Price Gouging Should Be Mandatory

A Case for Price Controls

From the pro-(traditional)-price-controls Roosevelt Institute. I initially thought this image was supposed to be ironic.

Kamala Harris is promising price controls. I guess we’re going full commie now. The Road to Serfdom starts today. Sorry McCarthy, you lost. It seems you didn’t jail enough radicals and red agitators. It’s gotten so bad that even the self-proclaimed torchbearer of democracy is showing signs of concern.

But wait, not so fast. The 100% unbiased Nobel Laureate Paul Krugman and his friends at the New York Times are assuring us that VP Harris isn’t proposing price controls at all. In fact, Mr. Krugman is totally incredulous why anyone would even think that. No you silly little geese, he tells us, what’s being proposed is a ban on price gouging, which is nothing like price controls, it only “prohibits many businesses from ‘demanding an exorbitant or excessive price’ on things including food and fuel during disasters.”

So while yes, the policy is a plan to control prices, it’s definitely not price controls.

I. Price Gouging ≠ Price Gouging

Now to be fair to our friend Paul, there’s obviously a difference between a ban on price gouging and the kind of price controls employed by the Soviet Union and the Nixon administration.

That said, isn’t it kind of weird that a niche piece of technical legislation, which is already law in 38 states and only pertains to rare events, is now a key pillar of the Harris political campaign? As far as I can tell, there haven’t been any recent major disasters necessitating a response. In fact, every time VP Harris and President Biden bring up price gouging, they emphasize how there aren’t any emergencies still happening that would cause excessively high prices (implying the high prices are instead the result of corporate greed). But the emergencies are part of the definition of price gouging!

It’s pretty clear that the Harris campaign is pulling the old motte-and-bailey switcheroo. First, the Biden-Harris administration blames high prices on price gouging, where here “price gouging” means something like “corporate greed”. Second, the Harris campaign proposes a ban on “price gouging.” Naturally, everyone freaks out because conditional on the “corporate greed” talk, this seems like full-on price controls, which would of course wreck the economy. Then, the wonks and Krugman types swoop in to chastise everyone for misrepresenting the policy proposal; the ban isn’t on “price gouging,” it’s on price gouging¹. Here Senator Warren gets caught (watch until the end) trying to run the full game in the same interview.

Americans are used to being gaslit, and given recent word-game shenanigans I think we can forgive them for mistrusting media reporting on what the Harris campaign actually means by price gouging. I, on the other hand, love trusting the media, and will take them 100 percent at their word. The title of this essay refers to price gouging in the narrow, Krugman-definition sense, as in raising prices excessively during times of emergency. But before we get to that, a brief aside on one of the dumbest ideas I’ve ever heard.

II. Greedflation is Dumb

From Noah Smith. His article takes Greedflation seriously and has data and stuff.

Greedflation is the idea that the recent increase in inflation rates was caused by greedy corporate fat cats enriching themselves at the expense of the working man. If you don’t immediately see the problem with this theory², I need to let you in on a secret. Now this might be hard for some of you to hear, but I’ve been studying economics for many years, and it’s my obligation to make the truth known to all who will listen. The people running companies are trying to make as much money as possible.

I’m sorry to burst your bubble. You know how when you go shopping, you’re trying to get the most bang for your buck? The companies are doing the same thing to you, but in reverse! They’re trying to get the most buck for the bang from you.

So when President Biden claims that prices have recently increased because of corporate greed, it raises the question, what exactly does he think the people running companies have been doing all this time? Not being greedy?

Now, many of the proponents of the Greedflation narrative have anticipated this response. Greedflation is still true because something, something, monopoly power. I don’t understand what point this is even supposed to address, since it only raises the same question of what the greedy monopolists were doing before inflation, and on top of that, most industries aren’t monopolies.

The actual way corporate greed can cause prices to increase is through collusion. If competing firms agree not to undercut each other, they can successfully raise their prices and profits. Price fixing is already super illegal, and the game theory makes it hard to do even when laws don’t apply. So while this theory has the advantage of not being false a priori, it has the disadvantage of asserting that the largest illegal conspiracy in the history of commerce has just transpired, and asserting this without offering a single piece of evidence. At least the #Pizzagate people had the emails.

By the way, for the Greedflation true believers out there, now would be your moment to save society. If prices have been artificially raised above competitive levels, you can start your own company worker’s cooperative and charge fair prices, undercutting the greedy capitalists. Of course, the companies will probably cut prices to protect their market share, but wasn’t that the goal all along? You weren’t in it for the money, were you?

III. Prices as Information

The standard pro-price-gouging argument is that allowing prices to rise during emergencies both allocates scarce goods to the people who value them the most, and redirects additional resources towards creating additional supply. Opponents will claim this doesn’t work because short-run supply is perfectly inelastic³, and that the allocative efficiency framework falsely assumes everyone values a dollar equally⁴, and the two sides usually go in circles for a while before giving up.

I think Friedrich Hayek has the best illustration of why price gouging bans are harmful, which he employed in elucidating the broader conceptual point that prices carry information. Unlike your ECON 101 textbook, the world is complex, and there aren’t actually demand and supply curves available for individual actors to consult before making decisions.

