Cafe Hayek — where orders emerge

The Price of Something Is Not Necessarily the Cost of that Something

by Don Boudreaux on September 7, 2017

in Prices, Reality Is Not Optional, Seen and Unseen

Here’s a letter to a woman who heard me interviewed this morning on the radio about so-called “price gouging”:

Ms. Kera Singh

Ms. Singh:

Thanks for your e-mail. About my opposition to government prohibition of “price gouging,” you ask “What if someone cannot afford to pay the high price for a motel room or for even some water?”

Your question is good and appropriate. I can’t deny that the possibility you raise might occur or that its occurrence would be tragic. But I don’t believe that this possibility is sufficient to justify government restrictions on prices following natural disasters. The reason is that another possibility is much more likely than is the one you identify. This other, more likely possibility is that price controls make desperately needed goods and services even more expensive – more difficult and costly to get – than goods and services would be without such controls. I spell out in this blog post some of the reasons why price controls likely inflict disproportionate harm on the poor – that is, why price controls likely further reduce, rather than increase, poor people’s access to much-needed goods and services.

I’ll be happy to elaborate more on this blog post if you wish. But let me close here by noting an inescapable reality: under such severe circumstances, too often the choice is not, say, a bottle of water for $25.00 or a bottle of water for $2.50. The choice instead is a bottle of water for $25.00 or no bottle of water for $2.50. No one wants to pay $25.00 for a bottle of water, but no person desperate for water will reject the option of buying a bottle of water for $25.00 if the alternative is to have no water to buy at the government-capped price of $2.50. Harsh as they are, these alternatives – high prices for goods that are available, or low prices for goods that are not available – are typically the ones that confront people in disaster-ravaged areas.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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Some Links

by Don Boudreaux on September 7, 2017

in Books, Myths and Fallacies, Prices, Reality Is Not Optional, Seen and Unseen, Subsidies, The Economy, War

My colleague Tyler Cowen, writing in Bloomberg, describes so-called “price gouging” as “a type of hurricane aid.”

GMU Econ alum Mark Steckbeck applauds so-called “price gougers.” A slice:

Not only does the higher price of water deter greedy people from indiscriminately hoarding what limited supply of water is currently available in that immediate area, it creates the incentive for people in places like Austin, Dallas, Norman, Oklahoma, and Little Rock, Arkansas to shift supplies of water from those areas where it is plentiful, to the Gulf coast areas of Texas where it is desperately needed. Without the reward from charging higher prices, most won’t do it.

I’m honored that Mark Perry fashioned one of my recent blog posts into a Venn diagram.

No one of good sense can fail to be worried about North Korea’s development of nuclear weapons and of missiles to deliver these weapons far and wide. George Will writes on this matter with good sense.

Jim Bovard explains how government subsidies increased the damage done by hurricane Harvey. (The same is likely to be true of hurricane Irma.)

My colleague Bryan Caplan’s insight-filled 2007 book, The Myth of the Rational Voter, is on a reading list for a seminar taught by Harvard’s Greg Mankiw.

My Mercatus Center colleague Dan Griswold continues with his monthly assessment of the Trump economy.

Rosemary Fike adds her clear voice to those who demonstrate that the destruction wrought by natural disasters is not good for the economy.

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Quotation of the Day…

by Don Boudreaux on September 7, 2017

in Competition, Complexity & Emergence, Curious Task, Hubris and humility, Seen and Unseen, The Profit Motive, Work

… is from page 133 of Israel Kirzner’s 1985 volume, Discovery and the Capitalist Process:

Market prices in the Austrian view are not primarily approximations to a set of equilibrium prices; instead, they are (disequilibrium) exchange ratios worked out between entrepreneurial market participants. On one hand, these exchange ratios with all their imperfections reflect the discoveries made up until this moment by profit-seeking entrepreneurs. On the other hand, these ratios express entrepreneurial errors currently being made. Market prices, therefore, offer opportunities for pure profit. And we can rely on these opportunities to create a tendency for market prices to be changed through the rivalrous bidding of alert entrepreneurs.

