When The 'Invisible Hand' Is Efficient AND Exploitative

In high school and college, most Americans studying the basics of economics are taught about Adam Smith's invisible hand of the market, and how the principle shows us how "competition channels ambition toward socially desirable ends," which no capitalist (and no successful student in Econ 101) denies it does.


Except when it doesn't.

Robert Reich has a good example involving his flight out of NYC just before Frankenstorm Sandy, one of the last flights for the West Coast before the route had to close because of the storm. He had purchased his ticket the week before, paying "a few hundred dollars" for it. As the storm loomed, the airlines raised the price of similar tickets to $4000, promptly oversold existing, known full flights, and started bidding up by offering small bonuses to few-hundred-dollars ticket-holders who would relinquish their seats on the last flight out for a ticket for the next flight out at some unknown future time, presumably after the storm passed... the bonus a pittance intended to compensate them for their inconvenience.

First of all, note that the storm makes all the difference. Under normal circumstances, the airlines have little motivation to overbook flights more than a small percentage, and passengers have ways of rebelling against airlines that overbook large numbers of seats as a standard practice. But with the storm, the airlines have the effective power to renege on the implicit commitment of a sold ticket, in the interest of obscene profits for themselves. They have to get the ticket-holder's consent, of course, by offering a small bribe, but the airlines still make several hundred percent profit on the deal in exchange for not providing the service they sold at a "fair price." Some free market! Here's Reich:

Assuming that the 47 extra passengers had each paid $4,000 to get onto the plane at the last minute, and the 47 who gave up their seats for them received $400 in return, the trade would have been “rational” in narrow market terms. After all, the seats were “worth” $4,000 to those who bought them at the last minute, and switching to the next flight (whenever that might be) was “worth” $400 to those who agreed to do so.

But the transaction was also deeply exploitative. The airline netted a huge profit because of the impending storm.

I couldn’t help think this was a miniature version of the America we’ll have if Mitt Romney is elected president. Rational and efficient in terms of supply and demand, guaranteed to maximize profits, but fundamentally unfair.

I don't know what capitalism was like one or two centuries ago; I suspect it was not much different from the version re-emerging in our shiny new American century. But in my lifetime, capitalism has yielded the best of all possible economic worlds for the capitalists... at the cost of a not-so-great world for workers selling their services and customers buying services and products. How much added service did the airlines provide for their extra several thousand dollars profit?

Think before you answer. If you are utterly convinced that the economic value of a prepaid flight out of NYC increases tenfold based on a change in the weather, to the extent that an airline company should be able to profit obscenely from the inconvenience of its own paying passengers, by all means, tell me that unregulated capitalism provides that best of all possible worlds.

But if you, like me, are unwilling to live that way, in a world in which your everyday purchase happens (or doesn't) on terms determined and potentially redetermined exclusively by the seller, entirely for the seller's benefit, please help me to avoid that world... the world of a President Rmoney. It isn't virtuous and it isn't the free market; it's just the same old exploitative flim-flam.