This year marks the 100th anniversary of the great flood that inundated Johnstown, Pennsylvania, on May 31, 1889, killing 2,209 people. Donald Dale Jackson, writing in the May 1989 issue of Smithsonian, describes the relief efforts:
“At a time when federal disaster relief didn’t exist, Johnstown’s recovery was achieved through one of the greatest private charity campaigns ever mounted. The American Red Cross, only recently founded, won renown as a national disaster relief agency for its work in Johns-town . . . .
“By . . . June 2, railroad crews had repaired the tracks connecting Johnstown to Pittsburgh, 55 miles west. By then the press and the initial detachment of relief workers were in town, Americans were starting the read the first shrill dispatches from Johnstown and a cavalcade of help was on the way . . . .
“The exhaustive press coverage stimulated a rush of private benevolence that eventually threatened to overwhelm Flood City. Food, clothing, medicine and other provisions began arriving immediately. Morticians came—Johnstown’s first call for help requested coffins and undertakers. Demolition expert ‘Dynamite Bill’ Flinn and his 900-man crew cleared the wreckage at the stone bridge. At its peak the army of relief workers totaled about 7,000. They carted off debris, distributed food, erected temporary housing and occasionally made a heartening discovery—a parrot named Bob was found alive in the wreck of one house, complaining that it had had ‘a devil of a time.’”
Manias such as the Tulipmania, the South Sea Bubble, the Mississippi Bubble, the Gold Panic of 1866, the stock market crashes, and violent swings in the value of the dollar are frequently cited as examples of occasions when speculators contributed to instability and imbalance. But who could do the job better?
Selected government officials might want to see a different outcome. But their track record of setting prices is invariably one of famines, endless shortages of what people want, and gluts of dull, low-quality products. The bureaucrats have little incentive to improve or innovate.
When speculators are wrong, however, they are punished severely for their mistakes by losses. Over time, the large speculators would tend to be those who were most prescient in their calculations. Through competition, the energies and talents of numerous speculators—all inspired by their selfish desire to profit—are channeled into the public good.
Control or Economic Law?
Shortly before he died, the noted Austrian economist, Eugen von Boehm-Bawerk (18511914), wrote a brilliant article, “Control or Economic Law?” He carefully dissected market operations, analyzing the effect of coercive Outside interferences. Government intervention doesn’t suspend the Law of Price, he concluded; it merely alters the conditions under which it operates.
By changing the available alternatives, government coercion affects individual choices. Production plans must be revised, and purchasing decisions have to be altered. Nevertheless, the Law of Price continues to prevail: The price of every good traded still falls somewhere between the top price a potential buyer is willing to pay and the bottom price at which a potential seller is willing to sell.
Today’s market prices are affected by countless government regulations, taxes, and subsidies. Yet when trades take place in spite of these interventions, the prices agreed upon by seller and buyer still comply with the Law of Price; they still reflect the respective values of buyer and seller.
In Brazil, where inflation is rampant and controls have been placed on the prices of many items, eggs, among other products, have disappeared from the shops. But enterprising street peddlers now offer eggs at about twice the controlled price, $2 per dozen. Although illegal and exorbitant in the eyes of the Brazilian price controllers, this price serves consumers and conforms with the Law of Price. It is above the peddlers’ minimum acceptable price and below the maximum price the buyers are willing to pay.
When our government started requiring seat belts and pollution control devices on automobiles, the manufacturers’ asking prices rose. Of course, potential buyers weren’t pleased by the increase. Some dropped out of the market, settled for used cars, or turned to other means of transportation. But the Law of Price still pre vailed. Although fewer cars were sold at the higher prices, and fewer consumers were served, those higher prices were still below the top prices the actual buyers were willing to pay.
In India, government approval and licenses are needed to operate most sizeable businesses. Large manufacturers must spend a great deal of time lobbying in New Delhi, which increases their costs and compels them to raise their asking prices. These higher asking prices, in turn, cause some potential buyers to drop out of the market.
However, one Indian soap manufacturer has avoided the need for licensing and has benefited from tax breaks available to small firms. He manufactures on a small scale with hand labor at several locations and economizes on packaging. His price falls below the maximum price that many potential buyers on the Indian market are willing to pay, and he has become India’s largest detergent maker.
There is no denying that government interventions affect market prices. If coercion raises costs, producers must ask higher prices. Fewer items will be sold, and fewer consumers will be served. Yet although today’s mongrel prices are blends of market forces and government coercion, they do nothing to refute the Law of Price. The prices at which goods and services are exchanged are always above the bottom prices of the sellers and below the top prices of the buyers. Economic law prevails.
—Bettina Bien Greaves