolable property rights are a necessary condition of modern civilisation. They signal the optimal (from consumers’ point of view) amount of each good or service to be used when, where and by which producers and consumers. No other mechanism can fulfil this role. The glory of unfettered prices is that, precisely because no individual or group controls them, each person can respond to these signals in a way that benefits him but does not harm others. Alas, few people appreciate this vital attribute; further, it seems that many would prefer to mimic politicians by imposing their preferences upon everybody else. For many Australians, the question is not whether some privileged person’s or group’s choice will dominate at others’ expense: the question is who will do the dominating. Accordingly, politicians who propose to hijack the price system and cause it to send distorted and false signals usually find large and enthusiastic audiences.

Perhaps this is because many adults seem to regard prices not as signals but as obstacles that impede their ability to obtain the things they want. But “want” and “need” are not economic demand. They are not the same things as the ability and willingness to offer X (which you own or have earned or produced) in exchange for Y. Hence “high prices” are not the reason that we cannot all drive a Mercedes, live in a mansion in an exclusive suburb and regularly fly first class. The inherent, impregnable and unavoidable reality is that there are fewer Mercedes, dream homes and first class seats than there are people who want these things. Prices convey this reality. Accordingly, a “compassionate” politician’s proposal to ensure “universal access” to “first class healthcare and education” does not affect this underlying reality. It is as obvious as the sun rising in the morning, therefore, that any such proposal will inevitably fail to achieve its objective. The trouble is that most Australians, encouraged by their politicians, obstinately decline to acknowledge this reality.

When politicians intervene in markets, they corrupt prices and distort the signals prices emit. To suspend the price mechanism is simply to ensure that some other means (such as political favouritism, bureaucratic arbitrariness, random chance, queues and the rule of the mob) will allocate goods and services. Parliament can decree that “fairly priced petrol” or “world class” medical services or whatever is a “basic human right.” There seems to be something wafting through the air in governmental precincts that prompts “leaders” to believe that if a price that is “too high” they need simply wring their hands, wave a magic wand and issue a decree. But any such ignorant grandstanding will not have the slightest impact upon the underlying reality that there are fewer of these goods and services than there are people who desire them.

When politicians suppress a price below its market-clearing level, they do not (as they arrogantly think) “control” the price. They simply change the form it takes. When politicians intervene, prices subsequently assume two forms: that which is seen and that which is not seen (and therefore ignored until the unforeseen and unintended consequences of the pollies’ foolishness becomes apparent). As a result of their intervention, the real prices that consumers bear almost invariably increase. Unlike a market price that equilibrates the quantities demanded and supplied, an artificially low price inevitably increases the quantity demanded, decreases the quantity supplied – and thereby creates ever-longer queues. (Attention Brisbane residents: regardless of what our witless Lord Mayor tells us, precisely the same point applies to traffic and water. The problem is not a “shortage” of water or “congested” roads. These are visible symptoms of less-visible problems induced by politicians – namely, policies that suspend the market mechanism. The government exhorts people to conserve, but clear property rights and unfettered prices would do the job much more effectively. Privatise and let a market price for water prevail, and the “shortage” will ease; privatise and charge tolls on all roads, and “congestion” – and the alleged need for bridges and tunnels – will dissipate.)

As an example, consumers may pay a lower direct (“seen”) price for petrol if the government freezes its price. But by waiting in a queue they also pay a higher indirect (“unseen”) price. Depending upon the value they place upon the time wasted in the queue, the sum of these prices will usually be greater (and often much greater) than the free market price. Similarly, people pay a seemingly low “seen” price for “guaranteed” state-run “healthcare” – but the rampant organisational inefficiencies and unavoidable waiting lists, on which people linger for weeks, months and even years, add dramatically to the real price (including death) people bear. As in the petroleum industry, so too in the medical and hospital industries: consumers – young and old, rich and poor – would benefit if the government withdrew and laissez-faire prevailed.

No committee of “leaders” in Canberra or a state capital can know the extent to which, at a given instant, Consumer A prefers Good 1 (say, a freely flowing motorway) to Service 2 (say, a surgeon’s time and expertise). Accordingly, it is laughable to the point of preposterousness to think that they can know, at each instant, how much consumers prefer thousands of goods and services relative to one another. Fortunately, in a civilised society (i.e., one in which unregulated prices prevail) nobody has to know: each producer is guided simply by the prices of what he sells (and the revenue they create) relative to the prices of what he buys (and the expenses they generate) and by the profits and losses these operations generate.

