Consider a drug with no substitutes and a 90% chance of working. Is this drug sufficiently essential to justify government preventing Americans from importing lower-cost versions of it? Many people will answer “yes.” But what if this drug’s chances of working are only 50%? Or a paltry 5%?
If you encounter difficulty answering such questions, the reason is not just that there’s no objective point at which a drug’s success rate transforms it from inessential to essential. Any such question is difficult to answer because a “correct” answer depends also upon just what illness a particular drug treats.
Which of the following four drugs, if any, would you classify as essential: one with a 0.1% chance of curing covid-19; one with a 10% chance of curing covid-19; one with a 40% chance of curing leukemia; one with a 100% chance of curing toenail fungus?
You’re more astute than me if you have a sure answer to this question.
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Here’s a follow-up note to Mr. Lee Bennani:
Mr. Bennani:
Thanks for your follow-up e-mail to my previous note.
You’re correct that among the perceived benefits of anti-price-gouging restrictions are “elevated chances for poor people to buy needed items instead of these things [being] all bought up by the rich.” This perception, alas, is false.
Nothing is easier than to imagine that, with prices kept artificially low by government diktat, poor people’s ability to acquire goods is increased both absolutely and relative to the ability of rich people to acquire goods. But imagination isn’t reality.
In reality, anti-price-gouging restrictions almost surely decrease the ability of the poor to compete successfully with the rich in acquiring goods.
Anti-price-gouging restrictions reduce available supplies of goods. The resulting increased scarcity of goods thus raises these goods’ actual market values. As a result, the costs that individuals are willing to incur to acquire these goods are made higher than these costs would be without any restrictions on price hikes. (The excess of per-unit values over per-unit maximum-allowed monetary prices is why people are willing to wait in long lines – to incur socially wasteful costs of spending hours in queues – for a chance of buying goods that are in short supply.) The fact that government prohibits monetary prices from accurately reflecting these higher values no more changes this reality than did the Chinese government’s initial prohibition on physicians accurately reporting COVID-19 change that reality. In both cases, government prohibition of accurate reporting makes matters worse.
So with quantities supplied artificially shrunken by anti-price-gouging restrictions, who is most likely to acquire what few supplies are available? Not the poor. Yes, they are (perhaps) better able than are the rich to afford to spend time waiting in long lines. But the rich are (surely) better able than are the poor to pay others to wait in long lines for them.
More importantly, the rich are far more likely than are the poor to have personal, social, business, and political connections that enable them to persuade merchants to hold inventories aside for them – for the rich – to purchase.
Unless you honestly believe that in the throes of shortages created by price ceilings poor people are on equal footing, in competing for goods and services that are in short supply, with people such as Jeff Bezos, Mitch McConnell, Andrew Cuomo, Scarlett Johansson, LeBron James, Paul Krugman, the mayor of your city, the branch manager of your bank, and your wife’s gynecologist, you should reassess your claim that anti-price-gouging statutes result in “elevated chances for poor people to buy needed items instead of these things [being] all bought up by the rich.”
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
My intrepid Mercatus Center colleague Veronique de Rugy reveals how the coronavirus crisis puts many government regulations into clearer perspective. Here’s her conclusion:
The large number of rules lifted by federal, state and local governments in response to this pandemic reveals the sad reality that many regulations serve little to no good public purpose. Hopefully, people will realize how counterproductive these rules were and will not allow them to be reinstated after the crisis is over. In the end, we’ll all be freer and safer.
Also from Veronique is this clear-eyed assessment of airline bailouts.
Here’s needed perspective, from Dr. John Lee, on what we know and don’t know about COVID-19.
Also offering needed perspective on the current crisis is GMU law professor David Bernstein.
Since prices are not allowed to rise with rising short-run marginal costs, the shortage will continue. (In fact, it will continue even in the long term if the long-run industry curve shows diminishing returns to scale.) As by an invisible hand, the government will be pushed into doubling-down on authoritarianism. This reaction was illustrated by Trump’s bossing General Motors around and by Peter Navarro’s talking tough, which is easy when you have laws and decrees and armed men behind you. Navarro is Trump’s new “equipment czar”; the informal title says everything.
