Here’s What’s Wrong About Price Gouging

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Here are some situations. See what you think of them.

You’re getting ready to drive to work when you turn on the radio and discover that an accident has closed two lanes of the freeway you usually take. Unwilling to spend two extra hours inching through horrible traffic, or to forfeit half a day’s wages so you can go to work at a later time, you decide to sacrifice four dollars and take the toll road.

Your friend has a birthday tomorrow, and you want to give him his favorite thing, which is a certain kind of Brazilian coffee. When you get to the store, you find that the cost has gone up. Several would-be customers are shaking their heads and turning away: they’re not buying at that price. “Bad season in Brazil,” one of them says. “Half the crop wiped out.” Hence the price increase. But you want to please your friend, so you pay the extra money and buy him a pound of coffee.

The first snowfall of the winter turns out to be a bad one. When you see the stuff clogging your driveway, you regret that you didn’t contract with the neighborhood snowplow guy to clear the drive whenever it snowed. You call him on his cell, and over the sound of heavy equipment you hear him say something about wanting to “do the customers with contracts first.” In fact, he’s got all the contract customers he can handle — but he’d be willing to help you out today, for twenty dollars extra, fifty dollars for doing it right away. You happily agree.

Do you see anything wrong about any of these little episodes? I mean, do you see anything contrary to common morality? Anything contrary to common sense? Anything contrary to normal economic reasoning? No? You don’t? I don’t either.

You would have paid a hundred dollars, if the snowplow guy had asked for it. It would have been worth it to you. But no, he’s not allowed to ask for more.

Now suppose the government decreed that no motorist should have to pay more to drive, just because there was some dumb accident on the freeway. Suppose the government therefore closed the toll road, just to make things fair, meaning that you would be required either to spend extra hours on the freeway or to forfeit some of your pay for a much delayed arrival at work, or both.

Or suppose the government decided that no one should pay more for essential foodstuffs (e.g., coffee), just because some unpreventable meteorological event occurred. Suppose the government therefore decreed that no one should be allowed to pay more for coffee than the price that prevailed before that event, meaning that all available supplies of coffee would be long gone before you went to shop for it — purchased by casual customers who would never have bought any coffee at the price it is worth to you.

Or, to go at this one more time, suppose the government refused to allow the snowplow guy to charge you extra just because there was a big snowfall and you hadn’t been prepared for it. Obviously, you wouldn’t get your driveway plowed, despite the fact that some of the people who got theirs plowed, at the ordinary price, had nothing better to do with their cars than drive to the convenience store for a bag of chips, whereas you needed to show up at the office to sign an important contract. You would have paid a hundred dollars, if the snowplow guy had asked for it. It would have been worth it to you. But no, he’s not allowed to ask for more.

What do you think of the morality and economics of that second set of situations? Not much, I imagine. Yet that is the morality and economics that is official in our country. That is the morality and economics that the people, as a corporate body, loudly applaud.

Consider what happens when some meteorological accident befalls an East Coast state. As soon as a hurricane is foretold, state and local officials decree that no one will be allowed to charge more for gas, food, or lumber than they do on a normal day. To charge more would be “gouging,” and an awful thing. The result? The economy grinds to a halt. Long lines form at stores and gas stations. People in urgent, perhaps desperate, need wait in line up behind people who have nothing better to do that day, and no one has a compelling economic interest in rerouting supplies to the weather-threatened region from other places; it’s a hassle, and the price would be the same anyhow. Besides, if you made a mistake in pricing, you could be arrested. Fat little Chris Christie, or some similar buffoon, bustles from one gas station to another, threatening to arrest “profiteers” and occupying the 6 o’clock news. And the people cheer.

It appears to be an article of the national faith that prices are determined by the law of supply and demand. But another article of faith is that the government can and should violate that law.

The other day, federal officials made headlines by announcing an investigation of airline companies because they allegedly raised prices on flights in New England after a government train had an accident that disabled the main line from New York to Boston. The idea of these high-level feds is that it would have been scandalously immoral for the airlines to charge more money for their seats, thereby allowing travelers who were willing to pay more to go ahead and pay it, and travelers who didn’t set so high a priority on getting to Boston right away not to pay it. Except on John Stossel’s show, no murmur of disapproval greeted the well-publicized announcement of this sanctimonious investigation, or witch hunt.

So this is the mystery of contemporary politics. Actions that would, in certain contexts, make almost all Americans shake their heads in wonder are welcomed, in other contexts, with pious approval. Why is that? I don’t know.