Of all people, even Friedrich Engels agreed. He observed that prices and their fluctuations reveal to producers “what things and what quantity of them society requires or does not require.” Without a price mechanism, this Father of Communism was at a loss to know “what guarantee we have that necessary quantity and not more of each product will be produced, that we shall not go hungry in regard to corn and meat while we are choked in beet sugar and drowned in potato spirit, that we shall not lack trousers to cover our nakedness whilst trouser buttons flood us in the millions.” It is dispiriting to reflect that Karl Marx’s partner in crime understood prices and the system of profit-and-loss much better than most people do today.

In Praise of “Profiteering”

Prices Are Objective, Demand and Supply Are Subjective

Surely nothing is more obvious than the principle that the lower a good’s or a service’s price, the greater is the quantity demanded by consumers. Equally obviously, producers tend to supply more in response to higher prices and less in response to lower prices. Yet these principles seem to flummox most people – including the highest and the mightiest in the land. It utterly escapes them, for example, that with respect to any given good or service there is simply no such thing as a fixed quantity demanded. Similarly, the quantity supplied is subjective rather than objective. News reports about oil, for example, seem to imply that there is some preset amount of the physical stuff in the ground. That might be true in a geological sense, but it is flatly false in an economic sense. From place to place and time to time, the discovery, extraction, processing and distribution of oil confront producers and consumers with very different trade-offs.

Some oil (say, in Saudi Arabia) may require relatively little expenditure (say, $10 a barrel) to produce; other oil (say, in the North Sea) might be produced for $25 a barrel; and still other oil (like that in parts of Canada) may be still more costly to produce. Perhaps it cannot recoup its costs at $40 per barrel, but might at $80 per barrel. When the price of oil falls, wells whose expenses exceed the revenues they generate are capped. If the price subsequently rises, or if new technology causes the cost of extraction or processing to fall, then they may be recommissioned. Not just the supply – the very “goods character” of oil is subjective. Stuff that under some circumstances is not readily regarded as oil, such as oil shale and tar sands, might well be so regarded under other circumstances. As with oil, so too with any other good: the quantity supplied varies directly with price, and the quantity demanded varies inversely with price. The quantities demanded and supplied are variable (subjective) not fixed (objective) and vary according to the preferences and expectations of consumers and producers.

So What’s “Profiteering”?

Much huffing and puffing has appeared recently in Australian newspapers about “profiteering” and “price gouging.” Not once, however, did I read anything resembling a coherent definition of these terms; and on only one occasion (James Morrow, “The Market Should Fuel Petrol Prices,” The Australian 13 September) did I read anything that even hinted at their beneficial effects. But who needs a clear definition when moral preening is the objective? It is “unfair” and “greedy” to raise prices during an emergency, and to do so “exploits” consumers (especially the young, old, poor and weak). Accordingly, any businessman who raises his prices drastically and suddenly, particularly during an emergency, is acting unethically and therefore is a “price gouger” or “profiteer” (the terms seem to be roughly synonymous).

To say that an increase of a good’s price is a consequence of sellers’ greed is to say that sellers can charge whatever price they like – that they can set their prices, in other words, without any regard to consumers and their demand for the good. This, of course, is patently absurd: in the market it takes two – a buyer as well as a seller – to tango. It is perfectly true that sellers seek to sell at the highest possible price. But it is equally true that buyers strive to pay as little as possible. Consumers endeavour to stretch their dollars as far as they will go. Is this greedy? Further, their desire to economise affords them many options. If a particular consumer decides that petrol is too dear, then he can choose to travel less, car-pool with neighbours or colleagues, or shift to a more economical means of transport. Like the producer, the consumer chooses in light of his desire to use his resources such that they maximise his welfare. Is this unfair? If not, where is it written that only producers, but never consumers, can be unfair and greedy?

It is useful to consider this point with a different cast of characters. During the past 12-18 months, the Australian financial press has been replete with reports about the record prices received by Australian producers of primary commodities such as coal and iron ore. They export the vast bulk of what they produce. As a result, Australia’s terms of trade are presently higher than they have been at any time since the mid-1970s. A growing percentage of these growing exports goes to countries whose citizens live at considerably lower levels of material ease, comfort and convenience than Australians. Curiously, however, not once during this time have I read that Australian producers and exporters are profiteering, price gouging, acting in a greedy or unbecoming manner or otherwise using unethical means to generate their massive profits. Nobody, in short, has alleged that it is unfair and greedy to raise prices during a minerals boom; and no bastard has said that this action exploits the Chinese – including that country’s many young, old, poor and weak people. Quite the contrary: during a boom, any Australian multinational that drastically raises its prices is acting “in the national interest” and merits laudatory coverage in the financial press. So why is it that executives of mining companies are heroes but their counterpoints in oil companies are allegedly profiteers?

