David R. Henderson  

"Price Gouging" Is Urgently Necessary

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The title of this post is the title that Tom Woods gave his interview with me. It's here.

It goes about 23 minutes. Make sure you listen for the pastor/congregation and filet mignon jokes at the end.


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COMMENTS (22 to date)
Effem writes:

So we ditch the "women and children" strategy and auction off life rafts next time a ship goes down?

David R. Henderson writes:

@Effem,
So we ditch the "women and children" strategy and auction off life rafts next time a ship goes down?
No. I’m not sure how you got that out of my interview. You did listen to the interview, right?

David R. Henderson writes:

@Effem,
One question that might motivate you to listen to the interview and rethink your question about lifeboats: Do you think the number of lifeboats would increase if they were auctioned off?

Phil writes:

If the general public only understood Bastiat, they would find the absence of price controls during emergencies as the more compassionate policy.

This is an ignorance problem, not a compassion problem.

Mark writes:

I'm curious, has any research been done to determine if profit margins for basic goods actually increase significantly during natural disasters, or if price increases are indeed primarily due to increases in costs?

Jon Murphy writes:

@Mark:

I'm curious, has any research been done to determine if profit margins for basic goods actually increase significantly during natural disasters, or if price increases are indeed primarily due to increases in costs?

That's a great question. I don't know of any research off the top of my head, and a quick Google Scholar search revealed nothing, but it is an interesting question. I suspect that finding an answer may be difficult given that disasters tend to be short term and balance sheets tend to be monthly, so any changes from the disaster may be smoothed out by "normal" activity. Or that a firm may earn higher profits on goods, but said profit evaporates when it comes time to do repairs and such.

Here is what I suspect (but take this with a grain of salt since, as I said, I have no evidence for this other than simple price theory): I suspect that, in the very near term, one would see initially higher profit margins. Assuming firms are rational, they likely stocked up on basics before the storm at "normal" prices and were able to sell them after the storm for "extra-normal" prices. However, once that initial supply is gone, profits would disappear as now firms have to pay higher prices to get new supplies in. The initial high profits are used to acquire more supplies (which, remember, would be at a higher price than pre-storm), and anything extra would go to repairs.

Suppliers from out-of-state (that is, outside the disaster area) might be able to sustain relatively higher profits, but even that would depend on the level of competition and their own supply chains.

Just a thought.

Tom DeMeo writes:

Is it Mr. Henderson's contention that we should not mount a government driven rescue and relief effort for Houston? Should we just let the market sort it out?

From an economic point of view, an emergency could be described as the broad interruption of the flow of money, goods and services, to the point where it creates widespread human suffering.

This is a discussion of minor opportunities that are exploited when a pocket of stranded supply happens upon a pocket of available compensation, but as a general matter, the flows of both are interrupted, and it is impossible to service the supply and demand pipelines on a wider scale. A few transactions could take place, but the majority of supply and demand can not clear. There are exceptions, but otherwise, the markets are stuck.

If this kind of thinking could solve anything significant, it wouldn't be an emergency.

Hazel Meade writes:

I wonder to what extent the apparent "price gouging" is more of a second order effect. It could be that retailers are marking up goods because they're trying to rapidly restock from suppliers further away, who charge higher fees for emergency or express delivery. I.e. if you're trying to get a fresh gas delivery, you might have to pay the truck driver a lot more to drive into the disaster area, or you might have to pay extra to get a shipment from someone other than your usual supplier - an Exxon station getting desperate and buying from a shell distributor or something).

Basically, we can't really assume that the end retailer is just marking up prices because he CAN, but that he those markups are being driven by increases in cost throughout the supply chain.


Don Boudreaux writes:

In response to Tom DeMeo's opening question, see this essay by Tim Worstall.

Jon Murphy writes:

@Tom DeMeo:

Is it Mr. Henderson's contention that we should not mount a government driven rescue and relief effort for Houston?

