A few years back we thought about building a deck or a porch on the back of our house. But we decided against it when the estimates started coming in. They were about double what the architect had told us it would cost. Double! Had the architect misled us as a way of encouraging us to proceed with the project? No, six months earlier the Mississippi had overflowed its banks and destroyed a lot of houses in the St. Louis area. Carpenters and builders had no time to build a back porch or a deck. They had bigger fish to fry. To get them to build a porch, you had to pay a premium.
We delayed the project for a couple of years, and prices came down. That delay was an example of the hidden benefit of high prices. When prices are high, the least-urgent projects get delayed, freeing up resources for more urgent projects. The porch just isn’t worth it. So the wood I would have used instead gets set aside to rebuild a washed-away house. The carpenter I would have kept busy now works on building that new house.
That magical role of prices in directing resources is the bread and butter of economics. But to the non-economist, high prices are just a form of gouging that ought to be stopped. It’s wrong to let people profit from the distress of others.
Economists tend to be pretty agnostic on morality. Prices work, we explain patiently; price controls don’t. If you try to limit prices by law, you’ll just end up hurting the people you’re trying to help. Price controls will discourage lumber from coming into disaster-struck regions. Better to let prices do their job, we’ll say.
I think what underlies this difference in opinion between the professional economist and the man or woman in the street is deeper than just an understanding or misunderstanding about what works. There’s a more fundamental issue here: the issue of what motivates behavior.
Non-economists tend to look at motivation as either altruistic or greedy. Either you’re motivated by profit or by the opportunity to help others. A lot of people are turned off by market-based solutions because using the market is so mercenary. Why would we want a social order based on greed? Why would we want to encourage some to profit from the hardship of others?
Where economists see resources whizzing around the country to help people in distress, non-economists see profiteering, gouging, and immorality.
Let’s look a little more closely at natural disasters like the Mississippi flood in 1993 or any of the various hurricanes that touch land and wreak havoc. After these disasters, prices of lumber and tools and the services of carpenters often spike upward for a while and can remain high. I’ve been told that when hurricanes hit and lumber prices go up, some people don’t just ship the lumber they bought for their own use to the devastated area to make a killing; they load it into trucks and drive it there themselves. Those are the people I want to think about for a moment. What do you think is on their minds as they drive south?
As an economist I assume those people are like the rest of us—a mixture of saint and sinner. Normal. Complicated. Full of all kinds of motivations, some base, some sublime. As they head down to, say, Florida, I assume they’re glad to make some money on their lumber. But I also assume they’re glad to be part of helping people out. Glad to make money. Glad to be helping. Glad to make money. Glad to be helping.
Which is it? Profits or love?
It’s both. They’re not mutually exclusive. Presumably the high prices motivate some cold and heartless people to overcome their desire to spend the weekend counting their money and instead to head to Florida. But I also presume this is not the typical person driving lumber southward. The typical person is someone who wants the lumber for purely personal use—a nice deck or porch, some home-repair project—but who now finds the incentive of the higher price attractive. That person drives down joyously knowing that the lumber is going to help someone who lost a house. The money is nice. And so is the intangible feeling of helping others.
Here’s the key insight of economics: some of those folks who go down with a song in their hearts because they know they’re helping others would have stayed home if the price of lumber hadn’t soared. It’s hard to get in your car and disrupt your life and give up your lumber. The monetary incentive makes it easier. The higher price doesn’t just induce the hard-hearted to go. It induces the altruist as well.
But if people are altruistic, won’t they go without the monetary incentive? Sure, some will. Just not as many. You might be tempted to say that without the monetary incentive, only the saints will go. But even this misses the point. Some saints will stay home because they have saintly things to do there. The monetary incentive applies to them as well. Even saints can do more good in the world when they have more resources than when they have fewer.
Prices Substitute for Knowledge
There’s a final point to be made about letting the price of lumber rise. Go back to the porch I wanted to build. The flood never reached my neighborhood. Most of the damage was miles away, and after the news reports died down I forgot about the flood. I never saw the feverish rebuilding, so I had no idea that lumber and the time of carpenters had gotten scarcer. But I didn’t have to know. The higher price induced me, along with a lot of other would-be porch builders, to do a good deed. We gave up our lumber and carpenters to people who were willing to pay the premium. No one had to give me a lecture on the benevolence of delaying my porch. I was induced by the invisible hand to be altruistic.
How sad it is that people think economics is the study of money or that they think economists believe in elevating mercenary motives above compassion. The great insight of economics is that people make tradeoffs. The basis for that insight is a recognition that behavior is complex and that no one has a single-minded motivation or a single goal. When we talk about the role of prices in our economy, we need to remember that complexity.