Comments (45)

• Manuel Lora

  Great article.

  Published: January 30, 2007 9:03 AM

• Ben Kilpatrick

  Price gouging complaints are ridiculous. For example, rents have spiked, but (surprise, surprise) people have started renovating old rooms and semi-abandoned residential buildings. Had rent control been put into place, the entire city would still be a wasteland. Contrary to what a lot of people seem to think, the people of New Orleans and other affected areas have gotten very little federal or state aid. For example, Louisiana's Road Home program has, in the past year approved something like 500 out of 100,000 applications. Most of the rebuilding of homes is being done with insurance money. Most of the people I know who are doing renovation have gotten very little directly from the govt other than a few thousand from FEMA immediately after the storm and a FEMA trailer.
  On another note, after Katrina, it was almost impossible to find gasoline. I remember how gas started to run out in cities in a sort of ever-widening circle (I was driving around LA and MS in a panic). When I could find gas, it was either in a two-hour line or for three dollars a gallon, but I was happy to pay.

  Published: January 30, 2007 9:08 AM

• Brad

  The problem people have with "gouging", to my mind are:

  1) They see that business man X is getting a windfall in the short term, a deemed unearned excess at the expense of the bedraggled.

  Answer: While it is true that the stock on hand was likely bought at a lower price, if the crisis doesn't desist soon, they will have to purchase future stock at higher prices as well, and in the case of groceries and gas, margins are razor thin as is, and cash flow is crunched when prices spike either way.

  2) If the price spirals our of reach of many, it will be the rich that will get the goods.

  Answer: It is certainly possible that the rich might hoard at any price point, but if the price is artificially low, it merely will allow people of lesser means to hoard. The point is expounded on in the article, that the higher the price, by and large, rationing will occur when needed and more people will get a share.

  Published: January 30, 2007 9:39 AM

• Francisco Torres

  In Mexico there have been similar cries against price "gougers", in this case due to the increase in the price of the daily Mexican dietary staple - the white corn tortilla. The daily dose of economics illiteracy from the Mexican media could not wait long enough . . .

  Now the government of Felipe Calderon has promised a crackdown on speculators and price gougers. It goes wihtout saying that the number of level-headed people in Mexico that can explain the social consequences of this potential witch hunt is even lower than in the States, and that is saying much.

  Published: January 30, 2007 9:45 AM

• Paul Marks

  New Orleans began to decline long before Katrina - and it was taxes and regulations that caused the decline.

  As for Katrina: Even the failure of the government maintained levies and the mess (at all levels of government) afterwards do not seem to have underminded faith in collectivism.

  This is not just a matter of the standard "liberal" left sources. For example, in Britain the main conservative newspaper (the "Daily Telegraph") has published several articles which attack the Bush Administration for not spending money on New Orleans.

  The fact that lots of money has been spent does not enter the journalists minds - they see poverty and ASSUME that the government has not spent money. Whilst this attitude remains so powerful (even in conservative circles) it is hard to see progress being made.

  On the matter of "price gouging" the situation is no better in American conservative circles.

  For example, it is easy to snear at the "O'Reilly Factor" on Fox News, but it is the most popular non leftist television show in the United States - the people who watch this show dissent from the knee jerk leftism of the mainstream American media and academia.

  And yet Mr O'Reilly presents, as an alternative to full collectivism in health care, regulation to prevent price "gouging". Again, that the existing regulations are the reason health care is so expensive does not enter his mind (and why should it - after all he would never have come upon such an argument during his time at university or in the day to day work of political journalism).

  It is too easy to despair. We must reach out to the critics of leftism and try to convince them that it is the basic assumptions (not just the details) of collectivism that are false.

  On the positive side, I firmly believe that non libertarian conservatives and independents are open to libertarian arguments on economic questions (I know this from experience) - so if we can reach conservative and independent opinion formers, and present our case well, we can influence them (and, in this way, reach the general population).

  After all conservative and independent journalists are the subject of fanatical hatred from the left already, if they were to argue a more free market case the left could not hate them any more than they already do.

  As the old saying puts it "they can only kill you once".

  Published: January 30, 2007 10:02 AM

• Mark Brabson

  It is going to be interesting here in Florida the next time we have a full fledged hurricane disaster. Under Florida law, when the Governor declares an emergency, all prices are "locked" in at whatever level they are at. And often the emergency may be declared more than 8 hours BEFORE the hurricane actually strikes. So when we have our next big one, you are going to see the mother of all shortage situations in Florida. Oh yes, and if you are caught raising prices so much as one penny, you can be arrested and your business shut down on the spot.

