The Disaster of Anti-Price-Gouging LawsWednesday, November 14, 2012
Natural disasters bring out the differences between the two worlds we simultaneously inhabit: the world of personal relationships and the world of market relationships. Most of the time the tension between the two is barely noticeable. But when a storm cuts supplies of needed goods, we become acutely aware that social life is more complex than we might imagine.
Most of us would never think to charge a distressed loved one or friend for help. So it is not hard to understand why people get angry when, after a storm damages the commercial infrastructure, sellers raise their prices for gasoline, bottled water, generators, batteries, flashlights, and other acutely needed goods.
Not only do people get mad, but politicians also pass laws against price “gouging.” In the wake of Hurricane Sandy, predictably, we saw headlines such as these: “New York Investigates Price Gouging Post-Sandy” and “N.J. Sues Gas Stations, Hotel for Post-Sandy Gouging.” No one is hated more than the price-gouger.
But maybe that anger inappropriate, however understandable, because we are judging actions in the market by standards appropriate only to the family and other intimate groups. Nobel Laureate F. A. Hayek thought so and warned that persisting in this error harms everyone.
The hurricane-stricken areas, especially around New York City and in New Jersey, suffered acute shortages of gasoline and other needed products. Long lines and hours of waiting made recovery from the storm ever harder than it had to be. It wasn’t long before accusations of price gouging began to fly. “[New York Attorney General Eric] Schneiderman said he had received ‘hundreds’ of complaints from consumers who claim merchants have hiked prices on essential goods since the hurricane hit,” CNN reported. “Under New York law, it’s illegal for merchants to sell products at ‘unconscionably excessive’ prices during ‘an abnormal disruption of the market.”
CNN was quick to add: “New York’s price gouging law doesn’t specifically define what constitutes an ‘unconscionably excessive’ price.” The lack of a definition gives government officials a fearful amount of discretion and flies in the face of the rule of law, which at a minimum requires that people know in advances what actions would violate the law.
“While some disparity in prices before and after a market disruption is allowed,” CNN reported, “‘gross’ disparities are illegal “when it is clear that a business is taking unfair advantage of consumers ... under severe circumstances that call for shared sacrifices,” the attorney general’s office said.”
This is not helpful. What is the definition of “gross disparities” and “unfair advantage.” We find out only after the government brings charges against a seller. That’s not how the rule of law is supposed to work.
We can avoid this difficulty by understanding how important the market’s price system is to our well-being and how government interference with it harms us all.
First, understand that 1) prices are not numbers pulled arbitrarily from the air and 2) that their role goes beyond simply informing us how much money we have to pay to obtain a product or service. To the extent a market is free of government intrusion, prices emerge from the day-to-day exchanges between buyers and sellers, each of whom evaluates the opportunities encountered in the marketplace according to his or her subjective preferences before deciding whether to enter into a transaction. The result is a schedule of prices roughly reflecting supply and demand. This process is neither instantaneous nor infallible. Human error can become embodied in prices. The virtue of the market (again, to the extent it is free) is that profit opportunities lie in the discovery and correction of error. This is why, when it is allowed to work, the price system works pretty darn well.
But note: If prices do their job by reflecting supply and demand, and if supply and demand are subject to change, it follows that prices also must be free to change to reflect new conditions. Otherwise the price system cannot do its job.
Where does that leave price gouging? Obviously a severe storm can disrupt the normal delivery of goods. At the same time, demand can spike for certain goods. Under the law of supply and demand, if the supply of a good falls and the demand for it rises, other things equal, price will rise. That is the expected effect of changed conditions. We would be amazed if it did not happen.
Yet people get mad when the price of gasoline and flashlights goes up after a severe storm. Clearly we are using the standards of intimate relationships to judge market activity—and we harm ourselves by doing so.
In his classic book, Economics in One Lesson, Henry Hazlitt taught that the key to thinking like an economist is to look beyond the immediate effects of things. Sure, no one likes to see the price of important products suddenly jump. That indeed creates hardship. But it is not the end of the story. Two parallel sets of consequences are activated by the price hike.
First, those who face higher prices will look for ways to economize. Each person will more rigorously scrutinize how urgently he or she needs the goods in question. As a result, people will tend to buy less than if the price remained at pre-disaster levels. Obviously, this is helpful under the circumstances. If each person buys less, more people can buy some. No one will have all he wants, but the inadequate supply will be spread further than it would have been. What of those who are priced out of the market altogether because their incomes are too low? When people are free, they generously help such people. It makes no sense to tamper with prices in order to help the poor. Better to take up a collection for them and leave the price system alone. To do otherwise is to shoot ourselves in the foot.
Consider the alternative. If prices remain at the lower pre-disaster level, the early purchasers will buy up the supply, leaving none for the rest. Long lines will form, requiring hours of waiting. Time spent in line is a cost. So no letting prices rises merely changes the form of payment from money to time. This favors people with less money and more time on their hands. Why should they be favored over people with more money but less time? (Store owners might address this problem by limiting the number of items any one person can buy, but this also makes people mad, while encouraging straw purchases.)
Second, suddenly higher prices will attract new supplies from beyond the damaged areas. Entrepreneurs make pure profit by noticing and taking advantage of price discrepancies that permit them to buy low and sell high. Why would someone invest time, expense, and effort to buy gasoline or bottled water in one place and transport it long distances under difficult conditions if he could not do so at a profit? You might want to condemn someone for not undertaking such activity altruistically, but it is hard to see why anyone should leave his family and personal concerns to render assistance to strangers perhaps with great difficulty without financial reward. How many critics of price gouging are willing to do it?
Personal moral judgments aside, there is no denying that rising prices will lure new supplies to the stricken areas, and that will put downward pressure on prices, hastening the return to normalcy. Can a process that encourages such beneficial activity really deserve condemnation?
I realize that price-gouging laws don’t forbid all prices rises, only “excessive” ones. But here’s the rub: No governor, legislator, or bureaucrat can know what counts as “excessive.” Only the market process can “know” the right price under the prevailing conditions. If the government guesses wrong—which it is likely to do—it will have stunted the self-correcting market process and slowed down recovery. Will the bureaucrats be held accountable? Of course not.
So let’s not expect markets to be like families and families to be like markets. Most important, let’s keep the bureaucrats’ hands off!