As we begin the cleanup in the aftermath of three very powerful hurricanes, Harvey, Irma, and Maria, we see devastation that has not been seen before. Irma at one point registered as a Category 5 hurricane and wreaked havoc on the Caribbean Islands, Puerto Rico, and parts of Florida. This just days after Category 4 Hurricane Harvey left Houston and the surrounding areas in shambles. Cleanup for Harvey alone is estimated as to cost as much as $100 billion. And now Hurricane Maria has left all of Puerto Rico in the dark.
It would be wonderful if we could enact a policy that would eliminate hurricanes and other storms that destroy cities and pull so hard on our scarce resources, but we can’t. In a world of scarcity, there are limits to what policy can fend off and protect against. That doesn’t mean we do nothing. It means we must do the best we can to overcome, provide aid, and rebuild.
So, how do we do that?
The Economic Way of Thinking as Our Guide
In the wake of unpreventable hurricanes and other natural disasters, our goal is to conceive of the best plan that will minimize costs and impact, where possible, and maximize the support that others can give. The economic way of thinking can and should be our guide. To maximize our efficacy, we need to understand what the market can do and what the state can do. In times of weather disasters and emergencies, people, often out of legitimate fear, seek refuge and protection through the power of the state. The economic way of thinking helps us understand whether the state can deliver the things we so badly need.Scarcity is always our problem. We always have desires and wants that exceed our ability to satisfy them. But scarcity is exacerbated when a hurricane or tropical storm strikes. People have vital needs for electricity, water, ice, and food. Those basic needs don’t go away because of the hurricane. The hurricane makes it harder for us to get the things we need because highways are impassible, fallen trees block roadways, buildings are destroyed, and electricity is lost. In anticipation of these problems, demand even increases as people stockpile to prepare for the uncertain future.
Thus, we are left with a supply and demand imbalance. We want more gas, ice, and water as we prepare for future uncertainties, but there is less of those things to go around. The question is what to do about it. Most of us agree that we must do something. Economics helps us reconcile, with as much precision as possible, exactly who should do what.
The economic way of thinking is all about relative prices and relative capabilities. Is the market capable of overcoming these supply shocks as quickly and cost effectively as possible? What can and should the state do, and how do for-profits and nonprofits fit into this equation?
What we know from basic economic realities is that when supply and demand are out of whack, disrupted so quickly and fiercely, we need a mechanism in place that redirects and rations those scarce resources most effectively. But it doesn’t end there. We also need a mechanism that induces greater supplies of the things we need so badly.
Prices and profits do this better than the state can because they are nimble and they allow dispersed individuals to act quickly and decisively to meet the needs of others. When we experience a large decrease in supply, or an increase in scarcity, the price mechanism helps us know what to do next in several ways.
First, the price acts as a signal. It helps us know that scarcity has increased — and we must have this information. Second, the price acts as an incentive — its increase tells potential suppliers to try and find more. This jumpstart is precisely what people need. Prices call suppliers and demanders into action to work to solve the new scarcity problem. As demanders, higher prices tell us to slow our consumption and be as prudent as possible with the goods that have become more scarce. Suppliers respond to the price increase with possible solutions to the problem, because the elevated price gives them a reason to do so.
The Morality of Market Responses
That might sound nice on paper, but does it work? It’s one thing to understand economic theory, but it’s another to see how it works in the real world. The result described above is not intuitive: that the short-term increase in prices of goods and services that are drastically scarcer than they were a few days before is good — necessary, in fact. Without that price increase, two things would occur that would make a terrible situation worse: consumers would not slow their consumption, which would deplete those goods faster, and would-be suppliers would have no incentive to apply entrepreneurial energy to solving the problem of scarcity.
The morality of the market is that through the interconnected system of prices, property rights, and profits and losses, we are better able to coordinate with each other (which promotes peaceful exchange), we are better able to find new ways of doing things (which fosters entrepreneurial creativity), and we are able to overcome the supply shocks of natural disasters and care for each other.
The morality of markets is that we don’t have to find a benevolent or omniscient leader to take care of this for us. Without prices, that’s exactly what we would need. Prices are the moral rationing agents of market exchange, and when allowed to function, they decrease scarcity rather than increase it. Moreover, these benefits are not only available to the rich, but they extend across all income groups.
The Immorality of State Responses
When we ignore economic realities and use the state to limit quantities that can be bought and sold, to fix price ceilings, or even to punish firms for prices we deem “too high,” we interfere with the corrective process of the market, and that exacerbates rather than corrects the supply shocks. These policy measures are often enacted by good people with good intentions, but the economic way of thinking helps us know that isn’t good enough.We need solutions and we need them fast so we can spur entrepreneurs into action to solve the problems and meet the needs of others. The well-intentioned “price gouging” regulations over market responses that emerge from weather disasters create immoral results — we curtail problem-solving, we encourage hoarding and even looting, and people remain in desperate need.
We can’t use policy to ward off hurricanes, but we can respond the best and most moral way possible. We can read the signals prices provide to us in times of distress and use them to overcome the problem. This is the moral response.