Raising prices on products at times of emergency is widely considered an unethical and often illegal practice. But prices are how markets regulate scarcity. Is it possible that what some call "price gouging" is actually helpful to those caught in natural or other disasters?
Raising prices on products at times of emergency is widely considered an unethical and often illegal practice. But prices are how markets regulate scarcity. Is it possible that what some call "price gouging" is actually helpful to those caught in natural or other disasters?
Co-host today is Daniel McAdams, and Daniel is still in Dallas, Texas, and getting ready to come back to Lake Jackson, Texas, as we recover from the hurricane.
Daniel, welcome to the program today.
How are you this morning, Dr. Paul?
I'm doing fine, and Lake Jackson is holding up, so I think we're going to survive.
It looks like other people in Texas still are suffering.
Even just north of us in Houston, there's still a lot of flooding, and we still have some rivers coming our way, and we don't know what that means yet.
Of course, the people in Beaumont, Texas, over now into Louisiana, are still suffering from this massive storm.
There's no doubt about it, how much water has come down.
Fortunately, there was not 150 mile-an-hour winds.
The winds that did come in were very short-lived, so this has just been a water flood fiasco rather than a high windstorm problem.
But anyway, we want to talk about a subject today related, you know, to the storm.
And it comes up all the time.
Every time there is a storm or some type of a natural weather event, and then there's always shortages.
People go out to prepare and protect themselves.
So they go out and buy as much of the goods that they can find.
And of course, the shelves get empty very, very fast.
Now, if somebody comes along and decides that, well, demand is high.
And what happens in an economy when demand is high?
Well, prices go up.
That's a natural phenomenon.
That's the way it works.
But under these conditions, what happens is some people don't like price gouging.
But price gouging is just a nasty word for the market adjusting the price to the demand of that goods.
And it shouldn't be anything, you know, that should be demagogued and used as a vicious crime.
That, I think, is going in the wrong direction.
And there's been a few of our officials, maybe more than a few, that have spoken out because it's real easy to get everybody sympathetic for high prices in the midst of an emergency.
But, you know, when you study this and understand it, you find out that higher prices isn't necessarily a bad thing, not in a market economy.
It's just very, very emotional, and it's easy to demagogue.
And the politicians tend to have a habit of doing that if they can capitalize on it for political reasons.
I imagine you've come across a couple of individuals who have made statements about those terrible people who are gouging the innocent consumer with high prices.
Yeah, there have been here.
And I'm sure, as you point out, these people mean well.
They're trying to protect people that are in bad situations during a crisis like this.
But there are laws against price gouging.
The Texas Attorney General cited people charging too much for water, gas, and gasoline.
And he's angry about it.
He said, quote, price gouging is illegal.
We will prosecute any business that engages in price gouging after a declared disaster.
And of course, the price gouger is looked at as a horrible profiteer who's taking advantage of other people's misery.
But Dr. Paul, as our economics teacher, you do have another view of what this is all about.
Yes, it's a reflection of an economic understanding, which is completely wrong.
But our economic understanding has been completely wrong for a long time because our universities teach Keynesian economics and they're getting us on the wrong track.
They don't teach Austrian economics.
So what they're saying is that if you have a shortage, that if you can paint a picture of people needing something, which is not difficult, then you can say, well, people can't charge anymore.
But what they don't realize, they're taking a bad situation and making it much worse.
Because the way the market works, just try to look at something that is not related to water in the midst of a hurricane.
If prices go up, this is a good sign in the adjustment process of supply and demand.
Price goes up, demand goes down.
You buy a little less.
If gasoline prices go from $2 to $5, which I think not too many years ago did go to $5, what do you do?
You use a lot less of it, which is good.
And the other thing that happens is when the band is still there or goes up, like in a hurricane, the man absolutely goes up, then there's somebody's going to want to accommodate.
And in an honest way, they might say, well, the price of water now is $5 a bottle.
It used to be $1 a bottle.
And I might work a little harder.
I might drive my truck through the water.
I might take a gamble.
I might stay up all night and get this water to them.
But when I figure my gasoline, my extra time and loss of sleep and all this, I want this amount of money.
And since there's a high demand, he might get it.
But if the price stayed at $1, that guy in that truck is not going to do it, no matter how humanitarian instincts he has.
And this is where they get confused.
The humanitarian instincts is in conflict with economic reality, that the higher prices actually incentivizes people to produce more.
And it has nothing to do with greed.
Because you could say that about every price there is.