DBx: The market is not simply a process; it is an error-discovery, error-correcting, and creative process. And so to judge the real-world market at any moment according to the criteria of what economists call general competitive equilibrium – or “dynamic stochastic general equilibrium” – is a mistake. General-equilibrium models correctly take account of the enormously complex economic interconnectedness of individuals and firms throughout a modern economy, but these models incorrectly emphasize equilibrium conditions. A focus on the interconnectedness yields far more genuine economic insight than does a focus on the hypothetical equilibrium. Unlike focusing on equilibrium conditions, focusing on the interconnectedness does not blind us to the incessant experimentation, error-discovery, error-correction, and genuine creativeness of the market process.

An economist overly focused on equilibrium, for example, might see (or thinks he sees) wages for some workers that are below the value of those workers’ marginal products, and then conclude that government should somehow force those wages up. In contrast, an economist focused on the process understands that, as long as there are no government-erected barriers to restrict labor mobility, these excessively low wages are profit opportunities that entrepreneurs will likely soon exploit. This economist understands also that government intervention (say, a minimum-wage statute) blocks this process of market adjustment.

Even if this intervention helps some workers without harming any other workers, it has achieved only what the market process was likely to soon achieve. That is, at best a specific instance of market error was corrected by government sooner than it would have been corrected by the market process. Some might chalk this achievement up as a positive accomplishment of intervention. But government is emphatically not a process – at least not one as nimble, nuanced, and quick as the market process. Once in place, the intervention – here, the minimum wage – remains in place. If market conditions change (as they inevitably do), the minimum wage in the above example that was ideal when it was imposed almost certainly becomes a source of harm in the future. The entry into the labor market of new workers who cannot produce enough per hour to justify their employment at the minimum wage search for, but do not find, jobs. Some businesses that would have profitably served their owners and consumers – and have been a source of profitable employment for low-skilled workers – never are established because the minimum wage makes those particular business plans unprofitable.

There’s a deeper issue: the economist or politician or bureaucrat who claims to have discovered a market imperfection that can be remedied by government intervention claims to know more than do the entrepreneurs and other market actors actually on the ground and actually spending, or not spending, their own money. While in principle the possession by the economist or politician or bureaucrat of such superior knowledge cannot be ruled out, in practice such knowledge is so unlikely to be possessed by these market outsiders that we should, as a rule, ignore outsiders who claim to possess such knowledge. Why should these market outsiders – none of whom has much, if anything, personally at stake on their claims – know more than market participants about the specific opportunities currently extant in the market? Why should we trust the assertion of a professor in his office, or of a politician on the stump, that some particular unexploited profit opportunities currently exist in the market, given that entrepreneurs and other market actors actually on the ground in the market have incentives to exploit and, hence, to rid the market of particular profit opportunities? The likelihood is far too great that any such claim by such a professor or politician or bureaucrat or policy-wonk is mistaken.

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Bonus Quotation of the Day…

by Don Boudreaux on September 6, 2017

in Curious Task, Hayek, Hubris and humility

… is from page 275 of the 2014 collection, The Market and Other Orders (Bruce Caldwell, ed.), of some of F.A. Hayek’s essays on spontaneous-ordering forces; specifically, it’s from Hayek’s profound 1964 article “The Theory of Complex Phenomena”:

It is high time, however, that we take our ignorance more seriously.

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How Likely Are Prohibitions On “Price Gouging” to Help the Poor?

by Don Boudreaux on September 6, 2017

in Myths and Fallacies, Prices, Reality Is Not Optional, Seen and Unseen

On this EconLog post by David Henderson, commenter David Cantor wrote: “There is a further consequence to these very high prices. Matching supply and demand through high prices also means that scarce resources are preferentially allocated to the well-off. I find this morally repulsive.” Mr. Cantor’s concern is understandable. And his comment prompted me to offer this reply (slightly expanded here), none of which is new but all of which warrants repetition:

Keep in mind that even the expectation of very high prices causes quantity supplied (and quantity demanded) responses before natural disasters strike. These responses, it can be argued plausibly, occur even for many disasters that strike without specific prior warning (such as earthquakes in California), but these responses without question occur for natural disasters, such as hurricanes and blizzards, for which their victims have prior warning.