Consider the paradigm example used to illustrate price gouging: a city that rarely gets snow is about to be hit by a major snowstorm, and there’s a shortage of snow shovels⁵. A lot of economic analysis is concerned with how the alignment of incentives enables self-interested indviduals to cooperate, but to illustrate a different point, let’s just stipulate that individuals in this society are perfectly altruistic; each person places equal value on everybody’s well-being (including their own). Finally, suppose that price gouging is strictly banned in this society, so prices are all frozen in place during emergencies.

Imagine you live in the affected city and you want to get a shovel. You know other people will need one too, and you anticipate there won’t be enough for everybody. Being perfectly altruistic, you want the shovels to go to those who need them most, but one of those people might be you; how exactly do you adjudicate your needs against the needs of everyone else?

Also, since everyone is altruistic, you anticipate there will be an effort to bring additional shovels to the city. How are you supposed to weigh your own desire for a shovel against the time and resources others will expend to bring you a shovel during a blizzard?

Now imagine you live in an unaffected city. Being altruistic, you might consider renting a U-Haul, buying out your local hardware store, and driving a bunch of shovels to those who need them. How do you determine if the benefit to them exceeds the cost to you? To make matters worse, remember that everyone else is considering the same tradeoff, and that the costs and benefits of your decision depend on the decisions of everyone else.

If prices were permitted to repsond to market forces, and everybody only took actions such that their own marginal benefit (cost) exceeded (fell short of) the price, prices would adjust to accurately represent the social marginal benefit (cost); you could then compare your own benefit (cost) against the price, in order to make the choice that maximizes total social well-being.

Prices, when they adjust to accomodate changes in demand and supply, enable individuals, each possessing their own set of local information, to coordinate to achieve the best outcomes for everybody.

One of the things defenders of price gouging bans will say is that they don’t want to prohibit all price increases, only price increases that are excessive. I too am only against the bad things and supportive of the good things! The problem is that nobody possesses all of the decentralized information required to determine which price increases are “excessive”; we would need access to the information embedded in the market price, which is precisely what the law makes illegal.

IV. Price Gouging Mandates

One of the odd things about price gouging is that despite constant allegations in the media, it doesn’t seem to be very common⁶. If you recall the great toilet paper panic of 2020, were you more likely to see obscene prices or empty shelves? Did it make a difference whether or not you lived in a state in which price gouging was legal?

Let’s again consider the case of the impending snowstorm, but let’s return to the real world, in which people are primarily, but not totally, self-interested. Suppose also that price gouging is legal in this case.

Imagine you’re the Walmart employee in charge of procuring snow shovels for the city about to be hit by the blizzard. Congratulations, you’ve just been handed a giant logistical nightmare, which entails finding and shipping whatever inventory the other-city-Walmarts can spare, and scouring the inventory of every shovel supplier in the continental United States for whatever shovels can be delivered on short notice⁷. Oh and by the way, you’re bidding for shovels and truck space against every other retailer, hardware store, and online buyer in the city.

Now suppose by some miracle you manage to succeed; it took a couple of sleepless nights, but you’ve secured a modest supply of extra shovels for your stores. You paid exorbitant shipping fees and surcharges, and the sales price will reflect that, but you know that your community really needs the shovels, and many people would be more than happy to pay the extra cost. It took a little effort, but hey, you’ve done your own little part in helping ensure the sidewalks and pathways are cleared of snow, and that the people of the city can safely go about their day.

What will be your reward for all this? A thousand TikToks complete with before-and-after screenshots that prove Walmart is evil and rips people off. Then the Jacobin articles, then Vox and the Daily Beast, and then of course the obligatory New York Times op-ed: Did Walmart Just Put Profit Before People?

Of course, you could try explaining that the only way someone could have gotten “ripped off” by the shovels is if they bought one, and if they bought one, they necessarily valued it more than what they paid. And of course, no explanation you could give would make even a shred of difference.

So no, in the real world, you wouldn’t bother with any of that. If you tried, your boss would probably slap you in the face and tell you to go home. Grab a shovel for yourself and go be with your family. And so you would. And the stores would simply sell out. And nobody would be mad.

Oh sure, a few people who would have been willing to pay five times the regular price might get disappointed. But they wouldn’t be mad, like they would be if they suffered the indignity of getting ripped off because had to buy a shovel for double the sticker price.

I’m not the first person to notice that the desire to protect their reputations prevents most sellers from engaging in otherwise profitable price gouging. I am, however, the first person as far as I know to suggest we make price gouging mandatory. The government must absorb the blame that would be normally placed on the companies, so that firms are free to supply their customers with what they need.

To start, the government could fine companies for selling out of necessary items during emergenices. This would force them to raise prices to competitive levels, although I’m concerned they would circumvent this policy by just making the price of a single unit arbitrarily high. Noting that many states prohibit price increases of more than 10-25% during emergencies, we could instead require price increases of more than 10-25% during emergencies.