It's greedy.
And that's why the socialists always use it.
He charges too much, too much for this, and therefore he's a bad person.
But the prices tell us a whole lot.
And of course, in a free market, it means production goes way up, and then the competition is to supply all those goods and services without any controls.
But that is, of course, what people don't like.
All of a sudden, under emergency, they give up on this idea that supply and demand could work, and only government can tell you how to run things.
But quite frankly, when there's a scarcity, when there is a big problem, the distributions of goods and services are best done in a free market system.
And as soon as you have scarcity and you introduce more government, it actually gets much worse.
That's where our basic problem is in this gouging, because they're destroying the pricing system, which is vital to a market economy.
And this does the beauty of free market economics is that it's based on observable human action.
And I know that you observed it, Dr. Paulo.
I'm sure Mrs. Paul observed it.
We observed it when we knew this disaster was about to strike.
People went to the store and where they may have needed a case or two of water to get them through this, they were lining up their carts with 15, 20 cases of water at the lower price that it was before the storm was coming to take advantage of that low price because there knew there would be scarcity.
Of course, that's the scarcity they caused by overpurchasing what they needed.
And so therefore, the poor guy who came later suffers because there simply is no water available at any price.
Right.
And then they want to grab their moral high ground and saying, well, they won't admit they messed up.
They help contribute to the shortages that the person that wants to correct it and say that we are going to go to extreme lengths to come in and take more risk and bring some water in, they get blamed for the gouging instead of the system that didn't allow the prices to rise three weeks ago, you know, when people started to stock up.
So, and I can assure you, there's going to be a lot of cases of water sitting around, and there's less preservation and conservation, you know, when that happens.
Price Controls and Shortages00:05:14
You conserve more.
You know, when gasoline went to $5, believe me, people drove a lot less.
There was just no need to.
And there were more people getting in cars and share riding because it was so expensive.
And that was several years ago where it was very abnormal to have $5 a gallon.
But people have an incentive to conserve when these prices are high.
So prices are crucial.
And this is nothing more than a price control.
And price controls are very, very bad.
The whole principle of wage and price control are very, very bad.
And they've been around for a long time, all the way back to ancient days.
And they usually come up when there's a government debasement of the currency and inflation, and prices are going up.
And they want to solve the problem of inflation by price controls.
But you might say that you're in a bad area and you need 25 plumbers to be flown in to do some very important work.
And you say, well, yeah, we'll do that.
But, you know, our usual rate is $100 an hour.
I don't know what the, I don't know how much a plumber makes.
It's usually $100 an hour.
But if you're going to fly me down there on a helicopter to come in here and start working on those pipes under those conditions, my rate is $300 an hour, but I'll come.
Now, that is the same principle, but I don't think it's my attitude, the way I expressed that sounded very negative.
He probably would just say, you know, that is a high risk and problem, and I don't want to.
And then the other person said, well, if you got $100 before, maybe we ought to give you $300.
Yeah, I'd probably do that because it is a big problem.
I'm going to lose a lot of sleep and all that.
They don't allow this free exchange of wage of pricing and supply and demand, which is so important.
And somebody says, yeah, that's fine when the economy is working under normal circumstances.
There's no war going on and no crisis going on.
Then you let that happen.
No, when there's scarcities and problems, that is more important than ever that you have free market pricing because you need supplies much faster.
Just think of the supplies that are going to be needed to rebuild so much of Houston.
And what if lumber prices triple and you want to rebuild your house?
How much are you going to pay?
Well, it'll work out because as soon as the price goes up, let's say they charge this week a lot for the lumber.
Maybe in a month from now, the lumber prices are going to come down because a lot more people are going to supply.
But they don't understand this.
And the politicians, they actually want to punish some of these people for raising the prices.
And I guess, Daniel, you've seen a couple of these comments where this is a vicious crime, and you better not do it because they have a monopoly on humanitarianism and not willing to look and look at the conditions.
Well, maybe government could do a lot to help by just lightening up and let the market work in the pricing structure.
One of the things that got me is they were, everyone was angry that a hotel in Corpus Christi had raised its rates to reflect the scarcity of hotel rooms.
And that apparently is a terrible thing.
But you're right, Dr. Paul.
The penalties for these offenses are pretty stiff.
And under Texas law, it's $2,000 per offense if you're caught, quote, price gouging.
But if you price goug and the victim is over 65 years old, it's $240,000, quarter of a million dollars for overcharging an older person for a bottle of water.
That's pretty draconian.
