Imagine that you are a shoemaker.
No, not the prime minister-elect of Spain. I didn’t intend to insult you. I meant an actual shoemaker. Let’s say that you wanted to know how many shoes to manufacture this month at your plant (presumably an off-shore facility where you ruthlessly employ people who used to work knee-deep in rice paddies). To simplify matters, let’s assume that you aren’t manufacturing on contract.
There are two ways you might try to figure out how many shoes to make. One way would be to conduct a series of polls and focus groups to determine consumer demand for footwear at this particular moment in time. It’ll be guesswork, it’ll be time-consuming, but you could do that. Of course, you’d have to do it again next month.
Or you could just do a quick survey of what shoes are selling for, vs. what they used to sell for, which ought to give you an idea of the supply and demand.
This is, in a nutshell, the problem with all those scare stories you hear and read about how the world is about to run out of oil, minerals, water, etc. Usually, these feverish predictions are not accompanied by any price data suggesting a trend towards scarcity. Unless human beings as a whole are entirely irrational creatures — plenty of individuals can be irrational for my point to remain correct — prices of goods in high demand will rise as their availability drops. These prices are bits of communication between potential buyers and sellers. They are a 24-7 consumer-demand survey, conducted not by some central planner with a bank of phones but by people engaged in spending their own money and selling their own services in a market economy.
The recent run-up in world oil prices, and thus the price of gasoline at the pump here in the United States, might be offered to rebut me. Doesn’t this price increase suggest that our finite supply of fossil fuels is about to run dry? Hardly. As Ronald Bailey noted in a recent Reason article, these kinds of dire predictions have been issued many times in the past without being anywhere close to reality. In fact, there are many sources of oil left to explore on the Earth, some remaining uneconomical at current prices but likely to be pursued if the price level rises further.
Such predictions are akin to the centuries-old fallacy that human beings would eat themselves into a Mathusian death check by breeding faster than the growth in food production. Turns out that fertilizers and irrigation — themselves in part facilitated by new discoveries and more recently by an innovative oil-based plastics industry that provided cheap and durable pipes — allowed for vastly greater agricultural yields per acre than the pessimists could have dreamed of. That’s the problem with extrapolations based on limited information; if I tried to predict the future stature of my youngest son based on his growth rate since birth, I’d come to the conclusion that he will exceed 12 feet in height by the time he reaches middle school.
Another problem with the oil-dearth thesis, however, is that inflation-adjusted prices for oil, and for refined and formulated gasoline, aren’t really high in the first place. Sure, there’s been a spike recently, but most folks who complain about “sky-high” prices at the pump are failing to account for changes in the purchasing price of the dollar. As my colleage Roy Cordato observed, if you fail to adjust for inflation you could also probably conclude that the price of bread has never been higher, and be equally silly.
During a recent segment of our statewide newsmagazine, “Carolina Journal Radio,” Cordato reported that when you adjust for inflation, gas prices today are far lower than they were 20 or 30 years ago, when the effective price for a gallon of gas was over $3. Today’s prices are evidence of abundance and innovation, not scarcity and stasis.
Another CJ colleague, Mike Walden of N.C. State University, wrote a couple of years ago that price signals can and should be used to manage our water resources, too. To the extent that real water shortages are on the horizon in North Carolina and elsewhere, they should be evident in the price consumers pay for water service. Government subsidies, particularly when the state bail outs local water systems, distort this market mechanism and really do fool us into thinking we have more potable water than we do, thus resulting in a misallocation of resources and excessive growth in areas that can’t sustain it in the long run.
Less panic and more insight is needed here, as usual.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.
