At a time when majorities everywhere seem to believe that the market is imperfect and the government (the government each one thinks he would run, not the current one run by others) is perfect, America sometimes or perhaps often looks like a relatively enlightened spot. Compared to probably all advanced countries, a sizeable minority—if not sometimes a majority—of Americans hold opinions that are economically more realistic and more consistent with the ideal of a free society.
Thanks to Peter Van Doren, editor of Regulation, for bringing to our attention a working paper titled “Price Gouging in a Pandemic” by Christopher Buccafusco (Yeshiva University School of Law), Daniel Hemel (University of Chicago Law School), and Eric Talley (Columbia Law School). The authors compared the results of a 1985 Canadian opinion survey on the “fairness” of increasing shovel prices by 33% following a big snowstorm with their own survey and (extensive) analysis of American opinion on the “fairness” of increasing prices of hand sanitizer by 33% in May 2020. In most American states, such an increase is forbidden during emergencies, as precisely documented by Buccafusco et al.
While 82% of Canadians found this sort of increase unfair, the researchers report, “only” 47% of Americans did so. I may add that Canadian opinion is probably representative of the typical opinion in what used to be called the “free world.” This being said, the fact that the Canadian survey covered only two cities, Toronto and Vancouver, may have affected its representativeness.
Strangely, nearly all Americans surveyed expressed a preference for rationing scarce supplies instead of auctioning them off, oblivious to the fact that auctioning is equivalent to letting the market determine prices, which a majority of them thought was not unfair! Perhaps this is just an instance of voters’ irrationality (the paradox of voting)? Still, three-fifths opposed any legal punishment for charging higher prices, which suggests that their preference for rationing was only a moral one—like when stores voluntarily reduce the number of items a customer can purchase in one visit.
These results must have something to do with the American tradition of individualism and liberty. I would conjecture that they are also related to the large proportion of Americans who have real business experience. This reminds me of a fascinating Wall Street Journal story featuring a 16-year-old American, Max Hayden, who, during the pandemic, purchased and resold scarce goods such as game consoles with a profit of $110,000 (see Sarah E. Needleman, “Sixteen Years Old, $1.7 Million in Revenue: Max Hits It Big as a Pandemic Reseller,” June 9, 2021; it’s well worth reading).
Max was able to do this—thus making sure that the scarce goods were going to those who valued them most as well as smoothing prices over time—without being sued or prosecuted by the government because, in New Jersey, goods deemed to be luxury goods are not hit by the “price gouging” legislation. His father, though, did not have a very enlightened opinion; the WSJ wrote:
Max’s father, whose name is also Max Hayden, said he was initially uncomfortable with his son’s business success because he benefited from a situation created by the health crisis. But he concluded that it was permissible because his son only resells luxury goods, not necessities.
“It’s a real distinction,” said Mr. Hayden, 61, “This is capitalism.”
Perhaps the older Mr. Hayden never reflected on the idea that letting each consumer decide what is a necessity or a luxury for himself is also capitalism, and so is moving goods in time—buying now for the purpose of reselling later when the price is anticipated to be higher. French economist Jean-Baptiste Say explained the last point two centuries ago. In A Treatise on Political Economy, Say wrote:
There is a further branch of commerce, called the trade of speculation, which consists iu the purchase of goods at one time, to be re-sold in the same place and condition at another time, when they are expected to be dearer. Even this trade is productive; its utility consist in the employment of capital, warehouses, care in the preservation, in short, human industry in the withdrawing from circulation a commodity depressed in value by temporary superabundance … so as to discourage its production, with the dcsign and purpose of restoring it to circulation when it shall become more scarce … The evident operation of this kind of trade is, to transport c0mnodities in respect of time instead of locality. If it prove an unprofitable or losing concern, it is a sign that it was useless in the particular instance, and that the commodity was not redundant at the time of purchase, and scarce at the time of resale.
The young Max Hayden was a successful entrepreneur and did not create “an unprofitable or losing concern.” As for the older Mr. Hayden’s moral concern, he was probably just caught in the conventional statist wisdom.
The paper by Buccafusco et al. also provides a good review of the debates on the economics and ethics of letting prices rise and fall with the conditions of supply and demand.
READER COMMENTS
MarkW
Jun 28 2021 at 7:17am
One odd thing that does happen is that (even without price-gouging laws) established retailers cannot raise prices much during emergencies for fear of offending customers who, of course, they want to keep after the emergency is over. Customers would blame the store for gouging but they blame ‘hoarders’ for empty shelves, so stores rationally keep prices down and let shelves go empty.
That creates the opportunity for upstart entrepreneurs like Max Hayden who has no longstanding business reputation to protect nor any track record of having charged ‘normal prices’. People would scream bloody murder if Walmart doubled the price of PS4s when they’re in short supply but don’t get bent out of shape if Max snaps them up from Walmart at the normal price and charges double on eBay. Normal people are weird.
Pierre Lemieux
Jun 28 2021 at 8:51am
MarkW: Another interesting phenomenon is that ordinary people, who expect their established retailers to follow a strange ethics (if we believe Buccafusco et al.), will rush to their stores to stock on toilet paper sold at below-equilibrium prices. Another interesting phenomenon is that when ordinary people are in gangs, they are not as tolerant of Max-type entrepreneurs: see Munger’s discussion of a 1996 hurricane in North Carolina in Anomaly’s et al.’s PPE anthology, which I reviewed in Regulation.
