Love is in the air. Its palpable. And you could almost stroke it as we approach Valentines Day. This is a day that has come to be associated with sugar and spice and all things nice. It is a day when flowers and chocolate flow with abandon.
But this has not always been the state of affairs. The year is 1929 when gang warfare ruled the streets of Chicago and where one of the worst massacres took place on Valentine’s Day. Thirty years earlier, Alphonse Gabriel Capone was born in Brooklyn, New York to poor immigrant parents. His father was a barber and his mother a seamstress. There was nothing in his childhood or family life that could have predicted his trajectory and rise to infamy. But as he grew, he went on to become the most infamous gangster in American history. He became Al Capone.
He had a multi-million-dollar operation in bootlegging, prostitution and gambling. He dominated the organised crime space of the time, and was responsible for many brutal acts of violence, mainly against other gangsters. The most famous occurred in 1929, where he ordered the assassination of his rivals. His hitmen approached members and associates of Chicago’s North side gang who were gathered at Lincoln Park garage on the morning of Valentine’s Day. They were made to line up against the wall and shot by four unknown assailants posing as the police. This incident has since been known as St Valentine’s Day Massacre.
But back to the chocolates and flowers. Have you ever pondered how these two commodities symbolise one day of the year globally? How millions of strangers without a system of structured central command, spontaneously coordinate themselves to ensure your girlfriend gets the chocolates and flowers, even in the remotest parts of the world, where neither roses nor cocoa beans are grown?
To understand this phenomenon, let us travel back in time to 1973. During this year, the price of oil skyrocketed. And being the rational human beings we are, it made sense for us to economise. Oil has many uses ranging from jet fuel, to manufacturing toys and clothes, and growing flowers. So as a consumer, due to the high prices, you employ your reasoning and cut back on your consumption of oil-based or oil-driven products and services. You make a deliberate decision on which ones you will maintain or forego.
Contrary to popular belief, the magic bullet that enables you to make that decision is not your brain. It is a price. A price is a signal that is wrapped up in an incentive, positive or negative.
Prices act as signals to indicate scarcity. In economic speak, this is known as the scarcity principle. When a good or service is in limited supply but coupled with a high demand, it results in a mismatch between the desired supply and demand. Hence the price of the scarce good rises until an equilibrium is reached between supply and demand.
When the price of oil increased in 1973, most roses in America were grown in greenhouses in the States of New Jersey and Pennsylvania. Resultantly, the cost of operating and heating the greenhouses to maintain the right temperature to grow roses dramatically rose. The rose flower growers passed on the costs of growing roses to consumers. It, therefore, became very expensive for Valentine lovers to buy roses during that year. The message to consumers from this price signal was to find substitutes for Valentine gifts. So many boyfriends opted for chocolates.
And just like that, the cocoa bean farmer in Ghana was smiling all the way to the bank because there was an upsurge demand for his cocoa beans. Where there was sadness from rose growers in the Western Hemisphere, there was celebration from cocoa bean growers in Western Africa.
But the growers of the greenhouse roses were not happy with this substitution. They wanted back in the game because this was a profitable business. So rather than moan the loss of their income, they figured there must be a way to still sell roses at affordable prices. All they needed to do was to find a natural substitute for heating their greenhouses. Hence, they contracted farmers in Kenya and Ecuador to grow roses naturally. The Kenyan farmer did not need to know the genesis of scarce oil. All he perceived is that growing roses fetched him a higher price than growing coffee. So he put his energies in growing roses and abandoned coffee. The greenhouse rose flower growers also developed a global infrastructure that facilitated the delivery of the Kenyan and Ecuadorian flowers across the world.
Ultimately, the decision by the Kenyan and Ecuadorian farmer to grow roses under natural conditions freed up more of the scarce oil to manufacture the jet fuel. The market had just spontaneously reallocated resources from low value uses of oil to high value uses of oil without a central command. This meant producing most value from our limited resources.
As Vernon Smith, a Nobel Prize winner in Economics, once said, the pricing system is a scientific mystery. Its deep, fundamental and inspiring as that of the expanding universe or the forces that bind matter.
In a nutshell, this is the mystery of the invisible hand. It illustrates how free market dynamics make things happen for the greater good of society. Individuals actin in their own self-interest, compete for scarce resources. This competition causes resources to be used in the most efficient and effective way, thus creating value and wealth for the individual and the whole economy.
So the next time your government tells you they will buy a bag of maize for so many shillings, or they will reduce your parking fee by so many shillings, or when your politician seeking your vote tells you he will give you freebies of education, health and all things nice, stop and ponder; fool me once, shame on you; fool me twice, shame on me.
Valentine's Day is the poet's holiday - Ted Kooser