It appears to be an article of the national faith that prices are determined by the law of supply and demand. This idea is even taught in high schools, where realistic ideas almost never appear. But another article of faith is that the government can and should violate that law (which it constantly does), and that no one will pay a price for the government’s action: no one will spend hours waiting to buy something he’d prefer to pay a bit more money for; no one will find that the items he wants to buy have disappeared when he finally gets to buy them; no one will lose his life or livelihood because of an arbitrarily imposed “fair price.”

Americans believe that there’s no such thing as a free lunch. They also believe that the government can cook one up for you, at any time, and no matter what happens. No problem! Just make a law.




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Hayek, the Stones, Beckham . . . and Kotter?

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Nobel Prize winning economist Friedrich Hayek died in 1992 at the hoary age of 92. He lived long enough to have heard the Beatles and Rolling Stones, perhaps seen an episode or two of Welcome Back, Kotter, the 1970s situation comedy centered on the travails of a high school teacher and his “at-risk” students; but not long enough to experience the rise of European soccer’s invasion of the US, personified by the move of England’s David Beckham’s to the Los Angeles Galaxy team in 2007 — for a slightly exaggerated $250 million price.

Hayek recently came to mind during a spirited debate with a retired teacher friend over educational policy. She brought up that old canard about our market society having misplaced economic values because teachers are not compensated as well as rock or sports stars. Her assumption — a common one — was that monetary compensation ought to be commensurate with intrinsic worth; and if rock and sports stars are paid more than teachers, our society must value entertainment much more than education — prima facie evidence of market failure that ought to be rectified.

Whew! I didn’t know where to begin. But since the toughest part of a good discussion is clarifying terms and premises, I backpedaled to them.

First of all, the term “society,” though a useful abstraction, has been inappropriately reified and pumped up with steroids. Ayn Rand questioned its notion of “society” as a tangible entity by prosaically listing its components — the butcher, the baker, etc. That allowed her, quite fairly, to dismiss concrete conclusions from its meta-usage, much as we now dismiss the merely statistical reality of a .3 child in the typical American family of 2.3 children.

Second, “economic values” is another high-sounding but meaningless term. Hayek dismissed this inflated premise as prosaically and brilliantly as Rand. He insisted, indeed, that “there is no such thing as ‘economic values’ ”:people have values; economic markets are the most efficient means to realize them. “Economic values” makes as much sense as “biological, physical, or chemical values.”

Conservatives and libertarians often stumble over the same concepts and fall into the same trap. But instead of trying to correct the terms of debate, they go with the flow and say that it’s just fine if folks value entertainment more than education — that’s their choice in a free society. Moreover, who’s to draw the distinction between one and the other?

Cutting through the Gordian knot of highfalutin conclusions, Hayek explained that the price disparity between rock or sport stars and teachers was simply due to old-fashioned supply-and-demand: there are few of the former and lots of the latter. No overwrought conclusions about social values — no concerns about “society” respecting good teachers less than it does Beckham — are warranted.

Since Hayek’s death not much has changed on this front, except for one crucial distribution, which proves Hayek’s insight. Teachers are still a dime a dozen, and public schools lack any mechanism for recognizing or rewarding superstars, while a degree in education remains about the easiest such degree to acquire. (I know, having received a complimentary MA for neither fee nor work.) Sports stars are — mostly — still members of protected cartels that keep supply low and prices high. But the music industry has undergone some radical upheavals.

Back in the 1970’s — the heyday of the Beatles, the Rolling Stones, and the Who — rock stars were, well . . . Rock Stars. Today, the high-end popular music market has broadened to include country music, hip-hop, world music, opera, cross-over collaborations, and a variety of independent “others,” with a concomitant dilution of the take. Additionally, in this technologically sophisticated post-Napster era, recorded music is cheaper. A DJ I know, lately from WNYU, guesses that the Beatles or the Stones made more than $30 million in 1970. Accounting for inflation, that’s about $300 million in today’s dollars (see “Cash Poor” in last year’s Liberty).

Dr. Dre, a hip-hop superstar and Forbes magazine’s highest paid musician in 2012, earned a measly $110 million — followed by Roger Waters of Pink Floyd at $88 million, Elton John at $80 million, U2 at $78 million, and Take That (a British boy band) at $69 million. Justin Bieber, only 18 years old, was the tenth highest paid pop star in 2012 at $55 million. The take at the top has tanked.

But what about musicians in the trenches; how do they compare with teachers, and the general population?

The average personal gross income in 2012 for musicians was $55,561, with only $34,455 coming from their music endeavors, according to Artist Revenue Streams. The average US teacher salary (grades 1-12) was about $52,000 — according to many sources. Per capita personal income for the entire country in 2010 was $39,945, according to the Bureau of Labor Statistics.

Today, the Rolling Stones keep rolling on; David Beckham is on the cusp of retirement; the quality of US public education keeps deteriorating . . . and Frederick Hayek is probably rolling over in his grave.




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