Planning for an Emergency; J. Cobb

The NPC committee is developing a plan to coordinate industry and government· in several areas: cur tailing demand, substituting other fuels, distributing available sup plies to priority users, determining when to tap the Strategic Petroleum Reserve, and relating U.S. emer gency planning to obligations under international agreements. Although several committE~e members at a recent meeting made Mr. Cobb is Director of Economic Analysis with the Council for a Competitive Economy, 410 First Street, S.E., Washington, D.C. 20003 strong statements in favor of the free market, there is an emerging danger that any such study or plan will most strongly endorse manda tory allocations, price controls and rationing, and will attempt to pre vent profiteering, speculation, and black-market trading.· A new study prepared for DOE by Resource Plan ning Associates of Cambridge, Mas sachusetts, came to just such conclu sions-due to the methodology they used in their study. This is the re sult of a common prejudice against the free market-the belief that it is capricious and laccidental in its op erations and that only a deliberately built structure could possibly be ttra_ tional" or ttequitable" in an emer gency.

There are several imP9rtant eco nomic and philosophical issues that we hope the NPC committee will note as it completes its study. In sum, they involve the nature of dis location, information, motivation, and equity. Underlying the preju dice against profits is· a.·misunder standing about market behavior and our society's basic coordination pro157 158 THE FREEMAN March cess. The free market is an example of a coordination system in which millions of people can quickly adjust their activities to one another with out the need to know details about who, what, why, where, and the like. If a certain price goes up, consumers are informed, and motivated, to re duce consumption-and producers are informed, and motivated, to in crease production. A higher price will also attract new producers or purveyors of substitute products into the market. An emergency, such as the sud den cutoff of oil from the Persian Gulf, would cause a massive dislo cation in the American economy. The OPEC nations have said that their next embargo would not be targeted at anyone country because the in ternational oil sharing agreement would blunt the effect; so any oil cutoff would affect the entire indus trialized world. The problem for the victims of such a cutoff is to adjust to the smaller energy supply. What is the quickest, most efficient, most adaptable process of economic inno vation? The unconstricted free mar ket has proven itself time after time.

Of course, there are political ways for individuals to adjust to a changed environment, and there are eco nomic ways. The political ways are available only to a privileged class of people who have the power to in sulate themselves from the prob lems and force everyone else to bear a double burden. In contrast, the economic ways of adjustment to changed circumstances ultimately benefit all members of society; the poor benefit even more in the long run because economic opportunity and growth are not suppressed by the political authorities in the pro cess of erecting rigidities and spe cial privileges for favored, more powerful groups. The economic adjustment process is first and foremost an information problem. The issue is how to dis cover the most efficient path away from the dislocation. Importantly, the information most. needed to an swer the millions of specific ques tions is not centralized in Washing ton; it is not even statistical information. Nobel Laureate F. A.

Hayek, in his famous analysis, ((The Use of Know ledge in Society," (American Economic Review, Vol. 35, September 1945, pp. 519-30) demonstrated that each individual's perception of economic opportunity and knowledge of local supply-and demand conditions is actually more important than the kinds of data that government agencies can col lect. During an emergency, the least effective thing to do would be to wait passively until some central authority gave instructions. Only the process of a free market, with scarce resources allowed to command prices that ipso facto com municate important data about the 1981 PLANNING FOR AN EMERGENCY 159 urgency of needs and the availabil ity of supplies, can make effective and speedy use of the information that each person has. You only have to think about the aftermath of a major hurricane or an earthquake to understand how important are the efforts of every individual, and to appreciate how valuable an effec~ tive communications system can be.

If the supply of imported oil should be cut off, the price people might be willing to pay in different cities and for different uses of the available domestic supply would be the only effective mode of communication. Our experience with Department of Energy allocation regulations in 1973 and 1979, when motorists lined up at gasoline pumps, testifies to the inefficiency of the bureau cratic nonmarket. In planning for an emergency, so ciety will need the help of every ca pable person. Not only must each in dividual's particular knowledge be available for use, but the motiva tion to use it must be there. It is easy for government to take motil vation for granted because cliches of duty and patriotism are common coin in Washington. Yet, as every school teacher or office supervisor knows, without real, self-interested moti vation, people will only pretend to do what they are supposed to do; real accomplishment will be mini mal. Not only should the emergency preparedness study recommend tha.t free market prices be used to allo cate oil supplies, but those who de liver oil to the market should be permitted to keep their profits.

Without genuine, after-tax rewards for producers and suppliers-and even speculators, who attempt to predict future requirements (and of ten lose money)-the free-market· process won't operate. No amount of wishful thinking about brotherly love a.nd self-sacrifice will help bring en ergy to the people who may need it most during an emergency. The dominant theme during an emergency ought to be: Solving the problem. The risk, however, is that greed, envy, and spitefulness will take over. Some people are going to be hurt more than others when the crisis begins. That is the nature of a crisis-it happens during earth quakes and hurricanes, and eco nomic crises are no different. There is a common view that everyone ought to suffer equally, or at least that no one should profit from an other's pain. This is the logic of price controls and rationing. It is also the clever fa~ade under which greed, envy, and spitefulness operate.

Economics, as a science, can dem onstrate certain regular conse quences of policy decisions. The re sults of price controls and rationing are shortages and misallocations. In the wake of shortages and misallo cations, we usually observe bribery and corruption also. When the eco160 THE FREEMAN nomic process·becomes corrupt, it is much less efficient because re sources are diverted from solving the original problems that con cerned the policymakers, and much productive effort is directed instead toward making the corrupt system work. Nobody in his right mind should want to see corruption and inefficiency, especially during an emergency. The question of equity, therefore, is the most difficult political issue to resolve. Greed, envy, and spiteful ness will have advocates who will worry very little about solving the longrun problems of the crisis-that is, adjusting to the economic changes that are forced upon us. They will concern themselves, instead, with questions about redistributing other people's money and helping partic ular groups at the expense of others.

Politicians love this sort of game; it makes them appear valuable both to special-interest groups and to the innocent, trusting voters back home. As we have seen, however, the longrun problems of the crisis can only be solved by a free market, and those active in the market who make the right decisions will earn finan cial rewards. The correct expression of equity, then, is not a matter of redistributing but of protecting the honestly earned rewards ofthose who contribute toward solving economic problems. After all, ending a crisis has to be a better solution to the emergency needs of the poor than patchwork measures that just make it easier to suffer. What specific recommendations should the National Petroleum Council make in its report on emer gency preparedness? One recom mendation in particular would have more impact than hundreds of de tailed plans and descriptions of pe troleum needs and transportation facilities. This would be the simple declaration of public policy that in an emergency the government will bind itself to respect the private property rights of its citizens and that the courts would enforce the common law of contracts.

The uncertainties imposed by government make private planning impossible; the expectation that speculative profits would be· out lawed makes it impossible for the free market to hedge some of the risk. There is no happy medium be tween government planning and private planning for a future emer gency. Government planning crowds out private planning, just as a fox in the hen house stops the production of eggs. The only way the United States may survive a major energy emergency between now and 1985 is to open the way for private planning and a free market to prepare for rapid and efficient adaptation to any cri~~ , A FRESH SPIRIT of change is in the air. It has swept into the Office of President a man who, as the Gover·· nor of California, has shown his dedication to the principles of lim·· ited government. It has carried into ascendancy in the halls of congres8 men who by their records have dem·· onstrated their commitment to sup·· port constitutional principles which were designed to protect individuall liberty.