Here’s a letter to a long-time reader of Café Hayek:
Dear Aileen:
Thanks, as always, for your e-mail.
You’re correct that most people have “strong negative reactions against large price increases” during crises. Indeed, it’s only because these negative reactions are so strong that politicians predictably inveigh against such price hikes and threaten – and often impose – government-enforced prohibitions on so-called “price gouging.”
But this negative reaction – which is fueled by economic misunderstanding – doesn’t change reality. This negative reaction doesn’t alter the underlying fact that during crises the demands for many goods and services rise relative to the supplies of those goods and services and, thus, necessarily make the value of each unit of those goods and services higher than it is during normal times. The high prices reflect this reality.
A government-issued command that people pay a money price for some good or service no higher than a government-set maximum is no more effective at pushing the value of that good or service down to the government-dictated price than would a government-issued command that water boil at 80 degrees Fahrenheit push the temperature at which water boils down to the government-dictated temperature.
Economic reality is not optional, despite the false promises of politicians that they can work miracles. Unfortunately, people’s belief in economic miracles – indeed, their demand that politicians attempt to perform such – distorts their vision of, and responses to, reality. The result is reality made worse.
Sincerely,
Don