Rightly warning of the viral growth of government powers is Raymond Niles.
Roman Pancs argues eloquently that the current shutdown of the economy is de facto criminal. Here’s his conclusion:
The current government interference with freedoms of movement and contract is—for lack of a better term—criminal. If you want to interfere, interfere with zoning rules and build makeshift hospitals. Interfere with FDA approval guidelines, with patents on critical components for life support machines and face masks, and with employment restrictions imposed by professional associations. Motivate the industry to produce life support machines. Announce prizes for medical advances. Pay the nurses double. But do not gratuitously interfere with the freedoms that are the core values of the civilisation. Western democracies have already been exhibiting isolationist tendencies, and the recent travel bans run the risk of normalising nationalism.
But what scares me most is the layman who neither questions nor protests. And the economist who refuses to calculate.
… is from pages 81-82 of Vol. 19 (Ideas, Persons, and Events [2001]) of The Collected Works of James M. Buchanan; specifically, it’s from Jim’s 1991 paper “Frank H. Knight,” a remembrance of his great mentor at the University of Chicago:
Frank Knight could never have joined those of the self-selected elite who, in idea or practice, seek to plan, steer, or direct the lives of those who are excluded. He was a classical liberal, not because he predicted that only with widespread individual liberty would desired results be generated, but because the liberal order is required to allow individuals, all individuals, to define their own objectives.
DBx: Neither society in general nor the economy specifically is an engineering project to be ‘maximized,’ ‘optimized,’ or whateverized either by the market’s invisible hand or by the state’s visible fist. And individuals are not fleshy Lego pieces to be assembled or arranged by a giant planner.
Peter Calcagno has a nice post over at EconLog titled “Price Signals, Price Gouging, and Philanthropy.” I encourage you to read it.
A commenter on Pete’s post, Phil H, registered a mild objection. Here’s my (slightly edited) reply to Phil H, posted in the comments section of Pete’s post:
Phil H: I think it incorrect to write, as you do, that:
price gouging should be impossible when there are well-functioning markets; the existence of gouging demonstrates that the market has (temporarily) failed to clear.
Higher prices are evidence that markets are indeed well-functioning. We observe so-called “price gouging” when supplies fall relative to demands – and, typically, when this outcome is caused by a decrease in supply simultaneous with an increase in demand. When supplies fall relative to demands, prices should rise. Evidence of a poorly functioning market under such circumstances would be the absence of price increases.
Nothing in the concept of a well-functioning market requires that supply increase instantaneously – or even ‘quickly’ – to offset any increase in demand such that price is maintained at its ‘normal’ level.
Put differently, because nothing in the concept of “well-functioning market” assumes or requires that supply and demand always intersect each other at some given and long-standing price – because nothing in the concept of “well-functioning market” remotely is at odds with supply and demand shifting relative to each other such that the price at which today quantity demanded equals quantity supplied differs from what that price was yesterday – nothing about so-called “price gouging” is evidence of a poorly functioning market. Indeed, a central part of the notion of “well-functioning market” is prices moving up or down as quickly and as far as possible to clear markets.
Here’s a letter to a Café Hayek patron:
Mr. Bennani:
Thanks for your e-mail.
You’re one of four people who’ve e-mailed recently to scold me for allegedly failing to understand what you call “real world complications which make price gouging problematic.” These complications lead you to “side with consumers and political leaders that want limits on businesses’ ability to jack prices up.”
I’m the last person to deny that reality is far more complicated and complex than any theory can capture and than any observer can grasp. Indeed, reality’s unfathomable complexity is among the chief reasons for my opposition to government-imposed restrictions on the ability of merchants to charge whatever prices markets will bear.
Observers such as you, me, and political leaders have no way of knowing the full range of challenges that suppliers confront even in normal times to do all the countless tasks that must be done to get goods from farms, factories, and warehouses – where they benefit no one – to markets where consumers can purchase them. During times of crises these challenges multiply – a reality that is reflected in higher prices.
