Our moral intuitions are not adapted to the basic tenets of capitalism. People do not think about prices in the way that economic theory suggests. But if a company increases prices as a result of increased demand we get angry. We also accept that companies maintain prices despite reduced costs. In 1986, Kahneman, knetsch and Thaler found that people will accept higher prices if the survival of a company is under threat. At the same time, consumers can boycott them if they behave unfairly. This is what we refuse to accept when crisis hits, especially for goods that normally have stable prices.Ĭompanies are set up to make money. The invisible hand can make supply and demand meet, but only if prices are allowed to form freely and independently. In such a situation napkin producers could start making toilet paper, and moonshiners could start making disinfectant. In such a situation the wealthy could afford to wipe as much as they wanted, while the poor would have to settle for yesterday’s newspaper.Īt the same time we understand that if prices were allowed to adapt, the market would increase supply for goods in high demand.
#Adam smith invisible hand handout free#
Yet even proponents of the free market can understand that this does not feel right. The liberal market response to stockpiling would be to allow prices of canned goods and toilet paper to shoot up, thereby causing people to buy less. The public expects supply to fail and overbuy. An example is the stockpiling of toilet paper and canned goods in the current crisis. When prices cannot be adapted, it gives rise to surpluses and shortages. Following this, Uber had to apologize and promise that in such situations they would stop adapting price to supply and demand. When terror struck Sydney, Uber prices quadrupled because of demand. Uber calculates their prices depending on current supply and demand. Some new business models have introduced dynamic pricing where we previously were used to manually fixed prices.
It seems we tolerate the invisible hand where we are used to seeing it. The public despises this type of opportunism, yet there is no comparable loathing of so-called ‘dynamic pricing’: The price of plane tickets varies according to supply and demand without causing much anger, and the price of gold has exploded as the markets have collapsed without anyone decrying this as immoral. That is NOK 1200 per litre, more expensive than their most premium Champagne. Opportunistic behavior does not stop there, a Sushi restaurant sells disinfectant at a price of NOK 300 per bottle. The number of disinfectant advertisements on the online marketplace Finn.no has increased greatly as a result of increased demand. It is striking to say the least that the US has a public hotline for reporting price increases as a consequence of increased demand.
Florida has even gone to the extent of establishing a hotline where people can report price increases for COVID-19 related products. In the US, politicians criticize retailers. Some shops sell them at nearly five times the pre-crisis prices. Some use the COVID-19 crisis to increase their profit, and the price of disinfectant and facemasks has skyrocketed. When crisis hits we turn out to be more ambivalent to it than we thought. Many support this mechanism which has lifted billions of people out of poverty created vast amounts of wealth.
Most of us learned about this in High School. This is what Adam Smith referred to as the invisible hand. Prices change when the relation between supply and demand changes. Our moral intuition does not agree with the basic tenets of capitalism.
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