Natural disasters and high gas prices are two things guaranteed to make pundits and policy makers shout about price gouging, and the last few weeks were no exception.
Bush and many state governors have been giving the free market a rhetorical pounding, decrying (to quote Maine governor John Baldacci) "profiteering, unfair trade practices, or collusion in gas and oil markets." Bill O'Reilly insisted recently that the government should coerce oil companies into cutting their profits by 20 percent "to spare Americans pain."
With demands for regulation and punishment coming from both left and right, with laws already in place in many states against price gouging, and with the government advertising hotlines and web sites where citizens may report gouging violators, consensus is decidedly in favor of intervention.
Yet if you pay attention to these bureaucrats and commentators you won't hear a single attempt at a cogent definition of price gouging. Even the laws against it fail to identify precisely what it is.
This is because, while everyone seems to believe in something called a "fair price" that businessmen should obey, with prices constantly rising and falling no one can decide what that price should be. Dispassionate analysis, however, demonstrates that the idea of a fair price is a hopeful fiction, and that attempts at price control damage the economy.
To demonstrate this, let's take the example of an item desperately needed during an emergency: bottled water. Operating in a free market where gallon jugs of water were selling for $1.29, after our hypothetical disaster they might sell for $30.
First, it should be pointed out that in a free market there is no coercion. If someone pays $30 for a jug of water, it is because they prefer the water to the $30. The participants in the market get to keep their personal freedom while deriving mutual benefit from their transactions. With respect to individual liberty, everything is hunky dory.
Second, the free market is the only system in which needs are satisfied beneficially and peacefully, even in an emergency. Observe that in our example there is a greatly increased demand for water.
The disaster has disrupted water supplies and, by hampering transportation, made delivering additional supplies much more difficult.Water is now an extremely scarce resource. Increased prices, however, serve as a way of allocating this scarce supply.
Store owners, having taken into account the information that (1) many more people will demand bottled water, and (2) more water will not arrive for several days, have raised prices to $30 per jug. Suddenly individual customers, who each must use their available cash to satisfy a variety of urgent needs, are forced to conserve available supply. Someone who might buy three jugs of water if the price were lower now decides he can only afford one, and in this way supply is distributed efficiently and peacefully.
Urgent needs are satisfied before less urgent ones. Water that might have been used to satisfy trivial needs is distributed to people in more desperate circumstances.
In addition, higher prices communicate information to suppliers. Knowledge of high prices and profits to be had in the disaster, area businesses exert themselves in heroic fashion to provide more water.
Prices stimulate suppliers to accept the higher personal risk of delivering water to a disaster-stricken area, to reopen their stores earlier and keep them open longer to make their stock available to customers. The pressure created by the free fluctuation of prices ensures that supplies will get to where there as most needed quickly as humanly possible. In this way business owners serve society's needs as well as their own.
Yet, in this day and age, prices of scarce resources are often prevented from increasing naturally. Finger-wagging news anchors, aggressive attorneys general, and other subtle socialists all try to coerce business owners into fixing their prices.
In a situation like this, prices for water might be fixed at, say, $9. Now the first few people who make it to the stores might purchase all the available water. Water that would have been used to keep alive a family member now goes to sustain someone else's household pet.
Meanwhile, business owners have less reason to scramble to provide desperately needed supplies. They sit at home rather than struggle to reopen their stores or make less of a fuss about having more water delivered. In this way efforts to control the economy greatly increase human misery and suffering.
"Price gouging" simply means charging the price that consumers are willing to pay. Economic science has well established that attempts to control the economy and institute a "fair" price are detrimental to society. That our so-called public servants consistently fail (or refuse) to accept this basic knowledge is a comment on our system of government as a whole.