The other night he charged the oil companies with conspiring to keep gasoline prices high. He quoted a 1995 Chevron memo stating that refining capacity was too high and profits too low. In much of the 1990s, you’ll recall, gasoline prices were historically low, and profits were down. In 1998 I was buying gasoline for 73 cents a gallon in the south. Adjusted for inflation, prices nationwide were lower than in 1950.

Apparently the other oil companies agreed that prices in the mid 1990s were too low to justify the level of production. To O’Reilly and other populists, that is prima facie evidence of collusion to harm consumers. Naturally, he called on the Bush administration to investigate. A populist is someone who believes scarcity is a capitalist plot. He therefore thinks the price system is merely a device controlled by producers to gouge the public. Nothing could be further from the truth.

Scarcity is a fact of nature, and the price system is a communications network for coping with scarcity. Since at any given moment nature forbids us to have everything we want, we must make tradeoffs. If we want more computers, we’ll have fewer washing machines. The tricky question is, how can we tell producers what to make? One reason socialism — which abolishes or cripples the price system — fails is that central planners can’t make production decisions according to consumers’ preferences even if they want to.

Producers make investments on the basis of prices and expected returns. They must pay attention to the prices of the labor, machines, materials, and land they need to make their products. If consumers are willing to pay only $2 for an item, no producer can afford to spend $3 on the components needed to make it. That’s a recipe for bankruptcy. Consumers are in effect telling producers, “Don’t make that item. Make something for which we are willing to pay more than $3.”

Profit (the money left over after all expenses are paid) is how consumers indicate to producers what tradeoffs they are willing to make in a world of scarcity. Producers are rewarded for creating value and penalized for destroying it. If a producer can take $3 worth of components and change them into something consumers are willing to pay $4 for, he has created $1 in value. But if he takes those same components and makes something consumers are willing to pay only $2 for, he has destroyed value.

The genius of the market is that, left free, it relentlessly induces people to create value for consumers and ease the conditions of scarcity. Today people generally have more than their parents or grandparents had, even though there has been no increase in the amount of matter available from which to make things.

Let’s look at O’Reilly’s oil case. If gasoline is selling for, say, $1 a gallon, the oil companies will not — cannot — make investments equivalent to, say, $1.10 a gallon. Intentionally going broke is no way to lower consumer prices.

To maintain or build refineries, the oil companies would have had to hire workers and buy capital goods and materials. But producers of other goods also wanted to hire those workers and buy those things. None of them could afford to pay more for the components than consumers were willing to pay for the final products. A bidding process took place, with the winner being those producers who made the things consumers were willing to pay the most for. In the 1990s the oil companies were outbid because consumers wanted other things produced more than they wanted additional gasoline. Had the oil companies built the refineries anyway, we would have had to do without those other things.

Thus the implication of O’Reilly’s diatribe is not only that the oil companies should have produced more gasoline than we consumers wanted, but that other companies should have produced less of the things we did want.

That’s typical for a populist. Posing as a man of the people, he actually seeks to substitute his preferences for ours.

Sheldon Richman is senior fellow at The Future of Freedom Foundation in Fairfax, Va. (www.fff.org), author of Tethered Citizens: Time to Repeal the Welfare State, and editor of Ideas on Liberty magazine.

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