All Commentary
Thursday, May 12, 2011

It’s Only Gouging When They Do It

Double standard.

The recent spate of natural disasters, especially the tornadoes that hit the southern United States, has rekindled the seemingly eternal debate over the supposed problem of “price gouging.” Interestingly, for all the debate, no one has a clear definition beyond its having something to do with selling products at “above normal” prices in the wake of a natural disaster. Speaking as an economist, I can tell you the term has no technical definition. In fact the best definition I can offer is this: selling goods at prices other people think are “too high” or “unfair,” characteristics that are very much in the eyes of the beholders, or in this case, buyers.

As economists have long pointed out, anti-gouging laws are horrifically counterproductive for a variety of reasons. By capping prices at pre-disaster levels, the laws prevent prices from reflecting the increased scarcity of the goods in question. Prices, as I’ve discussed before, play two intertwined roles: They are knowledge wrapped in an incentive. Rising prices after a disaster provide important information to users of the good, indicating they should economize on their use of it and devote the now smaller supply (relative to the intensified demand) to only the most important uses. And those rising prices provide the incentive necessary to do so, by raising the cost of using the resource for less urgent purposes.

Signal to Suppliers

At least as important is the dynamic effect of rising prices. Higher prices signal to other suppliers of the good that it is more scarce, indicating that supplies need to move to the affected area. And this signal is wrapped in an incentive: The higher prices provide the profits to lead other suppliers to want to bring goods to the affected area. Coercively preventing sellers from raising prices only exacerbates the very shortage the distressed area is experiencing and eliminates the incentive for people to use the good for only the most important purposes.

But what is perhaps most interesting about gouging is that the charge is only selectively applied. Right now, just a week or two after the tornadoes in the South, carpenters, plumbers, electricians, roofers, and trash removal workers are seeing wages well above their pre-disaster levels since the demand for their services is extremely high. We saw the same thing after Hurricane Katrina, not to mention pretty much every major natural disaster you can think of. Yet not once has any of those workers been prosecuted for price gouging. In fact, you pretty much never even hear the accusation made against them.

No Difference

Economically there’s no difference between the two cases. The price of items like gas or water rises because demand for them increases after a disaster and because supply lines are often interrupted. The same is true of labor services: People demand them more and some number of local trades people will be injured, dead, or busy repairing their own property. The combination drives up the wages of those who remain in the market.

Just as economics would predict, the higher wages available to such workers act as beacon wrapped in an incentive to draw in skilled labor from other parts of the country, if not the world, to take advantage of the temporarily higher wages. The Gulf Coast saw a significant influx of Hispanic day laborers after Katrina for precisely this reason. The benefits here are clear: The additional competition from the new supply of skilled labor begins to drive wages back down to where they were before the disaster — again just as economics predicts.  The public also gets access to the much-needed skills as the supply of labor expands. There is not one difference between what happens in these markets and what happens in the markets for gas, generators, water, or any other good.

Immune from Accusation

So why is it that we never see trades people accused of gouging? I suspect that it is due to our prejudice against profits. Most people don’t object to an individual earning a higher wage during such a time, but when a business, especially a large corporation, earns higher profits in the short term, that raises moral objections. Again, economically there is no difference here: Both the higher wage and the higher profits arise from the same supply-and-demand process and, more important, have the same functional role in ensuring expanded supply.

Those who complain about “price gouging” (some of whom are probably receiving higher wages) need to be consistent. If raising prices during an emergency is morally objectionable, the complainers should be willing to apply anti-gouging laws to workers.  If that is morally objectionable, then the lack of any meaningful economic difference between higher wages and higher profits should lead them to do the right thing for both producers and consumers and call for an end to anti-gouging laws.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.