Thursday, July 8, 2010

Ketchup and Capitalism

Over the Fourth of July weekend, I was reminded of some reasons why free market capitalism is the best system out there.

If any of you just happened to visit a Walmart and saw the pre-Fourth of July insanity--I literally saw two separate Walmart parking lots COMPLETELY full--then you might have seen a little of what I'm talking about. Even with the crazy amounts of people buying everything in sight to stock up for their weekend adventures, I still managed to buy all the staples that I, and everyone else, needed to celebrate. Never was Walmart sold out of what I needed.

A keen eye probably would have noticed that the prices were probably a little higher than usual, although I failed to pay attention because I was hungry looking for chips. One of the great features of the free market is the ability for sellers to raise prices in times of high demand. Some may use the terms "gouging" or "profiteering", but who is hurt in the exchange? Yes, I paid a higher price...but did so willingly, of my own accord, because I needed my Fourth of July kicks more than I wanted the money I gave the cashier. These free market mechanisms also gave me an added benefit: since they were able to raise their prices, I was able to actually find what I needed, and there were few shortages/empty shelves.

Smart shoppers would have realized that prices will be higher leading up to the 4th, so they'd check through their cupboards for the lost ketchup bottle, bag of chips, or can of baked beans. Which points out another free market benefit: efficient use of scarce resources. There's nothing efficient about buying a higher priced ketchup when there's a perfectly good bottle already purchased sitting in your cupboard. Raising prices helps guide consumers in making these decisions, reducing shortages by creating efficiencies.

Another free market benefit shows itself AFTER the 4th. I found myself wandering into Walmart again. Since the store stocked up heavily so they could make a killing profit-wise for the 4th, many things were over-stocked. Surplus 4th of July goods were a fraction of the price they normally are any time of the year. I got a 40 ounce bottle of Heinz ketchup for only $1 dollar. I also noticed baked beans, chips, pop, paper plates, beer, etc. etc. were all dirt cheap as well. Less demand for the cliche 4th of July goods coupled with over-supply makes for some great deals.

To give another example, look at gas prices before/after hurricane Katrina. Leading up to one of the worst hurricanes ever, gas prices steadily increased in anticipation of broken oil rigs, higher travel, etc. Conventional wisdom says we should hate oil companies for doing such a thing, but the unseen side is that oil companies were stocking up barrels in warehouses (reducing pre-Katrina supply) in anticipation of shortage problems post-Katrina. Just as there was no shortage of ketchup in Walmart, after Katrina, which involved essentially evacuating entire states, gas was soon available after the hurricane. There were massive shortages, yes, but that shows the magnitude of the hurricane was beyond even the most risky oil speculators' wildest dreams. But to get things back to normal, allowing prices to do what they wish was the key; using price caps would only have resulted in massive shortages. Hell, I'm sure oil companies would have air-lifted entire gas stations into New Orleans if they knew they could make $120/gallon on gas. But when you're fleeing for your life, I'll buy gas for that much. People fleeing for their lives prior to the hurricane had to pay high prices for gas, but luckily for the "greed" of oil companies trying to make a profit, the most people possible were able to fuel their cars for evacuation with the fewest shortages.

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