“Profiteers” Rationally Ration Existing Supplies

When a hurricane approaches a major populated area, many people flee. And when such a storm destroys numerous homes, large numbers of people require emergency food and accommodation. Under the first scenario, and particularly when the two scenarios occur one after the other, people place considerable upward pressure upon the prices of fuel, food and accommodation in the affected area and along the evacuation route. Why? Because they urgently demand these things. The number of people who demand motel rooms, for example, is greater (perhaps much greater) than normal; and the stock of rooms is, initially at least, no greater – and, depending upon the storm’s destruction, may be much smaller – than normal. The higher price they are prepared to pay signals the urgency of their demand.

How to allocate many people to relatively few rooms? How, therefore, to minimise the number of people who must sleep outdoors or in their cars? Clearly, the many who demand accommodation must economise; and to economise is to do things like stay with relatives or friends, or increase the number of people per motel room above what would normally occur. And what is the best – that is, the most efficient, effective and peaceful – means to encourage people to economise? Allow prices to fluctuate freely. Let hoteliers (and grocers and petrol station managers, etc.) charge as much as people are willing to pay him for a room.

The point also applies more generally. Recent years have witnessed one of the most heartening and exciting developments in human history: the prospect that hundreds of millions of people, particularly in China and India, will lead something that resembles a middle-class life. The standards of living of many people are rising to the point where they demand cars – and hence petrol. Where and by whom is it written that Westerners should have preferential access to fuel? How, then, to allocate the given amount of petrol – at present prices – among the greater number of people who wish to buy it? Allow its price to fluctuate freely. Let oil companies and petrol station owners charge whatever price their customers are willing to pay for fuel.

When some long-term epochal development or acute disaster renders certain resources much more valuable than usual, it is vital that prices reflect this reality. It is imperative, in other words, to reduce the quantity demanded relative to supply. Regardless of the prices that (say) owners of accommodation charge, the sudden and widespread destruction of housing in a particular area means that there will not be nearly enough motel and hotel rooms for all displaced people to obtain the amount and quality of accommodation that they could under normal conditions. After a hurricane, if prices remained at the levels prevailing before it struck, then a family of four might rent two rooms – one for the parents and other for the kids. Is this not greedy? But if the price of a room “skyrockets” after the storm, then the parents and children have a strong incentive to pile into one room – thereby and perhaps unintentionally making the other room available to another homeless family that also demands shelter. Or perhaps they will go to Uncle Bill’s and Aunty Jane’s house – and thus make two rooms available to homeless people who may not have families close to hand. Thanks to the “unfair” price, in other words, more families can now be shielded from the elements. Is that not a good thing?

The greater scarcity (relative to the situation prevailing before the storm) of housing, food and water, etc., that occurs in the wake of any widespread destruction of homes is inherent – even if it is temporary – and prices quantify this underlying reality such that consumers have an incentive to restrain their “greedy” behaviour. It is vital to recognise that well-intentioned people who attempt to ban “profiteering” do not alter this scarcity. To prohibit “price gouging” does not conjure a single room, meal or litre of petrol into existence. People who bark at high prices after a hurricane have a beef with Mother Nature – not with hoteliers and grocers. If the government imposes price controls, then those who happened to arrive first at hotels or supermarkets (or those who know politicians most intimately) would tend to consume as much as they would under normal circumstances – would, in other words, act greedily under these drastically altered circumstances – and thereby leave less for others. Some and perhaps many people would be left hungry, thirsty and without shelter, and would thus place even greater strain upon already-stretched charities. What on earth is right and proper about that?

