A few weeks ago, I was scrolling my Facebook feed and came across a video taken outside an Australian supermarket. The video featured about half a dozen Asian customers purchasing baby formula, two tins at a time, and stacking them neatly in a large pile outside of the market. Then, like a revolving door, they would return to the store to purchase two more. The pile amassed must have been at least 50-plus tins of baby formula.
Confused by the relevancy of the post, I looked to the comments to find animus from other mothers. There were accusations of extortion, unethical behavior, and law-breaking; some openly seethed with rage and even directed racism toward the Asians.
For the past several years, Australia has been experiencing a shortage in baby formula. To cope with dwindling stocks, supermarkets have implemented a two tin per customer policy. However, this shortage isn’t a result of a baby boom down under. It’s a result of a lack of reliable formula in a country in the opposite hemisphere, China. Hence the reason you find Chinese people buying all of the formula: they are sending it home.
The ‘Evil’ Practice Keeping Consumers Alive
By the time the formula reaches China, the retail price increases three-fold, but that doesn’t deter the Chinese from buying it. Demand remains steady in a country that births about 17 million babies a year. Through the eyes of collectivists, people were preying on the misfortune of others through price gouging. Those of us who understand economics saw a market working.
Price gouging is often touted as an "exploitation" of desperate consumers. Governments try to crack down on the practice by enforcing price caps on products. In the United States, 35 states and the District of Columbia have enacted legislation to keep prices down, even during emergencies. However, these well-intended laws have a negative effect on consumers, leaving shelves empty and people in desperate need. Price capping laws have prevented hurricane victims from obtaining generators after their towns were decimated, and the mandates have even jailed the suppliers of the generators!
Higher prices force consumers to be more mindful of their purchases, and the price hike signals to suppliers to increase production as soon as possible.
By artificially keeping prices low, customers are encouraged to buy as much as possible, often more than they need. Higher prices encourage conservation. If the first customer in the store during a hurricane purchases the entire water supply, that leaves nothing for anyone else. Higher prices force consumers to be more mindful of their purchases, and the price hike signals to suppliers to increase production as soon as possible.
Price gouging isn’t some nefarious behavior meant to line the pockets of manufacturers. It is nothing more than the market reality that when supply is low, demand increases and prices go up. Conversely, when supply is high, demand decreases and prices go down. No natural disaster or regional economic problem will change the basic laws of supply and demand.
How Price Capping Becomes the Catalyst to Price Gouging
Why exactly is there a shortage of formula in a country like China, which has a robust, self-reliant economy? The problem isn’t a general lack of formula, it is a lack of reliable formula. In 2008, six babies in China tragically died due to melamine-laced baby formula, and another 54,000 babies were hospitalized. Four years prior, 12 infants died from a watered-down milk scandal. In short, the Chinese rightfully have no faith in the Chinese-made brands and refuse to buy them. There is even skepticism among Western brands in China due to the enormous counterfeit market. The Chinese haven’t just mastered replica designer bags; they can fake baby formula, too.
The contaminated formula scandal led to a slew of criminal prosecutions, imprisonment, resignations, and even two executions. But why would formula developers put melamine, a compound used to make plastics, into baby formula? The reasoning goes back to the highly praised but incredibly dangerous practice of price capping.
Unable to use quality ingredients to create the baby formula and subsequently charge a fair market yet competitive price for the formula, makers turned to a cheaper and, in this case, deadly option.
Until recently, the Chinese government extensively employed the use of price caps for a wide range of commodities and services, including baby formula. This was meant to make items affordable to China’s largely poor population. Unable to use quality ingredients to create the baby formula and subsequently charge a fair market yet competitive price for the formula, makers turned to a cheaper and, in this case, deadly option.
As usual, the government’s regulatory means to keep costs down for consumers eventually produced health problems for those same consumers.
Only in 2015 did the Chinese government rescind the price control policy for about 80 percent of the products, including the formula. But the damage has been done, and the effects are long-lasting as market confidence has yet to recover for Chinese-manufactured baby formula.
What the West Should Learn
What the Chinese were and still are experiencing is a paradox of collectivist fiscal policy. The Chinese Government's "helpful" price caps destroyed China's baby formula market and a new one arose in its place.
Had the Chinese government left the market alone, developers would have been incentivized to create the very best quality formula at the best possible price.
Had the Chinese government left the market alone, developers would have been incentivized to create the very best quality formula at the best possible price. The 18 poisoned infants would have been spared, and the Australian market would likely be untouched by Chinese consumers. But as usual, the state insisted on "helping" consumers.
What’s that saying about the road to hell again?