  Published: January 30, 2007 10:09 AM

• Mark Brabson

  Oh, and I almost forgot to mention the insurance reform that is going on in Florida as we speak. Price control is at its heart of course. The government has already driven several insurance companies out of Florida. This should pretty much take care of the rest.

  Trouble is, you can't even ARGUE the insurance situation with most people since they don't even have a true concept of what insurance is supposed to be.

  Published: January 30, 2007 10:14 AM

• RogerM

  Brad: "While it is true that the stock on hand was likely bought at a lower price, if the crisis doesn't desist soon, they will have to purchase future stock at higher prices as well, and in the case of groceries and gas, margins are razor thin as is, and cash flow is crunched when prices spike either way."

  This is a very important point. Americans, and journalists like O'Reily in particular, don't understand basic accounting. Businesses have fixed costs and variable costs. Fixed costs include the cost of wages, rent, and utilities. They're fixed because the business owner must pay them regardless of how much business he does. Often, but especially in retail, fixed costs per unit sold make up a much higher proportion of the price than do variable costs.

  Variable costs, in reatil businesses, are usually the costs of the item purchased for resale. Variable costs "vary" with the amount of business done.

  Each unit sold must pay for both fixed and variable costs. But while variables costs per unit sold remain the same regardless of volume, the burden of fixed costs changes with volume: higher volumes require smaller charges per unit and lower volumes require higher charges.

  When a disaster creates a shortage of something, say plywood, the retail businessman sells fewer sheets of plywood because he can't replenish his supply as quickly as people demand plywood. In other words, his volume falls. If he kept his prices at the pre-disaster level, he would sell all of his plywood immediately and his store would be empty. He would spend the profit from those sales to pay his fixed costs and keep his store open until he received more plywood from the wholesaler. But if the new plywood didn't arrive for awhile, because others were willing to pay more, or because producers couldn't produce enough, he would go out of business.

  Disasters reduce the volume of sales for retail businesses, so each unit must support a higher portion of the burden of fixed costs than it did before the disaster. By raising prices, or "gouging", the business owner ensures that he can pay his fixed costs until more product arrives. Once volume increases, he reduces prices because each unit has less of a burden of fixed costs to carry.
  

  Published: January 30, 2007 10:45 AM

• Dennis Shoup

  I have to read Mike Davis's "Late Victorian Holocausts" for a class on European imperialism. While the book does an admirable job depicting the evils of imperialism, it is written from a Marxist perspective. Davis argues that the severe famines in places like India at the end of the nineteenth century represent the evils of "the invisible hand." He contends that India exported its food to England because the English had more money and that the free market couldn't work in India due to hoarding. Furthermore, according to comrade Davis, the failure of imperial administrators to set price controls made food too expensive for the native Indians (apparently he thinks price controls lead to things other than shortages.) I find it odd that he contends that for some period of time economic law took a holiday and ergo famine ensued. I am sure he is leaving some vital element out of the equation, such as that what was going on in India was not reflective of a free market at all in that it was imposed by force, and years of mercantilist policy had effectively pauperized the indigenous population. Is anyone else familiar with this very flawed work or any libertarian critiques of it?

  Published: January 30, 2007 11:26 AM

• Matt

  The idea that soaring prices ensure that those with the greatest needs will get what they need is ridiculous. If people with legitimate and urgent needs didn't get shortchanged with 'Gouging', wouldn't this be called Acute Situational Inflation?

  It seems to my naive eyes that both socialists and libertarians would argue their approaches serve the "greater good" and it is a rather chicken-and-egg argument whether a nation's economic health depends on its social health or vice versa.

  There is an opportunity cost to serving the economic greater good with price gouging. While the new New Orleans may thankfully not be a "wasteland" it runs the risk of being devoid of any of the population which made it a social and cultural icon. Many who could hardly afford current prices at the best of times can scarcely consider paying them after a disaster. The housing market may be well served in this case, but how do we quantify the myriad other costs? I guess I am being irrational?

  One interesting draw of libertarianism from my otherwise "left of center" leanings, was the notion that charity can do a better and less wasteful job than government at taking care of the truly 'neediest' citizens. My curiosity was piqued. Sad to read this article about a disaster and find no mention of charity. But as the author points out, I guess our biggest priorities come to the forefront in a disaster.