“Profiteers” Increase Supplies

Freely fluctuating prices not only ration existing supplies: they also provide powerful incentives to cause supplies (including labour) to rise or fall in response to changing demand. When (say) a crop failure in a certain region creates a sudden increase in demand for imports of food into that region, “greedy” suppliers from other regions will tend to rush into the famished region. They do so in order to arbitrage – to capitalise upon the “unfair” prices that will prevail until more supplies arrive – and thereby cause prices to fall. If the cause of the price hike (lower supply induced by crop failure) is a bad thing, then surely the cause of the price’s subsequent fall (higher supply induced by “greedy” arbitrageurs) is a good thing? The consequence of their “greed” is that food reaches hungry people as quickly as possible. More food and fewer hungry people: are they not good things?

A related point: the timing, severity and location of some natural events such as hurricanes in the Gulf of Mexico are, thanks to modern meteorology, crudely predictable. If left to their own devices, entrepreneurs may therefore decide to stockpile certain goods in storm-prone areas in the days ahead of a hurricane. If the stockpiles survive the destruction – note that the entrepreneurs bear this risk – then these suddenly-much-more-valuable goods are available to the people who value them most at exactly the right time and place. But to stockpile a good is to place pressure upon its supply chain and to increase costs. Stockpiling is economically feasible – that is, people will take the time and trouble to build stocks – only if they can reasonably expect that much higher prices will offset these risks and costs. If entrepreneurs cannot raise their prices after the disaster – in other words, if they cannot arbitrage between the “pre-” and “post-disaster” markets – then (apart from their personal use) they will have little incentive to accumulate stocks beforehand. Is the absence of much-needed stockpiles not a bad thing?

This point also applies to wages. Trade unionists routinely denounce “profiteers,” but never criticise people whose wages rise dramatically in the immediate aftermath of a disaster. But by their reasoning, is not the (say) electrician whose skills are in very high demand and whose prices increase dramatically after a major storm not also a “profiteer”? People will more readily work abnormally long hours under oppressively trying conditions if they receive very high wages. Many (particularly those from areas unaffected by a hurricane) will donate materials, time and money to relief efforts. But others – particularly residents of the hurricane area who, all things considered, would rather be with their families or outside the ravaged area – require money to overcome this desire. If wages (that is, the price of labour) rise dramatically, then many more people will be willing to work very hard for long hours under difficult conditions, and repairs can occur much more quickly than they otherwise could. And quicker repairs are good things, are they not?

Entrepreneurs, arbitrageurs, businessmen and employees – in short, human beings incentivised by “greed” – typically expose themselves to inconvenience, hardship and danger in order to earn these profits. Adam Smith demonstrated in A Theory of Moral Sentiments (1759) that a variety of powerful emotions, including altruism, motivate people. Importantly, however, if you wish to induce somebody to furnish a good or service in a great hurry, then a monetary incentive tends to be a reliable motivator. In the material world, in other words, people tend to do at least as much for themselves as for strangers. The glory of freely fluctuating prices and laissez-faire capitalism – the “system of perfect natural liberty” as Smith called it – is that is relies upon co-operation rather than coercion. Accordingly, the supplier prospers only to the extent that the consumer benefits.

Thomas Sowell’s economic analysis of the Spanish siege of Antwerp in the 16th century provides an excellent example. As a result of Philip’s blockade, the price of food in the city began to rise rapidly. Yet its population remained reasonably well fed because blockade-runners were able to evade the Spanish barricades. One interpretation is that these “greedy” suppliers sought to “take advantage” of residents’ plight by selling food to them at “unfair” prices. Another is that these suppliers’ circumvention of the blockade not only exposed them to considerable commercial risk (the confiscation and hence loss of their supplies): it also exposed them and their employees to grave personal danger (injury, imprisonment and execution). Surely, then, the prices they received for the food they brought into Antwerp provided reasonable compensation for the considerable costs and risks they bore?

Alas, officials in Antwerp did not agree. They decided to forbid “price gouging” and imposed severe penalties upon violators. Blockade-runners quickly decided that under these conditions the risks of blockade running outweighed its rewards, and so they plied their trade elsewhere. As a result of the politicians’ “compassion,” the supply of food in Antwerp was soon exhausted, starvation threatened – and the city was obliged to capitulate to Papist tyranny. Clearly, the underlying and eternal problem is not that suppliers are “greedy” – it’s that politicians are idiots (see also In Defence of Price Gouging and Price Controls and Other Nixonian Evils).

