I just read a friend’s diatribe against the pharmaceutical industry for “price gouging” in the insulin market. “Corporate greed” once again gets the blame for a problem caused instead by government “regulation,” which has given insulin manufacturers a monopoly in the USA.
The solution to the problem is simple: Good old-fashioned competition, based upon price signals coming from insulin users themselves.
In Europe, several companies compete for the insulin business of diabetics. In Europe, prices for insulin are substantially lower than for the same product in the USA. Thank you, competition.
And thank price itself for signaling entrepreneurial types that folks needed such a product. Price is the most important signal in a successful capitalist economy. And lack of price signals is the single biggest reason that “regulated” and “command” (i.e., socialist) economies do not work.
Price is the most important signal in a successful capitalist economy. And lack of price signals is the single biggest reason that “regulated” and “command” (i.e., socialist) economies do not work.
I’ll give you an example–bottled water, taken from the image above:
Let’s pretend that Corpus Christi, Texas, gets hit by a massive hurricane. In the aftermath, the system that delivers fresh, clean, drinkable water is non-functional. Only bottled water can be used safely for drinking. And humans, among other animals, need regular refills of water to stay alive.
That same hurricane blasted away supplies of bottled water. Cases of the stuff disappeared in the wind and the storm surge. Bottled water is hard to find, and the survival of people depends on the little bit of water that can be found.
That limited supply needs to be rationed until more supply can be delivered.
But how can it be effectively rationed?
Simply by raising the price.
A typical seven-dollar case of water now sells for upwards of $50. Folks are beside themselves with anger! How dare anyone capitalize on someone else’s suffering?!
But what would happen if that seven dollar case of water remained at seven dollars? Would the supply be enough for everyone to get what they need? Or would panicked survivors come in and buy up all the water for themselves? What would be left for those who came after them?
As the drought of bottled water eased for some, it might still be a problem for others, neighborhood by neighborhood. How would we know which neighborhoods still need bottled water?
If you guessed “prices,” then you win the prize! Those where people are complaining about “price gouging” for bottled water are still in need of supplies of water.
“Price gouging” is our friend!
The Law of Supply and Demand is simple: If supplies of a commodity are plentiful, and the demand is low, then the price is low. If supplies decrease, or can’t meet increased demand, then prices go higher.
This is a perfect example of the Law of Supply and Demand functioning in a market, with the added bonus of showing how it can protect consumers from scarcity. The Law is simple: If supplies of a commodity are plentiful, and the demand is low, then the price is low. If supplies decrease, or can’t meet increased demand, then prices go higher. This phenomenon works to signal that the market of a particular commodity is being satisfied, or not.
Price literally makes the economic world go ‘round.
And let me also mention this: Those who object to the free functioning of price often make the leap to being sure that the vendor selling the bottled water for $50 a case will allow someone to die of thirst right in front of them rather than lose any “illegitimate profit” from their so-called “price gouging.” What a dim view of humanity! Those who live by free market forces are often accused by those ignorant of economic science of being “miserly” and “cruel.”
Nothing could be further from the truth. In fact, if you understand how free markets work, you also understand that they can save lives. And faith in the efficiency of the law of supply and demand has nothing to do with an individual’s philanthropic tendencies.
So let me tell you how else this so-called “price gouging” functions in a free market:
Word soon gets out that “they’re getting $50 a case for bottled water down in Corpus Christi!” Enterprising capitalists say, “Let’s load up a truck with cases of bottled water and go sell it!”
Do I need to explain what happens? Quickly, truckloads of bottled water show up in Corpus Christi. The supply goes up, and the price comes down.
That is the law, and it functions naturally, without any “help” from government!
Shortly after word gets out about the so-called “price gouging,” Corpus Christi’ans once again can buy bottled water for reasonable, but maybe slightly elevated prices. And, when the fresh water system begins pumping clean, fresh, safe water into people’s homes, the bottom falls out of the bottled water market, and some parts of those truckloads will incur a loss for their owners, because now supply exceeds demand, and they may just want to sell off the surplus at a much lower profit, or even a loss, so they can leave town and go home.
Now let’s look at what would happen if government prohibited that same “price gouging” that saved so much potential suffering in Corpus Christi.
Now a government agency most likely controls the flow of goods to stricken areas. No doubt potable (i.e., drinkable) water is at the top of the list of goods…let’s hope.
The bureaucrats in charge of the operation now wait for reports to come in to their central location, so that they can begin to allocate supplies. They are inundated with reports of shortages coming in from every town, city, and hamlet along a wide swath of the coast, because the hurricane was just that enormous.
Other bureaucrats are scouring the stricken areas, interviewing folks to learn what they need. Meanwhile, everyone in these areas are forbidden from selling the one commodity that everyone needs at anything but the pre-storm price.
Those supplies evaporate quickly, to the first in line, who buy up all they can in a panic. Now there’s nothing left for those behind them, where “price gouging” once would have rationed those supplies effectively.
The assigned bureaucrats are getting their data into the system as quickly as they can, but they are understaffed, and they just can’t get the job done fast enough. They know they’ve got thirsty people out there, but they don’t know exactly where until they get the information into the computer.
Meanwhile, people are hoarding what limited supplies of water they have left, because they don’t know when more supplies will show up.
And very few truckloads of water are on the way, because…well, what’s the motive? And where would they go, anyway? There is nothing to signal the locations of those most in need, where “price gouging” once would have been that signal.
If anyone thought they might be able to make a small profit by trucking in bottled water, they wouldn’t know where to find those most in need. The likelihood of their arriving in a neighborhood where the warehouse holding adequate bottled water supplies was still intact is highly likely. Now we have a truck full of bottled water with no way of knowing where to go.
Those overworked bureaucrats would eventually get supplies of bottled water to where they are needed, but that might come coincidentally with the return of the fresh water delivery system functionality. We see this over and over again when warehouses full of supplies collected by government agencies sit wasted because they came too late to be effective for those most in need.
Government bureaucrats can’t possibly compete with the efficiency of price signals.
And this goes for the insulin market, and any other market for a commodity that people need–even desperately needed medications.
Let the markets work! Free markets save lives!
(simply click on the photo or text for more information)
Basic Economics is a citizen’s guide to economics, written for those who want to understand how the economy works but have no interest in jargon or equations. Bestselling economist Thomas Sowell explains the general principles underlying different economic systems: capitalist, socialist, feudal, and so on. In readable language, he shows how to critique economic policies in terms of the incentives they create, rather than the goals they proclaim. With clear explanations of the entire field, from rent control and the rise and fall of businesses to the international balance of payments, this is the first book for anyone who wishes to understand how the economy functions.