AUSTRIAN ECONOMICS ADDICT

California’s water shortage due to the drought is being dealt with in typical interventionist fashion. The Government wouldn’t even consider how the free market deals with scarcity. Murray Rothbard wrote about a water shortage that occurred in 1977 in northern California in this article titled, The Water Shortage, (at economicpolicyjournal.com). Time has passed since this was written but the economic principles are as true today as they were in 1977.

FREE MARKET vs. CENTRAL PLANNING

When Government is the supplier a good, whether it’s water, electricity, or healthcare, the first thing that happens when there is a shortage is they blame the consumer for using too much. When electrical use is high during the summer, suppliers always warn consumers to use less electricity because of the strain on the system. Rolling black outs may come into play if use outstrips the ability to supply enough electricity. I’ve always wondered why producers of electricity are always trying to get consumers to use less of their product, even to the point of giving them energy efficient light bulbs. In the free market, producers use advertising to try to increase demand for their product.

The first rule of economics is scarcity. What we desire is greater than the means available to fulfill this desire. These scarce goods have to be rationed one way or another. If there were no scarcity, there would be no need to economize on any good. Prices ration scarce resources in the free market. Bureaucrats and planning boards ration scarce resources in a centrally planned system.

ROTHBARD EXPLAINS SCARCITY, SHORTAGE, RATIONING

I’m going to let Rothbard take it from here because he is way better than me at explaining scarcity, shortages, rationing, prices, and supply and demand. Her are some excerpts from the 1977 article.

“….northern California, has been suffering from a year-long drought, ……. government must leap in to combat it—not, of course, by creating more water, but by mucking up the distribution of the greater scarcity.”

“…. on the free market, regardless of the stringency of supply, there is never any “shortage”, that is, there is never a condition where a purchaser cannot find supplies available at the market price. On the free market, there is always enough supply available to satisfy demand. The clearing mechanism is fluctuations in price. If, for example, there is an orange blight, and the supply of oranges declines, there is then an increasing scarcity of oranges, and the scarcity, is “rationed” voluntarily to the purchasers by the uncoerced rise in price, a rise sufficient to equalize supply and demand. If, on the other hand, there is an improvement in the orange crop, the supply increases, oranges are relatively less scarce, and the price of oranges falls consumers are induced to purchase the increased supply.”

“Note that all goods and services are scarce, and the progress of the economy consists in rendering them relatively less scarce, so that their prices decline. Of course, some goods can never increase in supply. The supply of Rembrandts, for example, is exceedingly scarce, and can never be increased—barring the arrival of a Perfect Forger. The price of Rembrandts is high, of course, but no one has ever complained about a “Rembrandt shortage.” They have not, because the price of Rembrandts is allowed to fluctuate freely without interference from the iron hand of government.”

“If the water industry were free and competitive, the response to a drought would be very simple: water would rise in price. There would be griping about the increase in water prices, no doubt, but there would be no “shortage”, and no need or call for the usual baggage of patriotic hoopla, calls for conservation, altruistic pleas for sacrifice to the common good, and all the rest. But, of course, the water industry is scarcely free; on the contrary, water is almost everywhere in the U.S. the product and service of a governmental monopoly.”

“When the drought hit northern California, raising the price of water to the full extent would have been unthinkable; accusations would have been hurled of oppressing the poor, of selfishness, and all the rest. The result has been a crazy-quilt patchwork of compulsory water rationing, accompanied by a rash of patrioteering ecological exhortation: “Conserve! Conserve! Don’t water your lawns! Shower with a friend! Don’t flush the toilet!”

“…. local ecologists and statists got into the act. They groused that the over-conservation had induced people not to water their lawns, which led to the “visual pollution” “unsightly” lawns…..”

“…. wouldn’t the poor be hurt by the water district raising its water prices? …No….the poor are not being hurt by the higher price because, being forced to cut their consumption, their total bill has not increased. Thus, a price rise by a private firm is always selfish and oppressive of poor people; but when a monopoly governmental agency increases its price, the poor do not suffer at all, since if they cut their purchases sufficiently in response to the higher price, their total dollar payments will not increase. It is this sort of nonsense that our statists and busybodies are now being reduced to.”

NOTHING HAS CHANGED

In the present drought situation, central planners are trying the same failed responses to the problem, while free market solutions siton the sideline waiting for their chance to prove they are better than these “first string solutions” of the central planners. Remember, there is no solution to scarcity, just a better or worse way of dealing with it.

This article, California City Will Fine Couple $500 For Not Watering Lawn, State Will Fine Them $500 If They Do, by Mary Beth Quirk, at consumerist.com, shows that central planners have not gotten any smarter in 35 years. They are true believers in their central planning religion, and no amount of conflicting incentives or failures will convert them.

The market is always trying to correct perverse incentives created by central planners. It will come up with alternatives to paying the fines, as shown in this article, Spray-Painting Your Grass Green Is One Way To Avoid “Brown Lawn Fees“, by Mary Beth Quick, at consumerist.com. The shame of it is there would have been no need for this lawn spray-painting business in a true free market. It only became viable because of Government planning. The labor, capital, and resources used to keep from getting fined, could have been used in more productive ways satisfying true free market demand. If the price would have been allowed to go up to ration water, each person could have decided how much to use at the higher price, allowing them to use their money for other things than complying with green lawn laws. This is a version of the broken window fallacy, read here, Hurricane Sandy And The Broken Window Fallacy.

Understanding some basic economic principles will give us enough knowledge to confidently argue against the political “solutions” bureaucratic central planners come up with in dealing with the first rule of economics; scarcity.

Related Article – Incentives Matter, at austrianaddict.com.

Related Article – The Reality Of Obamacare, at austrianaddict.com.

Related Article – Milton Friedman on Market Failure vs. Government Failure. Which Has a Higher Cost? at austrianaddict.com.

This entry was posted on July 24, 2014 at 6:04 pm and is filed under Econ. 101, Government and Politics. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Broken Window Fallacy, California's Drought, Conflicting Incentives, Incentives Matter, Market Solutions vs. Central Planning, Murray Rothbard, Price Rationing, Rationing Scarce Goods, Shortage vs. Scarcity