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Source link: http://archive.mises.org/4346/how-a-market-might-have-handled-katrina/

How a Market Might Have Handled Katrina

November 17, 2005 by

Now that the furor over the botched response to Hurricane Katrina has largely subsided, let us examine an aspect of the episode that most commentators have neglected, namely how the market might have managed the crisis better. Is the laissez-faire economist really advocating the Dickensian caricature of companies selling bottles of water and first aid kits to the highest bidder? No, and this is a point often overlooked even by pro-market writers. The market does not allocate goods to those who are willing to pay the most for them. FULL ARTICLE

{ 26 comments }

Wolf DeVoon November 17, 2005 at 7:05 am

As usual, you blanked out the rule of law and public order, which are urgently needed before, during, and immediately after a natural disaster. Private relief sounds wonderful, like private flood insurance and privately-led infrastructure (roads, levees). But free market gunslingers and looters do not improve the social response to a natural disaster.

Yancey Ward November 17, 2005 at 8:18 am

Wolf,

And with FEMA in charge, New Orleans was a bastion of law and order?

Wolf DeVoon November 17, 2005 at 8:42 am

“I hereby certify that the law cannot catch or deter a clever evildoer. That’s not the purpose of law, which exists first as a means of restraining mob violence, ignorant prejudice, and statist tyranny. If we apprehend a callous predator, from time to time, that’s laudatory. But ending systemic, wholesale injustice is far more urgent,
especially the heavy lifting of securing constitutional rights, which are few in number — no summary punishment, fair trial by jury, no
perjury, no secret evidence, and the right of appeal to ensure fundamental fairness.” (The Rule of Law)

In an emergency, local law enforcement is overwhelmed and civil due process is suspended. The fundamental question is not whether Federal troops or FEMA bureaucrats kept order fairly or effectively. Rather, were they acting lawfully and constitutionally? Probably yes. No one’s life, liberty, or property were taken summarily or wrongfully, as far as I know. The press was free to report events. I’m not defending FEMA. My point is that emergencies highlight the need for civil institutions and constitutional law.

John Christopher November 17, 2005 at 8:51 am

Wolf, a sentence reminding that government should restrict its intervention to the defense of liberty and property you and that it failed that role in New Orleans would have pleased? I mean, this excellent article was about a specific economic issue and it did not pretend to be exhaustive on the general topic of government and disaster relief. A lot of people on this blog are probably of the opinion that when government ventures into charity, social engineering, education… it actually weakens the Law. As we saw in New Orleans, defending liberty, property, order was not on top of local and federal government priorities neither in words nor in actions. This is a really good article. Thank you to the author and mises.org.

iceberg November 17, 2005 at 9:22 am

No one’s life, liberty, or property were taken summarily or wrongfully, as far as I know.

So after the fox raids the henhouse, he turns around and says “But hey, at least there is law & order in there now!”

Wolf, I think it has been adequately demonstrated that the government while out there to obstensively “protect people”, trampled life (witness the Superdome fiasco), liberty (witness the shock troops enforced evacuations), and property (witness the city condemning of homes, police “commandeering” of cadillac cars and other goods, etc.)

N. Joseph Potts November 17, 2005 at 9:38 am

This very promising article didn’t mention the “selfish” relief efforts of many (typically large) corporations fairly openly currying public favor by variously (a) delivering and giving away emergency supplies such as ice; and (b) stocking and selling emergency items in very large quantities at prices unchanged from normal periods.

(b) is of course financially profitable to the benefactor WHEN the demand actually arises. The practice can lead to large quantities of unsold inventory, and undoubtedly does with regularity. (a) is a dead loss financially, but both practices figure to increase customer good will, which most definitely does have a financial value, even if it cannot be reckoned or even proved.

All this amounts to a potent source of aid, including its delivery, and very few discussions of the situation have made note of it.

William November 17, 2005 at 9:48 am

You touch on the biggest issue to socialized disaster relief but never hit it. It is an information problem. Markets provide vast amounts of critical information through prices. Government has no access to this information and intentionally attempts to distort it.

What equipment is needed? Where do you use it? Who and where are the people needing medical attention? These questions are not so easy to solve in a city of hundreds of thousands. They are impossible to solve for the government.

For example, the city school buses suddenly became an extremely valuable resource. One of the rich folks trying to pay 1000 plus dollars for a 100 mile ride could attest to that. One clever individual stole one and carted several dozen other folks to safety. The city let the buses get flooded.

The other issue is in what resources are needed. Walmart had 14 trucks of stuff on the way to the area. The beauty is that this stuff is WALMART funded not tax payer funded. So if it is not the correct stuff or not usable or not appropriate then it is Walmart’s problem. More over there are lots of these private agencies. Some will be more effective than others. Instead of one size fits all.

