OP-ED: Can hiking oxygen cylinder prices be justified?
Tim WorstallBusiness
It is possible that we might want the price of an oxygen cylinder to rise during a pandemic of a respiratory disease. Something to think about when we see complaints, as in this newspaper, about the rise in such prices during the latest lockdown. I will try to make this argument delicately as once, when I made it more exuberantly and with greater force, the magazine I was writing for fired me - for being uncaring and too free market.
Yet the basic insight is still correct. If something is in short supply then we want at least one of two things to happen. Either that demand be restricted, or that supply be increased. The joy of free markets is that a change in the price, a rise in it, achieves just that. We can just leave it to businessmen – speculators if you prefer – to try to maximize their own incomes and they do that job for us.
For, what happens when people do increase the price of oxygen bottles? The first thing is that those who might like one but do not really need it will be dissuaded from buying or renting one. That increases the supply to those who really just must have it. Yes, it is true that the effect falls more heavily upon the poor than the rich but the effect does still happen. Every rise in the price reduces the number of people willing to pay it.
The second is that people are going to try to increase supply. In the case of oxygen tanks in Bangladesh there will be more imports, something we have already seen. But more than that, there will be those who import bottles usually used for other industrial gases. There are actually complaints about this happening right now. It is entirely true that a bottle made and certified for some other gas is not as good, for medical oxygen uses, as one made and certified for medical oxygen. But it is still better than having no oxygen supply at all. So our higher prices have called forth more supply.
Yes, you are right, that greater supply is coming from people just slapping something together and for reasons of entirely their own greed. And yet greed is not something in short supply among us humans and if it can be harnessed to keeping more people alive then why not? That being the great trick of markets and prices. They harness those bad sides of human nature into being useful to the society at large.
That is, we actually want prices to rise in a time of shortage. The price change reduces the shortage, by reducing demand and increasing supply.
Adam Smith went through this in Wealth of Nations using a slightly different example. It might not make as much sense in a country with two, possibly three, harvests a year as in Bangladesh. But in Britain there is just that one wheat harvest a year and back when Smith was alive it was wheat that kept the country alive. The “Hungry Time” was the last 6 weeks leading up to the harvest in mid- to late – August each year. When last year's food had, or had nearly run out, the new harvest was not yet ready.
Smith pointed out those speculators in wheat did everyone a favour. If they bought wheat just after the harvest, when it was cheap, then sold it later in the year when it was more expensive, then what they really did was move prices through time. They raised them, through their purchases, just after the harvest. Then they lowered prices from where they would have been when they sold in that Hungry Time.
Most of us look at that and think, well, they bought cheap and sold expensive, how dare they! But the correct evaluation is what would prices have been without them? Lower at harvest time, higher before it. Speculators benefit us when they make money in this manner. And, to be frank about it, if they lose money then who cares?
The exact details are a little different with oxygen tanks, as we are not moving the prices through time for a seasonal product. But the whole effect is still the same. Changing prices means a change in both demand and supply – so our shortage is balanced by exactly that change in prices.
Yes, of course, we would much prefer a world in which there was as much of everything as everyone needs. Even better, we would like as much as everyone wants. But we live in a universe of scarce resources and therefore there has to be some limitation on who gets what. Prices do exactly that. But then so does a system or allocation without prices – it is possible for the bureaucrats, the politicians, to set prices and then decide who gets what. The problem with this system is that it does not diminish demand in any way, something we may or may not be thankful for. But it also doesn't increase supply. Laws about who may have oxygen don't encourage those guys filling bottles meant for other gases with the very oxygen that may save someone's life.
We can indeed call all of this speculation. We can call it free markets if we prefer, or appealing to human greed, or some very unfair process that benefits the rich. All of which are, in part at least, correct descriptions. The one saving grace of the system is that it does actually work. This being something that is not true of all the other systems we have ever tried.
We can even go on and start to argue that we would prefer an economic system that was fair, just and righteous. If that is so then fine, argue for exactly that. But the hurdle to be leapt is that it must also be more efficient than this market one we have got and the problem with that jump is that no other system we've ever tried has managed to be so. I, along with every economist ever, look forward to someone managing to design something that does work better but until then, prices it is.
The author is a senior fellow at the Adam Smith Institute in London