Ari Armstrong, Coronavirus, Exclusives, Featured, Legal, Uncategorized

Armstrong: Criminalizing price ‘gouging’ does more harm than good

Call me old-fashioned, but I think state attorneys general should go after people for crimes that actually exist, rather than for actions that aren’t crimes. Apparently Colorado AG Phil Weiser disagrees. His office has aggressively cracked down on so-called price “gouging,” which is not a crime in Colorado and should not be criminalized. Weiser dubiously invokes “unfair and unconscionable business acts” to support his actions. Meanwhile, Congressman Joe Neguse has asked the feds to look into price “gouging.”

Not only should our legislature and the federal government not prohibit price “gouging,” other states that currently outlaw it should repeal those laws. And Colorado’s AG should stop trying to stretch existing law to cover it.

Normally price “gouging” is a good thing, and outlawing it does enormous harm, especially in times of emergency. Higher prices align what people demand with what others supply, and legal actions against price hikes cause shortages, sometimes life-threatening ones. As economist Michael Munger says, “If you use the police to keep prices artificially low, it makes the problem of scarcity much worse.”

On the demand side, higher prices encourage people to conserve on the good (or service) in question, to reduce their use to what is most important and to find substitutes. If you have to pay more for toilet paper or water or bananas or gasoline, generally you figure out ways to use less of it. If gas costs more, you may give up scenic drives or bike more. It toilet paper costs more, you may wipe more efficiently or even set up a bidet.

On the supply side, higher prices encourage people to part with more of their existing stock, produce more of the good, and produce substitutes for the good. If generators are in high demand, say in an area with a power outage, someone with two generators might sell one or even both if the price goes up. If a disease wiped out egg-laying chickens, prices of eggs would soar (where legal) and various businesses would ramp up production of things like mung-bean egg alternatives.

The very term price “gouging” is misleading, as it implies violence where there is none. To set a higher price that someone voluntarily pays is fundamentally different from, say, forcibly “gouging” out someone’s eyes. Since the early 1800s, English speakers have used “gouge” to mean to cheat or swindle.

Part of the problem is that the term “price gouging” as typically used today is what Ayn Rand would call a package deal. It wrongly combines cases of consensual price-setting with cases of outright fraud, as if there were no difference. To use one of Munger’s examples, if someone offers to cut down an elderly woman’s tree for $350 but then sends a bill for $1,200 in the mail, that’s fraud and properly outlawed. Or if someone uses deception to con someone into a $1,200 service, that’s fraud. Setting a price for a fairly represented good or service is not fraud and should not be illegal. We should use the term “price-raising” (or “surge pricing”) when that’s what we mean.

Is there something about an emergency that should cause us to set aside normal considerations of supply and demand and stop people from committing “capitalist acts between consenting adults,” to borrow a phrase from philosopher Robert Nozick? Generally no. Emergencies are when it is most important that people are able to buy and sell goods at mutually agreed prices.

But what about that case in Tennessee, where two brothers cleared store shelves of hand sanitizer, antimicrobial wipes, and face masks in hopes of reselling the supplies for a large profit? Isn’t that the epitome of the “greedy capitalist,” snagging up supplies before others have a chance to buy them and then reselling them to people in need at large markups? Shouldn’t we be grateful that Tennessee outlaws price-gouging and the state’s AG cracked down on the brothers, compelling them to “donate” their supplies?

On the contrary, laws against price-gouging in Tennessee and Kentucky (where the brothers bought many of the supplies), along with the widespread social stigma against price “gouging,” created the mess. After all, the stores whose shelves the brothers cleared could have and should have raised prices on those items themselves, if that weren’t illegal. Then the brothers would have had no economic incentive to buy up the goods, and the stores’ regular customers would have had access to the items, albeit at higher prices. With low prices and an expected emergency, runs were inevitable with or without the notorious brothers, even if stores limited the amount each customer could buy. Laws against price gouging are the problem, not the solution.

Of course, even if sellers were legally allowed to raise prices, that doesn’t mean they would all do it. Amazon, after all, refused to let the Tennessee brothers sell on their site. Economist Tyler Cowen points out that, even if laws allowed price hikes, Amazon probably wouldn’t raise prices. Emergency goods constitute a tiny fraction of Amazon’s total sales, and the company probably would not want to take on the associated public and political ill will. That’s unfortunate and harmful, Cowen points out. This suggests an idea to me: If it were legal, companies that want to help prevent shortages but that don’t want to “price gouge” could raise prices and donate the residual profits to charity.

Meanwhile, we’ve seen lots of companies in Colorado and around the country step up to make and donate things like protective masks and hand sanitizer. Why would profit-seeking capitalists do such a thing? Capitalism does not mean that everyone always seeks to maximize monetary profits; it means that people are free to engage with others on consensual terms. This includes charity and nonprofit work. Business owners often want to contribute to their communities beyond their formal operations and build public good will. One problem is that often these companies have run into regulatory hurdles that hinder their provision of emergency supplies.

Are there any exceptions? Can government ever justly intervene in cases of price hikes? Here is a common example. Let’s say you’re lost at sea in a rowboat, and you come across an inhabited island. The island’s owner says, “Sure, you can dock your boat in my harbor, but it will cost you every cent you own.” At some point I think government properly does not enforce such agreements because there is no true consent. But such extreme cases are not comparable to emergencies people typically find themselves in, such as during hurricanes and the COVID-19 outbreak, and they do not justify general laws against large price hikes.

Weiser, our AG, deserves our gratitude for cracking down on genuine cases of fraud during these troubled times. But he should not seek to enforce non-existent laws for political reasons, nor should the legislature empower him to go after price “gougers.” Legislators should first do no harm.

Ari Armstrong writes regularly for Complete Colorado and is the author of books about Ayn Rand, Harry Potter, and classical liberalism.  He can be reached at ari at ariarmstrong dot com.

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