The Free Market Knows Best ... Again

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The Dow’s up and oil’s down. And it all seems to have happened so quickly. Just a few weeks back the talk was of doom and gloom, as the price of gas kept inching up above 3 bucks a gallon? Funny how quickly those who swore that the bad days had arrived for good have disappeared from sight! (Well, maybe not so funny if you believed them and sold your stocks before the rally.)

We can only be thankful that those pessimistic loud mouths didn’t scare the public into forcing politicians to take panic action.

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When oil prices were at their highest, what scared me more than market jitters was the fear that politicians would be driven by hysterics to “do something.” We have seen price controls in the past in America, and it looked like we were heading in that direction again.

Now if you had an inkling that price controls would have done any good, just imagine if politicians had fixed the price of gas at over 3 bucks a gallon. We all would be stuck paying a lot at the pump now. Plus, price controls always — ALWAYS — lead to shortages of whatever’s being controlled (Producers stop producing things if they think politicians will control the prices at which they can sell them.)

Those long gas lines we saw in the 1970s, when there were price controls on oil, would have been seen again. So why were we considering such lunacy? I think I know.

It has to do with cycles. There are generally three time cycles that compel political action: Economic cycles, political cycles and news cycles. Each cycle has its own momentum and its own set of consequences. When something shocking happens, like a war or a natural disaster, politicians and the media usually panic. And at no time in our history have news cycles and political cycles moved faster than they do today.

With so many news sources providing instant coverage, the only way to get attention is by being louder and more sensational than the other guy. And the more panicky the news coverage, the more pressure on politicians to do something that will change the economic reality.

The problem is that these news cycles and political cycles don’t give economic cycles a chance to run their course. While the news media and politicians panic when something goes wrong, markets generally don’t. True, the market can temporarily panic, as it did right after 9/11. But it quickly finds equilibrium. Ground Zero was still smoldering and America was preparing for another attack when the stock market recovered. If left on its own and kept within the law, the market can pretty much weather any storm.

And the price of oil is a perfect example of this. Over time, higher oil costs have stimulated companies and entrepreneurs to find new spots to drill for oil, new ways to distill oil (from shale, etc), and new alternatives to using oil overall (hybrid cars). This has helped lead to our current oil surpluses, which in turn has been followed by falling oil prices.

Thank goodness that all the talk about oil prices being beyond the reach of market forces didn’t build quite enough momentum in the political and news cycle to cause political action that would have prevented the market from correcting the price spike.

Again, when normal economic cycles become slaves to political cycles, all hell breaks loose. As tempting as it is to demand instant political relief from temporary market distortions — like the market downturn after 9/11 or the oil price hike over the summer — it’s almost always better to let economic cycles in a free market find their own equilibriums. Otherwise, you have the kind of market disruptions of the late 1970s: Long gas lines, 20 percent interest rates, 13 percent inflation. Those nightmares could easily happen again if we give in to the “quick fixes” demanded by media pundits and fulminating politicians. Beware of such demagoguery and let the market do its work.

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David Asman is the host of "Forbes on FOX" which airs on the FOX News Channel, Saturdays at 11 a.m. ET.