People crush together in a tight knot. They scream, yell, wave their arms and gesture frantically. Papers fly, people run back and forth and phones ring incessantly. A bystander is hard-pressed to make much sense of the apparent chaos. The pit of a commodity exchange, when things really get roaring, looks and sounds like bedlam. Clerks hold two phones against their ears, shouting first into one and then the other. No sooner do they slam a phone into its cradle than it rings, beeps or bleats again. On the other end is somebody with an order to buy or sell. In the pit, traders holler or use hand signals to buy and sell commodity contracts either for the customers on the phones or for their personal accounts.
This method is ap-tly enough called “open outcry.” It is not merely one way resources get allocated and future prices — of everything from grain to meat to copper to gasoline — get determined. It’s the best way. Everything is aboveboard and out in the open. The interests of buyers and sellers are equally and publicly represented. No person gets a better deal than another on account of race, class, gender, religion, political persuasion or disability. Everyone is free to participate. No one is coerced. It’s very fair.
Lately, though, gasoline prices have been climbing and politicians have been quick to question the fairness of free markets. Even though there are numerous and verifiable reasons for the higher prices we’ve seen at the pumps and on the news, a handful of lawmakers rather conspicuously demanded an investigation. Because it is an election year, the justice department has obliged. It’s hard to believe it honestly hopes to uncover any evidence of collusion or price-fixing. Inevitably, whenever we have been beset by a gasoline shortage, the government has staged dramatic spectacles, throwing the spotlight of suspicion on the oil companies. (The Nazis had international bankers to pick on; we have the petroleum industry.) Each time, investigators have had to shut down the arc lights and quietly go away empty-handed. This case won’t end any differently.
It’s easy to understand why. In the first place, we started out the year with low oil supplies. The government sold off a big chunk of the Strategic Petroleum Reserve in the interest of reducing the federal debt. Meanwhile, some oil companies adopted a management style called “just-in-time.” Both were noble enough gestures. One of the elements of just-in-time management calls for holding on to no more inventory than is immediately needed. Usually, this saves money. Indeed, even with the higher gas prices we’ve seen lately, we pay less in inflation-adjusted dollars for fuel than we have in years. Companies also postponed buying oil because rumor had it the United Nations was working on a humanitarian deal to let Iraq sell oil on the world market. Since the resulting increase in supply would drive prices down, companies figured they might as well wait to make any purchases. Unfortunately, that deal is yet to materialize. Meanwhile, demand has increased, forcing prices higher. With smaller than usual reserves, refiners had little cushion against these climbing crude oil prices. Furthermore, the unusually long and bitterly cold winter meant more crude oil went toward making heating oil and less to gasoline production.
Grain prices have also exploded recently. Yet, interestingly, no politician has accused farmers of collusion and price-gouging. Of course, such charges would be ludicrous since the worst drought in recent memory is the main culprit for these price increases, but they would be no less absurd than the accusations made against oil companies. Politicians willing to indulge in these irrational denouncements are merely hoping to make political hay by exploiting popular stereotypes. Consider our national caricature of the farm industry as represented by the family farmer: a noble agrarian feeding the world, backbone of the nation and salt of the earth. Contrast this with the usual representation of those in the petroleum industry: fat cats. If you were a populist lawmaker with not much more than your incumbency to recommend you to voters, and you were bent on vilifying one of these constituencies in order to give yourself the illusion of relevance, which would you slander: the salt of the earth or the fat cats?
As with all stereotypes, the problem with these is that they are largely mythical. The romanticized image of the American farmer ignores an enormous corporate presence in agriculture. Likewise, this derogatory, paranoid depiction of the petroleum industry overlooks the thousands of individuals who depend on oil for their livelihood. In parts of Oklahoma and Texas, whole towns go bust whenever the oil market turns sour. Grocery stores, gas stations, banks — businesses all up and down tiny main streets — go under, only to be replaced by antique malls (a polite euphemism for junk shops). Higher oil prices put people in these regions back to work. This does not imply that inflated oil prices are, on balance, a good thing. Rather, it illustrates that denouncing an entire industry as fat and greedy is narrow-minded and stupid.
Of course, there is nothing new about opportunistic politicians making reckless, uninformed, self-serving comments about the markets. A popular view in some political and intellectual circles maintains that economic liberty is less important than other kinds of freedom. Many people are incensed that the government has limited their right to freely express themselves over computer networks. Many are likewise angered at being molested by their government while trying to travel to Cuba. Ironically, many of these same people applaud government efforts to dictate prices (especially wages), or to restrict the rights of people to trade freely with one another across national borders. And so we find ourselves saddled with the especially grievous indignity of being prohibited to bring Cuban cigars the short distance home from Canada, which does not ban their deportation. While these people seem to have a clue that command-and-control is no way to run a free society, they have yet to understand the same is true in the economic realm.
The fact is, sudden jumps in prices serve an important economic purpose. They entice suppliers to produce and import more while they prompt users to buy less. This helps prevent shortages and panics. The government made a real mess of things during the so-called energy crisis in the 1970s when it imposed price controls on gasoline. This not only resulted in the infamous gas lines, rationing schemes and localized shortages, it also caused gluts in some parts of the country — an event not so widely remembered. Face it, when it comes to economic decisions, the market is more efficient, not to mention more fair, than the government can ever hope to be. When politicians insist otherwise, it’s either because they don’t understand the economy, or they want more control than we ought to give them. Either way, we should insist they look for new jobs. Because, if you’re interested in living in a free society, a free market is not only the best way, it’s the only way.
Charles Foster’s column appears in the Daily every Thursday.
