There are many annoyances that come with living through a pandemic, but perhaps one of the most aggravating experiences is going to a store only to learn that they are completely sold out of the product you came to buy. Whether we’re talking about masks, hand sanitizer, or even toilet paper, shortages can be a huge inconvenience. They remind us that the abundance we have become accustomed to is not something we should take for granted.
Like the US, Canada is also experiencing widespread shortages, largely driven by the surge in demand for hygiene products and medical supplies. In particular, the Province of Ontario is facing a shortage of hand sanitizer, which is about the last thing anyone wants when a deadly disease is ravaging the world. However, the problem is not that they lack sanitizer, but that they aren’t producing enough plastic bottles to distribute it.
To address this problem, the Ontario government recently announced a pair of subsidies aimed at increasing the production of bottles. The first subsidy, announced on January 18, will provide $1 million to an injection molding company called Merit Precision to help them create two new production lines.
“This investment will enable the company to provide locally produced bottles for hand sanitizers and disinfectants manufactured in Ontario by Peterborough-based Charlotte Products,” the government’s press release states. “Currently, Charlotte Products is facing the challenge of not having enough bottles to meet the growing demand for its cleaning products.”
The government is also providing $2 million to the global manufacturer OPHARDT Hygiene Technologies Inc. to help them expand their production of hand sanitizer dispensers. Between these two partnerships, and potentially more in the future, the government is hoping to ramp up bottle production enough to alleviate the shortage.
Capitalism vs. Interventionism
The apparent need for subsidies raises an important and foundational question. Why did this shortage exist in the first place? Sure, there was a surge in demand, but why didn’t the market respond with more production?
At first blush, this looks pretty bad for capitalism. Capitalists assert that free markets will always step up to meet consumers’ needs because they are guided by Adam Smith’s “invisible hand.” But clearly, despite having 10 months to adjust, markets failed to alleviate the shortage, and eventually the government had to step in to help.
So perhaps the invisible hand is merely a superstition. Perhaps markets can’t be trusted to meet consumers’ demands and the government needs to intervene to alleviate these shortages.
This is certainly a common perspective, but it’s missing a critical detail. The invisible hand doctrine specifically refers to free markets. But as it turns out, the market for hand sanitizer in Ontario is far from free. In fact, it’s really a shackled market, because anti-price-gouging laws prohibit prices from rising.
The problem with these laws is that they undermine the very mechanism by which the free market eliminates shortages. If prices were allowed to rise, the opportunity for profit would have given sanitizer companies a financial incentive to ramp up production. Further, once sanitizer companies started demanding more supplies (bottles, chemicals etc.), the price of those supplies would also rise, which would naturally encourage more companies to produce more of them. Thus, as a result of the higher prices, there would be a cascading effect leading to increased production throughout the supply chain. But since prices were kept artificially low, there was no incentive to increase production—despite the fact that it was desperately needed.
In sum, the shortage of bottles wasn’t actually caused by a failure of the free market. Rather, it was caused precisely because the market was not free. The invisible hand was not impotent, as critics assert. Rather, it was handcuffed by the interventionists themselves.
The Cycle of Interventionism
This story is a perfect example of the cycle of interventionism described by economist Ludwig von Mises. “As a remedy for the undesirable effects of interventionism,” Mises explained, “they ask for still more interventionism.”
In this case, the government first intervened by imposing a price ceiling on hand sanitizer. The unintended consequence was that it created a shortage. So, now the government is intervening again with subsidies to alleviate the shortage.
But as well-intentioned as they might be, price controls, subsidies and other interferences will only make things worse, because they inevitably distort the price signals which guide the market. So rather than using more market interference to attempt to solve the problems created by the first market interference, the government should just stop interfering and allow the market to function the way it’s supposed to.
The invisible hand doesn’t need to be coddled. It just needs to be set free.