A POPULIST IS SOMEONE WHO who believes scarcity is a capitalist plot. If only social arrangements were otherwise, he believes, mankind would enjoy a boundless cornucopia of goods and never want again. The populist thus assumes that our current economic institutions, such as the price system, are merely devices controlled by producers to withhold needed goods and to gouge the public.
Nothing could be further from the truth. Scarcity is a permanent feature of nature resulting from several facts:
Individuals can be in only one place at a time. They generally can do only one thing at a time. They have limited life spans. (Time is scarce.) A hunk of matter devoted to purpose A cannot simultaneously be devoted to purpose B.
Consequently, tradeoffs are mandatory and ubiquitous.
But facing these limits are the unlimited wants of individuals. That combination of limited means and unlimited ends should have been a recipe for tragedy. Yet mankind (with some exceptions) does not face the sort of struggle for survival animals in the wild face.
How have we managed to avoid the Malthusian curse?
One way that we did it — as the Rev. Thomas Robert Malthus himself acknowledged in later editions of his famous Essay on the Principle of Population — is “moral restraint.” Put simply, people do not have all the children they can have. Even where the birthrate is highest, fecundity is well below fertility.
Moral restraint is an example of a more general characteristic of human beings. Possessing a conceptual faculty, including self-consciousness, we can be aware of our situations and act accordingly as no other animals can.
Guided by reason we can substantially change our environment; we can imagine and innovate; we can discover and appreciate the value of the division of labor.
As Ludwig von Mises wrote in Human Action,
The very condition from which the irreconcilable conflicts of biological competition arise — viz., the fact that all people by and large strive after the same things — is transformed into a factor making for harmony of interests.
Ponder that: the human race began under the shadow of two uncomfortable facts. Its members have unlimited and virtually identical wants, and nature is a miser. That should have led to endless fang-and-claw conflict. Instead, something quite opposite occurred: in Mises’s words, life-enhancing “catallactic [market] competition” replaced life-threatening biological competition.
How is that paradox to be resolved? Mises had an answer:
Because many people or even all people want bread, clothes, shoes, and cars, large-scale production of these goods becomes feasible and reduces the costs of production to such an extent that they are accessible at low prices. The fact that my fellow man wants to acquire shoes as I do, does not make it harder for me to get shoes, but easier. [Emphasis added.]
Markets, prices, and profitsl
The system of social cooperation we call the free market is what keeps life from being a war of all against all. Our lives depend on it. If more people understood that, they might not so casually propose ways to sabotage it.
The market order is so good at easing (but not erasing) scarcity that most people forget (or never learn) that only it stands between us and the Hobbesian state of nature. They have no idea how rough life was just a short time ago. (Somewhat relevant factoid: When Bill Clinton was governor of Arkansas, the state’s nickname was changed from “Land of Opportunity” to “The Natural State.” In light of the above, that bespeaks volumes.) Since the economically ignorant do not know what life would be like without the market, they have no idea what it makes possible. Worse, when something happens that they don’t like, they can think of nothing but to blame capitalism. They are helped in that effort by an intellectual class that despises markets even as it owes its existence to them.
The price system is an easy target because its function is not intuitively grasped. It 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 to do with fewer washing machines or stereos. The tricky question is, how can we tell producers what to make? One reason socialism — which abolishes the price system by forbidding property and trade in the means of production — fails is that central planners can’t make production decisions according to consumers’ preferences even if they want to.
In markets, 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 and grandparents had, even though there has been no increase in the amount of matter available from which to make things.
The hazards of economic ignorance
As a case study in economic ignorance, consider the Fox News Channel’s populist star, Bill O’Reilly, and his recent charge that the oil companies conspired to raise gasoline prices. He quoted a 1995 Chevron memo stating that refining capacity was too great and profits too low. In much of the 1990s, you’ll recall, gasoline prices were historically low, and profits were down. 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, that is prima facie evidence of collusion to harm consumers. Naturally, he called on the Bush administration to investigate. (Even the Clinton administration was unable to find evidence of collusion.)
Where does O’Reilly go wrong? 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. Furthermore, they won’t invest for a smaller return if the money can bring a larger return some other way. Is there something nefarious about that? Not if you understand the price system as a signaling device.
To maintain or build refineries, the oil companies would have had to hire workers and buy capital goods and materials. But makers of other products 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 occurred, with the winner being the producers who made the things consumers were willing to pay the most for. Prices are how we signal what we want produced. In the 1990s the oil companies were outbid because we signaled that we wanted other things produced more than we 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 fewer 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.