The Real Profiteers

Politicians are not just morons: they are malign. The term profiteering is best reserved for politicians who extend unduly generous (relative to what typically occurs in an unfettered market) terms to individuals and businesses who supply goods and services (particularly military hardware). The purpose of a contract in a free market is to exchange the best (from the point of view of the consumer) goods and services at the lowest possible price. In sharp contrast, the purpose of government contracts is to enrich the political class and their mascots. The normal and healthy discipline of the counting house is utterly alien to politicians. They neither know nor care that government contracts, compared to private sector contracts, typically specify above-market prices for substandard (in terms of quality, timeliness, etc.) goods and services. And given politicians’ preferences and the inevitable organisational chaos that stems from them, even those private sector firms that strive to do the right thing in their emergency dealings with government will become frustrated.

We’re from the Government and We’re Here to Fleece You

The New York Times (2 October) provides a glaring example. In “Stumbling Storm-Aid Effort Puts Tons of Ice on Trips to Nowhere,” it reported that in early September America’s Federal Emergency Management Administration (FEMA) ordered 96 million (later reduced to 83 million) kilograms of ice cubes. Intended to cool food, medicine and Katrina’s sweltering victims, the ice cost more than $100 million. Alas, little of it was delivered to its intended recipients. The article profiles one frustrated driver who transported 900 kilos of the stuff on a 6,600-kilometre odyssey, beginning on 2 September, from Ohio and Pennsylvania to Missouri, Mississippi, Alabama and Virginia. In the latter state the driver waited an entire week – his lorry burning fuel around the clock so that its cargo would remain frozen – as FEMA officials pondered whether supplies originally purchased for Katrina’s victims might be better used to prepare for Hurricane Ophelia (which was expected to strike land in North Carolina). But only three trucks were despatched to North Carolina, and on 17 September the driver was directed to Nebraska – where the next day he unloaded his ice into a storage freezer rented by the government.

This driver was pleased to receive $4,500 for his time and trouble – double his usual pay. “He was perplexed, however, by the government’s apparent bungling. ‘They didn’t seem to know how much ice they were buying and how much they were using,’ he said. ‘All the truckers said the money was good. But they were upset about not being able to help [Katrina’s victims].’” Another driver’s company will invoice the government more than $15,000 – strictly in conformity with terms dictated by FEMa – for the delivery to a warehouse in Iowa of ice worth less than $5,000. “It seemed like an incredible waste of money.” Yet another driver says he “can’t understand what happened. The government’s the only customer that plays around like that.”

Exactly. And it gets worse. First, the government is utterly clueless about the cause of its incompetence. The New York Times article also cited a report issued by the Department of Homeland Security that allegedly identified the problem: there is “no automated way to coordinate quantities of commodities with the people available to accept and distribute them.” There is, of course, just such a mechanism: it is called laissez-faire capitalism. How do individuals and businesses cope with information overload? They rely upon the decentralised planning of millions of private individuals, summarised in the signals emitted by unfettered prices, to provide guidance. How do governments “cope”? By bastardising the price mechanism and deranging consumers. And by launching enquiries after they comprehensively botch things.

Second, the government’s mind-boggling shenanigans have strained the patience of private trucking firms. As a result, the next time FEMA requests assistance their response will likely be less enthusiastic. After two of one firm’s drivers spent more than a fortnight on the road to no purpose, it decided that enough was enough. When a FEMA contractor called and requested that it move ice stored in Nebraska to Texas, the firm declined. “Our trucks have been tied up for 17 days. We couldn’t take another trip like those.”

We’re from the Government and We’re Here to Shoot At You

In Katrina’s wake, politicians and senior administrators not only fumbled their own rescue efforts: they stymied and derailed the many and varied efforts undertaken by private individuals, religious and other groups and organisations. The refusal to permit Wal-Mart to send trucks laden with food and water into the city on the grounds that they were “not needed” is just the tip of the iceberg. William Anderson (Katrina and the Never-Ending Scandal of State Management) relates a depressing eyewitness chronicle by two emergency medical workers who were attending a conference in New Orleans when the hurricane struck:

We organized ourselves and the 200 of us set off for the (Greater New Orleans) bridge (that crosses the Mississippi River) with great excitement and hope. As we marched [past] the convention center, many locals saw our determined and optimistic group and asked where we were headed. We told them about the great news. Families immediately grabbed their few belongings and quickly our numbers doubled and then doubled again. Babies in strollers now joined us, people using crutches, elderly clasping walkers and others people in wheelchairs. We marched the 2-3 miles to the freeway and up the steep incline to the Bridge. It now began to pour down rain, but it did not dampen our enthusiasm.