Right.
And the other thing that goes along with this is that if you have an economic disaster like a hurricane or earthquake, they say, well, it's not all that bad because think of what it's going to do for the economy.
Think of what's going to happen in Houston.
The federal government, the FEMA programs and the flood insurance program, they're really broke, but they'll come up with the money.
There's no reason why the government's not going to print the money.
So there will be a stimulus and they're going to send the goods down here in the lumber or whatever is necessary.
And they'll look like an economic boom.
And some people have this silly notion that really, why don't you look on the bright side of this?
This is good for business.
You know, this is an economic boom.
There's going to be more jobs than ever.
But just think about it, that this is a bad problem.
It doesn't really help the economy in the sense that you can do that.
And if you take a year to rebuild, you're only back to where you were to begin with.
So there's no really net benefit.
It doesn't mean that you shouldn't do it and you will do it and some people will benefit.
But you can't justify and say, well, it's good for the economy.
People don't do that too much with a natural disaster, but they do it with war.
They say that we better watch out.
Somebody's going to start a war because it's good for the economy, a lot of employment.
People Want Economic Freedom00:04:57
Now, they do this because they actually believe it, because the argument in our textbooks has always been that Hoover and Roosevelt, they couldn't do anything to prevent and get rid of that depression.
They never looked to the Fed to find out how they created it.
But then they said, Roosevelt, you know, got us out finally when we got into war and we employed all these people.
Yeah, we employed all those people, but what they were doing, they were going over and fighting war and hundreds of thousands didn't come home.
But that is not an economic boom.
Then you keep thinking, well, if we spend our money on that, that means these people wouldn't be employed.
No, the money that we would save under these conditions or artificial jobs that we create by government, all these work programs, because that money would stay in the economy and there would be more productive work and people would, the money would be spent according to economic supply and demand, not by government interference.
But this whole argument that the economy is going to be better off, you hear it a little bit, but you hear it especially, which always annoys me that, you know, a little war now and then is good for the economy.
I don't quite buy into that.
Yeah, exactly.
You know, the other factor in this as we are talking about human action is that when the scarcity of water did come, there were certainly people that told us when we were not able to get enough, they said, hey, we'll share some water with you.
It's fine.
We have some extra.
So there is that human factor that does take a big effect as well.
Yes, and it's this other thing that they use, the word selfish.
I think what you say is actually very true and people will share.
But the people, the people who want more money for their goods or their labor, they're selfish.
And somebody commented once and they said, you know, it's pretty amazing that if an individual makes a lot of money and they want to keep it, they're selfish and they're greedy.
But nobody ever accuses, maybe a few do, but the people who take the money from the people who work and give it to somebody else, oh, they're not greedy at all.
It's only the people who want to keep what they earn are greedy, not the transfer mechanism of government and the agencies and the beneficiaries use to redistribute the wealth.
But yes, if it doesn't fit their assumptions on economics, then they have to paint one badly and say they're selfish, it's price gouging.
What do they just call it?
The free market has just raised the prices of water from $1 to $3.
And, you know, recognize that this is not unusual.
It's not so bad.
It's really part of the solution.
And it doesn't destroy charity.
Matter of fact, it might create an atmosphere where there's less shortages.
There might be even more sharing.
And there's been a lot of that already.
So this whole thing, the demagogue so often has a natural tendency, but it's also a creation and a creature of government, government bureaucrats and the politicians.
Because if you were running for a major office in Houston or any place or in our state right now and say, you know, I'm going to repeal all the laws of punishing people for gouging.
I mean, it would be so bad.
But to me, that doesn't reflect the evil of one group versus the other.
It reflects the ignorance of some people about economic problems.
And I just wished more people would think about economic policy and try to understand that because I think the world would be better off.
Do you have a closing comment, Daniel?
Well, here's to price gouging.
Let's call it right pricing instead of price gouging.
There you go.
That's much better.
Free market pricing is what I like.
And the main thing is to remember: the freer the market is in pricing goods and services, the better it is to deal with shortages.
And if you deal with price controls and wage controls, believe me, you create a lot of shortages and you create a lot of illegality.
Because during World War II, we had wage and price controls, and then there was a lot of black markets, a lot of people breaking the law.
And it doesn't work.
The best distribution of goods and services is by free market pricing.
And it's a principle of liberty.
And fortunately, for our argument, the principles of liberty argue for the most efficient system that mankind ever knew.
I want to thank everybody for tuning in today to the Liberty Report.