  Published: January 30, 2007 1:12 PM

• livingplanet

  matt, thanks for deviating from the group think on this article.

  social reality seemed to have left the room. maybe they need to see again all those left behind, or the bodies floating. i guess $500/cruise cabins are justified...

  price clearing and all that is enlightening, but new orleans sums up what cronyism, corruption, politicking, and management incompetence are all about.

  Published: January 30, 2007 2:05 PM

• Roy W. Wright

  Matt: I find your comment vague. What is your argument, precisely?

  Published: January 30, 2007 2:05 PM

• Roy W. Wright

  price clearing and all that is enlightening, but new orleans sums up what cronyism, corruption, politicking, and management incompetence are all about.

  This article is specifically about so-called price gouging. I think there have been quite a few articles on the problems you mention, which can be neatly summed-up as "government interference with capitalism."

  Published: January 30, 2007 2:13 PM

• Lisa Casanova

  Matt,
  Of course charity has a place. But charity isn't something you can force people to do. Just because you say "You can't sell ice/gas/food/whatever for the price you think makes it worth your while" does not mean that people will just start giving it away. Suppose I live 100 miles away from a hurricane-hit area and I have a lot of ice. Is it better that I drive 100 miles, camp out, and sell it for $20 a bag, or is it better that I just stay home because it's not worth the trip to me to give it away for free? Even charity has costs.

  Published: January 30, 2007 2:15 PM

• Kevin B.

  Matt,

  "That isn't smog. It's smug!" - South Park

  There is self-interest in charity. There is no need to refer to "charity," because the article is discussing how to serve as many people as you can as efficiently as calculable.

  Published: January 30, 2007 2:20 PM

• Brad

  For those who can't grasp the positive aspects of "gouging" (i.e. free market), if they support locked prices to the seller, would they then also support criminalizing hoarding? If the price is artificially low, more units can be bought by whomever is first. If a convenience store has 50 units of one gallon containers of water that typically goes for $3, what prevents the first person through the door with $150 from buying all 50? Are they then restricted if they choose to sell a few later?

  So limits would have to set to deter hoarding. Then who decides the proper number of units is enough? Who gets punished (if I know government, the businessman will be the one punished for "overselling" and not the individual)?

  I could go on and on. The real issue is trying to set limits on transacting scarce resources, short or long term, only creates new problems (or opportunities for someone else). "Fairness" is really a subjective opinion wound with emotion, which then selects which attributes of the transactions they want to see.

  The axiom that the government creates nothing, it merely forbids or compels, is what is at issue here. And when it does so, in any other mode than to protect life and property, it merely creates a ying that has a yang. It is only through emotionalism that the yings are all counted up and all the yangs are swept under the rug. When the government forbids short term price adjustments, without companion anti-hoarding laws, they merely create a different scenerio of allocation, one that, once ALL factors are calculated, isn't any more or less fair in aggragate.

  Lastly, I would not be surprised after the next disaster, complaints of hoarding don't come about. And then the government WILL step in with new rules, that will inevitably leave someone else out in the cold as they aren't able to buy as many units as they would have wished, then there will be "licensed" exceptions the hoarding law, etc etc etc. Once the government comes in with a "cure" it inevitably has to invade again and again and again.

  The market, in total, is not fair or unfair, it merely is efficient. The government is not.

  Published: January 30, 2007 2:30 PM

• Matt

  Glad to have provided a bit of contrarian fodder.

  Roy: My comment is vague perhaps because I don't have an economic solution of my own to provide. It just seems to me that the "Gouging=free markets serving the needy" argument of the article and most commenters is lacking, and that perhaps the libertarian view on charity would have something to say about this. (I ask as a relatively naive reader) Also to your other comment: in what ways do you see government having interfered with capitalism in New Orleans? It seems at least the rental markets are roaming quite freely.

  Lisa: If you lived 100 miles away from a hirricane-hit area and had a lot of ice, AND WERE CHARITABLE, I would think it's best to drive 100 miles, camp out, and GIVE the ice to those who need it. Or, fearing for your own safety or health, donate that ice to a charitable organization that you trust to distrubute the ice as EFFECTIVELY as calculable.

  Published: January 30, 2007 2:37 PM

• Matt

  Lisa: I realize charity can't be imposed on people, but I thought one of the assumptions of libertarianism is that charity will spontaneously take place. Or is this point only raised when trying to placate socialists?

