Tuesday, May 11, 2010

Should the government intervene in how businesses price their goods?

"Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."
~Adam Smith

For the last 10 years, I have been aware of the additional regulations and restrictions that our government has put on small businesses. It has troubled me both because of the cost as well as because of the way it limits a business’ ability to compete effectively.

In 1776, Adam Smith, who is considered the father of economics, wrote the classic book entitled The Wealth of Nations. In this book, Adam Smith argues that if left unfettered, businesses will compete to provide the maximum value at the minimum cost to consumers. He called this the “invisible hand of competition.”

The “invisible hand” is the force of competition that ensures goods are delivered at a fair and reasonable price. After all, if one firm charges $10 for a product, and another firm charges $8, it is only logical that customers will go to the $8 vendor until the more expensive firm lowers its price.

When I had to read this classic text in graduate school, I had no idea that it was written the same year that our country earned its independence. Obviously, Adam Smith understood the role of competition, as did our founding fathers.

With only certain exceptions (e.g. regulated utilities), when the government tries to influence the price of products delivered to consumers, it tends to destroy the way our free markets operate. And free markets, of course, are the basis of capitalism.

What really caused me to blow my gasket was Spirit Airline’s announcement that they would begin assessing a $45 charge for carry-on luggage. I was actually not upset that Spirit wanted to do this. In fact, being a frequent traveler who has been hit in the head with flying luggage too many times to count, I would like to see a decrease carry-on luggage. Additionally, I have seen how often the TSA line slows significantly – or even stops completely – because someone with carry-on luggage did not know the rules about liquids or some such issue.

I, myself, always check my bags so that I do not have to deal with the hassle of TSA or force-fitting the luggage into the overhead bin. Of course, what I like or do not like is really immaterial. I just had to vent a bit here as this is one of my pet peeves.

What does trouble me about the luggage charge is that the government is saying that Spirit should not implement this fee and is looking for ways to legislatively stop them from doing so. In my opinion, the government should stop meddling in this issue as well as in so many others. Unless there is collusion or price-fixing, Adam Smith’s invisible hand of competition will control how successful Spirit will be with this carry-on luggage charge.

Ordinarily, one of two things can be expected to occur as a result of this new pricing strategy. The first possible outcome is that customers will stop flying Spirit, making it necessary to repeal the charge. The second is that customers will be willing to pay this price for a whole variety of reasons – lower total prices, for instance. The bottom line is that businesses operate best when that invisible hand of competition is permitted to function as it forces them to operate in a manner that ensures customers are receiving the highest value.

Too often, entrepreneurs tend to sit back and let governmental regulations hamper their operations. However, there are many ways to become active in limiting the number of these regulations. Chambers of commerce and lobbying organizations for each individual industry are just a couple options. Additionally, running for office is a great but difficult way to influence the government’s ability to impact businesses.

You can do this!

No comments:

Post a Comment