Transactional Experiences

A few weeks ago, as I was seeing Morocco with a few friends, we decided to get away from the coastal cities and visit the full interior of the country. Luckily, we found a driver online who was willing to take us. The deal? For several hundred U.S. dollars, he agreed to drive us more than 22 hours across three days, from the country’s coast to the southern border — and then back. The full drive traversed mountain ranges, limestone canyons, and the world’s largest non-polar desert. The terrain was insane; a one-way trip inland lasted roughly 12 hours, if you didn’t take too long for lunch.

In between naps and gazes out the window, I couldn’t help but think of the remarkable nature of this transaction. Here was a man we had never met before. Yet, he drove us — at times, more than 10 hours a day — across an entire country. He was a citizen who’d never been beyond his nation’s borders, and we were three college students from another continent. The one thing we knew we had in common? A single price upon which we agreed.

Smith famously wrote that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” As so many on campus and elsewhere castigate the free market, characterizing it as greedy and immoral, we would do well to remember Smith’s favorable view of transactions.

The word “transaction” unfortunately possesses a negative connotation. After all, Dean Khurana tells incoming freshman classes to strive for “transformative,” not “transactional” experiences in college. Certainly, friendships should not be transactional. But for many of the things that we have in our lives, a transaction was at work (and happily so). As you know already, such trades helped you to procure the phone you’re using, the clothes you’re wearing, the Ubers you ride in, and the food that you eat.

Smith’s great insight — which holds true today — is that when everybody is pursuing their own self-interest, the unintended consequence is that both people’s needs and desires are fulfilled. The market revolves around one defining mechanism: if there is profit to be made, sellers are willing to move mountains to make it.

Take the commonly cited — and controversial — example of prices after a hurricane. Let’s say that right as a storm rolls through, flooding hits many nearby grocery stores that sell paper towels. Because of the suddenly limited supply, remaining stores are able to charge much higher prices, so the cost of paper towels skyrockets from $1 to $25. At first glance, the act of profiting so handsomely from a disaster seems greedy and unjust. So why shouldn’t we establish a law to say that paper towel prices cannot rise in natural disasters?

Such controls were common in the 1970s under presidents Nixon through Carter; the price of gas was limited to an artificially low price by well-meaning politicians. But the results spoke for themselves. In this situation, if there were four individuals who needed gas, the one who got it was simply the first one to arrive at the station. Because the price was so low, the first person in line could fill up their entire tank, leaving no gas for the other three. Price controls encouraged overconsumption when supply was low. The lesson here is that naturally high prices serve the unintended purpose of encouraging lower consumption.

The same goes for the paper towels in our hurricane example. With a higher price, households now will likely buy only one paper towel roll instead of their usual four; in return, many more households are able to have a roll. This is a far more equitable distribution than if the first few people were able to buy all the paper towels, leaving everyone else with none.

In turn, paper towel sellers elsewhere naturally act like the market’s version of FEMA; as they see the higher prices in this area, they’ll ship more paper towels in, trying to capitalize. And the supply will keep on increasing until the price comes down to its normal level.

Let’s say instead the government tries to impose both a price and a quantity control: every household can only buy one roll, but at an affordable price. The problem? There is no extra profit to be made, and paper towel sellers from elsewhere don’t have the incentive to come in and provide more, leaving the supply low.

Lastly, if we're worried about the individuals in the area whose incomes are too low, the government should subsidize the individuals, so they can be guaranteed a $25 paper towel. But the answer should be to make markets more free, not to reduce their effectiveness; if the government puts a ceiling on the price, no matter how well-meaning it is, the poorest individuals cannot be guaranteed even one roll. Few would consider this more moral or fair than the market outcome.

It’s popular today to complain about capitalism, and the complaints undoubtedly are made with good intentions. But noble intentions here do not mean good consequences. There is an unintended beauty to free enterprise, and we’ve become so accustomed that we tend to ignore it. So we denounce the free markets, self-interest, and the business world. After all, it’s easy to tear something down. It’s much harder to remember exactly what is at stake of being lost.

Andrew W. Liang ’21, a Crimson editorial editor, is a Social Studies concentrator in Adams House. His column appears on alternate Thursdays.