Vice President (and Presidential candidate) Kamala Harris has announced, as part her proposal for ‘fixing’ various economic ills, that she would, as President, impose new rules to prevent “price gouging” on groceries.
There is contention among the commentariat as to whether that does or does not equate to “price controls”. Certainly, it must involve someone in government making an ad hoc (and undoubtedly politically-driven) moral determination about what is and is not an “unfair” amount of profit that the government would then prohibit; that amount of profit would presumably represent some permissible margin above the expense of actually getting groceries to market in the first place, which would define a corresponding permissible upper bound on allowed pricing, at least in aggregate and relative to those expenses (along, no doubt, with a lot of bureaucratic haggling and second-guessing over what expenses may, themselves, be considered ‘legitimate’); and presumably, if a company exceeded that allowed pricing level, the government would do something to stop it. So, perhaps one might be forgiven for assuming it represents an effective price control if not a formal one.
But, OK. Unless it evolves into something more draconian during the next (and inevitable) bout of inflation — that is, unless even that nominal government-defined level of “fair” profit suddenly seems “excessive” to the regulators because it “hurts the consumer” — the policy is probably more accurately described as a “profit control” than as a “price control”.
It is, to be fair, also narrowly tailored to groceries specifically — presumably and nominally because those are considered to be “critical” to the public weal (but, probably more realistically, because voters are currently mad about inflation in grocery prices and blaming those prices on “greed” rather than on natural/political disasters in the wider world and on fiscal/monetary policy at home is politically expedient). No, it is not, as Donald Trump has declared, “communism”. It is not even “socialism” — although I do think, based on my generalized view of what “socialism” is and means (and contrary to the popular assertion from the American Left that it can’t possibly be Socialism if it isn’t actually full-on Marxism) — that such a policy could be fairly described as at least tilting toward “socialistic”, inasmuch as it uses the excuse of some prophesied “social good” to justify usurping personal liberties that otherwise involve purely voluntary actions.
It is also reasonable to fear that, having succeeded in applying that policy to groceries, and thereby normalizing it, a future Harris administration might over time discover a plenitude of other broad product categories that are deemed “critical” to the public weal (or to be politically popular) and which should, therefore, also be swept within the bounds of that originally-narrow policy. And the apparent mechanism being proposed for implementing the policy — simply decreeing that the Federal Trade Commission has the authority on its own to regulate profits, without requiring an act of Congress — is troubling to anyone concerned about the increasing assertions of unitary (and imperial) executive authority coming from both sides of our political divide. That isn’t the way major perturbations to the relationship between government and citizens are supposed to happen…
At any rate, many economists have declared the proposal (vague as it is) to be particularly bad policy (see this example, and this one, and this one), not only in this specific instance but as a general principle. It is, however, likely to be a popular notion despite being a rather dumb one. Democracy may be democratic but that doesn’t necessarily make it wise.
I’m with the economists — and not only because I believe that theories of market dynamics (a.k.a. supply and demand) both accurately represent underlying reality and generally work in practice. My objection is not merely practical but moral.
One of my earliest political awakenings, from back in the early 1970s when I was a pre-teen, flowed from an observation of alleged “price gouging” in action and the irrational political response to it.
Back then, we were in the midst of an “oil crisis” because our major suppliers — the countries of the OPEC cartel — had shut off the spigot for political reasons. There was a genuine shortage: there was not enough oil for everyone to have what they thought they wanted or needed and there was no way to magically pump more out of the ground any time soon. Gasoline was being rationed through legal mandates. People waited in line for hours to get it (if they could get it at all); and prices went up, not by a few cents or a dime, and not by 10% or 20%, but by nearly 4:1 in the space of a few months.
But, there was one gas station in the Back Bay of Boston (I lived in southern NH and got news from the Boston news stations and the Boston newspaper) which always had gas and never had a line. Why? Because it was charging something like 6 times the nominal market price.