  Published: January 30, 2007 2:57 PM

• Sam

  Actually isn't price gouging just meaning a way of selling a shortfall in resources to those happen to be most capable of paying? The basis of a free-market transaction is if someone can't pay then they are refused the good/service. High prices during hardship could therefore be a test to see who has the more common sense during good times. Those who live it up during good times have nothing spare during bad times, oops. Or those who refuse to live anything but a minimal life during goods times too miss out during the bad, double oops. Perhaps therefore this might be an answer as to why people want to be richer than their immediate concerns might ask for? Building up a surplus in good times allow for a backup plan during hard times. Hence in diasters you get a real sense of who's the smart industrious ones quick smart.

  Published: January 30, 2007 3:00 PM

• Sam

  Actually isn't price gouging just meaning a way of selling a shortfall in resources to those happen to be most capable of paying? The basis of a free-market transaction is if someone can't pay then they are refused the good/service. High prices during hardship could therefore be a test to see who has the more common sense during good times. Those who live it up during good times have nothing spare during bad times, oops. Or those who refuse to live anything but a minimal life during goods times too miss out during the bad, double oops. Perhaps therefore this might be an answer as to why people want to be richer than their immediate concerns might ask for? Building up a surplus in good times allow for a backup plan during hard times. Hence in diasters you get a real sense of who's the smart industrious ones quick smart.

  Published: January 30, 2007 3:00 PM

• Yancey Ward

  Matt,

  You keep asking about the "libertarian" view of charity and how it might inform these types of situations. The answer was provided above, though in an indirect way. Charity is a free choice to the individual. Trying to prevent price adjustments and, as Brad points out, the resulting hoarding of extremely scarce but vital resources is to compel "charity". A libertarian cannot support such compulsion since it violates the core principle of libertarianism and, in any case, cannot be charity by definition.

  Published: January 30, 2007 3:05 PM

• Lisa Casanova

  Matt,
  Maybe if I were charitable, and could take all that time off work, and could afford the gas, etc without ANY monetary compensation, I might give away the ice. But if I am not inclined to do so, is it better to allow me to sell it, or cap the price and give me an incentive to stay home instead? You could say in practically any situation "It would be better to give X away instead of sell it, if you were charitable." But in the real world, providing charity has costs for the provider. The fact that I might sell ice does not crowd out those who wish to provide charity. They can still do so. But if I can't afford to just give away what I have, isn't making it available for people to buy a better option?

  Published: January 30, 2007 3:39 PM

• Michael A. Clem

  Matt, perhaps you could address the economics of the situation. If price controls are in effect, then either whoever gets to the store first gets as much as they want, and the rest get nothing, or else you have to suspend the market altogether and somebody has to decide who is "deserving" of the goods and who isn't.
  
  

  Published: January 30, 2007 5:36 PM

• Matt

  Brad, I don't presume to have a full grasp of Charity from a Libertarian perspective, but my previous comments do suppose a 'free choice charity'. So, I was not arguing that charity was compelled - rather I was surprised how it is apparently 'marginalized' in the free market. I.E., charity does not appear to be an adequate solution to similar problems. I may be pointing out my own lack of understanding, but I thought some libertarians would argue that free-market charity would be there to save the day for the truly needy.

  Lisa, presuming that you are one of the "smart, industrious" capitalists (to borrow a phrase from Sam) who has made a fortune in ice, it might be possible to take a day off work. That more would chose to sell their ice at a profit (or not make the 100 mile trip at all) underscores my hypothetical argument (with myself) that charity is not a realistic means of meeting the needs of the most needy. And therefore, that the most needy are overlooked in a libertarian utopia. The provocative title of this article (might have read 'Humanitarian Gouging') and the arguments made within were a little alarming, and my comments designed to see whether the Mises camp has anything better to offer the neediest in their time of need than a $5 half-gallon of milk.

  Published: January 30, 2007 5:41 PM

• Matt

  Michael, if needs are a function of price (as they seem to be from the pro-gouge perspective), then with price controls in effect those who got there first and bought all they 'wanted' could be said to have bought all they 'needed' at that price point. I agree this is still flawed. The problem to me is that in either scenario there will be many who go without for a lack of supply. The lack of supply can happen earlier at less profit to the seller (with price controls), or later at increased profits (as the gouger offsets speculative and unspecified costs in doing business). My point is that two weeks into the Katrina disaster, I'm pretty sure even the $20 milk is sold out. The fact that very few frontier milk salespeople were driving down the interstate to cash in on the milk bonanza (and thereby lower prices due to competition according to the gougers) seems to indicate that another solution is needed. While it seems rational to sidestep the moral dilemma of who is deserving, there is no real reason to do so. Charitable organizations are typically quite capable of identifying the needy. If they need a firm guideline, they could just give the milk to the ones who are wading shoulder-deep in the toxic flammable cesspool. That's a little inflammatory on my part, but my argument is that there are some extreme 'outlier' scenarios where the free market principle (minus charity) falls flat when it comes to helping the needy.

