"Unbridled capitalism"

Commenting on a previous post, reader Joe upbraids me for advocating "unbridled capitalism," particularly with respect to the market for gasoline:

How, exactly, does it benefit our state for people to take advantage of a national tragedy and charge exorbitant amounts for gasoline? That's not "so-called" price gouging. That is price gouging - pure and simple.

Economists who worship at the alter of unbridled capitalism and don't care who gets harmed in the process might not see price gouging as a problem. But most mainstream economists realize that certain market transactions produce externalities (or in many instances, just bad outcomes) that require government intervention. That's in any econ 101 textbook.

I doubt Adam Smith would have a problem with the government trying to keep gas prices from rising to unnecessary levels. It's easy to talk about the free market in abstract, but try telling the working family living paycheck-to-paycheck that the high gas prices which are cramping their budget is "good" for the market. - Joe

Here's my response:

Joe -

I reject your characterization of free market capitalism as "unbridled." Free markets are regulated by restraints inherent in the voluntary interaction between producers and consumers.

For example, in a free market, price is the mechanism which maintains the balance between supply and demand.

We are currently seeing a major depletion of gasoline supplies due to the effects of the hurricane. Refineries are offline and pipelines are barely functional. If prices are not allowed to rise to meet the resulting imbalance between supply and demand, the inevitable result will be additional and increasingly severe shortages.

The best way to re-establish market equilibrium is to allow prices to rise to the levels required by current market conditions. There is no better way maximize incentives for producers and suppliers to renew their capacities as quickly as possible.

Gas prices - whether they are high or low - shouldn't be viewed as "good" nor "bad." Like the prices of other commodities, they simply communicate market reality.