Against anti-anti-anti-price gouging

First let’s unpack the “against anti-anti-anti-price gouging” title to get oriented:

  1. Price gouging – a common name for price increases of goods in demand due to an emergency
  2. Anti-price gouging – common attitudes toward price gouging sometimes made into laws
  3. Anti-anti-price gouging – standard economics defenses of price gouging and opposition to such laws
  4. Anti-anti-anti-price gouging – direct challenges to standard economists’ anti-anti-price gouging views
  5. Against anti-anti-anti-price gouging – An economist still waiting for an argument deeper than “icky”

Pandemic-related price gouging and anti-price gouging news stories are rampant. Economists have offered the standard economics defenses of price gouging to explain their opposition to anti-price gouging laws. (And here, here, and here on video.) Non-economists are rarely persuaded. To most, price gouging just feels wrong and the economists’ dry logic does not overcome the feeling.

Mostly, when non-economists try to defend common attitudes against the economists, the arguments in reply seem to add up to no more than “yes, but it still feels icky!” Several years ago I posted here in search of a systematic defense of anti-price gouging laws. I’m still looking.

A new hope?

Into the conversation steps economist Amitrajeet Batabyal to argue against the standard economic arguments with an op-ed titled “Why Economists Who Have No Problem With Price Gouging Are Wrong.” Batabyal provides a short overview of the standard story, then identifies several problems that he says standard economists fail to consider.

I was not impressed.

Batabyal’s brief overview of the standard view is good enough. He highlights Hayek’s observation that prices are necessary to coordinate decentralized decision-making, and such coordination promotes discovery and effective use of resources. Anti-price gouging laws are like price ceilings which are known to promote shortages.

He strikes back against the standard view:

First, economists claim high prices and profits will boost supplies, but Batabyal points out high prices might not work in the current environment because of uncertainty about how long the pandemic will last. Making masks might appear very profitable right now, he suggests, but investments to boost production might be wasted should a vaccine or ready treatment come about soon.

He is right, uncertainty factors into decision-making. The problem with his argument is uncertainty is part of the economists’ standard view rather than an argument against it. There is always uncertainty, small or large. High-enough prices regularly spur producers to action despite uncertainty. What’s more, high prices are not the only way decentralized actions get coordinated. Markets often overcome uncertainty through long-term contracts which have buyers sharing the risk.

Second, Batabyal explains that even high prices cannot motivate producers when government regulations keep production from ramping up. In other words, he seems to be saying, there is no use in relaxing anti-price gouging laws to boost supplies of desperately-needed goods when other government regulations are preventing efforts to boost supplies of desperately-needed goods. Are you confused at how this is an argument that supports anti-price gouging laws? I’m confused.

Batabyal’s examples add to the confusion, citing a Chinese-regulation requiring factory workers to have face masks before they could start producing more face masks. Then, and I quote, “In fact, to comply with these regulations, car and phone producers added mask production lines.” How does car and phone producers adding production lines prove higher prices would not work because of other government regulations? Batabyal links to an essay in The Economist containing these anecdotes, but left out a detail: Chinese mask producers went from producing about 20 million masks per month before the pandemic to making nearly 120 million per month by the end of February. Again, what does this have to do with anti-price gouging?

Third, says Batabyal, “it would be difficult to agree with the proposition that Americans only care about economic matters in their ordinary lives.” So far as I am aware, no one has asserted the proposition that Americans only care about economic matters. Even economists do not only care about economic matters. Ask an economist about the labor-leisure trade-off or the existence value of an endangered species. Batabyal himself has written on environmental values.

In any case, the fact that Americans care about more than economic matters has seemingly little to do with price gouging or laws against it.

Next “there are communal and moral dimensions of price gouging.” The “communal” claim appears to be this: In repeated interactions, sellers who dramatically raise prices may create ill will among consumers and consumers so-affected may refuse to do business with the seller in the future. This claim suggests businesses should consider reputational consequences of price increases, but does not argue against price increases per se nor offer support for anti-price gouging laws.

I will quote his “moral dimension” discussion in its entirety so you can appreciate the depth of analysis: “The moral case against price gouging lies in recognizing that amid a pandemic, inordinately raising prices of goods like masks is equivalent to ‘kicking’ vulnerable people such as medical workers.”

Let’s stipulate that kicking vulnerable people is wrong, Batabyal still needs to explain why “inordinate raising” of prices was equivalent to kicking vulnerable people. If, as the standard economics argument goes, free flying prices induce greater supplies of “goods like masks” exactly when such masks are in high demand, then higher prices are equivalent to helping vulnerable people, not kicking them.

Batabyal agreed that the standard economics view makes sense when “viewed narrowly,” but they fail he said when “scrutinized holistically.” But his “holistic” scrutiny does not overcome the standard economics view. Uncertainty is already part of the standard economics toolkit. The presence of other regulatory barriers is no argument in favor of price controls. Standard economics recognizes people care about more than economic activity. That consumers may punish price gouging sellers is no argument that government should punish price gouging sellers. Asserting that price increases are like kicking vulnerable people does not make it so.

The op-ed concludes by invoking Karl Polanyi to the effect that markets remain valuable to a community only when they are “contained and limited by non-market considerations.” I imagine most economists would agree. Still, Batabyal has not made the case that anti-price gouging views should be among the necessary non-market limits.

All he has is “raising prices of goods like masks is like ‘kicking’ vulnerable people.” In other words, “Icky!”

Return of the economist, still looking for a sound argument.

In conclusion, I remain against anti-anti-anti-price gouging. I remain an economist waiting for an argument deeper than “icky”