Whatever the specifics, the goal should be to completely reverse current policy orientation on this issue. In fact, many of the gouging bans are purposely left vague, so perhaps it’s best to keep the gouging mandates vague as well, in order to ensure we have the legal latitude to prosecute each and every non-gouger to the fullest extent.

V. Do I Blaspheme against the Market?

In Section III, I cited the teachings of the prophet Friedrich in illustrating how disruptions to the market are sinful, because they prevent us from using prices to coordinate. How then did I become so unenlightened as to question the natural machinations of the market?

You may have noticed that people don’t like being price-gouged. The market, in her infinite wisdom, divines to us the set of productive activities that best directs resources towards the things people like. So if people like inflexible prices and empty shelves, the market, through the mechanism of brand reputation, will provide. And who am I, exactly, to dictate to people what they should like and not like?

Now in this particular case, it seems that people’s preferences depend on a confused understanding of the world, and by correcting their understanding, we could achieve better outcomes for everbody. Would not the moral response then be to supply the correct information, rather than to apply the heavy hand of the state? Sure, except we’ve been doing exactly that for the last 250 years, and the results are really not good. Even when we somehow found a genuine non-autist with legitimate rizz to make the case, we couldn’t change hearts and minds.

Why would a government mandate do a better job of changing hearts and minds?

One, I think many people have a natural distrust of the market and a bias towards government intervention and planning; people would be more comfortable with a governemnt program which forced companies to store excess inventory for emergencies (and let them charge extra as compensation), as opposed to the exact same state of affairs obtaining if it were the result of unsupervised capitalism.

Second, appearances matter a lot in determining attitudes; Uber and Lyft are two of the few companies that get away with price gouging, and apparently all they had to do was rebrand it from surge pricing to upfront pricing. Similarly, people may not support price gouging, but might they support companies that comply with the Enough Inventory for All (EIFA) Act?

Finally, and perhaps most importantly, government policy can reverse status-quo bias. If price gouging was viewed as similar to student discounts, season passes, and the million other ways by which companies price discriminate without issue, people probably wouldn’t take so much offense to it. A government-mandated change to the status quo would push us in that direction.

VI. Conclusion

Most Americans don't like large corporations. In addition to being a sort of paradox (how are the corporations large unless most Americans like them enough to buy their stuff?), in some cases economically illiterate attitudes interfere with the ability of firms to provide for their customers. In the case of price gouging, I have turned to the dark side, and embraced the reality that the government might actually have a role in helping people. Price gouging mandates would immediately improve allocative efficiency in the situations that matter most, and would also, paradoxically, serve to enlighten us in seeing the value of economic freedom.

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1. This is probably a pretty smart piece of campaign engineering. I’m even fine with Mr. Krugman playing his part in the whole thing, but it’s particularly galling when he says something like, “I’ve been amazed at how many credulous commentators, and not just on the right, have asserted that Harris is calling for price controls.”

2. One reason why people belive nonsense theories of inflation is that there is no consensus acceptance among economists of a theory of the price level. The two mainstream views are described here and here. See here for a heterodox view that shows promise. See here for a heterodox view that is false.

3. Note the inherent contradiction between “sellers [] exploit their position by raising prices on goods already in their inventory,” and “investors aren’t going to set up a new snowblower-manufacturing hub based on a blizzard, because by the time they had any inventory to sell, the snow would long be melted.” Do the sellers want to have inventory to exploit customers, or not have it because the snow is melted? Also, it never occurs to the author that the investors might be incentivized to hold more inventory for next time, if they knew you would let them raise prices.

4. Of course, they usually can’t actually express this argument coherently, so I have to make it for them. The actual article says that, “The laws recognize that consumers, not being the coldly rational Homo economicus of academic models, are going to be less price-sensitive during disaster.” This is very confused! Does the author think economists think rationality means not decreasing price-senitivity during disaster?

5. While snow shovels during a blizzard has been a classic example of price gouging for many years, I noticed that in the recent anti-gouging Atlantic piece, the scarce good has been upgraded to a snowblower. The idea that people now have a right to affordable snowblowers is pretty funny to me, but lowkey it’s a huge whitepill that demonstrates how far we’ve come as a society. I hope future iterations of the article complain about people getting ripped off by price gouging on heated driveway installations.

6. I did find this civil case, as a result of which Hillsdale Farms had to donate 1.2 million eggs to New York food banks. I like how the case was settled like a celebrity game show, in which the winnings are donated to a charity of the winner’s choice.

7. If you don’t like this story, instead consider the possibility of storing sufficient inventory for emergenices. For Walmart not to lose money on a shovel that would only sell during a blizzard, the minimum shovel price increase would be: x = (1+r)^t + c(1+r)[(1+r)^t-1]/r, where c is the yearly unit storage cost as a fraction of the regular price, r is the weighted-average cost of capital, t is the average number of years between blizzards, and x is the ratio of the blizzard price to the regular price. Given industry-standard values of c, if Walmart wanted to carry shovels for blizzards that occurred every five years, they would have to at least double or triple prices.