The political authorities in Boston were outraged. They accused it of “price gouging” and, on that basis, shut it down. Because, it was hurting people, right? It was taking advantage! It was being unfair! It was predatory!
But, here’s the thing: based on reporters’ interviews with them, it seems that station’s customers were, indeed, incensed — but not by the high prices they had been paying. What incensed them was that the nannies of the government took away their gas! No, they didn’t particularly like paying so much for that gas. Who would? But they really liked being able to get the gas, when they needed it and without having to wait in line for hours to do so. They were, in fact, if not actually happy then at least fully satisfied with paying extra — even that much extra — to ensure they had a reliable and accessible supply. And, of course, anyone who did not want to pay that price was perfectly free to go to some other gas station and pay their dues in time — and in the risk of coming up empty in the end — rather than in cash…
I remember wondering, even as a kid, why those satisfied customers should be denied the opportunity to pay a premium price for premium access, and why that business should be denied the right to offer them such a premium service. And, I also remember wondering why a government should have the authority — never mind the desire — to interfere with that.
More recently, I was reminded of that episode by another story, this one from within the last few years (no, I don’t have an online link to it — you’ll need to trust my memory), about someone who bought a bunch of generators in the Northeastern states, loaded them into a truck, and drove them down I95 to the Southeastern states that were suffering in the aftermath of a particularly destructive hurricane to offer them for sale. He was, of course, selling the generators to people living without power, so his potential customers could accurately be described as desperate. And he was, indeed, offering those generators for sale at an enormous markup over what he had paid for them. He was, no doubt, benefiting from others’ misfortune.
Yet, people were not only willing but happy to pay the price he was asking — because the alternative was continuing to live without power.
He was a classic entrepreneur filling a market need and satisfying a small but grateful clientele by providing them with something they valued for a price that was very high but that they were, nonetheless, perfectly willing to pay. Yes, he was benefiting from their misfortune — but they were, in return, benefiting from his initiative.
And, yet, as in the example from my childhood, the State stepped in to shut him down — accused him of “gouging” and confiscated his inventory — on the theory that he was harming people by “taking advantage of them”.
But, who was harmed? Not those who chose not to buy his generators — they ended up exactly where they would have been had he never offered the generators to them in the first place. And, not those who chose to buy the generators — they willingly paid their money for a generator because they believed that it would improve their situation, that it would make their lives better.
Perhaps he was no saint. Perhaps he was, in fact, “greedy” for seeking a hefty profit rather than selflessly donating his time and effort and his invested capital. But, it wasn’t like there was a plethora of selfless altruists following his lead by flooding the market with their own truckloads of less expensive generators. They were certainly free to do so and, had they done so, they would have undermined his pricing scheme. Yet…they did not. He, on the other hand, did — he stepped up when no one else would. Why? Because he could profit from it!
I had to ask, then: really, would anyone have been better off had he not bothered to make the effort, whatever his motivation or his methods? Indeed, no. The State, in the name of reducing harm, was actually reducing benefit! It was self-righteously preventing things from getting better in the name of making things better. And, as in the example from my childhood, it was also taking away the freedom of both buyers and sellers to make mutually agreeable and mutually beneficial — and wholly voluntary — economic decisions. Why should it have had that kind of authority…?
As part of the chapter on Capitalism in my 2016 book, “American Conservative: Reclaiming Conservatism From the Right,” I also wrote briefly on the topic. Here is an excerpt of that:
The pricing of a scarce resource in the market is not an intellectual exercise designed to satisfy some moral criterion. It is the mechanism by which scarce resources are rationed – a high price serves to suppress demand to the point that it matches the supply available.
If some political mechanism was employed to depress the price artificially, the resource would still need to be rationed, and more so than before because a lower price would both increase the number of consumers who want to buy it and reduce the incentive for producers to create more of it. However, without the mechanism of price to manage that rationing, some other means – a lottery, or a social competition to prove greater “need” or “merit”, or a political competition to assert greater power, or corruption and graft, or a black market, or perhaps merely the chaos of a mob – would supplant it, if not by intention then by default. It is not obvious that any of those other mechanisms would necessarily and consistently generate a “better” outcome, by whatever criterion you might choose to measure it, than the market would.