Take hurricane Irma. Roads, bridges, and the electrical grid throughout Florida are today (September 6th) all fine. Irma is still hundreds of miles away from there. Yet the expectation that there will be very high prices several days from now, immediately after Irma’s anticipated landfall in south Florida, surely causes merchants to bring to south Florida many more supplies of bottled water, propane, and other such goods today – more supplies than they would have brought in today were no hurricane bearing down on that region. If Irma hits as anticipated, south Floridians will therefore be supplied with staple goods better than they would be supplied were prices there not allowed to rise after the hurricane strikes.

(Also note that, if prices aren’t allowed to rise, fewer merchants with available inventories will bother to open their stores after the storm: more merchants than otherwise will remain at home with their families, not bothering to brave the downed power lines and obstructed roads to get to their stores. Relatedly, if prices aren’t allowed to rise, merchants will, before the storm strikes, spend less time and fewer resources guarding their inventories against the prospect of being damaged by the storm.)

Importantly, prices in south Florida start to rise in anticipation of the hurricane even before it strikes. These price hikes not only further incite suppliers to bring more provisions to south Florida, they incite consumers to use supplies of those goods more sparingly – that is, more “efficiently” – than they would have used them were the prices not allowed to rise.

As for the rich having ‘unfair’ access to goods if the prices of those goods are allowed to rise to market-clearing levels, this possibility (which no one can deny) must be weighed against the fact that prohibiting price hikes almost certainly ensures that available supplies in the disaster regions are kept fewer than they would be absent the prohibition of price hikes.

But there’s a relevant question here: how can you be sure that the well-off will not have even greater advantages over the not-well-off in acquiring goods that are in short supply because of the prohibition on price hikes? It’s possible that an effective prohibition on price hikes will result in the poor getting a greater quantity of these goods than they’d get absent the prohibition, but arguments in favor of prohibitions on so-called “price gouging” typically merely assume that this outcome will arise. Yet the validity of this assumption can plausibly be questioned. Listed below are only some possibilities that opponents of “price gouging” too often fail to consider.

With prices kept by government dictate from rising…

… merchants hoard more of their inventories hoping to sell them at black-market prices, which will be even higher than prices would be were there no government prohibition on price hikes;

… merchants give family and friends – and themselves – greater access to available supplies the prices of which are kept artificially low by the prohibition on “price gouging”;

… merchants give political officials, business acquaintances, and celebrities greater access to available supplies the prices of which are kept artificially low by the prohibition on “price gouging”;

… the poor, because their homes and vehicles suffer, on average, greater damage than is dealt to the homes and vehicles of the rich, are less able to get quickly to the front of the queues of consumers waiting to buy goods in short supply;

… the rich, anticipating the queues that will arise because of the prohibition on “price gouging,” hire people to rush to stores immediately after the storm passes in order to buy supplies for the rich; (and the amounts that the rich will thereby purchase are likely to be greater, because of the artificially low prices, than the rich would buy if prices were allowed to rise);

… the rich – again because their homes are less likely to be severely damaged by the storm than are the homes of the poor – simply won’t need plywood and other building materials as desperately as will the poor;

… the rich, because they are more likely to have generators than are the poor – and to have more storage space (including refrigeration and freezer space) in their homes – will be better provisioned than the poor after the storm and, thus, will be less affected than are the poor by any government-induced shortages of goods;

… the rich are better able than are the poor to arrange and pay for ‘special’ or personalized deliveries of goods from a distance;

… compared to the poor, the rich will disproportionately evacuate from areas likely to be struck by a severe storm, leaving in the storm’s aftermath disproportionately large numbers of the poor and non-rich competing for bottled water and other goods that are in short supply in the ravaged area.

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Quotation of the Day…

by Don Boudreaux on September 6, 2017

in Curious Task, Hayek, Philosophy of Freedom, Seen and Unseen

… is from page 59 of F.A. Hayek’s brilliant 1945 lecture “Individualism: True and False,” as this essay is reprinted in Studies on the Abuse & Decline of Reason, Bruce Caldwell, ed. (2010), which is volume 13 of the Collected Works of F.A. Hayek (original emphases):

This is the constitutional limitation of man’s knowledge and interests, the fact that he cannot know more than a tiny part of the whole of society and that therefore all that can enter into his motives are the immediate effects which his actions will have in the sphere he knows. All the possible differences in men’s moral attitudes amount to little, so far as their significance for social organization is concerned, compared with the fact that all man’s mind can effectively comprehend are the facts of the narrow circle of which he is the center; that, whether he is completely selfish or the most perfect altruist, the human needs for which he can effectively care are an almost negligible fraction of the needs, of all members of society. The real question, therefore, is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which he can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole.

