Last month’s record flooding in South Carolina brought renewed crackdowns on price gouging. But higher prices simply convey information – in this case that consumers should conserve and producers should produce. In this way, prices allow the shortages that occur in natural disasters to be alleviated.
In the new Learn Liberty video below, Towson University professor Howard Baetjer Jr. explains the importance of prices with the example of building a railway in a socialist system where they do not exist. In such an economy, builders do not know whether to, for example, build through a mountain to save track or build around the mountain to save on engineers. Without prices, it’s impossible to know what is more valuable to society, track or engineers, threatening the overuse or misuse of one of them.
In the words of Ludwig Von Mises, who identified this knowledge problem in command economies, people are left “groping in the dark” about how to proceed. No person is smart enough to know how to use scarce resources for the good of the nation without the information conveyed by prices.
In a market economy, on the other hand, prices lead people to act in a way that is best for them and best for society. Railway builders, for instance, would choose whether to go through the mountain or around it based on whether track or engineers is cheaper. This uses up less of the resource that is more valuable to society and better used in more important ways.
In a flood, for instance, the price of clean water may increase dramatically because it has become scarce. This signals people to conserve, preventing a local resident from, say, filling up his winter Jacuzzi during that period. It also signals water producers and salespeople to bring more water to market to take advantage of profits, quench people’s thirst, and bring the price down.
Only through the market system can we allocate scarce resources to their most valuable and least costly use and satisfy as many human wants as possible. In the words of famed economist Friedrich Hayek, it is truly “a marvel.”