Don Beezley November 17, 2005 at 11:13 am

An excellent piece. Thank you.

To the various comments, even within the appropriate and beneficial response that Robert Murphy outlines in a free market environment, there is no reason to believe (in such a world) that government would not (could not) still support the rule of law by protecting the property rights of the private relief effort and their right to engage voluntarily in transactions with those needing help who choose to deal with them. Though it may or may not be vital to the overall issue of disaster relief, that specific issue seems ancillary to the points he is making and only distracts from the important points to be made about the coordinating and problem solving power of the marketplace, not only during disasters, but Especially during disasters. Government’s job isn’t to decide where the Walmart truck goes or doesn’t go, or if it goes at all. It’s to make sure looters, etc. don’t successfully attack it (although I’d send some private security along if they were my trucks and employees!).

It’s rather offensive how the government thinks we all get stupid the second an emergency goes down and we need transcended, all seeing bureaucrats to swoop in and save us. If you were dropped in a survival scenario, would you rather have with you a carpenter who didn’t graduate from highschool, or an ivy league Phd from FEMA, as your only other human resource?

tarran November 17, 2005 at 11:57 am

Depends, how much meat is on the ivy league PhD? ;)

Curt Howland November 17, 2005 at 12:29 pm

William, he did hit it several times, it’s called the “calculation” problem. You call it “information”, it’s the same issue.

Mr. Potts, you do indeed identify the “selfishness” that Ayn Rand was referring to when she talked of the benefits of selfishness. Making a bigger profit is done by better serving customers. Can’t do that if they’re not alive and buying, ne?

Which feeds directly back to Mr. DeVoon’s chosen subject, “law” and “order”. Chaos is very, very bad for business. Chaos is, however, very good for government. That is why the most peaceful and orderly environments are the ones with the least government interference. Want an example? Just go look the real “wild west”. Or compare San Francisco before and after the formation of the vigilance committees.

Paul Marks November 17, 2005 at 1:49 pm

A very good article.

Paul Edwards November 17, 2005 at 2:08 pm

I liked the article, however I feel at odds with the basis on which the following statement is made

“…some offers should have been refused. … it is entirely possible that the “right” thing … would be to politely refuse their offer. This is because the cost in resources needed to escort them or give aid to them if they became sick, would likely exceed the benefits of getting batteries to the few residents still in the flooded area.”

First of all, the question is to whom is the offer of assistance being made? If it is to the individuals living in N.O., rather than FEMA, then what FEMA thinks of the offer is irrelevant. This is the problem, a useless centralized organization assuming the right to accept or decline assistance on behalf of the individual recipients. The right thing to do, for FEMA, is to step out of the way and let more efficient and intelligent private persons and organizations provide the assistance. After all, it is their resources and property, (which the article makes a point of), not FEMA’s.

Secondly, the only escorts and medical assistance in question should be from those offering help that they provide themselves. Concern for the cost of resources should be left entirely in private hands. We allow the state too much power because we assume assistance from them. It is the individual who can best decide what he’s willing to risk personally to help someone. Let him decide.

Finally, I do not believe this issue represents the (Misesian form of) calculation problem. The calculation problem is something entirely different from the event of an arm of the state intervening and hampering free market activity. The fact that FEMA is grossly inefficient is not because there are no prices in the factors of production. Therefore, it certainly would be glib to apply the term “calculation problem” in considering FEMA. The calculation problem is very specifically and exclusively connected with the monopolization of the entire means of production, as the article points out. This situation is not present in a hampered market such as ours, and FEMA does not suffer from it.

However, I strongly agree with the author when he concludes that “As in all other areas, the free market is superior to monopoly governments when it comes to disaster relief.”

mj November 17, 2005 at 3:04 pm

I find it interesting that william believes that Wal-Mart donated the 14 truck loads of goods out a sense of community. I expect the finance folks at Wal-Mart have already “booked” a tax deduction at retail prices, including labor expense. So much for no taxpayer expense, the Fed’s can just borrow a little more!

Yancey Ward November 17, 2005 at 3:30 pm

MJ,

Do you purchase a house just to get the interest deduction? In any case, what makes you think that Wal-Mart felt anything at all?

Michael A. Clem November 17, 2005 at 4:50 pm

Good article, and raising a point I’ve had trouble arguing. Prices are information, but, as you say, what decision people make with that information is based on the individuals and their values, not simply based on whoever pays the highest price. The market prices still tell people how best to allocate what they have, according to what they want.

Wolf DeVoon November 17, 2005 at 6:18 pm

By analogy, the political market for campaign funds and interest groups tell people how best to allocate their votes, according to what they want?

