Freeman

ARTICLE

Hurricane Hugo: Price Controls Hinder Recovery

DECEMBER 01, 1989 by RUSSELL SHANNON

Professor Shannon teaches in the Economics Department, Clemson University.

Editors’ Note: The Foundation for Economic Education sent this Freeman op-ed to the nation’s press shortly after Hurricane Hugo struck Charleston, South Carolina, in September.

In Charleston, South Carolina, many people struggling to recover from the havoc wrought by Hurricane Hugo discovered to their dismay something apparently even more evil: price gougers.

In the face of shortages of food, fuel, and desperately needed tools such as chain saws, many store owners of questionable scruples jacked up the prices of these needed provisions, some reportedly as much as 300 or 400 percent.

Responding quickly to the crisis, political authorities proclaimed that persons found guilty of such heinous crimes would be dealt with swiftly and harshly. The tedious delay so common to political actions was notably absent in this crucial situation.

To paraphrase a line from a play by Congreve, however, while these politicians “married in haste, they may repent at leisure.” For once again, as happens so many times, the advantages of the free market process they stifled have been sadly ignored.

First of all, repressing price increases will obviously not eliminate the main problem at hand, which is that there is simply not enough of these needed items to go around. So many people will just have to do without until more supplies can be brought in.

Yet while letting prices go up does have the unfortunate effect of putting poorer people at a special disadvantage, these higher prices might cause some people to use their ingenuity and seek out suitable substitutes: some can resort to bicycles, others might have neighbors willing to lend a chain saw, others still could be more careful about using the food supplies they already have. Then others in greater need could buy the goods.

Admittedly, these measures may offer only meager help in such an extraordinary crisis, but they are not apt to be totally negligible.

Of far greater impact is the effect of prices on supply. Given that prices did soar upward, one suspects that not all the greedy vendors are in Charleston and nearby areas. Knowing that they might reap large rewards, people with entrepreneurial spirits in Augusta, Greenville, and Raleigh might well stock up their pickups and truck on down the interstate highways, thereby helping not only themselves but also the sad citizens of Charleston. And thus the shortages would shrink.

In short, it’s all pure Adam Smith, who wrote back in 1776: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” The simple wonder of the price system is that it enlists the efforts of self-interested people in the services of humanity.

Nor is this the end of the favorable supply responses that have been thwarted by the price controls. Knowing that the storm was on its way, many store owners may have brought in extra provisions, at extra expense, anticipating that they could make enough extra money to compensate them for their troubles.

Yet what will happen on future occasions, when Hurricane Jonathan or Hurricane Samantha comes roaring across the waters? Remembering the thankless response to their efforts to prepare for Hurricane Hugo, these store owners may simply greet the news with a yawn.

There is a saying to the effect that it isn’t nice to mess with Mother Nature. The results of messing with market forces are apt to be equally dire. Surely the people devastated by the storm deserve our concern and our charity. But imposing price controls, rather than helping those people out, seems more likely to be adding to their misery.

We have not yet learned how to harness the vicious forces of nature. But if we will only allow the power of the free market to work, it can rapidly harness the forces of self-interest to alleviate the suffering that nature has caused. Because they failed to understand these fundamental facts of elementary economics, the political leaders who are imposing price controls as a humanitarian gesture may actually be serving as Enemies of the People!

Is all this idle speculation? Definitely not! We’ve had experience with price controls ranging back in history to the ancient Code of Hammurabi right up to those established during the Nixon Administration of the 1970s. No doubt many people still recall the long lines and frustrations at our service stations which were the result of price controls on gasoline.

Economic theory and historical experience converge, then, to suggest that patience rather than political responses would be the best policy to deal with pricing problems in Charleston.

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December 1989

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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