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Probing the Ethics of So-called “Price Gouging”

by Don Boudreaux on September 5, 2017

in Myths and Fallacies, Prices, Seen and Unseen

In my latest Pittsburgh Tribune-Review column I compare three different hypothetical responses to natural disasters. A slice:

Smith lives in Topeka, Kan. Upon learning that a hurricane will hit the Gulf Coast, she spends her own money filling her flatbed truck with plywood, bottled water and other supplies, then drives through the night to the ravaged region. Upon arriving, Smith gives all of her supplies, free of charge, to hurricane victims.

Jones lives in Tulsa, Okla. Upon learning of the hurricane, he does the same as Smith. But upon arriving, Jones sells all of his supplies at prices far above “normal.” If caught, Jones will be prosecuted for “price gouging.”

Williams lives in Taos, N.M. Upon learning of the hurricane, he remarks to his wife, “That’s so sad,” then does nothing further. He continues his daily life, far from the hurricane’s havoc.

Everyone agrees that, of these three, Smith is the most praiseworthy. She generously donated time and resources to help strangers in need. The world needs more Smiths.

But what of Jones and Williams? Williams did nothing to get more supplies to victims and won’t be prosecuted for his inaction. In contrast, Jones did get more supplies to victims, yet for his troubles, he’ll be prosecuted. And when the public passes judgment, Jones will be condemned while Williams will not. (The vast majority of us, after all, behave as Williams does.)

I don’t understand this morality. Unlike most people, I regard Jones as a greater benefactor to hurricane victims than Williams. Williams’ inaction is neither unethical nor praiseworthy. But Jones’ action, while not ethically praiseworthy like Smith’s, is also not unethical. Jones forced no one to pay the high prices he asked. More importantly, had Jones not acted as he did, hurricane victims would have had fewer much-needed supplies.

By condemning and prosecuting Jones, the world does not get more Smiths; it gets more Williamses.

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Reality Only SEEMS to be Easier to Understand If It’s Interpreted as a Battle Between the Forces of Good and the Forces of Evil

by Don Boudreaux on September 5, 2017

in Economics, Hayek, Reality Is Not Optional, Seen and Unseen

Here’s a letter to my former student Will Colson:

Your question is good: “Why do people get so mad at us economists when we indicate that high prices are not caused by businessmen’s greed [but] by consumers’ self interest in buying goods which become suddenly a lot more scarce?” The best that I can offer as an answer is this quotation from Hayek’s 1933 lecture “The Trend of Economic Thinking”:

“The attack on economics sprang rather from a dislike of the application of scientific methods to the investigation of social problems. The existence of a body of reasoning which prevented people from following their first impulsive reactions, and which compelled them to balance indirect effects, which could be seen only by exercising the intellect, against intense feeling caused by the direct observation of concrete suffering, then as now, occasioned intense resentment.”*

The fact is that emoting is easier and more fun than is thinking seriously.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* From page 21 of F.A. Hayek’s The Trend of Economic Thinking (Vol. 3 of Hayek’s Collected Works [1991]).

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Thaler’s Argument Fails

by Don Boudreaux on September 5, 2017

in Prices, Reality Is Not Optional, Seen and Unseen

Friday’s Marketplace report on so-called “price gouging” was very good, featuring as it did Matt Zwolinski and GMU Econ alum Mike Giberson. The economist interviewed in support of government prohibition of “price gouging” was the University of Chicago’s Richard Thaler. Here’s a letter that I sent to Marketplace:

Thanks for an informative report during your September 1^st program on so-called “price gouging.” It seems, however, that the chief reason Professor Richard Thaler offered in opposition to “price gouging” in fact only further justifies the practice.

