We've all seen newspaper stories like the real-life story quoted above. Earthquakes, floods, tornadoes, hurricanes leave a path of billions of dollars of property damage in their wake. Families are left homeless. Food, clothing, and shelter are suddenly in short supply. And how does the free-market economy react to all this pain and suffering? It generally responds by causing the prices of these necessities to go through the roof, assuming the roof is still there. Funny way to increase society's happiness! After all, when was the last time you went to the store, saw a higher price, and were happier as a result? Indeed, we suspect that most people share the sentiments of Florida's attorney general, who accused the lumber companies of being "no better than looters." Such a statement is usually followed by a recommendation that it should be illegal for businesses to raise their prices beyond a certain point. This is called a price control. But let's think about this. Would we really be better off if the government prohibited lumber companies from raising the price of plywood following a natural disaster like Hurricane Andrew?

Suppose that prior to Hurricane Andrew, the price of plywood was fairly uniform over the continental United States. Say plywood initially cost $300 per thousand board feet in North Carolina and Florida. Now Hurricane Andrew devastates Florida, causing the price of plywood to rise to $400 in that state (assume the price remains at $300 in North Carolina). What happens next?

The owners of plywood in states like North Carolina realize that they can make a buck by shipping their lumber stocks to Florida. Assuming that the shipping costs of a thousand board feet are less than $100, these owners can make a quick profit by raiding their warehouses and putting their available plywood on the first train going south. This is good...and bad. It's good because the people in Florida now have more wood to rebuild their devastated cities and homes. It's bad because the people in North Carolina now have less wood for building tree houses and redecorating their family rooms. Who can say whether the gains of the consumers in Florida outweigh the losses of the consumers in North Carolina? The answer is: anyone who understands the Unifying Field Theory of Economics (Profits=Revenues-Costs).

Shipping a thousand board feet of plywood out of North Carolina means that consumers there will miss out on about $300 in happiness which they would have received from that wood. But sending another thousand board feet to Florida causes an increase in happiness of $400 there. Taking plywood resources out of the hands of North Carolina consumers and putting it into the hands of Florida consumers has created a net increase in society's happiness. This increase in happiness has occurred only because of the high price of plywood in Florida. It wouldn't have happened if government regulators had refused to allow the price of lumber to rise as a result of the natural disaster.

In fact, HIGH PRICES ARE A DISTRESS CALL THAT GOES OUT TO THE REST OF THE ECONOMY. "Mayday, Mayday...Please send food, clothing, and the resources to rebuild homes...Over and out...P.S. Hurry Up!" This SOS call is picked up by thousands of "rescue organizations" across the economy that respond with a great outpouring of relief to the disaster victims. These "rescue organizations" have names like the Georgia-Pacific Lumber Company, the Kroger Corporation food company, the Sears and Roebuck clothing company, etc. Shipments of food, clothing, and plywood all start arriving in great quantities. Oh sure, maybe the intentions of these "rescue organizations" isn't what it ought to be in an ideal world. Maybe they should be more concerned about the pain and suffering of the disaster victims and less concerned about their own interests. But that's not an argument against the price system. On the contrary! It's a tremendous argument in favor of the price system. Even though the owners of these resources may not have a whit of sympathy for the poor consumers afflicted by this disaster, they're doing everything they can to help them in their hour of need.¹

The key to seeing all of this is to recognize that PRICES CONTAIN INFORMATION. The fact that the price of lumber is higher in Florida means that an extra 1000 board feet of lumber is more valued there than elsewhere. Price controls keep this information from getting out. In fact, one can think of price controls as a form of censorship. They keep the SOS call from being sent. And without this vital information, the free-market economy cannot transfer resources where they are most needed.²

That's all fine and good you say, but don't higher prices hurt people as well? Well, higher prices surely impose a burden on everybody. But note that the real problem here isn't the higher prices. The real problem here is that Hurricane Andrew (or whatever disaster we're dealing with) has wiped out the resources available to consumers. There's not enough food, clothing, and shelter to accommodate the past consumption behavior of consumers--this is the source of the real burden from the natural disaster, not the higher prices. Higher prices aren't causing there to be less food, clothing, and shelter. They are merely reflecting the fact that there's less of these things to go around. Price controls can't alter this stark reality.

In fact, artificially lowering prices makes things worse. Since the real problem here is the lack of necessities, the only way to make things better is to somehow get more of these things in the hands of consumers. High prices attract these goods from other parts of the country. Perhaps we can draw some consolation from the fact that the high prices which follow natural disasters are temporary. Thanks in large part to the tremendous desire of for-profit organizations to capitalize on this disaster, a flood of valuable resources will soon be sent to the devastated communities. As food and clothing quickly fill the shelves of stores throughout the area, prices will come tumbling down. Thus, the spike of high prices following a natural disaster contains the seed of its own demise. It unleashes forces that will soon cause prices to return to their pre-disaster levels.

You may be thinking, "That's great, but don't higher prices disproportionately hurt the poor? After all, they're the ones least able to pay. Shouldn't we help them if they can't afford necessities?" We certainly agree with this sentiment, but consider the following. Price controls do not just lower prices for poor people. They lower prices for rich people as well. If we are really concerned about putting more food and clothing in the hands of poor people, there is no guarantee that price controls will do the job. At the lower prices, rich people will want to buy more of these goods than they would otherwise. If they do, there will be less of them available for poor people. How's this for a perverse result: ARTIFICIALLY LOWERING PRICES TO HELP POOR PEOPLE MAY IN FACT DISPROPORTIONATELY HURT POOR PEOPLE.

All of this leads us to the following conclusion. If you don't like the allocations that arise under the price system, don't kill the messenger. The price system isn't the problem. On the contrary, since the price system directs resources to a devastated area, it is the solution. The real problem is one we touched on when we first discussed the willingness to pay approach: poor people don't have enough money to adequately express their desire for goods and services. So give poor people more money. Price controls can't be counted on to help the poor because there's no guarantee that more goods and services will actually go to them. At least when we give poor people more money, there is no doubt they are going to be able to get more of the things they really need. And we can take comfort in the knowledge that we haven't compounded the original, natural disaster with the man-made disaster of price controls.