In my last column I talked about some of the benefits of capitalism. Now, I will take up some of the common complaints about it.
We feel outraged if we believe that a business has “gouged” consumers with high prices. We had complaints of price-gouging in the gasoline business in North Carolina not too long ago. Here’s an even more extreme example, though, that will actually illustrate how raising prices during a supply shortage helps consumers in the short and long run: Let’s assume that a hurricane hits Southeastern North Carolina. If the hotels in Lumberton know that people will be evacuating the coast, should they double the price of a room, knowing that they can still sell all of their rooms that night? Believe it or not, to best meet the full needs of society, the answer is yes.
If they kept prices the same, believing that to be noble, they will actually help fewer people. Some regular Interstate 95 traffic, for example, will use some of the rooms. If these travelers learn the price has doubled, though, they will get back on the road, leaving more rooms available for evacuees. If I lived on the coast with my family of seven, if rooms were regular price, I would probably book two rooms for my family. If the price doubled, I have a decision. I could pay the higher price for both rooms. However, if I had the ability to drive farther inland, I might be able to get a cheaper rate. Or, if I was unwilling to be farther away from my coastal home, we would have Camp Dent for a night or two, all staying in one room. Either way, more evacuees are served by Lumberton hotels. People with the resources to travel farther will do so.
It may seem counter-intuitive, but the price signaling mechanism of free markets will most efficiently deliver more services to more people in need. Allowing free markets to operate results in the fastest resupply of resources. Prices will also return to normal levels more quickly. If prices truly doubled for more than a night or two, some form of supply would rush in. For example, I could kick one of my kids out of his room and advertise a room for rent for $50 a night. This leads to another common complaint about capitalism. In order for trades to be fair, both parties must have equal information. This potential imbalance is why we have laws against insider trading of stocks.
If I am an executive for a publicly-traded corporation, I’ll be the first to know if something very bad is about to happen to my company’s earnings. I could easily profit from this information by selling shares I own in my company or short-selling. Because of the easy availability of information today, capitalism has become fairest at a time when we’re hampering it the most. Twenty years ago, it would not have been easy for the evacuee to find out that I was renting a bedroom for $50 a night. With all of the social media, this information is easily posted by me and retrieved by others. Consequently, it’s rarely the case today where two people enter into an economic transaction where one side has information that is unobtainable by the other side.
If prices are ever held artificially low, more people suffer, and ironically, the poor usually suffer the most. If rent to the landlord on low-cost housing is, by law, below the market rate, we know from decades of experience that two things will certainly happen. First, no new low-cost housing will be built. Why would someone invest in housing that is guaranteed to lose money? Second, existing low-cost housing won’t be maintained. If the landlord doesn’t receive enough money to cover her bills, maintenance cannot be performed. So, a seemingly benevolent policy — holding prices low to help the poor, results in a small number of people getting a financial windfall, but living in dilapidated housing. Moreover, no additional poor people will be helped.
When asked about democracy, Winston Churchill said it “is the worst form of government except all the others that have been tried.”
The same is true with capitalism. It has its flaws, but it’s a better economic system than the others. We would be wise not to hamper it.
Eric B. Dent, a Lumberton resident, is a business professor at Fayetteville State University.
The Robesonian, June 2, 2013