A few years back we thought about building a deck or a porch on the back of our house. But we
decided against it when the estimates started coming in. They were about double what the architect
had told us it would cost. Double! Had the architect misled us as a way of encouraging us to
proceed with the project? No, we had forgotten that six months earlier, the Mississippi had
overflowed its banks and destroyed a lot of houses in the St. Louis area. Carpenters and builders
didn't have the time to build a back porch or a deck. They had bigger fish to fry. To get them to
build a porch, you had to pay a premium.
We delayed the project for a couple of years and prices came down. That delay was an example of
the hidden benefit of high prices. When prices are high, the least urgent projects get delayed, freeing
up resources for more urgent projects. The porch just isn't worth it. So the wood I would have used
instead gets set aside to rebuild a washed away house. The carpenter I would have kept busy now
works on building that new house.
That magical role of prices in directing resources is the bread and butter of economics. But to the
non-economist, high prices are just a form of gouging that ought to be stopped. It's wrong to let
people profit from the distress of others.
Economists tend to be pretty agnostic on morality. Prices work, we explain patiently, price controls
don't. If you try and limit prices via the law, then you'll just end up hurting the people you're trying to
help. Price controls will discourage lumber from coming into disaster-struck regions. Better to let
prices do their job, we'll say.
I think what underlies this difference in opinion between the professional economist and the man or
woman in the street is deeper than just an understanding or misunderstanding about what works.
There's a deeper issue herethe issue of what motivates behavior.
Non-economists tend to look at motivation as either being altruistic or greedy. Either you're
motivated by profit or by the opportunity to help others. A lot of people are turned off by
market-based solutions because using the market is so mercenary. Why would we want a social
order based on greed? Why would we want to encourage some to profit from the hardship of
Where economists see resources whizzing around the country to help people in distress,
non-economists see profiteering, gouging and bad morals.
Let's look a little more closely at natural disasters like the flood in 1994 or any of the various
hurricanes that touch land and wreak havoc. After these disasters, prices of lumber and tools and the
services of carpenters often spike upward and can remain high for a while. I've been told that when
hurricanes hit and lumber prices go up, some people don't just ship their lumber to the devastated
areathey load it into a truck and drive it there themselves.
Those are the people I want to think about for a moment. The people who know of the hurricane,
hear of the high prices and load up their trucks with lumber they've purchased for their own use but
who now realize they can make a killing by driving to say, Florida in the aftermath of a hurricane,
and selling their lumber there.
What do you think is on their minds as they drive South?
As an economist, I assume those people are like the rest of usa mixture of saint and sinner.
Normal. Complicated. Full of all kinds of motivations, some base, some sublime. As they head
down to Florida, I assume they're glad to make some money on their lumber. But I also assume
they're glad to be part of helping people out. Glad to make money. Glad to be helping. Glad to
make money. Glad to be helping.
Which is it? Profits or love?
It's both. They're not mutually exclusive. Presumably the high prices motivate some cold and
heartless people to overcome their desire to spend the weekend counting their money and instead to
head to Florida. But I also presume this is not the typical person driving lumber southward. The
typical person is someone who wants the lumber for purely personal usea nice deck or porch, some
home repair projectbut who now finds the incentive of the higher price attractive. That person
drives down joyously knowing that the lumber is going to help someone who lost a house. The
money is nice. And so is the intangible feeling of helping others.
Here's the key insight of economicssome of those folks who go down with a song in their heart
because they know they're helping others would have stayed home if the price of lumber hadn't
soared. It's hard to get in your car and disrupt your life and give up your lumber. The monetary
incentive makes it easier. The higher price doesn't just induce the hard-hearted to go. It induces the
altruist as well.
But if people are altruistic, won't they go without the monetary incentive? Sure, some will. Just not
as many. You might be tempted to say that without the monetary incentive, only the saints will go.
But even this misses the point. Some saints will stay home because they have saintly things to do at
home. The monetary incentive applies to them as well. Even saints can do more good in the world
when they have more resources than when they have less.
There's a final point to be made about letting the price of lumber rise. Go back to the porch I wanted
to build in St. Louis after the flood of 1994. The flood never reached my neighborhood. Most of the
damage was miles away, and after the news reports died down, I forgot about it the flood. I never
saw the feverish rebuilding that must have been going on.
I had no idea that lumber and the time of carpenters had gotten scarcer. But I didn't have to know.
When I saw the cost of a new porch we decided not to go forward. The higher price induced me,
along with a lot of other would-be porch builders, to do a good deed. We gave up our lumber and
carpenters to people who were willing to pay the premium. No one had to find me and give me a
lecture on the benevolence of delaying my porch. I was induced by the invisible hand to be
How sad it is that people think economics is the study of money or that economists believe in
elevating mercenary motives above compassion. The great insight of economics is that people make
tradeoffs. The basis for that insight is a recognition that behavior is complex and that no one has a
single-minded motivation or a single goal. When we talk about the role of prices in our economy,
it's useful to remember that complexity.