Thursday, May 11, 2006

The missed debate over 'price-gouging'

Investor's Business Daily recently ran an interesting editorial on the price-gouging legislation before Congress. The following is an excerpt:

To an economist, there's no such thing as "gouging" in a market that is free and efficient, and the oil and oil-product markets meet that standard. They have been probed often for collusion and other forms of manipulation, and they have come up clean. Charging the going rate under such conditions is inherently fair. The price is right as long as it's determined by the free market.

Economists don't call the shots in a democracy, of course, and public anger over high prices can force even the most sensible politicians into a corner. Do they try to educate the public -- and risk losing office in the process -- or do they go with the flow and try to do as little damage as possible? If it's the latter, they can limit the market interference by making sure any price-gouging rule is limited in time and place to some short-term crisis, like a hurricane.

Unfortunately, the House bill is not designed to fade away. If it were put on the books, it would eventually create price rules of some kind, with stiff penalties for violators and potentially rich publicity for prosecutors. The net effect would be a new price-control regime, and millions of American motorists remember how the last such regime went.

It's a fundamental rule of markets that setting an artificially low price for something will lead to less production -- an artificial shortage. We don't have gas shortages. We'll have them, as in the 1970s, if oil companies, refiners and station owners are forced through regulation or threat of fines to sell below the market price.

Even if Congress thinks it's not serious about price controls, it's already done some damage by endorsing the idea that something -- or someone -- other than supply and demand may be to blame for the gas-price spike. In effect, it's drawing attention away from the steps that should be taken and blaming the usual suspects instead.
I agree with most of the economic analyses, but there is point this article misses that is critical in my mind: it is not knowledge or ignorance of economics that prompted the House to pass anti-"price-gouging" legislation; economics has nothing to do with it. The House voted to outlaw "price-gouging" on moral grounds--animated by the view that profit itself is immoral.

Consider the argument against "price-gouging" during a disaster--an extreme situation that is often used to highlight the alleged evils of capitalism. Let's say that a disaster strikes an area and the municipal water supply is put out of service. In the absence of the normal supply of water, there will be entrepreneurs who will drop what they are doing, fill up trucks with water, drive to affected area and sell that water for a premium, motivated only by the profit that they will receive. Anti-"price-gouging" would criminalize their profits on the grounds that these entrepreneurs are exploiting those who need water.

But are the entrepreneurs immoral? Before the entrepreneurs, there was no water to be had. The entrepreneurs chose to reconfigure their lives in an emergency situation to provide a critical good. In exchange, they set a price for their time and energy that would allow them to profit--that is, they sought to get something out of the work that they performed. To force the entrepreneurs to charge less than the price that they would freely choose is to mandate that they be robbed under the aegis of the law. Furthermore, such action prevents others from buying water at a price that they would freely pay given the circumstances.

Could the victims of the disaster choose not to by water at disaster prices? Of course. Entrepreneurs do not put guns to people's heads saying, "buy from me or else." They say instead, "these is my price; you are free to take it or leave it" and no one has a right to outlaw such terms. Why? Because even in a disaster, one does not have a right to upend an individual's right to live his life for his own sake.

Now I know that to many people, the above scenario sounds cruel and unfeeling. These people will ask what about charity and human kindness. Charity and human kindness are wonderful things and there never has been a shortage of them to people who have been hurt though no fault of their own; think of the millions of dollars of donations made on behalf of the victims of 9/11 or Hurricane Katrina. Yet charity is not a right and when it is coerced, it is no longer charity. It is human cannibalism--and that's precisely what the House seeks to instill through its anti-price-gouging legislation.

Thus the "price gouging" debate ultimately hinges upon a moral argument. Furthermore, note that the free-market economists, for all their practical defense of the market, are unwilling to justify their position with a moral argument. They will offer economic truth after economic truth but they will never challenge their opponents directly by simply stating that the market works because people have a moral right to pursue their self-interest. These free-market economists can never win against the advocates of state power--not when their opponents claim that morality is on their side and continue to remain unchallenged.

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