Spanish – By Alberto Benegas Lynch (h)
It is incredible that elementary lessons in economics have not yet been understood. When the quantity supplied is fixed, and the demand for a product is high, the price increases, which is necessary to attract the attention of those who can increase the supply.
When an earthquake destroys many homes, the prices of houses and apartments will increase so that supply and demand are equal. If some old-fashioned politician decides to freeze prices to the pre-earthquake level, he or she will inexorably cause shortages because, given the new situation, demand will exceed housing that is left standing. Price fluctuations can send a signal to the real estate market that there is an attractive opportunity to invest in housing supply. Thus, fixed prices aggravate the problem of housing shortages and worsen the crisis.
A good example of this theorem is what happened in Nicaragua at the time of a devastating earthquake. The government decided to free up prices for luxury housing and fix prices for more humble housing “to protect the poor.” The result was that the situation returned to normal for housing aimed at those with higher purchasing power because higher prices led to an increase in supply. Meanwhile, people with humble means were condemned to continue suffering as housing shortage remained unchanged.
The truth is that when there is an earthquake, the number of houses available will fall short of the supply irrespective of whether prices are allowed to fluctuate. However, the fundamental difference between the two policies regarding free markets is that in one case, the situation remains frozen as it. Whereas, when prices are allowed to fluctuate, the market reaches equilibrium by attracting investment to the housing sector. Thus, the situation gets normalized.
The same holds for medicines. Whenever there is a public health crisis, there are people who complain that pharmacies are taking advantage of the situation. They don’t realize that it is more necessary than ever for prices to rise; otherwise, people are condemned to suffer the consequences of the disease. This is also true for food. It isn’t a question of anyone’s wishes. The price gouging process aims precisely at solving problems.
Whenever the price of a good is set below the market price, supply and demand are unbalanced. There is a shortage of the supply of the product in question. In common terms, of course, the greengrocer “takes advantage” of his customers’ desire to eat, or the bicycle seller “takes advantage” of his buyers’ desire to pedal, and so on. In a free market, traders are obliged to attend to the needs of their neighbors so that they can prosper, and prices are not the result of anyone’s whim, but of the prevailing situation that serves as an indicator of what is happening, not what some politician would like to see happen.
I anticipate then that in Argentina, there will be a shortage of hand sanitizer due to the announcements that have just been made in the wake of the coronavirus (COVID-19). The same can be said to be true of face masks if one finally yields to the temptation to politically regulate their price. In short, prices are indispensable signals for the running of the economy, but the more delicate the situation, the greater the need for them to operate freely.
Alberto Benegas Lynch (h) is president of the Economic Sciences Section of the National Academy of Sciences of Argentina, author of 15 books, and professor of economics, philosophy, and law at the University of Buenos Aires.
This article was originally published in Voices of Freedom.