  Published: January 30, 2007 5:58 PM

• Michael A. Clem

  Okay, so you're arguing the 'charitable' route. I agree, charities will do a better job of identifying the needy than government will. Further, I would agree that charity is the only answer where the situation is so extreme that the market processs can't be used. But for anything less than such an extreme, charity can only fill in the gaps, and the market process will ensure that the duration of the crisis is minimalized.
  

  Published: January 30, 2007 6:35 PM

• Kevin B.

  Matt,

  "The problem to me is that in either scenario there will be many who go without for a lack of supply."

  No system short will provide everyone's wants. Scarcity is a fact of life. I fail to see what is utopian about facing the fact that there isn't enough milk for everyone to have a glass.

  When trying to determine who or what should decide what use a scarce resource should be put to, the most qualified person would be the owner.

  Published: January 30, 2007 6:44 PM

• Matt

  Michael, I agree with you. The only remaining issue is that the author of this article invoked such an extreme and proposed that gouging was the humanitarian thing to do. Whereas you have acknowledged there may be some scenarios where charity is the only answer.

  Kevin, there may be local system shorts in Katrina-like scenarios, but for basic wants there would still be more than enough milk in the wider system for everyone in N.O. to have a glass. Charities (versus relying on spontaneous acts of individual charity) seem like a good candidate for filling that need and making those decisions.

  Published: January 30, 2007 7:46 PM

• Eric

  The article examines the aftermath of a disaster, but these economically ignorant laws also effect the time BEFORE the disaster.

  What happens to the incentive of a seller with forethought who thinks that maybe it would be profitable to stock up on emergency items before the hurricane season.

  If the hurricane occurs, and he tries to make some money for seeing ahead, he's jailed or fined.

  But if the hurricanes don't happen, then this seller might have stock that goes bad and loses big time. After all, there must be some costs associated with stocking up, or everyone would do so. Isn't this sort of like insurance. People just pay their premiums (with higher payments) if and only if the disaster actually happens, instead of the other way around. Nobody is keeping anyone from stocking up before hand.

  If you eliminate this market incentive, there will have to be less emergency goods available. Then everyone suffers. It's sort of like, misery loves company. We'd rather everyone suffer than have someone make a profit saving someone else from suffering.

  Published: January 30, 2007 7:51 PM

• Axel Riemer

  Matt,
  Thanks for sparking some debate. I think we need to be careful in throwing around the words 'want' and 'need'. Needs are what create a need for soup kitchens serving out broth, and homeless shelters. However, I want steak and my own house. While the disaster may have thrown more people into the needy category, that is, those who do not have the means to purchase items necessary for survival (water, food), preventing price "gouges" simply prevents those with wants from satisfying their desires. It would seem that price gouging moves those unfortunates who are on the edge of being "needy" (unable to afford the basics), and this is what preventing price gouging is supposed to alleviate. However, since price gouging is a symptom of a short supply, it is obvious that that supply will vanish, regardless of where the price is set (assuming no supplier is foolish enough to set a price so high that he does not clear his inventory). So, the inventory vanishes with or without price gouging. Without price gouging, assumably those people who would be bereft of the choice of purchasing said good still have a chance to buy. However, the shortage means that some people will not be able to get the good, regardless of their economic level. Since the price level has not changed, the flow of goods into the city will remain at the predisaster level, unless there are charitable suppliers (primary or secondary) willing to operate at a loss in order to allocate more units.

  On the other hand, if price gouging is allowed, the price of the good shoots up, but it still clears the shelves, even if at such a price that it barely sells out. The difference is in our price mechanism. In our friend the Evenly Rotating Economy (ERE) model, if the price of a good rises, and all else remains the same (this would imply that either an unplanned shortage due to a disaster or drought or famine or fire or vandalism has occurred with no change in demand, or that people's tastes have changed and demand has increased), more suppliers will enter that good's market, and the supply will increase. When we increase the supply of a good, the price of the good will decrease. Therefore, suppliers enter that particular market to satisfy the shortfall or the increased demand. (Remember, we implied no other changes, so the prices of the inputs of the good remained the same).

