price gouging | Tom Mullen Talks Freedom

Price Gouging Summed Up Market prices are the foundation of civilization. They are the signal that tells producers how much of any one thing to produce. They tell consumers how much to consume or whether to consume a product at all. The reason retailers don’t normally throw away eighty percent of their stock is because market prices tell them how much to have on hand at any one time to meet current demand.

When they miscalculate and buy a little too much, they still don’t typically waste their stock. They put it on sale and meet the demand at a lower price.

To the extent the market is allowed to set prices, producers generally produce what consumers want to buy in the quantities they want to buy. When all supply is consumed and large amounts of consumers are not left with unmet demand, it is referred to as the market “clearing.”

The government is always and everywhere at war with market prices. Regulations creating barriers to entry limit supply, artificially inflating prices. Price controls, including “anti-price gouging” laws override market prices, creating shortages. Subsidies to producers (farm subsidies, for example), allow producers to limit supply, artificially inflating the price.

Federal Reserve monetary inflation juices up demand, both on the consumer side and the producer side, creating overconsumption, low savings rates, malinvestment and imprudent debt. This ongoing war on the market price of money, a.k.a. “the rate of interest” does all sorts of damage in the real economy. It directs companies to borrow money to expand production of products for which there is no real demand. That in turn sends workers into these zombie industries.

Even without an external problem like the coronavirus (and the much more harmful government response to the coronavirus), bubbles created by monetary inflation eventually pop. Then all the malinvestment is exposed, the imprudent debt defaults, and the workers employed in unprofitable ventures get laid off. This is the market telling everyone where the mistakes were made.

Right now, we have two economic crises at once. We have state governments literally ordering people to stop producing goods and services in an attempt to combat the spread of the virus. Whether that is the best course of action is a subject for a different time. That it is doing massive economic damage is indisputable.

That damage has caused a second crisis: it has popped the economic bubble blown up by the Federal Reserve over the past twelve years. The market is responding by trying to adjust prices to their market levels. It is lowering the artificially high prices of stocks. It will lower the artificially high price of real estate. The price of oil has fallen both because of the anticipated reduced demand and the increased supply from Russia and OPEC increasing their oil production.

But not all prices are falling. Given the surge in demand, the market is trying to raise the price of items like toilet paper, certain medical supplies and other essential items.

All these price adjustments by the market are essential for our well-being. They are the cure for the economic disease caused by the government response to the virus and the previous twelve years of monetary inflation and artificially low interest rates.

What is the government doing in response? It is escalating its usual, conventional war on market prices to a nuclear war. It is punishing suppliers of essential goods for raising prices. It is ramping up monetary inflation to historic levels to keep stock prices artificially high and unprofitable businesses alive to go on producing products for which there is no demand. At a time when market prices are more essential to our survival than ever, the government is doing more to override them than ever.

This is not an academic theory that only works on a graph in a classroom. This plays out before our very eyes in the form of essential goods not available to us at any price.

Why is there no toilet paper available? Ask most people and they will say it is because of “hoarders.” These are people who bought far more than they needed in anticipation of future shortages. The people who arrived at the store after the toilet paper is sold out vilify them. Others might just call them prudent.

The same people who vilify hoarders also vilify “price gougers.” They don’t seem to grasp the obvious cause/effect relationship here. If it weren’t for artificial limits on price, i.e., “anti-price gouging” laws, the price of toilet paper would rise dramatically with the surge in demand and the so-called hoarders would not be able to buy nearly as much. That would leave far more for everyone else. The toilet paper market would find the optimal price level where the greatest number of people could get what they need.

We may be able to laugh off the shortage of toilet paper, but when it comes to food, water, medical supplies and other important items, shortages are no laughing matter. Why are there not enough ventilators right now? Because government regulation raises the price of entry into the market and lengthens the lead time for new production. If not for these artificial barriers, hundreds of new ventilator producers would seize the opportunity to enter the market and sell ventilators.

Instead, the government is considering ordering companies who make related items to make ventilators instead. That will only result in less efficient production of ventilators and shortages in the products those manufacturers would otherwise produce.

This is only the tip of the iceberg in terms of the government overriding market prices. Every economic policy the government undertakes is at its root an attempt to do so. Every single one makes us poorer than we would be if the government did nothing.

