That’s what Dana wrote to me in response to this post. Now part of that is just Dana humor, but there is an element of honesty to that statement, it’s a common response to economic reasoning. Many people, when presented with economic principles, don’t think the arguments through and critique them, they have an instinctive reaction against it. The thought “But that just isn’t very nice,” pops into their head. This still taints the memories of people like Margaret Thatcher and Ronald Reagan despite the many positive things they accomplished, people remember them as being “not nice.”People’s gut feelings are important, at least as far as their willingness to listen goes. I think that the “soulless” perspective of economics is warped and unfair.
I’ll tackle the “practical” advantage of economics first, cause that’s easy… The post that brought about that reaction was about conservation, there’s little doubt that price rationing is an effective way of reducing consumption. If something costs more, less is used, no debate, it works. Some people complain that that method is “unfair,” that it affects the “poor” more than the rich. It’s true that the poor always have less leeway when it comes to buying things, and they will have to make hard decisions before the rich do. It is not true that the rich are unaffected. As something’s price rises, everyone will have to weigh whether or not it is “worth it” to continue consuming that product. There’s this idea that the rich don’t pay attention to prices, that they buy whatever they want whenever they want. There are a few people in the world that are capable of doing that, but there aren’t enough of them to justify screwing up policy for. The rich are certainly price sensitive, take Bill Gates for example. Imagine that he’s hungry and he sees a hot dog vendor and thinks that’s a good idea. He asks for one and the vendor says, “That’ll be $40. There’s a hot dog shortage…” I’m willing to bet that there’s a good chance that Bill wouldn’t buy that hot dog even though $40 is nothing to him. If he was really hungry, and he was really craving it, then there’s a better chance of him buying it, but that would hold true for anyone. The point is that everyone values things at different amounts, I could buy gum for $8 a pack, but I never would, gum isn’t worth much to me. Someone that really loved it would probably go ahead and buy it (although they would end up buying less) because they wanted it.
Price is the only way people really understand the scarcity of something. People do not respond until they really “feel” the impact of the scarcity. You can trumpet the shortage of water all you want, exhort them to conserve all you want, you will not see a substantial reduction of water usage until the price changes. There are some people that are very worried about that, they conserve as a matter of course. It is part of their identity, it is part of their world view. Most people do not think about it too much, they just have too many other things to worry about. The only way to get them to conserve is to make them aware of the scarcity at the time of consumption. Since most people don’t live right next to the reservoir and can’t see the shortage, you need another way of bringing it to their attention. With a higher price, you make people think about their consumption, even the conservationists think about it. the beauty of it is that they don’t even have to care about water conservation, worrying about money conservation will accomplish the same thing.
For most things, competitive pressure keeps the prices as low as possible, but people still have to face the question of is it worth it to me or not. If there ends up being a scarcity of something for some reason, the question of who gets what becomes very important. In an ideal world, we would all know who needs things the most and we would all willingly allow those people to buy at the normal price and the rest of us would go without. In the real world, there is no way to know who needs gas, water, or even land the most. The ONLY way to weed out the people who really want something from the people that would just like to have it is by using price rationing. With the vast majority of things, there is indeed enough to go around, we only need to trim the excesses of consumption in order to maintain supply (golf courses in Arizona for example). There are some things, real estate in Manhattan for example, that are so scarce that only the wealthiest people/companies can afford it. That may not be fair in some people’s eyes, but how else do you divvy up that scarce land among millions of people and not screw whoever owns that land? If something is indeed incredibly scarce, most people are going to have to go without it, the owner is unable to know who wants it the most, and is unable to give it to everyone, so the highest bidder wins.
“But it isn’t fair!” Alright, explain to me why Beluga caviar is not a common food staple. “Well, it’s expensive, it’s a luxury item.” Ok, it is, but the reason that it is a luxury item is because it is expensive, not the other way around. Imagine a world where Beluga caviar is in abundance, maybe each fish has enough eggs to feed 100 people and they produce it 100 times a year. On top of that, the fish didn’t need to be killed for it, it was in an external sac that could just be cut off each time. People had, for millennia, eaten it as a cheap, easily available food source. Everyone ate it, but then through some sort of catastrophe, that world became much like our own and Beluga caviar become as scarce as it is here. You can imagine the gnashing of teeth involved in the rationing of it. “Greediness,” would be rampant as sellers kept raising the price until only the richest people could consume it. Eventually, people would turn to alternatives like peanuts, beans, etc. for cheap food, but they would always remember the “good old days” and blame rich people and Beluga fisherman for driving up the price. The real irony is it is they themselves that drove up the price due to their desire for the product.
“OK Isaac, but that was silly, no one cares about caviar, what about water, there is no alternative for that!” Fair enough, there isn’t. The key to the water problem is that people in some areas consume more than can be replenished and so shortages happen. If it were priced properly, people wouldn’t use as much and the shortages could be avoided. Also if the price were high enough, water would be brought to those areas and sold, thus increasing the supply. “But what about the poor?” Here’s where I can turn around and call the people that say that are soulless. In their version of the world, they would keep the price the same (so that the poor can afford it), encourage people to cut back, and bang! no problem, right? In reality, you run out of water and there isn’t any incentive for people to bring in more. Yes, in the economic way of doing things, the price goes up, but at least there is water to be had. The poor won’t die of thirst either… Behind every statement that “The government has to do it otherwise it won’t get done at all!” is a person that simply does not trust people. There isn’t any reason to believe that people will not voluntarily step up and contribute to the cause. The only reason people don’t do more is because of the attitude that “It’s the government’s job” Yes, there are greedy bastards out there, but people are, by and large decent. Barring government interference (don’t get me started on African thugocracies), people will find ways of distributing aid where it is needed.
If there really isn’t enough water to go around, if the world really does start to run out of water relative to the population, I don’t see what could be done. people will die as the supply runs out. In those types of situations, it doesn’t really matter what you think or what your political leanings are, there won’t be a solution until more water can be delivered. In the meantime, there is enough water to go around (inconveniently located in the great lakes) so we need to price water properly to make sure we never reach the point of disaster. Accurate prices will allow the distribution of water world wide and prevent water crises form occurring, how much more soul do you need?:-)
So there’s the practical defense of the economic way of rationing scarce commodities, for the ethical/moral reasons, see part 2.