  The other item of importance is that by allowing suppliers to raise their prices imparts valuable knowledge to the sellers and other entreprenuers. By raising their price, they now know their final price, and will bid for the good at any price (including all costs of course) that is beneath that. Don't tell me that PickNSave wouldn't ship additional milk to their LA centers if they could sell it there for $10 a gallon as opposed to $2.50 a gallon anywhere else in the country. Of course, this would decrease the supply of PickNSave milk elsewhere in the country, driving prices up a small amount everywhere that it was $2.50. If other grocers did not follow suit, and kept their milk at $2.50, consumers outside of LA would shift their buying habits to other stores, allowing those other stores to raise their prices (due to a potential shortages from increased demand). The point is, allowing the market to adjust prices is the most efficient way to correct shortages (and surpluses). A discussion of charity really deserves its own topic post, as the economic benefits are slightly different than a typical market transaction (however, you must still show a positive balance sheet, unless your charity is words of encouragement).

  The market is individuals. Our actions and choices make everyday transactions through our monetary indirect exhange possible, with our changing tastes reflected in changing prices. This is the wonder of human action.

  Published: January 30, 2007 7:54 PM

• Axel Riemer

  Also, it has been said again and again, the policies of the state will have the opposite of their delared effect. The point of preventing price gouges is to allow more people to buy the over demanded good. However, the end result, going by the maxim above, will be that less of the good will be produced. Hazlitt's One Lesson is still my favorite book.

  Take me, for instance. If I have the inclination to rent a refrigerated truck and fill it with milk, I could drive it anywhere in the states and attempt to sell my milk for $10. Anywhere, that is, but where a price cap is in place, preventing me from selling for $10 (my minimum price, due to the costs of renting a truck and driving crosscountry to sell milk bought at retail). Obviously, this results in my not selling milk where it is most needed. Does this make sense? I could certainly drive to Texas with a truckload of milk. I could certainly drive to New Orleans with a truckload of milk. (I'm from Wisconsin, so its roughly the same to me). The only difference is that in Texas, they will not buy for $10, and in New Orleans, they will, but a government regulation prevents me from selling for $10. I know where I would prefer to be, and I know where the residents of New Orleans would prefer me to be, but if that price cap is in place, I doubt if I will leave Wisconsin. Realize of course, my decision to bring milk to the parched compatriots of New Orleans is not motivated by anything but my desire to earn money.

  Another thing to pay attention to is the affect of a single price cap, using milk again for our time-worn example. What happens to the prices of orange juice, apple juice, gatorade, snapple, coffee, lemonade, etc etc? Certainly! They will rise as the shortage is felt and people who could not get milk turn to alternatives, causing their respective prices to rise. Anyone who is in the beverage importing business to New Orleans won't bother with milk (the item there is a shortage in), but will instead concentrate on those other beverages that experience the increased demand. And so it goes, if all beverage prices were controlled, New Orleans would die of thirst.

  Published: January 30, 2007 8:37 PM

• Luke Fitzhugh

  The term "price gouging" is the essence of the controversy. In economics, there is no such thing as "price gouging." This term is one of many used by "modern" liberals to convolute the issues. Don't use it, or else don't call youself an economist.

  Published: January 30, 2007 10:38 PM

• Larry Shirley

  I believe that your theory is correct, but there are some practical fallacies with your argument when it is carried to extremes. Consider the case of a Gas Station located on a major highway outside of a city where a disaster has been predicted and people are fleeing the city. Recognizing the opportunity for profit, the Gas Station raises his prices to $50 per gallon and calls all of his friends at other Gas Stations in the area and tells them about his price raise. People who absolutely need gas will purchase one or two gallons to get them further up the road as they flee the area. But the next Gas Station up the road sees their opportunity and raises their price to $75 per gallon, figuring that anyone who passed up the opportunity to get $50 gas, would be even more desperate. This continues for roughly 100 miles outside the city with prices as high as $500 per gallon of gas. Frustrated, unable to travel further, and with insuffient funds to buy even a sigle gallon of gas, people revolt and kill the $500 Gas Station attendants and burn down the station. The entire situation resolves itself after 48 hours and gas prices return to normal. Since you beleive gouging prices is perfectly acceptable, do you prosecute the people for the murder of the Gas Station attendant or was their act justified as part of the spirit of free trade? Is there some point where price gouging produces societal inequities so quickly that the free market can not correct itself adequately? I believe there may be and it is for this reason that excessive price gouging should be illegal. Time is the critical element that is not incorporated in free market theory. Long-term price fixing is wrong, but short-term excessive price gouging is just as wrong.