In part because higher prices intensify suppliers’ incentives to bring more goods to market – and in part because merchants charge higher prices only because consumers pay these higher prices willingly – the best information available about the current level of any good’s scarcity is that good’s market price.
Therefore, those who ignore reality’s complexity are anti-price-gouging-measure supporters. Supporters of such measures simplistically suppose that the only consequence of forcibly capping money prices below market-clearing levels is more money left in the wallets of consumers and less money flowing into the cash registers of merchants. Among the myriad consequences that are unseen are the supplies thereby not produced or shipped to market, the wasteful consumption of the lucky buyers who find goods to buy at artificially low prices, the deterioration of the quality of goods, and the corruption spawned by merchants having on hand goods the true value of which exceeds the prices at which these goods can legally be sold.
That the simplistic belief in the justice of anti-price-gouging legislation is widespread and sincerely held, I don’t doubt. But the economist’s task isn’t to console the public by refusing to call out their economic misunderstandings. This task, instead, is to speak as plainly as possible to non-economists in the hope of opening their eyes to consequences that otherwise remain unseen in the swirl of a reality that in normal times is bewildering enough, and in crisis times triply so.
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
… is from George Will’s new column titled “A second pandemic: Virus opportunism“; its focus is on that banana-republic practice called “civil asset forfeiture”:
Virus opportunists who today are vociferously regretting Americans’ skepticism about government ought to regret that government supplies so many reasons for it.
DBx: So very true.
The hyperactivity of government on so many fronts on which it has no business acting causes whatever actions that it might legitimately take during a public-health crisis to be less effective. Of course, government’s hyperactivity and incontinent expansion dilute its focus, both fiscally and operationally. But this hyperactivity and incontinent expansion also create constituencies whose particular, narrow interests government must continue to serve even though doing so weakens government’s ability to address the crisis.
Here’s a letter to a long-time reader of Café Hayek:
Mr. Flores:
I did indeed read Saez’s and Zucman’s recent New York Times op-ed, but I wrote no letter or post in response. For a thorough demolition of it I recommend this essay by Phil Magness.
But I’ll here add that when I try to understand how anyone could endorse proposals such as confiscatory taxation and the other interventions peddled by Saez and Zucman, I find the task to be nearly impossible. Their proposals reveal a belief that material wealth is created and maintained independently of human effort – that wealth is a gargantuan blob of homogenous stuff that simply happens and grows of its own accord. (The proposition that wealth grows automatically is a central tenet of Saez’s and Zucman’s more-famous sidekick Thomas Piketty’s 2014 tome, Capital in the Twenty-First Century.)
For these writers, because wealth happens independently of human choices and action – because wealth is a mysteriously granted gift of nature – wealth happens independently of economic and social institutions. In the Piketty-Saez-Zucman view, nature’s only real failure is that, although she generously creates wealth and rains it down upon humanity, in her distribution of this rainfall she’s careless. Nature rains too much of the wealth she creates down on – or allows too much of this wealth, as it falls, to be captured by – some lucky people. Too little wealth, thus, is left for the rest of humanity.
If the Piketty-Saez-Zucman understanding of reality were correct, confiscating wealth from the lucky and giving it to the unlucky has no consequence other than a more equal ‘distribution’ of wealth. Because the initial ‘distribution’ of wealth is a result only of nature’s randomness, government orchestrated ‘redistribution’ of wealth neither works any injustice nor affects the amount of wealth available to humanity.
Adam Smith launched economics in 1776 by inquiring into the nature and causes of humankind’s wealth. If Piketty-Saez-Zucman are correct, however, Smith was misguided in looking for the causes of wealth among human attitudes, actions, and institutions. The old Scot could have saved himself the time and trouble of writing a 1,000 page book simply by jotting down on a note pad “Wealth has no human causes. It’s a gift of nature. End of story.”
