The natural response in the face of a pandemic like the one we are experiencing today with COVID-19 is to take immediate and direct action to curb the crisis. We are told we need to have extensive quarantines, citywide lockdowns, and shelter-in-place orders. We supposedly need to limit the number of goods people can buy so they don’t hoard them up, and definitely keep prices where they are at so people can afford to get what they need. Hospitals and clinics must cancel surgeries and new treatment plans to ensure that they are prepared for the waves of patients catching the illness. Restaurants need to switch to takeout models! Stores need to switch to online-only, close their retail establishments, and prioritize important shipments! Government needs to make sure everyone does what they should to ensure we all make it out alive!
But what if I told you that none of that was true? What if I told you that all you need in this situation is what you need every day in a free society: prices that can rapidly and easily adjust to changes in supply and demand?
I can almost hear teeth grinding and fists shaking in response, with exclamations that I must not care about my fellow man. But hear me out as I walk through the effects that such prices would have.
Let’s start with what has occurred so far. People have flooded grocery stores to stock up on everything from canned goods to toilet paper, emptying the shelves in the process. Hospitals and clinics have, “in line with CDC guidance” (this phrase is ubiquitous), canceled various appointments and planned treatments or surgeries. Amazon has limited third-party shipments to its warehouses to “high-demand” items. Increased remote work has crashed remote coordination services. Governments everywhere have engaged in various levels of forced quarantining and shut down numerous businesses or ordinary ways of doing business.
None of these effects or approaches of mitigation and avoidance are a problem per se. Much of this would naturally be done in response to a pandemic and the effects on demand would be similar. But what can be said is that such measures are taken crudely and mostly blindly in the absence of free prices.
The empty shelves would not be so prevalent were prices allowed to rise in contradiction of governmental laws against “price gouging.” Such a result would lead to natural rationing by consumers and would incentivize the ramp-up of production of goods in high demand. At current prices, it is true that some companies could potentially bear a short-term loss to increase production as a charitable endeavor. However, marginal producers (and even nonmarginal ones as the crisis continues) will only be able to ramp up production, even temporarily, if the prices rise.
A rise in prices informs producers of shifts in relative demand. That hypothetically the price of milk does not rise as much as the price of eggs or canned beans is a vitally important piece of information that cannot be conveyed through empty shelves alone. Rising prices would induce makers of the latter goods to expand production much more than producers of the former, and they would also encourage new entrants to prioritize accordingly.
We can observe the same mechanism at work in price drops, which are normally allowed to happen. The decreased demand for certain goods, such as tickets to events, flights, or crowded dine-in restaurants, signals these industries to find alternatives. These may include restaurants shifting to a takeout model, closing their main dining areas for the duration of the crisis, as has occurred in some places, or turning those dining areas into temporary warehouses for needed items (though this option seems foreclosed due to frozen prices disincentivizing the additional production that would make this helpful). Firms may also temporarily shutter their doors and send their workers into the labor force as potential temporary employees in areas that need them to produce vital necessities. (Instead, the government approach has been to propose bailouts and universal income checks while in some cases mandating the clear waste of resources.)
Price changes also differ by location, which naturally encourages the market to focus on the hardest-hit areas. A pandemic will not hit the entire country all at once, and although it may seem obvious (particularly at first) which areas are the worst off, the information that prices convey is vital to determining what the actual needs are. It may be that Seattle and New York City are the worst hit right now, but that alone does not tell you that Seattle is really needing ventilators while New York is short on nurses.
Allowing prices to work in healthcare is of the most vital necessity. Rather than the crude strategy of canceling care not considered “urgent” while stockpiling resources in preparation for the worst, it is better to allow resources to be directed to where they are most needed via the price mechanism. Regulations restricting the supply of care, including the construction of new facilities, the licensing of existing ones, and the number of people allowed to be licensed should be suspended (or, better, repealed). High prices for care, particularly for specialized laborers such as doctors and nurses, would invite the sector to expand its capacity by accepting med school trainees or professionals with lapsed licenses as temporary employees. High prices for emergency coronavirus care, particularly if permitted to be higher in the worst-off regions, would induce medical professionals to temporarily switch specialization and move to areas where they can do the most good. People taken in from shuttered businesses might be able to provide basic care and monitoring with minimal training, allowing those with more specialized training to prioritize the care that needs it most.
Insurance companies facing these high emergency costs would be heavily incentivized to come up with additional ways to mitigate the risk of spreading the illness. Tests that people could take at home and drop off at collection points, for instance, might allow for testing to be done without queues of potentially sick people that will almost certainly be sick when they get done. Even payments (and possibly delivery of necessities) to at-risk patients to incentivize a self-quarantine would be possible. And, most importantly, there are likely very many other possibilities that I, as a single person, have not and might not even be able to come up with. This kind of innovation and adaptation can only be optimally handled by entrepreneurs responding to changing prices, not central planners, no matter how intelligent, knowledgeable, or well intentioned.
The free market price system allows for the rapid and intensive reallocation of resources that is necessary in a crisis scenario like a pandemic. What needs to be done in such a crisis is not to attempt to steer the market to ensure that it provides what is needed (this approach is almost guaranteed to make the situation worse than it has to be), but to let it free to do what it always does: match the goals of entrepreneurial producers with the needs of the populace.
Reprinted from Disinthrallment.