Why Are There So Few Shortages Under Capitalism?

The United States is a fairly capitalistic country. People, when they go to the store to buy something, seldom encounter the answer, “There is none.”

Today in India there is a severe shortage of oxygen for hospitals. I saw an interview on TV where the Prime Minister defended his actions, he said that more oxygen was sent to Mumbai than requested by the local authorities.

Of course when these central planners were allocating the nation’s oxygen supplies to cities and regions, they had no knowledge of future needs. They did not know Coved would flare up. Does that mean that Covid was responsible for the oxygen shortages? In a sense yes, but also the way they centrally allocated oxygen was responsible for the shortages – because a different distribution system could avoid shortages.

Central planners never know future demand. They make a guess based on past patterns of demand.

Under Capitalism there is an automatic mechanism that avoids shortages. It is called price.

When hospitals discover that they need more oxygen than they planned for and can buy they bid up the price to get new sources of supply.

The higher price does two things: (i) it causes more supply and (ii) it causes less consumption. This is practically magic because that is exactly what you want: more oxygen and fewer people using oxygen.

So if in Mumbai an oxygen tank sells for $10 and in other cities it sells for $5, people who have oxygen tanks think of ways to ship them to Mumbai. This is a good result for people in hospitals that need oxygen to survive.

On the other hand, people who use oxygen face higher prices. A welder who uses oxygen tanks possibly cannot charge his customers enough to buy the new higher priced oxygen. It is no longer profitable for him to use oxygen. Less supply is used.

The fly in the ointment is that the price goes up. The hospital has to pay much more for its oxygen supplies. No one likes to pay more for anything. If the government said that in the face of shortages suppliers can not charge more for an essential product you would get exactly what you have now under central plannin: people suffocating in hospitals because no new supplies rushed to their aid and no other users of oxygen suspended their use. The law forbidding price hikes in the face of shortages would cut off the function of the price mechanism and forbid more supply for the hospital patents and less use by welders.