Tuesday, September 29, 2009


We would do well to remember the emergent nature of prices, especially in times of crisis.

I found this quote worth re-quoting and commenting on.
I hold to the fact that prices spike in times of crisis out of nothing but fear. People fear scarcity and not having what has previously been readily available to them, managers fear running out of goods and services, so demand suddenly skyrockets, and supplies tighten down. We become willing to give up more money for the good (or spend more money for more goods so we have enough for x amount of time) out of fear. The supplies are tightened because managers fear running out and having to shut down their business. I wonder what would happen if another Katrina sized hurricane decides to pelt the nation, instead of prices of, say, gas, skyrocketing if we didn't change the prices, we just decided to wait. What if the nation, instead of cultivating a culture of fear after natural disasters, we tried to think rationally and find quick, efficient ways to help as opposed to freaking out? I tend to think prices would probably stay low in times of natural disasters.
I also hold to the fact that things like price controls, which are detrimental to economies, are made entirely out of fear of the same thing. We fear we won't have enough money for some good or service, or that some good or service will become obsolete while we still need it, and so in an attempt to ration them in a more efficient (and possibly "fair") manner, we institute price controls. But the controls don't fix the problems, they create more problems. Set the price too low, and suddenly the shortage becomes larger. Set it too high, and there is a surplus because more people are willing to sell at that price than are willing to buy.
Fear is detrimental to economies. What would happen if we freed all the markets and let the prices do what they want?


  1. Robin,

    I like your thoughts about fear being a market force. It makes me wonder if fear, by itself, can cause price spikes like what was seen in the post Katrina period.

    It seems to me that over the medium to long term, if fear was the only thing prompting the price increases it would be taken care of relatively quickly by fear's left-handed cousin, greed.

    If the overall supply chain of whatever item fear worked its price increasing magic on was stable, then the price should go back down quickly as more supply is brought to the market.

    I'm not sure about the supply situation in the post Katrina gasoline markets. I think pricing increases may have had more to do with decreased supply then increased negative emotion.

  2. "Fear is detrimental to economies. What would happen if we freed all the markets and let the prices do what they want?"

    If we did this the words shortage and surplus would we dead and obsolete words.