On the Morality of Raising Prices in an Emergency

Michael Giberson

Arnold Kling has some interesting insights on what is sometimes pejoratively referred to as price gouging:

One of the issues that [Russ Robert’s didactic novel, The Price of Everything] raises–the very first one, in fact–is the morality of raising prices when something becomes scarce, such as flashlights after a weather disaster. Russ makes the standard case for allowing the price to ration the scarce resource, but I don’t think he will necessarily overcome people’s moral intuition, and I think it is very important to understand why.

The basic moral intuition is, “Don’t take advantage of somebody when they are in distress,” and I think it has broad implications. It explains usury laws. It also may explain the way we approach health insurance….

Kling’s conjectural history of the morality of usury seems to get it more or less right:

Back in Biblical times, when somebody came to you to borrow, it was not to build a steel mill or start a social networking site on the Web. Chances are, if somebody needed to borrow it was because of an illness, a famine, or other disaster. Since people in that situation were in distress, moral codes developed that prohibited charging interest for loans. Charging interest would have meant taking advantage of people in distress.

Jews and Christians overcame their aversion to usury when they saw money being lent to businesses and governments, rather than to people in distress. Even today, however, if a destitute person is sick or hungry, religious authorities would frown on your charging interest on a loan to that person. In that sense, the moral opposition to taking advantage of a person in distress persists.

So notice that while the moral intuition and the case of usury were initially bound together, in Kling’s telling, some cultures developed distinctions between the concepts. We might view achieving this distinction as a kind of moral progress. Kling doesn’t mention, perhaps because he sees the idea as too obvious to remark upon, that the business of borrowing and lending money has been an overwhelmingly positive development for humankind.

Kling continues:

I suspect that the moral opposition to raising the price of flashlights after a storm reflects that same intuition. It’s one thing to charge what the market will bear in the normal course of business. It’s quite another to profit from distress.

What changes in our moral concepts regarding price gouging would represent moral progress?

Many economists are of the view that “price gouging” is, as Lynne once put it, “a non-concept.” Or, perhaps more exactly, a concept that actively makes people in distress worse off by interfering with the most efficient means of rationing limited supplies and motivating increased supplies of useful goods.

Kling advises economists “to justify confronting people in distress with market prices.” Economists can do that, he says, but:

We have to persuade our fellow human beings … that people in distress should receive support from charity or government, not from suppliers of loans or flashlights or medical care; and that there are reliable mechanisms to ensure that people in distress will receive support from those alternative sources, so that placing the burden on suppliers is as wrong-headed as we always allege it to be.

I once observed, “Few things drive economists crazy faster than a politician talking about price gouging.”

Why? Because to economists, the economic lessons here are clear, commonsensical, and well settled, and politicians almost always advocate policies that appear to use the power of the state to make people worse off. In that post I also noted that while the fundamental economics appeared well settled, the policy debate remains as unsettled as ever. I suggested that economists needed new arguments.

Kling is on the right track.


One thought on “On the Morality of Raising Prices in an Emergency

  1. Excellent post and timely. I didn’t think of the “taking advantage” view, which is now immediately obvious. I think we (economists) can present the argument in this way:
    1) Things are screwed up and we’re running out of x.
    2) Since we can’t give everyone the same amount of x (the “fair” outcome), we need to ration it.
    3) Price is the fastest way to ration x. Other ways may be possible, but we don’t have time to argue.
    4) So we go with price rationing/gouging.

    Interesting, to me, that this argument is precisely the one I use wrt allocating scarce water resources — except I DO give everyone a small, initial allocation before using price to ration the rest. See today’s post.

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