  Published: January 31, 2007 9:50 AM

• Larry Shirley

  I believe that your theory is correct, but there are some practical fallacies with your argument when it is carried to extremes. Consider the case of a Gas Station located on a major highway outside of a city where a disaster has been predicted and people are fleeing the city. Recognizing the opportunity for profit, the Gas Station raises his prices to $50 per gallon and calls all of his friends at other Gas Stations in the area and tells them about his price raise. People who absolutely need gas will purchase one or two gallons to get them further up the road as they flee the area. But the next Gas Station up the road sees their opportunity and raises their price to $75 per gallon, figuring that anyone who passed up the opportunity to get $50 gas, would be even more desperate. This continues for roughly 100 miles outside the city with prices as high as $500 per gallon of gas. Frustrated, unable to travel further, and with insuffient funds to buy even a sigle gallon of gas, people revolt and kill the $500 Gas Station attendants and burn down the station. The entire situation resolves itself after 48 hours and gas prices return to normal. Since you beleive gouging prices is perfectly acceptable, do you prosecute the people for the murder of the Gas Station attendant or was their act justified as part of the spirit of free trade? Is there some point where price gouging produces societal inequities so quickly that the free market can not correct itself adequately? I believe there may be and it is for this reason that excessive price gouging should be illegal. Time is the critical element that is not incorporated in free market theory. Long-term price fixing is wrong, but short-term excessive price gouging is just as wrong.

  Published: January 31, 2007 9:50 AM

• Yancey Ward

  Larry Shirley,

  Of course, you are already proceeding from an assumption that no libertarian would ever make- that "price fixing" is wrong. The proposition that- if I own something, then I should be able to charge any price I wish for the item- is the libertarian stance.

  Now, as I understand it, you think there to be a practical limit to raising the price of a scarce item, and on this I would agree. The owner of such an item must balance his desire to sell the items for a given price against the probability that at some point a mob may simply take it without paying.

  Published: January 31, 2007 10:04 AM

• Vicente Barriatos

  I have some reservation about your assertion about entrepreneurs being predominantly future thinking individuals and it befits me to have some austrian economist, such as Professor Reisman and Bohm-Bawerk, supporting this claim:

  http://www.freemarketnews.com/Analysis/158/5800/australian.asp?wid=158&nid=5800.

  I don't want to rehash what's been said in this article, but please take a read....and see what you think of it.

  -Vince (posting on the right blog this time)

  Published: January 31, 2007 10:49 AM

• Francisco Torres

  Larry, it would not work that way. Once the $50 per gallon sellers calls his friends, they will all say "Thanks for the tip" and immediately charge 49 dollars or whatever to get MORE business away from the first guy, and not charge MORE to get LESS customers, all other things being equal (equal access to fuel by the sellers, equal rise in costs for each, et cetera.) If the case may be that some owners thought their customers would be desperate enough to buy fuel at 200 dollars a gallon, other sellers would most likely not make such assumption and still underbid their nearest competitors, in order to increase their revenue. The doomsday scenario you paint is thus very unlikely.

  Another possibility: A very entrepreneurial person would very likely see the opportunity to underbid the gas sellers up the road, by buying from the $50 a gallon person and selling the gas up the road at a lower price than the competitors, say 55 dollars a gallon, 60 dollars a gallon.

  In order for your scenario to work, you would have to leave out the incentive that such demand sends across the whole market, bringing in opportunity seekers and underbidders, an extremely unlikely thing to happen in an open economy.

  Published: January 31, 2007 1:04 PM

• Axel Riemer

  Very nice Torres,
  It reminds me of that recent article on Hill, the Great Northern Railroad magnate, who made boatloads of money undercutting the price-fixing attempts by his competitors.

  I fail to see how murder and destruction of a gas station are in the spirit of free trade. A better example would come from Laura Ingalls Wilder's book "The Long Winter". Mr. Wilder and many of the townspeople had gathered in the general store and were confronting the owner who had seed that he was saving to sell to the farmers for their spring crops. That was what he had purchased it for, and he was not willing to sell it, except at that price; that is, he was unwilling to accept a loss. The starving farmers and townspeople wanted the grain to eat.