Charles D. Quarles November 18, 2005 at 3:05 am

Wolf,

The political market for campaign funds provide people with the information needed to decide where their vote will best meet their needs. Every group is an interest group. People often are members of more than one group. Campaign finance reform is just a way for incumbents to gain power by restricting the flow of information.

Lobbying doesn’t bother me. What I’d like to see is disclosure of same within 24 hrs of contact. If you want to reduce corruption, reduce the power of government to destroy people. Case in point, when I read Ira Magaziner’s remarks about medical care, I knew that I had to be politically active to protect my life, liberty, and property if Bill Clinton became President. I did everything that I could to prevent his election both times. My fears were grounded in reality, even though I lost the fight.

Wolf DeVoon November 18, 2005 at 7:43 am

It’s a subtle puzzle. Free market outcomes are not always optimal or value-free. Murphy mentioned the commonplace vice of favoring our own children over others. Entirely natural. Rupert Murdoch put his kids in charge of big media enterprises, promoting them over more qualified managers. President Bush put an incompetent crony in charge of FEMA. Millions of people assented to these arrangements by voting for Fox News and Deputy Dubya. I agree that Clinton was just as bad, especially on health care reform. Our economic and political action is often vain, unfair, and willfully irrational. In a natural disaster vice is not magically suspended.

Paul Edwards November 18, 2005 at 10:02 am

Wolf:

Free market outcomes are not always optimal, true. People are so human it’s ridiculous, making one mistake after another. Economics cannot speak for how action turns out ex post. All it can say is that ex ante, free actors expect their actions to be optimal at least from a psychic, if not monetary perspective.

If a company owner puts his less competent son in charge of the firm, in preference to someone else, he has perhaps, traded off some profit for the psychic gain of having his son take over the family business. It does not matter that to the outside observer, the action seems less than optimal, what matters is that the actor sees it ex ante as optimal, all things considered (by him).

This arrangement is certain to be more optimal than having a coercive social apparatus dictate how that property owner will manage his property. It can’t miss at that modest aim.

Incidentally, as a general proposition, I find it hard to characterize favoring one’s own children over others as a vice, although it is possible to ruin a child. It’s like saying the habit of eating is a vice, although you can over eat. Some things are just as they should be.

Adem Kupi November 18, 2005 at 1:12 pm

Actually, I’d argue that free market outcomes ARE always optimal, for the reason you mentioned, Paul.
Value is subjective.
Monetary transactions exist in some sense to “objectify the subjective” by allowing our trades to clear against one another.
If someone makes decisions that the mass market finds inefficient(toward the amalgamated goals of its participants – inefficiency only exists in relation to a desired end), resources will flow away from them.
If Rupert Murdoch, for instance, puts his kid in charge of a media empire and he’s incompetent, that media empire will soon cease to exist – assuming that there is free competition in that market.
The only market failure is when markets are forcibly prevented from succeeding.

Paul Edwards November 18, 2005 at 3:08 pm

Adem:

I hesitate to disagree with you because we are very close to agreement. The tiny little nit to pick is “are outcomes always optimal (ex post)?” I address this rebuttal: “but i bought a house and regretted it, how did both parties in the transaction benefit there?” To which i answer human action, and therefore economics can only happen or deal in “ex ante”. Ex post you could both regret your action; but who’s going to know this till later? So therefore, no action is ever based on ex post observations. You bought the house because ex ante, you expected to benefit. Furthermore, a non-actor could regret your action, but who can know this for sure ever, as only action (in economics) reveals (ex ante) preference.

Action always happens ex ante, and it is only ex ante that can we say you ALWAYS expect to benefit by your actions. Or else you would not have bothered. It is only on that basis that I conceded that free market outcomes may not be optimal. I love this stuff.

Stephan Kinsella November 18, 2005 at 4:02 pm

Wolf, Thanks for not saying “check your premises” yet, or for finding a way to blame the Katrina disaster on corporations. :)

Bob, nice article. Couple of queries/points. First, I like your point that pro-market writers often overlook that not every action is an attempt to maximize monetary income. In fact, if you think about it, the very existence of money implies this: money is valued because it can be spent on other things. But an act of spending money is an action that definitely does not maximize money–in fact it gives it away. If we only wanted to maximize money we would never spend it on consumption.

But you say,

In many cases, the owners will indeed not care for the identity of the prospective buyer or the uses to which they will put the goods in question, and will truly sell to whichever party offers the most. However, there are many cases where this rule doesn’t hold. When parents maintain a college-bound child’s room for Thanksgiving visits etc., they are not maximizing revenue.

Well. Do you mean psychic revenue, or monetary revenue? Of course all actions without exception are aimed at making a profit. It’s just that, as you imply, not all profit is monetary in nature.

