≡ Menu

Hayekian Wisdom on “Price Gouging”

Although not directed specifically at efforts to keep monetary prices from rising in the aftermath of natural disasters, this insight from F.A. Hayek is nevertheless relevant to current discussions of the merits – or demerits, as the case is – of government-enforced prohibitions on so-called “price-gouging” (original emphases):

The point to keep constantly in mind is that all economic adjustment is made necessary by unforeseen changes; and the whole reason for employing the price mechanism is to tell individuals what they are doing, or can do, has for some reason for which they are not responsible become less or more demanded.  Adaptation of the whole order of activities to changed circumstances rests on the remuneration derived from different activities being changed, without regard to the merits or faults of those affected.


[T]he chief guidance which prices offer is not so much how to act, but what to do.

(This quotation appears on page 311 of Hayek’s 1968 lecture “Competition As a Discovery Procedure,” as reprinted in The Market and Other Orders [Bruce Caldwell, ed., 2014].)

The fact is that a natural disaster, such as hurricane Harvey, causes the market values of many goods and services to rise dramatically.  This reality will be reflected accurately enough in rising market prices for those goods and services or, if the state prevents such price hikes, this reality will not be so reflected.  But this reality remains.  Government can prevent prices from reflecting reality accurately, but it cannot change reality merely by distorting its reflection.  The government-induced distortions of reality will, however, cause reality going forward to be worse than that reality would be absent the distortions.  The reason is that prices kept artificially, distortedly low fail both to inform consumers and producers what best to do under the circumstances, and fail to incite consumers and producers to act in ways that lead as quickly and as smoothly as possible to an improved reality.