I don't think that's a reasonable interpretation of Dr. Henderson's interview. Those of us who argue against the price-gouging legislation are pointing out the inefficiencies it causes; it's not to say the government has no role in a disaster, just that some of their actions are making the problem worse. For example, if a house was on fire, and the firefighters were getting ready to pour gasoline on the fire, would objecting to such a tactic mean the firefighters should not try to put out the fire? I do not think one could reasonably argue the latter follows from the former.

From an economic point of view, an emergency could be described as the broad interruption of the flow of money, goods and services, to the point where it creates widespread human suffering.

This is a discussion of minor opportunities that are exploited when a pocket of stranded supply happens upon a pocket of available compensation, but as a general matter, the flows of both are interrupted, and it is impossible to service the supply and demand pipelines on a wider scale.

This is a long way of saying markets are in disequilibrium. A rather severe disequilibrium, but disequilibrium nonetheless. But this is where markets are most needed! The market as an institution is an institution designed to handle disequilibrium! The price mechanism, as part of the market process, is a mechanism designed to unite those "pockets" of supply and compensation (demand). It's not a "happened upon" (that would only occur if the price mechanism were to fail, say by price controls), but the whole purpose of the mechanism. The market isn't "stuck" in situations like this, it thrives! Markets are at their most useful in disequilibrium. Another way of thinking about it: a physician is most helpful when a person is sick, not healthy. When the situation is "healthy" (ie, normal) the market (the physician) coordinates quantity of supply and quantity of demand with small changes in price to accommodate changes in supply and demand. When the situation is "sick" (ie, a disaster), the market helps treat the disease through strong price signals (medicine).

In short, I reject your contentions that "A few transactions could take place, but the majority of supply and demand can not clear. There are exceptions, but otherwise, the markets are stuck." In reality, the exact opposite is true! Markets get "stuck" when there are artificial barriers preventing them from working.

David R. Henderson writes:

@Tom DeMeo,
Is it Mr. Henderson's contention that we should not mount a government driven rescue and relief effort for Houston? Should we just let the market sort it out?
No. The interview was totally focused on “price gouging.” I’m curious, though, since you asked the question, which part of the interview led you to ask that question?

Tom DeMeo writes:

@David R. Henderson

I asked because the argument you made was for unrestrained pricing serving to convey a more accurate allocation of resources and incentives, and that this was particularly important in a crisis.

Rescue and relief is the exchange of goods and services suddenly taking place without compensation, and in a disaster of this nature, that becomes the overwhelming means of exchange. People are risking their lives to get people these services because they believe supply and demand can't be reconciled in a normal way and they are concerned for people's lives. I was wondering how you reconciled that.

I understand the arguments made that pricing can help fill in the gaps. I think you are right in that regard. Just don't be surprised that it upsets people. The vast majority of the problems are being solved by people who are accepting no compensation, and are in many cases risking their lives to help others. The social pressure to just get to work and help in an emergency is a bigger and more important social value in the immediate term because it can temporarily do much more good, but that also conflicts with the mores of markets. It is difficult to support both concepts at the same time.

Obviously over the longer term, it is counter productive to behave that way.

John hare writes:

Tom,
The only people that can help for no compensation are those with the disposable resources to give. And have the inclination to do so. Those without the disposable resources or the inclination are excluded from helping when profits are not allowed. This restricts the available assistance to a considerable degree. I may be willing to haul a load of shingles with the expectation of profit even if I couldn't afford to give them away without getting my truck repossessed

Tom DeMeo writes:

@john hare


I am not arguing against compensation in an emergency. I haven't even taken a position here against price gouging, although I understand it looks that way. I actually think it should be legal, as long as no contracts are broken.

What I am arguing against is the notion that such gouging has the beneficial effect proposed. I think that during such emergencies, markets are temporarily more dysfunctional than not, and that the instinct to temporarily suspend enlightened self interest and pitch in to help is the far more powerful social force in these circumstances. Any benefits from price gouging are minimal, and run counter to the more valuable social instinct to help out.

