This week we begin our reading of Milton and Rose Friedman’s Free to Choose. I found so much in the first chapter that I wanted to discuss, I could probably write a post a day for the next week.
In this chapter, the Friedman’s spend a lot of time discussing the role of prices. Prices serve three functions: transmit information, provide an incentive, and distribute income. The sections of the first chapter explaining these three functions are a must read. However, I want to look at the story used to introduce these functions for this write up.
Having been born in the 70’s, I don’t remember much of the 70’s (I have been told many who lived through them don’t remember them either). I have seen pictures and read stories about the terrible gas lines. In school, we were taught these gas lines were because of OPEC, and that not even the President could do anything to fix it. I’ve even read about even and odd days at the gas station. If your license plate ended with the right type of number, you could get gas. If not, then you could get it tomorrow. What I have never read or heard anywhere, was that these gas lines were actually the fault of the government:
The long gasoline lines that suddenly emerged in 1974 after the OPEC oil embargo, and again in the spring and summer of 1979 after the revolution in Iran, are a striking recent example. On both occasions there was a sharp disturbance in the supply of crude oil from abroad. But that did not lead to gasoline lines in Germany and Japan, which are wholly dependent on imported oil. It led to long gasoline lines in the United States, even though we produce much of our own oil, for one reason and one reason only: because legislation, administered by a government agency, did not permit the price system to function. Prices in some areas were kept by command below the level that would have equated the amount of gasoline available at the gas stations to the amount consumers wanted to buy at that price. Supplies were allocated to different areas of the country by command, rather than in response to the pressures of demand as reflected in price. The result was surpluses in some areas and shortages plus long gasoline lines in others. The smooth operation of the price system – which for many decades had assured every consumer that he could buy gasoline at any of a large number of service stations at his convenience and with minimal wait – was replaced by bureaucratic improvisation.
This is a long exert, but I feel it is important for two reasons. First, this is a very different story than we are taught in school, and that most of us are probably familiar with. Second, we are in a situation today that may bring back these same gas lines. The uncertainty in Egypt is likely to affect the price of oil. If the Muslim Brotherhood takes control in Egypt, or if a new government in Egypt should go to war with Israel, oil prices are likely to go up. We all know this.
However, the current hodgepodge of various fuel standards artificially affect the price of gas as well. It also doesn’t help that the Obama administration has put a drilling moratorium in place for the Gulf of Mexico. The administration has continued this moratorium in spite of being found in contempt of court for it.
There are many comparisons being drawn to the 1970’s and today. The one overlooked by the media is the comparison with how much the government artificially affects today’s prices. I am really looking forward to the other comparisons we may find in this book.
For Next Week: I am going on vacation with my family this weekend, so I am taking a break from the reading. I will be back in two weeks to cover chapter two. Have a great two weeks!