You also state,

…the function of market prices is not to dictate how resources are deployed, but rather to let the owners make an informed decision.

Right. By enabling calculation. More on this below.

If there is a tremendous housing shortage, then the rising rental rates will let the parents know just how much someone else would like to use their child’s room. And the best trial lawyer in the world will probably not end up as a librarian, because of the outrageous salary he or she would be turning down. Again, the market price of his or her services signals how much others value them.

Bob, you say that it is “rising” rental rates that “lets the parents know” something–how much the room is demanded. Here you seem to imply that a trend in prices is what conveys information. I would think that a high price–that is, a high price relative to other prices–is what corresponds to a higher demand for houses–not the trend. In any event, whether it is price trends, or prices, is it not misleading to imply prices convey information? Especially when you say prices “signal” how much others value things?

Obviously, valuation is not cardinal, so the “how much” or quantitative information being conveyed must be how much money people are willing to trade for a given object or service demanded. In other words, if I pay $100 for a service (or am “willing to”?), that does mean I “value” the service at least $100, in money terms at least. But is the $100 price a “signal” of this? No, it is actually exactly how much I have demonstrated that it is worth to me. Where is the “signaling”?

As I noted above, it seems to me it is more precise to say that market prices “let the owners make an informed decision” because they enable calculation. Not by conveying knowledge or information, which is implied if you say prices “signal” something, right? Prices are a tool; an “accessory of appraisement”, because they enable appraisement by means of cardinal or mathematical calculation. What exactly does “signaling” have to do with this? Would you agree that it’s at least potentially confusing to say prices “signal” information? Does this notion not rest on a Hayekian view of the calculation problem as a knowledge problem?

For example, as Rothbard (here, p. 66) writes, “the entire Hayekian emphasis on ‘knowledge’ is misplaced and misconceived”; see also Hülsmann (here, p. 39), discussing “the irrelevance of knowledge
problems”, and Salerno (here, p. 44), stating: “[t]he price system is not—and praxeologically cannot be—a mechanism for economizing and communicating the knowledge relevant to production plans. The realized prices of history are an accessory of appraisement”.

Or, as Hoppe (here, p. 146) bluntly puts it: “Hayek’s contribution to the socialism debate must be thrown out as false, confusing, and irrelevant.”

I summarize and discuss these articles in this article, where I also write:

The encoding metaphor seems to be a pseudoscientific and scientistic attempt to give this kind of economic theorizing a patina of scientific respectability by borrowing engineering terminology. It is scientistic because, in vainly trying to borrow natural science terminology, there is an assumption that only the “hard” or natural sciences have true validity. It is akin to using such inapt phrases as the “momentum” of the leading team in a basketball game, the “energy” of crystals and astral forms, or, even worse, “revving the engine” of the economy. Both economics and ethics can be sciences, but not in the same way as the causal, natural sciences.

I would be curious to know–do you think it is meaningful to speak of prices “signaling” certain information or knowledge, without being based on Hayek’s knowledge-related view of the socialism issue (in which case, I would be interested in your elaboration); or, do you think your use of “signaling” does invoke the Hayekian knowledge paradigm, but you would disagree with Rothbard et al. above?

Wolf DeVoon November 18, 2005 at 6:08 pm

Good question.

Guri Refsnes November 21, 2005 at 4:29 am

What an inviting heading for the article,
and what a disappointment to read it. To a generally interested person who is not an academic economist, the article is a yawner, full of theoretical ifs and whens. Surely neither the author nor many of the commetators here have ever have been engaged in disater relief. Basics are missing. The article has nothing of real value to teach us. It is, the Austrians would say: Etikettenschwindel.

RPM November 25, 2005 at 9:34 pm

Stephan:

Prices are a tool; an “accessory of appraisement”, because they enable appraisement by means of cardinal or mathematical calculation. What exactly does “signaling” have to do with this? Would you agree that it’s at least potentially confusing to say prices “signal” information?

We’ve had this argument before. Do you ever think something signals information?

Is the basic problem that you, Salerno, Hoppe, et al. think that there is something besides the dispersed information that market prices are allowing entrepreneurs to incorporate into their calculations? If so, that’s fine, but I do indeed think Hayek is right when he says a tin mine collapse leads to higher price for tin which signals people to economize on tin. I have no problem with that statement.

RPM November 25, 2005 at 9:36 pm

Guri,

To a generally interested person who is not an academic economist, the article is a yawner, full of theoretical ifs and whens. Surely neither the author nor many of the commetators here have ever have been engaged in disater relief. Basics are missing.

I’m not being sarcastic: Can you tell me what you wanted? I mean, did you want me to get into specifics and say what the Red Cross’s distribution policies would be for diapers in a libertarian society? (Seriously, I’m not being sarcastic.)

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