And so if Piketty-Saez-Zucman are correct, the entire discipline of economics is and has forever been a ludicrous waste of time and energy. The fact that these three writers boast PhDs in economics and serve on prestigious faculties of economics is, therefore, an irony as stunning as ironies get.
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
… is from page 273 of Deirdre McCloskey’s excellent 2019 book, Why Liberalism Works: How True Liberal Values Produce a Freer, More Equal, Prosperous World for All:
It is a bad habit on the left. The left blames “capitalism” for the losses of some few people from progress that would take place under any political system if the system allowed betterment for all. And betterment is what saved us.
DBx: And what capitalism – the socio-economic order that Deirdre rightly prefers to call “innovism” – saved us from is the crushing, to-us-moderns-unimaginable, seemingly-unavoidable-except-by-the-elite poverty that was the lot of nearly all of our ancestors.
To escape such poverty requires that the world change. To escape mass poverty requires a move from familiar economic habits, arrangements, customs, and patterns to new economic habits, arrangements, customs, and patterns. And for the masses to continue to move further and further away from poverty – for the masses to continue to grow more prosperous – requires that such change continue.
There is no escaping this reality. Without change nothing changes.
Yet change at any moment requires adjustments by some particular persons and the willingness of all to adjust, for no individual can predict when change will require him or her to adjust.
For well over a century now, people on the political left have fancied – and continue to fancy – that the state can arrange for the creation of more prosperity without any ordinary people having to endure any downsides of change. The fallacious belief is either that the state can arrange for beneficial change without any immediate downsides, or that all the costs of change can be loaded onto those individuals who at the moment possess unusually large amounts of financial wealth (and thereby prove their ethical unworthiness).
The political left still believes that the working of such miracles is possible. The devout high priests of the left, in their campus sacristies, very cleverly spin accounts of such miracles and of how – if we only pray hard enough and evangelize with greater energy – more such miracles will happen. (Never mind that all serious attempts to work such miracles in the past have produced hells on earth.) And out on campaign trails, the stump preachers inspired by the left – or using leftist doctrine for venal purposes – retail this fantasy to gullible men and women who cannot resist believing in secular salvation through such miracle workers.
Sadly, this rejection of reality – this embrace of the belief in economic miracles – is evident increasingly on the political right. In the United States today, Marco Rubio, Josh Hawley, and Daniel McCarthy are representatives of this new conservative insistence that it is possible for the state to arrange for economic change (specifically, for economic growth) for the masses without the masses having to experience economic change.
Of course, what I describe at the end of the previous paragraph is not what these “nationalist conservatives” consciously think of themselves as believing. They sincerely believe themselves to be supporters of policies – policies such as precision-timed tariffs and ingeniously implemented subsidies – that will create growth for the masses with no downside changes (or with the burdens of such changes imposed on whoever is among today’s economic elite).
As on the political left, each of the new miracle-believers on the political right mixes in to the above general account his or her own idiosyncratic twists – tales about strengthening national security, ensuring the dignity of work, furthering family values. But at base is always a belief in the miracle of change without change, or the belief in change the downsides of which government officials can and will (with the right party in office, of course) ensure fall only on individuals who can ‘afford’ to bear them or who, because of their past dastardly deeds, deserve to suffer them.
…..
I continue to insist – for example, here – on the importance of distinguishing “losses” from “costs.”
Read this short but insightful blog post by the University of Chicago’s Casey Mulligan. Then re-read it. And share it.
At least while they were frightened, people complied. At times when people fear death, they go along with measures that they believe, rightly or wrongly, will save them—even if that means a loss of freedom. Such measures have been popular in the past. Liberals, libertarians, democrats, and freedom-lovers of all kinds should not fool themselves: They will be popular now too.
Warning of the same threat to liberty posed by people’s response to the coronavirus is Ted Galen Carpenter. (HT Walter Grinder)
Joakim Book explains what the Swedes have done better than most regarding COVID-19.
Here’s part II of Roger Koppl’s expert EconLog posts on pandemics and expert failure.
And here’s deep wisdom from my GMU Econ colleague Bryan Caplan.