Prof. Thaler argued that firms that raise prices during emergencies anger consumers and, as a result, reduce consumers’ likelihood of doing business with these firms in the future. This argument is undoubtedly correct. Yet surely no one is more aware of this downside of “price gouging” – and more interested in avoiding it – than are merchants themselves. Therefore, if after a natural disaster we nevertheless witness significant price hikes, we must ask why the price-hiking merchants are knowingly risking their reputations with consumers. The obvious answer is that the natural disaster caused supplies of goods to fall so extremely that it pays merchants to raise prices even though doing so imperils these merchants’ good reputations.

The fact that merchants willingly endanger their reputations in such situations by raising prices means that consumers’ desperation to acquire bottled water, propane, and other staple goods is extreme. And although the conclusion runs counter to most people’s moral instincts, the ability of high prices to incite suppliers to exert the extra effort that is necessary to rush additional supplies of goods to market is never more needed and vital – and justified – than when consumers are so very desperate to acquire additional supplies that the prices these consumers are willing to pay are so high that merchants will charge these high prices despite the resulting risks to their reputations.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

Thaler’s closing argument against “price gouging” – ““During a time of crisis, it’s a time for all of us to pitch in, it’s not a time for us to grab” – is not only unrelated to his main point in the Marketplace report, it ignores the fact that government restrictions on “price gouging” actually discourage pitching-in and sharing.

UPDATE: Here’s more from David Henderson.

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Some Links

by Don Boudreaux on September 5, 2017

in Crony Capitalism, Environment, History, Myths and Fallacies, Other People's Money, Prices, Seen and Unseen, Subsidies, Trade, Work

Pierre Lemieux exposes the anti-consumer rent-seeking greed that drives much of today’s trade policy. A slice:

The whole process looks absurd, but it is simply political. Aerospace companies – either Boeing vs. Bombardier or Airbus vs. Boeing – lobby for subsidies whose final impact on the world market is not easily measurable, and each company attacks the other’s subsidies. Great companies become efficient at playing the political games instead of concentrating on producing goods that consumers want. These companies and “their” governments don’t stop invoking the socialist mantras of “fair trade” and “level playing field.”

There is no way for bureaucrats to calculate meaningful costs or subsidies. The only known mechanism to get rid of inefficient producers is to let consumers choose and let the free market work, whatever the real or imagined advantages or handicaps of the competitors. What is needed is not the fair or level market, but the free market.

Arnold Kling agrees with Brink Lindsey that the demise of rote factory work is nothing to lament, but Arnold is not keen on all of Brink’s positive proposals.

Here’s an essay of mine from 2005 on so-called “price gouging.” A slice:

Fact one: capping the price does not keep the cost of bottled water low. Time spent waiting, time and fuel spent driving to distant towns where supplies are greater, and the anxiety unleashed by the inability to obtain water are all costs. The fact that these costs are not revealed in the price of bottled water does not render them less significant or real.

Fact two: while a higher market price both prompts consumer voluntarily to economize more diligently on water’s use and increases the quantity of water supplied (by giving incentives to suppliers to bring more water to this market), the queues and empty shelves generated by the price cap force consumers to economize, but do nothing to inspire suppliers to bring more water to market.

Fact three: the economization forced on consumers by price caps is ugly and arbitrary. Those obliged to do without are the unlucky ones who couldn’t get into the queue early enough and who have no political or business connections. These unlucky consumers are also typically too poor to pay the high prices demanded on the black market. A fact always missed by proponents of price caps is that black-market prices are higher than the unregulated market prices would be. The reason is that unregulated market prices—being visible and legal—will stimulate a larger inflow of supplies than will black-market prices.

Bjorn Lomborg warns that alarmist and hysterical rhetoric about the environment only makes matters worse.

Chris Edwards looks at responses to natural disasters before the era of big government.

Tyler Cowen points us to a paper that explores the redistributive effects in the United States of the National Flood Insurance Program. Here’s the abstract:

Our findings indicate that premiums as a percentage of coverage purchased are regressive: premium shares are larger than income shares for lower-income zip codes. Payouts, however, also as a percentage of coverage purchased, are progressive, meaning lower-income zip codes receive a larger portion of claims paid. Overall net premiums (premiums – payouts) divided by coverage are also regressive.

Kevin Erdmann at his best. (HT David Levey)

“‘Liberal Socialism’ is another false utopia,” so writes Richard Ebeling.

Marian Tupy argues that, even by its own standards, communism has failed miserably.

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