As we approached the bridge, armed sheriffs formed a line across the foot of the bridge. Before we were close enough to speak, they began firing their weapons over our heads. This sent the crowd fleeing in various directions. As the crowd scattered and dissipated, a few of us inched forward and managed to engage some of the sheriffs in conversation. We told them of our conversation with the police commander and of the commander’s assurances. The sheriffs informed us there were no buses waiting. The commander had lied to us to get us to move.

These people later built a small camp on the abandoned freeway. There the police attacked and scattered them, and forced them to take desperate measures to survive:

In the pandemonium of having our camp raided and destroyed, we scattered once again. Reduced to a small group of 8 people, in the dark, we sought refuge in an abandoned school bus, under the freeway on Cilo Street. We were hiding from possible criminal elements but equally and definitely, we were hiding from the police and sheriffs with their martial law, curfew and shoot-to-kill policies.

This resolute group eventually managed to make its way to the New Orleans Airport. But once there, their ordeal did not end:

We arrived at the airport on the day a massive airlift had begun. The airport had become another Superdome. We 8 were caught in a press of humanity as flights were delayed for several hours while George Bush landed briefly at the airport for a photo op. After being evacuated on a coast guard cargo plane, we arrived in San Antonio, Texas. There the humiliation and dehumanization of the official relief effort continued. We were placed on buses and driven to a large field where we were forced to sit for hours and hours. ... Those who managed to make it out with any possessions (often a few belongings in tattered plastic bags) we were subjected to two different dog-sniffing searches. Most of us had not eaten all day because our C-rations had been confiscated at the airport because the rations set off the metal detectors. Yet, no food had been provided to the men, women, children, elderly, disabled as they sat for hours waiting to be “medically screened” to make sure we were not carrying any communicable diseases.

This official treatment was in sharp contrast to the warm, heart-felt reception given to us by the ordinary Texans. We saw one airline worker give her shoes to someone who was barefoot. Strangers on the street offered us money and toiletries with words of welcome. Throughout, the official relief effort was callous, inept, and racist.

Did government forces “keep order” or foment disorder? And unlike the “officials,” did the “renegades” criticised by politicians actually rescue people and help to restore some sense of civility? The eye-witness reports of Laurie Holloway, the deputy managing editor of The Tennessean, support this notion:

It’s simply staggering to those of us who’ve come in later, to see what these teams have been able to do. They begin with local Red Cross staffers and volunteers, but soon come waves of people from all over. They’re lodged all over the place: some sharing a room with three others at a local nursing school; a few at hotels with no electricity; others in tents or rented RVs; a few even sleep in their cars. .... No task is beneath them, no challenge is too difficult. If you’ve donated to the Red Cross, please rest assured that at this level, for sure, there are no more dedicated people on the ground.

The volunteers wish for more information, because people ask questions constantly, and accurate info is both fluid and hard to come by. (It’s so hard to tell people with hope in their eyes that the latest rumor of help is just that, a rumor. “I heard FEMA will be here today?” “They say that buses are coming to take us to other states.” “They’re going to build us a tent city to move into, isn’t that great?” “The National Guard is bringing in trucks full of ice today, aren’t they?”)

I’m telling you, without the churches, this disaster would be even worse, as hard as it is to believe that’s possible. Donate if you will to the Red Cross or the Salvation Army, but know that the bureaucracy behind the big organizations is simply staggering. Without the people setting up the “renegade” food, clothing and supplies distribution centers, usually at churches, there would be many, many more deaths. Supplies are pouring into this area from all across the nation, huge truckloads of canned goods, water, medical stuff. They’re being collected at these churches, and they’re very organized about getting the supplies out to folks. I’m very impressed.

We also suspect the media will have been inundated with “hero” images of the National Guard, the troops and the police struggling to help the victims of the Hurricane. What you will not see, but what we witnessed, were the real heroes and sheroes of the hurricane relief effort: the working class of New Orleans. The maintenance workers who used a fork lift to carry the sick and disabled. The engineers, who rigged, nurtured and kept the generators running. The electricians who improvised thick extension cords stretching over blocks to share the little electricity we had in order to free cars stuck on rooftop parking lots. Nurses who took over for mechanical ventilators and spent many hours on end manually forcing air into the lungs of unconscious patients to keep them alive. Doormen who rescued folks stuck in elevators. Refinery workers who broke into boat yards, “stealing” boats to rescue their neighbors clinging to their roofs in flood waters. Mechanics who helped hot-wire any car that could be found to ferry people out of the City. And the food service workers who scoured the commercial kitchens improvising communal meals for hundreds of those stranded.

