Emotionalism triumphing over knowledge

A provocative article on an important topic - Price Gouging Can Be a Type of Hurricane Aid by Tyler Cowen.

After any natural disaster which disrupts logistics and supply chains, there are always shortages, some inconvenient (candles, flashlights) and some existential (shelter, food, water). And anywhere that is less than completely totalitarian, there emerges price gouging - pricing a good based on its relative scarcity/demand rather than on its cost or traditional price. Some nations, states, localities pass laws seeking to prevent or mitigate price gouging but it occurs anyway.

And when it occurs, regardless of ideology or party affiliation there is a human abhorrence, indeed, atavistic repugnance. The gouger is evil.

So it has been with Hurricane Harvey. I haven't seen a lot of reports but there have been some, primarily related to drinking water.

The abhorance is odd both in terms of experience and in terms of logic. Logically, if it is acceptable to force merchants to sell at below demand prices justified by community need, then it should be equally acceptable for authorities to confiscate all available drinking water from all citizens in order to redistribute by need. This second proposition receives virtually no support but the first is commonly endorsed despite their being essentially the same policy.

And once you head down the slope that centralized authority is the best decision maker in terms of both production and consumption, in no time at all you have rationing, shortages, starvation and death. So why do people endorse anti-gouging measures? Lot's of possible reasons though Churchill's comment in a speech to the House of Commons, October 22, 1952 seems pertinent.

The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.

"Price gouging" (surge pricing in Uber's language) is the functional mechanism which addresses the knowledge problem, identified by Friedrich Hayek. In a large, complex system (such as a national economy) there is no means by which a centralized locus can optimize supply and demand across heterogenous needs. It is too complex to be done.

From Friedrich A. Hayek in Conversations with Great Economists.

My whole concept of economics is based on the idea that we have to explain how prices operate as signals, telling people what they ought to do in particular circumstances. The approach to this problem has been blocked by a cost or labor theory of value, which assumes that prices are determined by the technical conditions of production only. The important question is to explain how the interaction of a great number of people, each possessing only limited knowledge, will bring about an order that could only be achieved by deliberate direction taken by somebody who has the combined knowledge of all these individuals. However, central planning cannot take direct account of particular circumstances of time and place. Additionally, every individual has important bits of information which cannot possibly be conveyed to a central authority in statistical form. In a system in which the knowledge of relevant data is dispersed among millions of agents, prices can act to coordinate the separate actions of different individuals.

And in natural disasters, that is precisely what "price gouging" does - it signals to participants in the wider economy that there is unmet demand, setting up an adjustment in production, logistics, and supply to accommodate the unmet demand. Without that signal, production and supply do not adjust to demand, prolonging the suffering.

One can see the 20th century as one prolonged contest between the philosophies of totalitarianism (centralized control) and the philosophies of liberty (classical liberalism). Or, perhaps, not so much a contest as a series of replicated field tests.

And across those hundred years till The End of History, totalitarianism (communism, socialism, postmodernism, etc.) demonstrated consistently and repeatedly that they had no solution to the problem of knowledge. All communist systems collapse. And indeed, that has remained true in the first few years of the 21st century with the naturally endowed paradise of Venezuela proving once again that no matter what the abundance and potential, it cannot be so great that it will not be destroyed by totalitarianism.

We know that free market pricing is always able (absent regulatory capture and coerced rent seeking) to provide the best optimized solution to problems of supply and demand regardless of atavistic distaste for price "gouging." Unpleasant as it might be from a normative perspective, tactically it is the best of all bad options.

All of this is pretty much black letter law for economists. Yet socially, we remain repelled by the idea despite knowing what we know.

Cowen introduces an interesting wrinkle into this age-old debate. The role, and unintended negative consequence, of social media.

Although Texas and Florida have laws against the practice, a bigger deterrent is perhaps the wrath of the customer: We have entered an era when companies fear social media to an unprecedented degree. But I wish to suggest that price gouging, in spite of its obnoxious-sounding name, is usually the best of a set of bad alternatives. If you are inveighing against high prices after a storm, basically you are lining up with the interests of American big business, at the possible expense of storm victims.

How does that work? There are still shortages of food and water in parts of the Houston area, due to malfunctioning waterworks and postponed deliveries. Let’s say bottled water was selling at $42.96 a case at the local Best Buy, as shown in this photo. A customer can take out his or her smartphone, snap a photo and post it on social media. The photo may go viral, and many people, including the legal authorities, will be mad at the company.

The reluctance to raise prices is especially strong for nationally branded stores. A local merchant may not care much if people in Iowa are upset at his prices, but major companies will fear damage to their national reputations. The short-term return from selling the water at a higher price is dwarfed by the risk to their business prospects. More and more of the value of business capital is intangible capital, more than 84 percent of the S&P 500 by some estimates. That’s why Best Buy so quickly apologized for its store selling the water at such a high price, blaming the incident on an overzealous local manager.

Consider an alternative: Instead of raising prices to very high levels, let’s say that the local big-box store sells out quickly during an emergency and has empty shelves for water. If those photos circulate, they will be interpreted as signs of general tragedy and want, rather than selfish corporate behavior. It’s too subtle an image to snap the price tag at pre-storm levels, contrast it with the empty shelves, and lecture your Facebook friends about the workings of market-clearing supply and demand and the virtues of flexibly adjusting prices.

To be clear, market-clearing prices are not always best. In emergency situations, very high prices can end up placing too many critical resources in the hands of the wealthy. Sometimes rationing can be fairer and promote human happiness. Nonetheless, the balance of argument does favor allowing and indeed encouraging higher prices in most emergency situations. If the store doesn’t raise prices, attentive customers may buy up the whole stock, resell it during the emergency and price gouge themselves. Or store employees may funnel the scarce goods to their friends and relatives. Don’t think the alternative to corporate price gouging is necessarily a fairer outcome, but that subtle point doesn’t always translate well to social media.

There's no research on this yet but I'll bet it is a measurable phenomenon. If social media, by shaming and doxxing, enforces an anti-gouging de facto practice, then businesses large and small will cease to respond to the market signals of demand and clean-ups, resupply and restoration will all take longer and be more expensive in the long run. Indulging the anti-gouging sentiment will unintentionally harm victims while making the sheltered shamers feel better about themselves. Yet another instance of Doing Bad by Doing Good: Why Humanitarian Action Fails by Christopher J. Coyne. And another instance of emotionalism triumphing over knowledge.