Making the case against 'price gouging' laws: a challenge and an opportunity.

AuthorLee, Dwight R.

If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilization), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them.

--F. A. Hayek, The Fatal Conceit (emphasis in original)

Few examples exist of greater disagreement between the public and economists than the one over laws outlawing "price gouging" (a term I put in quotation marks, along with "price gougers," because I consider both to be emotionally loaded and misleading, as I explain later in this essay). The general public's view is clearly reflected in the almost complete lack of political support for allowing prices to be determined by market forces after a natural disaster. Public opposition to "price gouging" is highly emotional and clearly unites politicians. In contrast, most economists are skeptical of politically imposed price ceilings (or floors) because such ceilings (floors) interfere with the operation of market forces that are the best means of allocating scarce resources to their most valuable uses and thus harm consumers. (1)

The persistent public support for "price gouging" laws represents a challenge and an opportunity for economists who are interested in improving public understanding and appreciation of how markets work. The challenge is that even though millions of students have taken economics courses, most of which explain why price ceilings generally harm consumers, there has been no noticeable reduction in public support for "price gouging" laws. (2) The opportunity is found in the reasonable expectation that a convincing case against "price gouging" laws would suggest an effective approach for moderating much of the skepticism and often outright hostility that exist toward relying on markets and market prices in general.

Although economic arguments are necessary for making a widely convincing case for letting prices respond to market incentives after a natural disaster, most people will not take those arguments seriously until economists take moral concerns seriously. For example, a highly emotional and instinctive morality appropriate for small groups is widely seen as being violated when those seeking profits sell needed goods and services at high prices after a natural disaster. This instinctive morality is to be applauded when applied to situations in which it is appropriate. For example, taking food to a sick friend with no thought of asking for a payment. But achieving the extended cooperation needed to help disaster victims requires markets and unrestrained market prices, as explained by economic reasoning. For this reasoning to resonate broadly, however, it has to be presented in a way that makes clear that markets supplement, not substitute for, help motivated by our instinctive morality to provide aid to victims of disasters as well as to people in general. Critical to a convincing argument for eliminating "price gouging" laws is explaining that doing so allows both the morality of caring for others and the working of the markets to complement each other in achieving moral outcomes, such as helping disaster victims, more effectively than either could achieve alone.

This paper begins by discussing the advantages and disadvantages of our instinctive small-group morality and how markets have reduced some of the disadvantages by expanding the number of people with whom we can productively interact. The next section explains why natural disaster victims cannot get all the help they need unless the help motivated by our instinctive morality is supplemented and enhanced with the information and motivation provided by unrestricted market prices as well as why, despite this enhancement, people still fail to appreciate the benefits those prices provide. The importance of being clear on what is meant by our "neighbors" when considering "price gouging" is discussed next. In this section, I also introduce the tendency for people to quickly categorize others on the basis of groundless prejudices as another reason for the resistance to seeing price increases as a means to help disaster victims. The fourth section begins with Michael Munger's (2007) story of the arrest of some "price gougers" being applauded by those they were in fact benefiting. This story sets up further consideration of the uninformed prejudice upon which much of the opposition to "price gouging" is based. I argue that highlighting this prejudice can motivate more people to become responsive to economic arguments against "price gouging" laws. Next I consider the perspective of a few philosophers who understand the arguments in favor of markets but still favor laws against "price gouging" because of moral considerations, with the notable exception of one who is persuaded in large measure by economic analysis to oppose those laws. Finally, I address the concern that the poor are harmed by "price gouging."

It's Not All about Me

Self-interest is an important component of human motivation; economists typically consider it the dominant motivation when they are constructing models of economic behavior. Adam Smith provided a succinct justification for self-interest when he observed that "[e]very man is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so" ([1759] 1982, 82). But Smith also recognized that people moderate their own self-interest with sympathy for others. Early in his first book, Smith wrote, "[W]e enter as it were into [another's] body, and become in some measure the same person with him, and thence form some idea of his sensations, and even feel something which, though weaker in degree, is not altogether unlike them" ([1759] 1982, 9). This sympathy for others seems to be instinctive, as evidenced by the negative reactions from infants (as young as six months old) to puppets that harm another puppet and their positive reactions to puppets that help the other puppet (Bloom 2013, chap. 1).

This instinctive morality provides the emotional foundation for the loyalty we have to our group as well as the love we have for and receive from our family and friends, all of which gives meaning to what would otherwise be emotionally barren lives. It also helps individuals expand their motivation beyond narrow self-interest to include concern for others within their orbit of personal activity, helping to reduce the tension in the "me versus us" that exists in small social groups or tribes.

Like all benefits, the social harmony fostered by our instinctive morality comes at a cost. It motivates greater suspicion, hostility, and likelihood of violence between groups, with this "us versus them" hostility often triggered by trivial distinctions (Greene 2013, 54). The distrust and hostility between groups has been a serious obstacle to peace and prosperity throughout human history. The most obvious example of their manifestation is the wars that have cost many lives and diverted resources out of productive activities into destructive ones. It has been estimated that the 100 million or more people who died worldwide from wars in the twentieth century (including all war-related causes such as famine and disease) is only 5 percent of the estimated war-related deaths that would have occurred if the world's population were still grouped into small bands and tribes (Keeley 1997, 93). (3) Intertribal conflict greatly limited trade between hunter and gatherer tribes, which required each to be almost completely self-sufficient, leaving little opportunity for people to increase their productivity by specializing in narrow activities and trading their output for those of a large number of other specialists. Our instinctive morality provided hunter-gatherers confidence that they could rely on the help from others in their tribe, but there were few to provide that help and little if any increase in the productivity of its provision.

Today trade has been expanded to include people all over the world, and we have had centuries of opportunities to benefit from and increase the gains of that trade, which explains why we enjoy a prosperity today that was unimaginable even a hundred years ago, much less during the era of hunter-gatherers. In less than an hour in a local grocery store, we can hunt for and gather a week's supply of food (much of it ready to eat) from a choice of thousands of items (including a host of nonfood items), made available by the cooperative (and specialized) efforts of millions of complete strangers making productive use of large amounts of human and physical capital. And we can pay for that food with the income earned in three or four hours from our own specialized productivity, such as working as an accountant in a comfortable office for a manufacturer that produces nothing but ball bearings using highly specialized machinery. (4)

Obviously, we are talking about the benefits we realize from markets based on private property, voluntary exchange, and specialization, with the freedom to pursue our own interests as long as we do so without interfering with others' legitimate rights to do the same. The tremendous benefits we receive from the cooperative efforts of a multitude of strangers in almost every aspect of our lives, not just when we go to the grocery store, are truly amazing. Yet among the general public little thought is given to these benefits made possible by the global cooperation generated in response to market prices, most likely because those benefits are made available so spontaneously that they are easily taken for granted. And when people do think about markets, they tend to do so in negative terms, seeing the impersonal nature, self-interest, and...

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