The evidence is on the ground. People with nearly nothing are doing what they can to help one another down there and they are getting things done. If you can haul a load of shingles with your truck, you might be able to help a neighbor save their dog, or pull a car out of a ditch. Huge numbers of people are doing those kinds of things and not asking for an exchange of value to do so. This works.

Ina couple of weeks we can rely on market forces to move forward. Our primal instincts to band together when threatened are not a bug, they are a feature.

Jon Murphy writes:

@Tom DeMeo:

The central theme of your comments (and correct me if I am wrong) is that markets do not function well in an emergency. However, you give an example of markets working well:

The evidence is on the ground. People with nearly nothing are doing what they can to help one another down there and they are getting things done. If you can haul a load of shingles with your truck, you might be able to help a neighbor save their dog, or pull a car out of a ditch. Huge numbers of people are doing those kinds of things and not asking for an exchange of value to do so. This works.

This is a market. Just because there are no monetary prices doesn't mean the same factors aren't at work. And, for those who are not bound by familial or neighborly ties, the monetary prices induce them to enter the market.

In short, I don't understand where your objection is (conditional on me understanding your objection).

John hare writes:

The existence of good charitable people is not dependent on there being rules against gouging. If they are handling it locally by pulling together, then there will be nowhere to gouge. But there will be fewer people bringing in supplies from two states away by taking time off work.

Effem writes:

@Effem,
One question that might motivate you to listen to the interview and rethink your question about lifeboats: Do you think the number of lifeboats would increase if they were auctioned off?

I listened and I agree. But proponents of "markets" almost never qualify the statement that "price gouging is necessary" with such things like "if it will lead to a supply response" or "if its not life and death." This is a big part of why they fail to win converts because many people immediately conjure up a lifeboat-type scenario in their head.

Q: Whether price-gouging is good? A: It depends.

David R Henderson writes:

@Tom DeMeo,
People are risking their lives to get people these services because they believe supply and demand can't be reconciled in a normal way and they are concerned for people's lives. I was wondering how you reconciled that.
Actually, I did talk about something related to that briefly in the interview. I talked about how Wal-Mart and others get good will by not price gouging but, instead, by being prepared with extra generators, etc. So, I said in the interview, you get the best of both worlds: lots of people going above and beyond, plus efficient allocation and more sucking in of supplies due to higher prices.
Just don't be surprised that it upsets people.
Oh, I’m not surprised. I think you could tell from both the interviewer’s and my tone that we’ve been there before: we know how much scorn is heaped on people who say what we say. Which makes it all the more important to say.
The social pressure to just get to work and help in an emergency is a bigger and more important social value in the immediate term because it can temporarily do much more good, but that also conflicts with the mores of markets. It is difficult to support both concepts at the same time.
I find it easy to support both at the same time. It’s two different groups of people, each helping in their own way.
Our primal instincts to band together when threatened are not a bug, they are a feature.
I agree wholeheartedly and it’s wonderful.

Damian Clem writes:

By this logic war profiteering must be ok. Since price increases generate supply (according to the interview) it's ok to gouge the taxpayer during an existential threat since that would compel industry to produce more military hardware and thus improve readiness.

I guess it makes sense if one ignores the economics of individuals or nations that will need their resource reserves to get back on their feet after a crisis and quickly--wait for it--re-enter a stable market.

Jon Murphy writes:

@Damian:

If the goal is to create/preserve "resource reserves", then yes, higher prices for wartime materials is desirable. Higher prices would force the consumer (ie government), to conserve (even for government, demand curves slope downward). Higher prices may force government to be more economical with their supplies or bring a quicker end to the war, in either case reducing the resources necessary for the "guns or butter" trade-off.

Socal Bill writes:

David, thank you for your comments on this. I've been getting lots of flak from friends and family over being against anti price gouging laws. I'm not so elequent as you are so i appreciate the way you explain this issue. I just don't get how people can't understand this basic principle of supply and demand.

David R Henderson writes:

Thanks, Socal Bill.

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