We can always envision some extraordinary circumstance in which the result created by a market would seem to defy common sense or violate our notions of fairness or decency. Imagine, for instance, that a fierce hurricane in the Caribbean surprises forecasters by making a sudden and swift turn toward Florida, endangering the entire coastline from Miami to Jacksonville. The people along the Florida coast suddenly begin demanding great quantities of plywood to board up windows and doors on their homes as protection against the winds and rain. But, due to the suddenness of the danger, there is no time to import plywood from other places and the demand will probably outstrip the supply available.
In a free market, the price of plywood will rise, effectively rationing the limited supply to those most willing to pay for it. Following a rational economic model, those with the most to lose – that is, those with the most expensive houses or with houses in the most exposed areas – will be willing to pay more than those at a lesser risk and the market will, therefore, allocate the limited supply to those people.
We note, with a great deal of sympathy, that this puts poor people at a disadvantage with respect to rich people: rich people can more easily afford to pay the higher prices. But the real problem is the storm, not the market.
Both the poor and the rich are going to lose something to the storm’s fury, and those losses will weigh more heavily on the poor than on the rich because the losses will represent a larger fraction of their personal wealth. That is unfair.
But the unfairness has nothing to do with the market for plywood. The pricing of plywood neither generates nor exacerbates the loss; it merely mediates the form the loss will take: cash out the door now or storm damage later.
If a poor person must spend $500 now to prevent $1000 in damage later, that is still a bargain for him. The $500 may be a painful amount to spend – there is no dispute about that – but it is the least painful alternative given the reality, completely unrelated to the market, that the storm is coming. The market is not causing his loss. It is ranking the magnitude of his loss against all the other losses that are just as inevitable as his.
We might still object to that result on the grounds that the poorest people would be the most likely to lose their property while the wealthiest people, able to protect their property, would lose only the money they spent on plywood. We might judge that disparity to be unfair from the perspective of social equity or justice. We might assert that allowing everyone a bit of protection would be better than having some well-protected and others unprotected; or we might assert that deciding who was protected and who was not should be left to chance so that no one could be said to have taken any advantage from another.
But, from a material standpoint, the market outcome would be both reasonable and optimal: by preferentially protecting the most valuable and the most at risk properties it would minimize the overall material loss. And, as a consequence, when the storm was over and the time came to rebuild, the rebuilding effort could be both more rapid and less costly than it might have been otherwise. Society overall would be, arguably, better off than had the distribution of plywood been “fairer” according to some non-material criterion. We might legitimately ask ourselves, then, whether such “fairness” is really to be desired.
…
A free market is a two-way street. In a free market, exchanges happen because both the buyer and the seller feel they will be better off after the exchange than they were before it. Otherwise the buyer would not buy or the seller would not sell. Hence, although one may profit more than the other, neither’s benefit may be said to come at the other’s expense. Both benefit. Both come away wealthier, having satisfied some need or desire that would remain unrequited but for the opportunity for exchange that the market provided.
When people assert that one or the other side of an exchange has been “greedy” – that (typically) the merchant or the employer has profited at the consumer’s or employee’s expense – what they are really asserting is one of two propositions: 1) the most fervent version of distributive justice, that any outcome which is unequal must be ipso-facto unfair and, therefore, unjust; or 2) a moral judgment that one participant (typically the consumer or the employee) is somehow more deserving than the other and therefore has a greater moral claim on the total benefit that the exchange produces. That is, they claim aggrievement not because the exchange resulted in any actual loss or victimization but because the gain failed to fulfill some external expectation for a “just” outcome. Moreover, it is probably accurate to say that even the failure to fulfill their moral expectation is nearly always presumed, not demonstrated: for the most part people making such claims have no idea how much either party actually profited and only some ineffable notion of what a morally proper allocation of profit might be.
