Wednesday, September 07, 2005

Price 'Gouging' (US), Profiteering (UK)

A most interesting column in today’s (7 September 2005) (Washington DC): “In praise of price gouging” by John Stossel (© 2005 John Stossel)

It’s about the politicians and media who want to punish those who practice price “gouging”, especially when there are shortages caused by events like last week’s hurricane. Stossel disagrees and makes a counter-case:

“Consider this scenario: You are thirsty -- worried that your baby is going to become dehydrated. You find a store that's open, and the storeowner thinks it's immoral to take advantage of your distress, so he won't charge you a dime more than he charged last week. But you can't buy water from him. It's sold out.

You continue on your quest, and finally find that dreaded monster, the price gouger. He offers a bottle of water that cost $1 last week at an "outrageous" price -- say $20. You pay it to survive the disaster.
It was the price gouger's "exploitation" that saved your child

Stossel’s good point is that prices cause people to change their behaviour. Instead of buying casually for any reason, including trivial ones, the make a more serious choice than usual, weighing up whether to buy the same amount or less and save their money for something else.

Adam Smith had quite a lot to say about famines in “Wealth of Nations” (“Digression Concerning the Corn Trade and Corn laws”, IV.v.b: 524-43) and the price changes and their consequences he spoke of for famines apply to other situations of severe shortages. He considers that the actions of governments to cap prices, will either bring on severer shortages, as people stock up, or from their continuing to consume recklessly.

Stossel continues:

“Might the water have been provided by volunteers? Certainly some people help others out of benevolence. But we can't count on benevolence. As Adam Smith wrote, "It is not from the benevolence of the butcher, the brewer or the baker, that we can expect our dinner, but from their regard to their own interest."

In quoting this famous passage, Stossel misses off the next sentence, which conveys a most important point, slightly changing the stark message of self-interest towards a more accurate presentation of Smith’s views:

“We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages” [WN I.ii.2: 27]

It is not rampant self-interest that brings about and conducts the exchange, i.e., your money for the merchant’s dinner goods (beef, beer and bead – a comment on an 18th-century diet?), because if two selfish egos conflict, nobody would get their dinner easy, nor would the supplier get whatever he wants in exchange.

The parties to the transaction must each ‘lower’ the passions by which they express their self-interest to the level which the other party can go along with. This is the bargaining process: the seller starts out with a higher price and the buyer with a lower price than the one with which they both end up. Hence, the buyer tries to convince the seller that charging a lower price would be good business and in his interest – unsold beef, beer and bread go mouldy – and the seller tries to convince the buyer of the benefits of wholesome beef, beer and bread if he buys now, which is in his best interest.

Stossel’s last point is a neat summary of his case:

Force prices down, and you keep suppliers out. Let the market work, suppliers come -- and competition brings prices as low as the challenges of the disaster allow. Goods that were in short supply become available, even to the poor.

It's the price "gougers" who bring the water, ship the gasoline, fix the roof, and rebuild the cities. The price "gougers" save lives.”

In the space John Stossel had (c.700 words) he does a pretty good job of explaining some economic hard truths. Try to disregard them, no matter your motives, and you risk making a situation worse. Government directed ‘famine relief’ in countries without the rule of law often becomes the selective punishment of whole populations who do not conform to the Government’s criteria of ‘good citizens’ (Zimbabwe, Sudan, Ethiopia). Where government agencies are corrupt and incompetent similar consequences come about (UN ‘Oil-for-Food’ in Iraq).

Resolving famines and severe shortages caused by earthquakes and floods is never an easy undertaking. The best modern author on the subject is Amartya Sen; though you won’t go far wrong by starting with John Stossel’s short piece on one aspect of dealing with emergencies.


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