Mises Wire

There's Nothing Moral about Opposing "Price-Gouging"

Let’s face it. The economic case for “price gouging” is one for which economists have both a strong argument and minority view, relative to more popular narratives drilled onto the three-by-five card of acceptable opinion. In that sense, we are in familiar territory, going back at least to Thomas Carlyle’s attack on economics as “the dismal science” when he realized economic arguments, when accepted by the broader population, would hasten the demise of slavery. 

So I was not surprised when a good friend sent me a Dallas News op-ed by University of Texas sociologist Daniel Fridman raising moral objections to the economic case defending rising prices for necessities following natural disasters. I had an idea about the depth of Mr. Fridman’s argument when he began acknowledging the economic case thusly:

[Some economists] claim that we should not mess with prices, whose job is to get goods to those who want them the most. If prices go up, buyers will think twice before purchasing something they may not need, while suppliers will be incentivized to go the extra mile and provide needed goods in order to make more money. If you take that extra gain away, you will have fewer goods and in the wrong hands.

There is some truth to this.

It’s very broad-minded for Mr. Fridman to acknowledge some truth to the Laws of Supply and Demand. Coming from someone in the People’s Republic of Austin, this must be something of a milestone. (One wonders what other natural laws in which he recognizes some truth.) But it’s not the truth of these laws that concern him. Rather, it’s how they ignore the moral case against “gouging,” which Mr. Fridman believes is understood “almost universally.” He writes:

The moral condemnation of price gouging is a recognition that in certain social situations, raising prices is kicking vulnerable people when they are down. Our reaction to price gouging is not some silly knee-jerk rejection from people who don't know enough about economics, as it is sometimes portrayed. It is, rather, deeply reflective of the societal need for mechanisms other than markets.

I am not here to criticize the moral case against price “gouging” except to note that a thinker on the level of Thomas Aquinas considered its shortcomings. Rather, I would suggest that morality is hardly divorced from the case made by economics and that recognizing this relationship is key to returning economics to its roots. Between the time of Adam Smith and the Progressive Era, one studied economics as a branch of the Moral Sciences. Even today, a common thread between a Thomas Sowell and a Paul Krugman, or a Jeffrey Sachs and a Bill Easterly, would be moral indignation about something, and the desire to apply economic theory to correct it.

So what are the moral cases for “gouging”? Let’s consider three.

First, one wonders about the morality of those who would urge acts of violence — fines or imprisonment — against individuals for selling their own property at whatever price they want. This is essentially what Mr. Fridman argues for when supporting anti-“gouging” rules. But would he be willing to impose it himself by, say, personally raiding the perpetrator’s savings or locking her up in his garage for charging prices he dislikes? If he would have moral qualms about executing such acts himself, then why wouldn’t he have qualms about leaving them up to individual functionaries of the state? By arguing for such state power, Mr. Fridman simply trades small, disparate moral harms (subjectively determined) for actual large, institutionalized ones.

This point gets to the nature of the state, which is an entity in society that performs actions legally that would be considered profoundly immoral when performed on an individual basis. Those who support anti-“gouging” legislation effectively support putting a boot on the neck of many producers crucial to surviving a natural disaster.

Second, there’s the morality of allowing prices to reflect market conditions before and after a natural disaster. Given the certainty of shortages, waste, and needlessly prolonged recoveries when anti-“gouging” laws are enforced (through threats of violence!), then why can’t opposing such ordinances be based on morality as well? While Mr. Fridman argues pro-“gouging” economists such as Mark Perry and Michael Salinger ignore morality, they might be motivated by it.

One is reminded of the role of market prices in causing self-interested individuals to act in ways that are socially beneficial. One woman from the Florida Keys told USA Today about the sense of foreboding she felt driving back to her house and witnessing the damage wrought by Hurricane Irma, and the profound relief she felt upon finding her own home relatively unscathed. “Thank God our insurance company threatened to cancel us if we didn’t put on a metal roof,” she said. 

The threat of lost or higher priced insurance motivated many property owners to upgrade their houses to hurricane strength. Hundreds of thousands of Floridians, for instance, received discounted insurance for buying and then using hurricane shutters. According to the Associated Press, “Citigroup estimated that damages were just $50 billion — well below initial figures — in part because some homes were better equipped to weather the wind and rain than during [Hurricane] Andrew.”

Finally and most importantly, the debate over “gouging” illustrates a dominant utilitarianism in which the majority should be allowed to force its will on the minority, as long as the end is valued highly enough. For Mr. Fridman, the near universal acceptability of anti-gouging laws are enough for him to determine their morality. Mises addresses this point in Human Action (Scholars Edition, p. 153):

The liberals do not maintain that majorities are godlike and infallible; they do not contend that the mere fact that a policy is advocated by the many is a proof of its merits for the common weal. They do not recommend the dictatorship of the majority and the violent oppression of dissenting minorities. Liberalism aims at a political constitution which safeguards the smooth working of social cooperation and the progressive intensification of mutual social relations. Its main objective is the avoidance of violent conflicts, of wars and revolutions that must disintegrate the social collaboration of men and throw people back into the primitive conditions of barbarism where all tribes and political bodies endlessly fought one another.

It follows that permitting “gouging” is congruent with a political economy of peace, whereas intervening in the price system invites violence. Forcing markets below those that would clear the market always and everywhere, in normal times and during natural disasters, pits buyers against sellers and consumers against producers, when they otherwise would have strong incentives to cooperate.

I fear I may not have been fair to Mr. Fridman. After all, he wrote an op-ed with strict word count restrictions. He may well be familiar with the moral case on the other side of the “gouging” debate and yet be unable to address them. Still, I’d hope he’d concede that while natural disasters are by nature disruptive, the anti-“gougers” have no unique claim on the moral high ground. Economists who advocate against policies that prolong suffering and hinder recovery have morality on their side too.

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