But the free market is, if nothing else, free. People get to choose for themselves which “injustices” are worth enduring for the sake of gaining some benefit and which aren’t. Perhaps it seems unjust that Apple collects millions of dollars from people who buy iPhones, while those purchasers each end up with their wallets several hundred dollars lighter. If you count only their cash they have become “poorer”. But they don’t feel poor. They feel happy because they have an iPhone, and they would rather have the phone than the money.
If we were to throw over the free market in favor of some other method for distributing the goods of society, whose expectations of justice would prevail? By what moral authority would they be imposed on others who disagreed? Or, more prosaically, who is in a better position than I to decide whether I am better off with my iPhone or with my money? And what gives them the right?
And, if the pursuit of such notions of justice eliminated the original opportunity for gain, if it reduced the tangible economic benefits available to everyone, would that trade of a substantive material comfort for an elusive moral comfort make us better or worse off? Capitalists – and iPhone enthusiasts – would answer with an emphatic “Worse! Much worse!”
Postscript
Some people may object that the examples I cited weren’t really “gouging” (though, of course, various governments specifically declared them to be so and acted on those declarations) because they were idiosyncratic, rather than systemic — that they did not involve any actual and persistent “market power” (i.e., monopoly) to enforce the requested price premiums but, rather, reflected merely individual and localized (and temporary) market quirks. They might say that policies like the one proposed by Vice President Harris are really aimed only at preventing monopolistic price gouging.
To that I would offer three rebuttals:
- We already have anti-trust laws on the books — and fairly active teams within the FTC and the Anti-Trust Division of the Justice Department — to deal with problems of monopoly. It is highly unlikely that we need new anti-gouging laws governing groceries to assist with that.
- What constitutes systemic ‘gouging’ is in the eye of the beholder — and beholders that work for left-of-center administrations (or populist administrations from either the left or the right) — and even more so left-of-center (or populist) politicians pandering to angry but ignorant voters — tend to be both unrealistic and unreasonable about such things, tend to see “gouging” where there is really only routine market dynamics.
- If you really think that such rules, once they existed, would not be applied to idiosyncratic instances, you don’t understand either government or politicians…
Accusations of corporate perfidy when profits are observed to be remarkably high are not new. They happen nearly any time there is a momentary peak in a business cycle. Nor should we be surprised that companies might record increasing levels of profit during a period of high inflation, if for no other reason than that today’s profits are reported in inflated dollars whereas last year’s profits were not. The recent boom in profits in various industries was real but was almost certainly a short-term (and uneven) result of the pandemic-related recession giving way to an overheated (and over-stimulated) post-pandemic recovery. Best prediction: those “record” profits won’t last.
But, for the moment, it is all too easy for opportunistic politicians and “activists” to urge a citizenry feeling the combined pinch of recent inflation and political/cultural uncertainty into outrage over “excessive” corporate profits. And it is all too predictable that the outraged citizenry will respond by demanding some kind of relief against corporate “gouging”, even if that gouging is illusory. That, also, is not new.
In the early 2000s, post 9/11 and under then President George W. Bush, we had another temporary run-up in oil prices due to various supply shocks, both natural and political, and oil companies were temporarily making higher than average profits. Outraged Democrats in Congress (and other people of “the left”) accused those companies of price gouging — although the popular term for it at the time was not “gouging” but “windfall profits”. In response, those outraged Democrats (and other people of “the left”) proposed a “Windfall Profits Tax” to confiscate the ‘extra’ money that was, they claimed, being immorally ‘extracted’ from the unwitting and blameless public.
As I wrote at the time, I might be (only very slightly) more sympathetic to the notion of limiting particularly high profits during good times if there was an equal eagerness to make up for particularly poor profits during bad times. But, of course, there is not and never has been. “Windfall profits”, it seems, belong to the public. “Windfall losses” belong to the shareholders…
© Copyright 2024, Augustus P. Lowell