16 Nov 2012

Defending the indefensible

By Charles Horton: The events surrounding hurricane Sandy have provided an excellent opportunity to learn some basic economic truths. The officials of states hammered by the hurricane flooded the airwaves and newspapers with warnings to those who would increase their prices, always referring to them as price gougers.

“Our office has zero tolerance for price gouging,” was the official report from New York State Attorney General Eric Schneiderman.

“We’re warning price gougers, don’t use a crisis as an excuse to make an unfair profit off of consumers,” North Carolina Attorney General Roy Cooper said.

It was hardly surprising to hear New Jersey Governor Chris Christie issue a blunt warning to merchants that price gouging is illegal and brings harsh penalties. “During emergencies, New Jerseyans should look out for each other,” Christie said.

The chorus of warnings sent the message loud and clear. Don’t get caught taking advantage of your fellow citizen by charging more than you should due to his misfortune or we will come down on you hard.

But, are those who raise their prices really committing an immoral act? Are they taking advantage of their fellow citizens, or are they just being demonized to shift attention away from hapless government officials who are unable to bring needed commodities to the marketplace?

I say these people should be exalted for their determined efforts to serve their fellow man. If anyone is to be demonized, it is the politicians whose blather about gouging actually slows the delivery of vital commodities. If you disagree with me, please keep reading as I defend the price gouger.

No one likes to pay more than they have to for anything. Life would be easy when everything we wished to consume was readily available and priced so low we had plenty of money left to save, invest or consume even more.

The only economic system to even come close to this utopian dream has been free markets. Close is by no means everything we wish for, but it is the best humanity has been able to conceive over the history of its existence. This is due to the fact that those who operate free markets have an understanding of the law of supply and demand.

This isn’t just the simple notion that low supply and high demand raise prices, while high supply and low demand reduce prices, but the realization that in a free market the information of the total supply and total demand are constantly being transmitted to both consumers and producers. It is this pricing information that tells producers how much to produce and where it should be delivered to maximize profit, with profit being the reason we produce anything. It is this same pricing information that allows consumers to know of the scarcity of a product and determine their usage of that product.

You may point to how rising prices discriminates against those without the means to afford the new higher prices. This is true, but fixing prices lower than the market would fix them discriminates against those people who would otherwise voluntarily restrict their usage of a scarce commodity due to the high price of buying more of that commodity.

Artificially lowering prices also tells producers that other markets will be more profitable for their products, or it may tell them that an oversupply exists so less needs to be delivered. This is in fact exactly what happened with gasoline, drinkable water and emergency food.

Refineries could postpone maintenance and produce more for a short period of time to meet needs, but this has costs associated with it and the price information they are receiving says that this extra cost will not be recaptured. Also, each mile that gasoline is transported adds cost to the product. The higher the price at the pump the further away gasoline can be purchased to bring to the region. The long lines and hungry, thirsty people were all the result of price fixing by the government, which they called anti-gouging in order to hide the truth.

This same phenomenon was experienced nationwide during the term of Richard Nixon as he fixed the price of gasoline, causing shortages everywhere. Long lines were common at all gas stations, which were closed for extended periods after running out of gas to pump. Additionally, you can witness the same kind of problem when you see a city that imposes rent control in an effort to keep housing affordable.

It is a shame that we pay so little attention to these lessons which are learned with so much pain and suffering, all of which would be greatly reduced if prices were just allowed to float as they are meant to float in a free market. History is a great teacher, but you have to step up to the trough if you want to eat the knowledge contained there.

While we do not like to pay more for items, rising prices serve us in two ways. First, they will serve to reduce the demand to some extent, making supplies last longer and generally be more available. Second, they provide the capital, which producers need to bid for more resources, which are then used to produce more of the commodity that is in demand.

Only the free market has this feature, and we have a very recent and continuing example of how poorly using the force of government works in solving the problems that the free market solves with the cooperation of all concerned.

Edited by Madison Ruppert


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