Prices

In an earlier post, I explained how God commands us to respect the principle of private property and forbids us to make laws that take away from some people to give to other people. In short, God commands us not to covet. Covetousness, however, is now all the rage in trying to set policy and judge disputes. Considering that God condemned this as far back as the Old Testament (Exodus 23:2-3), it seems to have been all the rage for a very long time.

When we respect private property and free trade, we human beings in the free market function as a gigantic distributed supercomputer which calculates the relative worth of items to society as a whole. When the free market is interfered with, this calculation cannot be performed, and no central authority can calculate it on their own. This is why socialism/communism can never work. (Contrary to myth, socialism does not work on paper. Ludwig von Mises proved in the early twentieth century that socialism simply cannot compute.)

Thus, if we respect God's free market, this marvelous creation, prices will be automatically set where they are most needed. But some people complain that the free market results in some people making unfair profits. They paint these people as wicked and greedy "profiteers." What they are really doing is appealing to covetousness, but they would never admit that. Since we Christians are supposed to be eradicating covetousness in our flesh (Colossians 3:5), we should be less and less susceptible to this kind of manipulation.

In a free market, profits are made by serving felt needs. The better you serve the needs of society, the better your profits will be. Capitalism is the only system that rewards man proportionately for serving his fellow man -- and this should not surprise us, since it is God's system. (Of course, if you have somebody stealing or competing unfairly, you do not have a free market. But 99% of the time, people accomplish this stealing or unfair competition through collusion with the government. For example, American sugar producers are competing unfairly against international sugar producers by colluding with the government, which cooperates by passing an import tariff on sugar. As a result, I can't buy a Dr Pepper made from cane sugar instead of high fructose corn syrup without paying through the nose. Meanwhile, the sugar producers and the corn syrup producers are both reaping the great profits that come from having mafia-like protection of their business and "territory." When you have this going on in a market, the proper name is "mercantilism," but unfortunately many people think that this cooperation between government and business is what is meant by "capitalism," leading to a bad name for capitalism.)

In a free market, if a seller tries to set prices too high (which means beyond what the product or service is worth), the market will reject the prices. The seller will punish only himself; there will be no need to pass a law against him or fine him. Consumers will go elsewhere: to a competing seller of the product or service, or to a substitute for the product or service. If there is no other seller, and the market is actually willing to pay the high price asked, the "outrageous" profits available in this one industry will function as an economic signal that results in additional entrepreneurs being attracted to the industry. Additional sellers in an industry mean the prices will quickly fall to where the free market actually values them. In this way, the free market and entrepreneurs serve all of us, and the entrepreneurs are rewarded for detecting and fixing an instance of overpricing. Of course, the biggest barrier to new entrepreneurs entering a market is government.

In times of emergencies, it is imperative that prices rise. Certain items are going to suddenly be in very, very high demand. If prices rise, the market will allocate these items accordingly. If somebody tries to hold the prices down, however, shortages will always result. The market correctly calculates that in an emergency, gasoline, first-aid kits, and generators are suddenly much much more valuable, while speedboats, video games, and Christmas trees are worth relatively less than they were before. God set it up this way. If we try to interfere with it, we will cause problems.

Many people were angry at "price gougers" selling gasoline at "unfair prices" after disasters such as the September 11 attacks and the Katrina hurricane. At root, this is covetousness: wanting something which is not yours and being mad that the owner will not give it to you for less than it is worth. It should be condemned from the pulpit as such. Economically, these people are gravely mistaken, because in these disasters the value of gasoline momentarily rose sky high. It is simply not possible that a gas station can provide all the gasoline people want in an emergency. The rising prices result in people rationing their gasoline: rather than buying enough to travel to their preferred destination, they travel to a closer evacuation point instead and leave some gasoline for everybody else to escape as well. This means less gasoline is wasted and more people are saved in the emergency. No government rationing scheme can come close to the performance of the God-ordained free market in this regard. As Walter Williams says, "Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster." And "not allowing the market mechanism to allocate suddenly scarce resources produces the inferior outcome." (Please go read those two articles. They are spectacular.)

Rising prices in this kind of a situation also function as an economic signal to entrepreneurs and investors to bring more of the item affected by the shortage into the market as soon as possible (and definitely faster than your government will do it). By interfering with such rising prices, we kill the potential reward that exists for the people who might be able to do something about the shortages.

And again, in such a situation, if a seller overprices, he will punish only himself, because people will buy elsewhere. As it is, if the market is free (not interfered with by the criminal activity of violating private property, which may be performed by government or others), the seller will be rewarded for doing the best thing to serve the people: raising his prices. And this is good, because if the seller is a Godly man, he needs to be obeying commands of God like "if anyone does not provide for his own, and especially for those of his household, he has denied the faith, and is worse than an unbeliever" (I Timothy 5:8). In a disaster, the gas station owner may not know when he will next receive a shipment of gasoline, and therefore he may not know how he is going to provide for his family tomorrow. He has an obligation laid upon him by the Lord God to do the best he can on that presumed last day of gasoline to earn as much as he can in order to provide for his family. Don't covet his gasoline, and don't begrudge him doing the right thing for all of us.