The free market doesn’t produce perfect outcomes. It’s an imperfect world. But a free market produces the best possible outcomes in the real world of scarcity and occasional disasters. Prices are the lifeblood of the free market. They are what make it produce the best outcomes. Every time the government overrides market prices, it makes things worse – in most cases, unfortunately, to thunderous applause.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

waterArt1 Whenever there is a natural disaster, we see two things: the best in human generosity, courage and resilience and the worst in economic ignorance. The former includes individuals rescuing stranded neighbors, volunteers lining up to join charity relief efforts, and corporations martialing their vast resources to pour needed items such as food, bottled water and clothing into devastated areas. The latter includes “economists” repeating the age old broken window fallacy and politicians denouncing and threatening so-called “price gougers.”

Emotions run high during disasters, which is a double-edged sword. The outpouring of sympathy for the victims leads to extraordinary efforts in assistance. But it also leads to irrational resentment of those whose actions are often vital to human survival, but whose motives are judged inferior. These are, of course, the aforementioned price gougers.

One of the weaknesses in rational responses to the accusation of price gouging is just that: they appeal to reason when the accusation is born of emotion. And that disconnect is an irrevocable one until the accuser can be persuaded to look at the situation reasonably. But once so persuaded, the accuser often voices the understandable objection that economic arguments rooted in supply and demand charts and theory are too removed from what the accuser considers “the real world.”

Here, then, is a “real world” scenario in which the actors respond to incentives just as anyone in similar situations have countless times in the past:

There is a hurricane and flooding. Drinkable water is in short supply. A man has $100. He needs a case of water to get his family of three through the week.

He walks into the store, where water is $25/case. There are 4 cases left on the shelf. He needs one, but can afford 4 and he doesn’t know how long the emergency will last. So, he buys all 4 cases.

Immediately afterwards, a family of five walks into the store with $100. There is no water to buy at any price. This family is now in desperate straits and must look elsewhere to procure what they need to survive.

Can anyone dispute the actors in this little parable have acted rationally and precisely as they would in the real world? No. Neither have any acted in a malicious or overly selfish manner. All have made the best choices among the alternatives presented them.

Now, change the price of a case of water in the above scenario to $100/case. What would be different? Of course, the man with a family of three would now only be able to buy one case of water, giving him what his family needs, but not necessarily as much insurance against future uncertainty as he would like. He gives up a little, but the family of five whose survival was in grave danger in the $25/case scenario is now able to purchase at least one case of water.

In the latter scenario, both families have enough to survive and a strong incentive to conserve water, thereby reducing demand and lowering its price, all other things being equal.

The so-called “price gougers” may have acted in their own interests, but they have not only benefited society economically, they have saved the lives of the family of five. Thus, Adam Smith’s 241-year-old “invisible hand” is confirmed by the real world yet again.

But there are still those who claim that, while the price gougers have acted rationally and within their rights and may even have inadvertently benefited others, they have still acted immorally. In the case of the recent hurricane in Texas, many say,

“No, you don’t understand. Many of these people aren’t even from Houston. They knew the hurricane was coming and bought up a bunch of water at regular prices, with the express intent of coming to Houston and selling it for huge profits, while others were giving water away for free. That’s immoral!”

First, anyone selling water at any price is obviously serving people who don’t have access to the free water. If the buyers had access to free water, they wouldn’t pay for it, at inflated prices or not.

Second, this sanctimonious moralizing begs the question, “Why didn’t you buy up a bunch of water and go to Houston and sell it at regular prices?”

The answers to the latter question are many, but they can be summarized as follows: most people do not have the time, capital or expertise to do what the price gougers did. Who can afford to take off from their own job or cease running their own business to start a whole new one on a few days notice, much less donate their time? Some can, but not most, which is why after all those who can be by charitable work are served, there is still a market for those seeking profits.

Lost in all the moralizing is the reality that the so-called price gougers face all the same challenges as anyone else, having to forego whatever income they otherwise would have earned if not for their disaster-relief project, and face the risk of losing future income because they took off from their jobs or put their own regular businesses on hold. These losses and risks must be compensated, which is another reason they sell products at a premium price, in addition to supply/demand realities.

Thus, in the real world, even with as many people as are able acting as charitably as possible, there is a need for those seeking profits from higher-than-normal margins, whose self-interested actions save lives and mitigate the devastating effects of disasters. Yet, the rest of the world condemn them and governments seek to punish them, threatening not only the price gougers, but those whose lives they may save or whose suffering they may lessen during the next disaster.