A prudent ship captain his crew set sail for a multi-month journey. In port, he makes sure he has enough supplies for his crew for the entire journey and then some (just to be safe). While underway at sea, he checks the galley and finds that about half of his food stores are spoiled because there was some unforeseen blight in the crops he bought. The captain gathers his crew together and says: “Mates, we have a problem. Half of our food is gone. Unfortunately, this means I must put you all on half rations for the remainder of our voyage.” The crew, understandably, begins to grumble. They enjoyed their rations and now there will be half?
“But sir!” cries one young sailor, “We were used to our old rations! The life on the ship was fun. We had beer and bread and meat. It gave us strength and kept morale high. Why must we be tortured so?”
“Because,” replied the captain, “otherwise we may not have enough food to survive our journey. We are weeks from the closest port and these stores must last. I promise it is better to have a dearth now than a famine later.”
The crew grumbles, but they comply. Two months later, the ship arrives at its destination with the full complement of crew who are tired but alive.
At the same time as the above story, a second imprudent ship captain also buys the same amount of food for his journey of the same length. While out at sea, he also suffers the blight and loses half his stores. He gathers the crew around and says: “Mates, half our food stores are gone. It looks like I may have to cut rations.”
“But sir!” another young sailor objects. “Half rations are no good! We won’t be merry! Our lives will be tougher. This is no good!”
“Agreed,” said the captain. “The happiness of my crew must come first. We should not have to suffer inconveniences. Rations will not be cut!” The crew cheers.
Two months later, a ghost ship drifts into the port full of emancipated men who have not eaten in over a month. The few that survived resorted to eating whatever they could find, including each other when necessary.
The above parable is adapted from Adam Smith’s Wealth of Nations, in particular, Book IV Chapter V. In times of scarcity, prices must rise in order to encourage conservation of resources (in this case, the price acts as the ship captain rationing food). Prices rise through the acts of speculators buying goods in periods of relative plenty and selling in times of relative scarcity (thus the maxim “buy low sell high”). It is obvious that the higher prices cause discomfort. People eat less or less desirable things. But the alternative to this discomfort is famine. If prices are not allowed to adjust for whatever reason (the ship captain who keeps rations the same), then the resource is consumed too quickly and famine can quickly set in. The discomfort is delayed to the future, but it is repaid with heavy interest.