Ethics and Gouging
During most emergencies there are those who could certainly use quite a bit of help and it is on such occasions that complaints about gouging surface most vociferously. The recent storms and hurricanes in the Northeast and elsewhere saw many people having to board up their homes and businesses and evacuate the area for safer regions. Some did not prepare for these times prudently enough and now depend on the help of others who have or who are in the business of storing up and selling the materials such times require. Some just couldn't plan ahead.
The usual complaints on such occasions have to do with gouging – with people, including private parties and businesses, charging much higher prices than in times of less inclement weather for the materials that are needed to cope with the emergency. And there is something to these complaints, even if taking legal measures against them are completely wrong.
In a free society whoever is selling something is free to ask whatever price he or she desires. Of course, when emergencies hit and the materials are immediately needed by many people, the unusually high price will usually have to be met or one must go without. And this makes it appear that there is something wrong with asking the higher price.
The truth is, however, that there is no universal principle for how people should act in such emergencies. Yes, there are some who ought to be generous, at least to those who have been hit hardest and had the least warning of the impending disaster. Others, however, who ought to have known better and thus been well prepared, do not deserve such generosity – they brought the problems they face on themselves and have no moral justification for demanding that others bail them out. They will just have to pay in order to be the Johnny-come-lately folks they have elected to be.
Exactly what is the proper way to relate to those who face these kinds of emergencies is something one cannot tell from afar. Here is an instance when local knowledge, with only the most general notion of propriety to back it, is the only kind that will inform one of the facts needed to determine what course one ought to take. Neighbors may know each other well enough to judge whether those unprepared for disaster are negligent or innocently ignorant or have been prevented from being well prepared by unavoidable circumstances – say some family illness made preparations impossible this time.
Economists tend to defend gouging based on their view that prices are a matter of what the market will bear. In other words, if one can sell one's goods or services for a high price, it is only sensible, rational to do so. Carpe diem, as the saying you—seize the day! Any good entrepreneur will have sympathy for this attitude and, in moral terms, it is often quite proper since one ought to make the most of one's assets so as to add to them through trade.
Yet, of course, there are circumstances in which prudence is not the highest of the virtues to be practiced. Generosity and charity are virtues, too, mostly for special occasions. Life is not a scene of perpetual emergencies, at least not in relatively free societies where people have the right to order their lives reasonably well protected. They are sovereign, not under involuntary servitude, and so can be expected to govern themselves.
Given that life does confront us with occasional emergencies of various sorts, our self-government needs to involve preparing for such events, not expecting others similarly challenged to come to bail us out. Yet there are also cases of really unforeseen challenges – people can be struck down by multiple adversities all at once and on such occasions those close to them, sometimes even strangers, have good reason to come to their assistance.
It is when some take advantage of those hit with such multiple emergencies by failing to be considerate that the charge of gouging makes sense and people should avoid doing it. Exactly when this is cannot be said ahead of time, nor from afar, but everyone who isn't blind to the vicissitudes of human life will know what I am talking about.
The bottom line is that these are matters of human choice and there is no universal principle to guide us all to a one-size-fits-all policy.
Discretion, good judgment, is what is needed, certainly not some politicians and bureaucrats rushing in where even fools won't dare to tread. Certainly bringing in the state – the police, in other words – is wrong and tends to lead to malfeasance since it mixes human emergencies with coercive force, a bit like a marriage between the Salvation Army and the Mafia.
Tibor Machan is the R. C. Hoiles Professor of Business Ethics & Free Enterprise at the Argyros School of Business & Economics, Chapman University, Orange, CA 92866.
Posted by Dilence Sogwood on 12/14/12 10:09 AM
Indy Lyn gets it right by saying:
"If true gouging does happen, I would think twice about really 'needing' the item in question, IMHO. "
Thus the supply and demand are rationalized rather than horded!
Posted by Dilence Sogwood on 12/14/12 10:07 AM
Furthermore, when a "Price Gouger" is forced to sell at state-mandated low prices and thus sell out the store, the "Price Gouger" cannot replenish his inventory at a level where marginal revenue ] marginal cost.
Therefore the "Price Gouger" is forced to wait it out with bare inventory. This requires the merchant to pay his fixed costs, and many of his variable costs while taking no money in.
Price gouging laws therefore screw the merchants in times of demand spikes. This is effectively a redistribution of wealth, mandated by the state.
Posted by Friend_of_John_Galt on 12/13/12 05:42 PM
Allen05 fails to consider that a gas station without power, might have an incentive to buy or rent a generator to pump the gas out of its tanks, if the price were raised sufficiently. High prices always call forth additional demand. Governmental interference in markets always causes false shortages and/or misallocation of resources.
