Under the free enterprise system, they have every right to their profits.Here's a test of your understanding of and belief in market capitalism. Suppose a crisis in the Middle East reduces the world supply of oil. Is it fair for oil companies to raise their retail prices? If they do, should the government intervene to hold prices down?
The correct answer to the first question may be a matter of semantics. Life, after all, isn't fair; and luck is not always ladylike under market capitalism.
Is it fair when the market makes your business fail? Or lowers your real wages? But if "fair" means playing by the rules, the answer should clearly be yes.
The second question constitutes the true test of your belief in market capitalism. Shifts in the balance of supply and demand sometimes tilt markets in favor of sellers, sometimes in favor of buyers. It is the essence of market capitalism that the government should interfere only when there is a good reason like fraud or price rigging or a need to protect the poor. (In the latter case, income support is normally better than price fixing.)
Americans allegedly believe in market capitalism. Yet last month they flunked this test royally. The American public clamored against higher gasoline prices and urged their governments to do something about it. These are the kinds of responses we might expect from Russians. And they came not just from the average Joe and Jane at the gas pumps but also from Republican senators and even a Republican president.
Let's think about what should have happened when Iraq invaded Kuwait and an embargo ensued. Since almost 6 percent of the supply of oil was (probably) taken off the market, the world price of oil should have risen to signal greater scarity. Consumers should have responded with frowns and by using less. Producers should have responded more. (Are you listening, Venezuela?) That's how a market adjusts -- and the sooner the better.
The above more or less describes what happened in August. The price increase at the pump approximated the cost increase for crude oil. (Another $6 per barrel translates into about 14 cents more per gallon.) Yet the outcry against greedy oil companies was nearly unanimous, and threats of retribution from Washington were frequent.
People seemed most upset by the unseemly speed with which domestic gasoline prices rose -- before any of the more expensive foreign oil could have reached our shores. Price gouging? It would seem so. But, when you think about it, this is a strange argument for Americans to make.
First, windfall gains and losses are part of our vaunted free enterprise system. In this case, events beyond the control of the oil companies raised the value of something they owned (oil in tanks). They were lucky. But does that mean the government should prevent them from reaping the gains? If so, the same logic argues for a 100 percent tax on capital gains -- and for subsidies to oil companies when crude prices fall.
Second, sellers of gasoline quickly knew -- or could reasonably assume -- that each gallon they sold would have to be replaced by a more costly gallon. Why, then, should they be expected to sell cheap and buy dear? Aren't they in business to make a profit?
Third, the popular view that it's permissible to charge more for products made from "new" oil arriving from abroad, but not for "old" oil that's been here for a while, is logically flawed. For example, it runs afoul of the awkward fact that half the oil we use has been here since the Paleozoic age. Since your car or furnace cannot tell old oil from new oil, the two commodities must command the same price in a free market. If we try to impose different prices, as we did in 1974, we will be led to some pretty crazy policies, as we were in 1974.
The public outcry about gasoline prices was amazing but not surprising. A few months ago, Yale economist Robert Shiller and two Soviet social scientists, Maxim Boycko and Vladimir Korobov, posed a series of questions about free markets to randomly selected New Yorkers and Muscovites. One of their questions asked whether it is fair for flower prices to rise on holidays, when demand is exceptionally high.
Not surprisingly, 66 percent of the Russians said it was unfair. But so did 68 percent of the Americans. This result parallels findings from a survey of Canadians about six years ago in which 82 percent of respondents thought it unfair for a hardware store to raise the price of snow shovels after a snowstorm.
Overall, Shiller and his colleagues found that popular attitudes toward markets and prices are remarkably similar in the United States and the Soviet Union. Yet there were some significant differences.
For example, 54 percent of the Muscovites but only 28 percent of the New Yorkers thought the government should intervene to hold flower prices down even if it caused a shortage.
This and other survey results point to a tentative conclusion. Americans practice market capitalism and preach it, but, deep down, they don't really believe in it. The writer is an economist at Princeton University.