In my latest column for AIER I offer a sincere plea to all who disagree with me and the many other economists who oppose government prohibitions on so-called “price gouging” at least to listen to our arguments before accusing us of being evil. (My promised response to Oren Cass on trade and externalities was rescheduled; it will now appear next week.) Here are two slices from my new piece on “price gouging” and price controls:
On a recent morning my email brought three different messages from strangers each expressing, in family-unfriendly language, a wish that I meet a hideous, horrible end. One of these correspondents also asked what price I charge billionaires for my soul. This correspondent helpfully included a link to an October 2017 piece of mine in the Wall Street Journal, which made clear just why these strangers were motivated to offer me their not-so-well wishes.
Google then informed me that this Wall Street Journal essay was also mentioned in some overnight tweets, all critical. The essay’s title – which I didn’t choose, but of which I approve – is “‘Price Gouging’ After a Disaster Is Good for the Public.”
So I write here a heartfelt plea, addressed to everyone who truly cares about the well-being of ordinary people, to listen – to truly listen – to the economic case against government prohibitions on price increases, especially those price increases that occur in the wake of hurricanes and other natural disasters.
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The natural disaster simultaneously decreases the supplies of goods and services and increases the demand. This reality is as indisputable as it is unfortunate. But given this unfortunate reality, describing the outcomes that everyone of goodwill wishes is easy. We want individuals with the most dire needs – people who need water lest they suffer intense thirst, homeowners who need plywood to patch the roofs over their children’s bedrooms, families who need blankets to stay warm – to have prospects as great as possible to satisfy these needs. The relevant question is: How best to ensure these outcomes that we all want?
Most economists say that allowing monetary prices to rise is key to making these desirable outcomes as likely as possible. We don’t say this because we’re obsessed with money, because we believe that prices are all that matter, or because we’re pawns of corporate interests. We say this because we understand (or, at any rate, we sincerely believe that we understand) that money prices set on markets reflect as accurately as possible existing economic realities. And in economic matters no less than in noneconomic matters, acting with accurate knowledge of reality is far more likely to prompt people to act wisely and to everyone’s mutual advantage than is acting without knowledge or with ‘knowledge’ that’s highly inaccurate.
Natural disasters worsen underlying economic realities. The higher prices of goods and services reflect this reality. These higher prices reflect the sad reality that natural disasters, while causing families to be in more desperate need for the likes of plywood, propane, and generators, at the same time diminish readily available supplies of these goods. Put differently, these higher prices reflect the unarguable fact that in regions devastated by natural disasters goods have become more scarce and, thus, their market values higher. It follows that government-imposed ceilings on the prices of these goods prevent information about these increased scarcities and higher market values from being reflected and communicated as accurately as possible.
Importantly, prohibiting monetary prices from rising to reflect goods’ decreased abundance does not make the goods more abundant. Nor does prohibiting prices from rising to reflect goods’ true market values bring goods’ true market values down to the government-stipulated maximum prices. This crucial point seems to be missed by proponents of price controls. Governments can control the monetary prices at which goods are exchanged, but they cannot control the values that market participants place on those goods. If, say, lots of people are willing to pay up to $200 each for the same tanks of propane that before the natural disaster sold for $40, the market value of each tank of propane is $200 even if merchants are prohibited from charging a price this high.
Relatedly, the amount of money that merchants paid yesterday to acquire each of these tanks no more determines the value of each tank today than does the amount of money paid in 1997 for a house determine the value of that house in 2024. That value is determined by the amount that buyers are willing to pay now – an amount that itself reflects the urgency of acquiring the good now. With fewer supplies of the good now available, and with the need for the good made more urgent by the natural disaster, the amount that people now are willing to pay rises.
By censoring this important information, price ceilings spread information that’s false.
The false information spread by price ceilings alone goes far to explain economists’ objection to price ceilings. Because more information is better than less, there ought to be at least a rebuttable presumption that the wisest policy is to permit prices to rise in order that they truthfully inform sellers and buyers of the prevailing, dire economic situation. As in all other aspects of life, people are more likely to act in ways that minimize harms or maximize benefits – and that reduce personal conflicts – the more accurate is the information that motivates their actions.