When resources are offered at a price that's artificially low, those in a panic are likely to hoard. I note how water bottles disappear within hours from all stores following a modest earthquake (in California) and plywood disappears from cities threatened by a hurricane. Both natural events, though uncommon, are predictable enough that a thoughtful person would have already set up a means to have necessary emergency resources available. (I keep a supply of bottled drinking water in our garage, and simply cycle it through or normal needs, to keep the stock fresh. In an emergency, I would draw down my inventory and not need to seek additional supplies elsewhere. Should I make an error, and have insufficient drinking water on hand, then I would rather pay a high price to cover immediate needs, than find that all the supplies were sold to others who (in their panic) decided to hoard.) Supply problems following natural disasters typically clear themselves in a week or so... Then prices would most fall back to the normal levels as before the disaster occurred.
I can't understand why a vendor should not earn as much as he/she can on providing needed supplies. This is as "fair and honest" as it gets. The high price is likely to make other potential suppliers seek to bring highly desired materials into the affected area -- indeed, the "gouging" rules are often reported to have caught an outsider who brought in "x" product and was offering it at an "excessive" price. But that is EXACTLY the desirable result, since if enough outsiders bring in products, then they would be forced by the "invisible hand" of competition to lower their prices to the market clearing level.
I note that the stock market works on this principle every day that it is open. There are buyers and sellers who come forth to trade based on that day's perception of the value of each stock. Sometimes a particular stock shoots up in price as those who wish to buy it are a greater number than those who wish to sell it. After some period of time, more sellers might appear (who wish to book a profit on their earlier investment in the stock) who then sell ... and often enough, then the market price drops when (or if) the number of sellers exceeds the number of willing buyers. Is this concept so difficult to understand?
Posted by IndyLyn on 12/13/12 03:38 PM
I lived on the Missouri River for some 15 years. Had my living portion of my house built on the second level, with first level primarily empty of anything which could not be moved upstairs... .because every year we flooded... and flooded good. The water usually rose about three feet into the first level of the house! Well prepared with food, fresh water, filters, etc.
Folks who live in tornado prone states, have underground basements, shelters, and storage space for survival for long periods.
Those folks who live on either east or west coasts KNOW they can't fight oceans, so they have to move inland for the prepping.
I kinda feel that those who do prepare as best they can for any 'expected' emergency... . will be able and should help those who physically couldn't prepare (that's what charity and the Church is all about). Sandy was an 'expected' emergency and New York and New Jersey are not peopled by thinking preppers. Maybe they thought everyone else would come to their rescue as we did in the 'unexpected' 9/11 emergency.
If true gouging does happen, I would think twice about really 'needing' the item in question, IMHO.
Posted by Dilence Sogwood on 12/13/12 02:45 PM
Allen are you really on a libertarian website with comments like this:
"I have never understood why in deciding who has access to scarce resources giving it to the more financially well off is more fair and honest than a random lottery by odd or even license plate number."
Because it would require the state to enforce that lottery allocation of goods. Sellers would be required to surrender their goods to parties against their will; Buyers would be barred from purchasing needed goods.
That is not freedom.
Posted by Dilence Sogwood on 12/13/12 02:35 PM
You completely forgot to mention the most important issue: rationalization of supply.
People will pay for what they need. If prices are artificially below market price, some people will horde and eventually (quickly) supply will evaporate. You will go from having expensive goods to having NO goods available at any price.
People have differenitated needs - (think of a family that needs baby formula versus a tree service company that needs gasoline for chainsaws). These needs can be addressed through pricing. Gouging laws lead to shortages and suffering.
Focusing only on the "evil profits" side of the issue ignores the supply rationalization side.
To Allen's half-understood point about Sandy is that once pumps did get electricity, everyone drove around with a full tank for fear of a shortage. The average tank is typically less than half full. The hording behavior was economical at a personal level due to price gouging laws, but put a serious burden on the ability to source gasoline in the handful of days after power came back on.
Alenn is also extrapolating one set of idiosyncrating circumstances onto a simple model as proof of invalidation, which of course is a fallacy.
Posted by Allen05 on 12/13/12 09:50 AM
Part of the theory is that if prices rise then other will see the profit and bring in extra resources. Hurricane Sandy provides an instructive example where gasoline prices jumped. The idea that additional profits would bring extra resources would not work since the problem was not a lack of gas but rather a lack of electricity to pump it out of the tanks. I have never understood why in deciding who has access to scarce resources giving it to the more financially well off is more fair and honest than a random lottery by odd or even license plate number.
As members of our society we have a larger set of interrelationships than simply how much profit a single individual can make. Just as we would not accept taking gas (for example) away from the owner an giving it to someone in need without fair and honest reimbursement, we should frown on taking advantage of a situation that limits the customer's options.