Craig
Jun 28 2021 at 12:28pm
“will rush to their stores to stock on toilet paper sold at below-equilibrium prices”
But Publix doesn’t know what the equilibrium price is either at that particular time. For sure they probably experiment with pricing here and there, right? But in the instant moment of the emergency, they aren’t going to be privy to where the curves have shifted. So its ‘we buy it from mfg at $X, we mark it up Y%, our gross margin is Z, our OPEX is OPEX$ and our net is some percentage of the gross sale. That’s how they think and of course they are not oblivious to current events, but beyond ‘limit 1 per customer’ the situation is not so dire that they’re going to care.
Pierre Lemieux
Jun 29 2021 at 11:48pm
Craig: Publix doesn’t need to know anything about the “equilibrium price.” They just need to observe that their shelves are bare to know that they could charge more, or that the turnover on their shelves is low to know that they must charge less. As Hayek explained that’s one of the big advantages of the free market: one only has to observe prices to know what is needed to efficiently coordinate his actions with millions of suppliers and demanders.
Dylan
Jun 28 2021 at 8:57am
Note, I think the survey you referenced was conducted in 2020 (although I’d be very happy to be wrong, and would look for all of the follow-up surveys of how people think in 2030)
Pierre Lemieux
Jun 28 2021 at 9:30am
Thanks, Dylan. Corrected! (I sometimes feel I am ahead of my times.)
Dylan
Jun 28 2021 at 9:54am
If you’re taking requests, I’d love to know how 2030 feels about cryptocurrencies.
Also this:
https://xkcd.com/2481/
Pierre Lemieux
Jun 29 2021 at 11:53pm
Indeed, not easy to predict (even if 2031 is quite close). I would guess that, if there has been no nuclear war in the meantime, everybody will use cryptocurrencies. If they are government cryptocurrencies, there is a good chance that not much liberty is left; the contrary if they are private cryptocurrencies.
Thomas Lee Hutcheson
Jun 28 2021 at 6:18pm
“the government (the government each one thinks he would run, not the current one run by others) is perfect”
I wonder if anyone thinks this?
Pierre Lemieux
Jun 29 2021 at 11:54pm
Don’t I have a blog friend named Thomas?
Thomas Lee Hutcheson
Jun 28 2021 at 6:25pm
I remain amazed at the contrast between the way some people can see the advantages of the price system in allocating scarce TP in a pandemic but not for allocating scarce CO2 absorption capacity of the atmosphere.
Pierre Lemieux
Jun 29 2021 at 11:56pm
Thomas: One reason may be that, thank God, it is not the government that determines the supply of toilet paper.
Mark Brady
Jun 28 2021 at 7:27pm
“Perhaps this is just an instance of voters’ irrationality (the paradox of voting)?”
So I click on the link which takes me to your 2014 article “The Vacuity of the Political “We”,” and I learn that “[t]he electorate is irrational even if each voter is rational!” Are you asserting that talk of an “irrational” electorate illustrates the vacuity of the political “we”? In that case how can voters as a whole be “irrational”?
Moreover, Wikipedia informs us that “the paradox of voting” holds that “for a rational, self-interested voter, the costs of voting will normally exceed the expected benefits.” This is NOT the same thing as “the voting paradox” which is about the intransitivity of majority rule among three or more alternatives, a different proposition.
Pierre Lemieux
Jun 29 2021 at 12:08am
It may be that some authors use the expression differently.
Pierre Lemieux
Jun 29 2021 at 10:29am
Mark: Perhaps I don’t understand your second point but I am simply reporting the well-known result that the electorate may express intransitive preferences even if each voter’s preferences are transitive. My review of Riker’s classic 1985 book gives further explanations.
Josh S
Jun 28 2021 at 8:29pm
I wonder if people have a negative opinion of using auctions for scarce supplies because they have a skewed view of the fairness of auctions because of the word “auction.” Specifically, that they associate the word with exclusive venues for rich people to bid on relatively unique items, e.g. Picasso paintings. Or maybe auctioning off a house that’s in foreclosure, where there is only one item and only one highest bidder. These are qualitatively different situations from, say, a gas station where many people will still get gas, and there’s no clearinghouse guaranteeing that the richest people get first dibs. I.e. there’s more of a belief that there’s a level playing field.
There are certainly cases of auctions common in daily life, such as in digital advertising or livestock auctions, but most people don’t see them. Maybe people who are familiar with those are more open to surge pricing. I’d be interested to know.
Quite Likely
Jun 28 2021 at 11:42pm
Isn’t Mr. Hayden just inserting himself into transactions parasitically and producing some profit for himself by raising the prices others pay for those goods?
Pierre Lemieux
Jun 29 2021 at 12:10am
Nobody is obliged to buy from him and, if he were a parasite, nobody would. Note also that when somebody sells, he is not pushing the price up. Finally, consider that the market is a permanent auction.
David Seltzer
Jun 29 2021 at 1:04pm
It seems to me Max senior conflated amiable morality with junior’s mundane morality.
Jon Murphy
Jun 29 2021 at 1:22pm
Brilliant insight
David Seltzer
Jun 29 2021 at 3:29pm
Thank you Jon.
Pierre Lemieux
Jun 29 2021 at 11:57pm
David: I concur with Jon.
David Seltzer
Jun 30 2021 at 11:23am
Thank you Pierre.
Comments are closed.