  The lesson here is that the farmers were able to leverage the storekeeper into selling at cost. Pure social pressure, no government intervention needed!

  And speaking of 'The Long Winter', just imagine how long global warming has been going on, if the Midwest used to be covered by blizzards for 4 months of the year. Scarcely a product of the Industrial revolution!

  Published: January 31, 2007 1:25 PM

• Francisco Torres

  My point is that two weeks into the Katrina disaster, I'm pretty sure even the $20 milk is sold out. The fact that very few frontier milk salespeople were driving down the interstate to cash in on the milk bonanza (and thereby lower prices due to competition according to the gougers) seems to indicate that another solution is needed.

  Ask yourself if the government didn't have something to do with the fact that few frotier milk salespeople were driving down the interstate to cash in on that bonanza. Remember that after Katrina, some sellers that went down to N. Orelans bringing in goods from elsewhere were arrested and their merchandise confiscated by government officials (thugs they call "policemen"), due to a so-called "anti gouge" law.

  Published: January 31, 2007 1:28 PM

• Matt

  Nice to read the evolving discussion.

  Torres,

  Notwithstanding any government meddling/bungling, I would argue that relatively few frontier salespeople rushed to N.O. because there was relatively little gold in them thar hills. As in Axel's "The Long Winter" example, I think social pressure would force the sellers to sell at a loss. Especially after those with more money have spent it to be air-lifted out, those with some money realize they could be stuck in the cesspool for much longer than originally anticipated, and those with no money start resorting to other forms of pressure. The general store owner had no choice about being surrounded by hungry villagers. Why would our free-market, free-choice, milk mogols ever choose to surround themselves with the rabid masses?

  I'm sure to be violating some terms of the economics game by removing cash from the equation, but assuming anyone with cash left N.O., is there any impetus to provide goods at a near total loss? Admittedly, this is an extreme, asymptotic situation. I guess I'm just arguing that the purported humane benefits of gouging fall off at some distance away from this asymptote.

  Published: January 31, 2007 2:06 PM

• Michael A. Clem

  There may have been some extreme conditions immediately during or after the hurricane and flooding, but it's been how many months now? General market conditions should have been working within days. Yet, if anti-price gouging laws were in effect, before and after, it's no wonder it's taking so long to recover.

  Published: January 31, 2007 2:24 PM

• Kevin B.

  What the issue of price gouging boils down to is an excuse to deprive others of their private property rights. I’ve noticed that theft is a grey area to most Americans that I’ve met. There always seems to be an exception for the rule “Thou shalt not steal.” I am swayed from believing that the State is in its present condition because of ignorance rather than because of this observation – that most people believe stealing is OK. It is not only the State actors but also the people in general who enjoy meddling (violating rights).

  Has this question been answered? If the goal of education is met, and most of the population learns that violating others’ rights, whether price fixing, etc., will hurt rather than help in the long run, then will they cease? I look forward to the day when we learn if most people are just ignorant or if they are selfish fools as well.

  Published: January 31, 2007 3:41 PM

• Lisa Casanova

  To address the charity point again- if profit seeking individuals have an incentive to go to a disaster area and sell ice (or milk, or whatever), then those goods are available for charitiable minded indivduals to buy and give away to the needy. If there's no incentive for me to drive to the disaster area and sell bags of ice, there's no ice for those who might have bought it and shared it with their poorer neighbors. The market does not crowd out charity. It provides the resources that make charity possible.

  Published: January 31, 2007 4:17 PM

• Sam

  Wait a tick is this similar to the concept of the local monopoly operator? The one of an isolated market in which the cost of finding alternatives outweighs just accepting the monopolistic high prices? The easiest example of this monopoly would probably be a cruise ship I think.

  Published: January 31, 2007 10:21 PM

• George Gaskell

  Larry,

  If, in the event of a natural disaster, there is a sharp increase in the demand for gas such that a seller could charge upwards of $500 per gallon and still find buyers, you seem to think that it's a problem that some people would not be able to buy any gas.

  But let's look at what happens when gas prices are artificially kept at 0.5% of the post-disaster market price -- within an hour there is no gas to buy anyway. It is all sold out. Store shelves are empty. Gas pumps are dry.

  Trust me -- I've seen this phenomenon up close, unfolding in real time.

  How exactly is the total unavailability of these goods any better than being able to buy them at relatively higher prices?

  Published: February 5, 2007 9:56 AM