Some Concluding Thoughts

The inept response of American governments, local, state and federal, to Katrina has been universally criticised. In the U.S., people who support Party A have used Katrina as a weapon with which to attack the government controlled by Party B, and vice versa. So too in Queensland’s “health care” scandal. Yet as far as politicians are concerned, it remains business as usual: whatever their partisan stripe and whatever the disasters they have caused or worsened, they demand yet more government intervention and expenditure – as if more resources mixed with the same old misconceived policies will “fix” things.

Alas, few have discerned what is painfully obvious: this is the typical government response to any situation. “To say this in an alternative way,” William Anderson concludes, “government was being government the same way that a dog is a dog ... For those who maintain that the government ‘failed’ its ‘mission,’ I must say that they are wrong. True, the government with its ham-fisted policies of blocking relief missions, imposing price controls and acting in a dictatorial, but incompetent style, seems to have ‘failed’ in making things better, especially in the days directly after the storm passed. But, if you understand that government is a mechanism by which some people impose their will by force over others, then you would have to admit that the government succeeded and succeeded beyond its own expectations.”

What, then, to do? Michael Rozeff (Katrina and the Authorities) offers specific advice. “Painful as it is to witness people suffering and even led to their deaths, we must look this in the face and acknowledge squarely what it means. We cannot listen to the authorities. We must not follow their directions. We should not believe in the government. We should not do everything we are told. We cannot count on officialdom for security. We have to find other ways to cope with the exigencies of life.” More generally, Anderson warns “you can always expect government to behave exactly like government. When you consider your political position, consider whether this institution ought to be put in charge or disaster relief at all, or the economy, or society, foreign policy, health care, education, courts, the environment or anything at all. Katrina and its aftermath is only the latest exhibit in the ongoing historical documentary in favour of a government-free society.”

When considering their position, investors would do well to become economically literate; and to do so is (among other things) to learn the principles Adam Smith expressed in The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). WON analyses man’s interaction with other men in the marketplace. It is therefore a study of prudence and enlightened self-interest, and it enables us to appreciate the beneficial actions of “profiteers.” But just as man does not live upon bread alone, people do not respond solely (and frequently, not even primarily) to material and commercial incentives. Ignorance of Smith’s thought, and of classical economics more generally, leads most people to think that economics is only about self-interest. Hence the importance of The Theory of Moral Sentiments: it analyses the origins, roles and consequences of propriety, sympathy and justice. It enables us to expect and appreciate the irreplaceable part played in a civilised society by charities and volunteers.

Many people spurn any desire to learn about the operation of free markets and the behaviour of free people because they believe these things are synonymous with the mentality that “greed is good.” This perception, which today’s mainstream economists do not bother to dispel (they simply add the caveat that politicians’ greed is best of all), is so deeply embedded that it is very difficult to reverse. To dent this erroneous perception, Americans might remind themselves – and Australians note carefully – that in the northern summer of 1979 what many people want today actually existed. Politicians, in other words, fixed the price that service stations charged Americans for fuel.

The result? The quantity demanded exceeded the quantity supplied, its price became politicised, queues formed and lengthened – and at Levittown, Pennsylvania and elsewhere, fights and scattered gunfire erupted. In an editorial published on 26 June of that year, The Wall Street Journal reminded its readers “classical economists used to list among the virtues of the price mechanism that it avoided social strife. It did not set group against group, they taught. In our lifetime, ... we have generally allowed prices to allocate goods among different end uses. It worked so smoothly we did not understand what the classical economists meant; today, we see. In addition to its economic virtues, the price mechanism is a vital buffer of civility.”

These days, politicians babble incessantly about “civil society.” But their use of this phrase neglects to mention that (perhaps because their economic illiteracy blinds them to the fact that) a necessary condition for civilised relations among people is liberty – and therefore secure property rights, free-market prices and an unfettered system of profit and loss. The unhampered market of consumers, suppliers and donors restrains people to communicate their urgency with dollars. The regulation of individuals by government, on the other hand, unleashes the government; and as seen recently in New Orleans, the rule of law overturned by government degenerates into the law of the jungle. In the state of nature, people use fists and guns to express themselves. Under those primitive conditions, greed, unfairness, injustice and exploitation run rampant.

Chris Leithner


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