Aug 16, 2004
Anti-Gouging Idiocy
[cross-posted at Austro-Athenian Empire]
In the wake of Hurricane Charley, we're seeing the usual governmental threats of violence against"price gougers." This is such an insane policy that even the barest acquaintance with economic principles should be enough to expose it as the disastrous bungle it is -- but economic ignorance seems to know no limits.
So let's haul out the Econ 101 basics. Here's how the market’s self-correction mechanism works.
When there's a shortage of some good, what needs to happen? Obviously, production of the good needs to be increased -- and in the meantime, consumption needs to be rationed. This is precisely what the price system accomplishes: the shortage of the good gives sellers an incentive to raise prices. This in turn simultaneously signals the consumers to constrain their consumption of that good and gives producers an incentive to step up their production and provision of that good. As a result, the shortage is redressed. (The same corrective process, in reverse, occurs in response to a glut.)
Now what happens when government imposes a price ceiling? The economy's self-healing signals are suppressed. By preventing the price from rising, government causes the good to be supplied in smaller quantities than it would otherwise be. As a result, the shortage is prolonged.
Would it be nice if, in the wake of a catastrophe, sellers provided necessary goods at below the new market price, out of the goodness of their hearts? Sure; if some charitable sellers are willing and able to do that, that's great. But anybody who's going to do that will do it with or without the anti-gouging laws; and if they can provide sufficient quantities to address the shortage, would-be"gougers" aren’t going to make any profits anyway. If"gougers" are making profits, that shows that there are too few charitable sellers to cure the shortage; the prospect of making profits at the new, higher market price is what draws"gougers" into the market. The sane response would be to welcome in the"gougers"; competition among them will quickly restore supply and eliminate the shortage (thus eliminating the opportunity for further"gouging" as well). Instead, government bans the"gougers" and so perpetuates the shortage. Following up a natural disaster with the artificial disaster of anti-gouging laws simply compounds the problem; first people get hit by a hurricane, which causes the shortage, and then they get hit by the government, which fights tooth and nail the market"s attempts to fix the shortage. The best analogy to anti-gouging laws would be a doctor who keeps ripping the scabs off his patients' wounds as fast as they form.
Price controls cause and maintain shortages. Always and everywhere. This is one of the simplest and most basic economic laws there is. It's known to anyone who knows even the rudiments of economic reasoning (a description which apparently does not apply to our elected officials). Nor do the laws of economics suddenly go into abeyance because there's been an emergency; those are not among the laws that rulers have the power to suspend.
Is it a bad thing when hurricane victims have to pay extra-high prices for necessities? Of course (just as it's a bad thing when you’ve got scabs forming on your body). And any (peaceful) measures that can get those goods to the people who need them at a lower price, or even for free, would be worth supporting. But anti-gouging laws do not replace high-price opportunities to buy necessities with an equal number of low-price opportunities to buy the same necessities; instead, they reduce the total number of such opportunities in the present and extend that reduction farther into the future. In the face of catastrophic shortages, no governmental response could be more criminal.
It is no crime to be ignorant of economics, which is, after all, a specialized
discipline and one that most people consider to be a"dismal science."
But it is totally irresponsible to have a loud and vociferous opinion on
economic subjects while remaining in this state of ignorance.
-- Murray N. Rothbard
In the wake of Hurricane Charley, we're seeing the usual governmental threats of violence against"price gougers." This is such an insane policy that even the barest acquaintance with economic principles should be enough to expose it as the disastrous bungle it is -- but economic ignorance seems to know no limits.
So let's haul out the Econ 101 basics. Here's how the market’s self-correction mechanism works.
When there's a shortage of some good, what needs to happen? Obviously, production of the good needs to be increased -- and in the meantime, consumption needs to be rationed. This is precisely what the price system accomplishes: the shortage of the good gives sellers an incentive to raise prices. This in turn simultaneously signals the consumers to constrain their consumption of that good and gives producers an incentive to step up their production and provision of that good. As a result, the shortage is redressed. (The same corrective process, in reverse, occurs in response to a glut.)
Now what happens when government imposes a price ceiling? The economy's self-healing signals are suppressed. By preventing the price from rising, government causes the good to be supplied in smaller quantities than it would otherwise be. As a result, the shortage is prolonged.
Would it be nice if, in the wake of a catastrophe, sellers provided necessary goods at below the new market price, out of the goodness of their hearts? Sure; if some charitable sellers are willing and able to do that, that's great. But anybody who's going to do that will do it with or without the anti-gouging laws; and if they can provide sufficient quantities to address the shortage, would-be"gougers" aren’t going to make any profits anyway. If"gougers" are making profits, that shows that there are too few charitable sellers to cure the shortage; the prospect of making profits at the new, higher market price is what draws"gougers" into the market. The sane response would be to welcome in the"gougers"; competition among them will quickly restore supply and eliminate the shortage (thus eliminating the opportunity for further"gouging" as well). Instead, government bans the"gougers" and so perpetuates the shortage. Following up a natural disaster with the artificial disaster of anti-gouging laws simply compounds the problem; first people get hit by a hurricane, which causes the shortage, and then they get hit by the government, which fights tooth and nail the market"s attempts to fix the shortage. The best analogy to anti-gouging laws would be a doctor who keeps ripping the scabs off his patients' wounds as fast as they form.
Price controls cause and maintain shortages. Always and everywhere. This is one of the simplest and most basic economic laws there is. It's known to anyone who knows even the rudiments of economic reasoning (a description which apparently does not apply to our elected officials). Nor do the laws of economics suddenly go into abeyance because there's been an emergency; those are not among the laws that rulers have the power to suspend.
Is it a bad thing when hurricane victims have to pay extra-high prices for necessities? Of course (just as it's a bad thing when you’ve got scabs forming on your body). And any (peaceful) measures that can get those goods to the people who need them at a lower price, or even for free, would be worth supporting. But anti-gouging laws do not replace high-price opportunities to buy necessities with an equal number of low-price opportunities to buy the same necessities; instead, they reduce the total number of such opportunities in the present and extend that reduction farther into the future. In the face of catastrophic shortages, no governmental response could be more criminal.