BY DANIEL FRIDMAN
In addition to wind, rain and destruction, hurricane season also brings a practice that is almost universally repudiated: Price gouging. Price gouging during emergency situations is against the law in several states, including Texas and Florida, where Hurricanes Harvey and Irma hit the hardest.
But several economists have spoken in favor of price gouging. They claim that we should not mess with prices, whose job is to get goods to those who want them the most. If prices go up, buyers will think twice before purchasing something they may not need, while suppliers will be incentivized to go the extra mile and provide needed goods in order to make more money. If you take that extra gain away, you will have fewer goods and in the wrong hands.
There is some truth to this.
Markets are indeed a reasonable way to move goods around. Yet the belief in markets often goes well beyond what they are. Economist Mark Perry recently argued that outlawing heavy price increases during hurricanes was as ridiculous as asking the government to outlaw temperature increases during heat waves. Another economist, Michael Salinger, equated understanding that price gouging is a good thing with learning as a kid that the moon was responsible for the tides. In other words, it is counterintuitive and you need to repress your gut reaction against it. These examples compare the price mechanism with natural forces that are beyond the control of humans.
But this is wrong.
Markets are not equivalent to tides or temperatures. They are a clever human creation to allocate goods. Economist and sociologist Karl Polanyi argued in his 1947 book “The Great Transformation” that markets are a valuable form of organization, but one which can only remain valuable as long as we contain it and limit it in accordance with nonmarket considerations. All societies have had, besides markets, other ways of connecting people and goods, such as reciprocity and redistribution. It was only in the 19th century that we started believing market forces could and should self-regulate; Polanyi warned this was dangerous.
Disasters such as Hurricanes Harvey and Irma test our social bonds in ways that few events do. We often hear that collective catastrophes bring out the best in people, and the meaning is clear: We act on our empathy, generosity and obligations to one another.
Some advocates of unfettered markets grumble that those who act self-interestedly and raise prices are contributing to an efficient allocation of goods, but are hardly recognized. Nobel Prize winner Milton Friedman stated that gougers deserve a medal. Yet there are good reasons why they do not, and why we cannot be easily convinced otherwise. The moral condemnation of price gouging is a recognition that in certain social situations, raising prices is kicking vulnerable people when they are down.
I asked students at The University of Texas at Austin, some of whom were returning from a devastated Houston, what they thought about price gouging. One student said, “It depends: from a moral standpoint or from an economic standpoint?” We should not separate the two. There may be benefits to price hikes in terms of efficient allocation, and real difficulties in policing gouging.
But there is a long way between these issues and praising self-interest during an emergency. A realistic solution to the problem cannot involve mocking our moral reaction against gouging as well intentioned but ill informed. We should rather solve the problem of allocation while taking seriously our moral commitments.
Communities recover better from disasters when they preserve their trust and social bonds. During catastrophes, we are not just allocating goods, we are also asking who we are, what holds us together and what we owe to one another as humans and as members of society.