Robert Murphy has written a marvelous article on the benefits to society of allowing merchants during a natural disaster the freedom to charge whatever price the market will bear for their goods.
For example, he describes the standard effect of prohibiting high prices of destroying the incentives to entrepreneurs elsewhere in the country to bring in new supplies quickly in hopes of reaping high profits during the disaster.
But in addition, he argues that the standing policy of punishing “price gouging” diminishes the chances that before the disaster falls upon the people but after it is predicted, entrepreneurs inside the affected area will stock up additional inventories.
The only way to profit from a disaster is to prepare for it successfully and better than most other people. To penalize folks for their own prudence, foresight, and resourcefulness to secure themselves and loved ones is monstrous. The ant in the fable labored heavily to get ready for his own disaster, winter, while the grasshopper chirped and sang. We are called by Aesop to admire the ant and to look askance at the grasshopper, but the modern state has perversely transvalued all values. In particular, it would be perfectly smart and just for the ant to squeeze the starving grasshopper for all he’s got. At the very least, it would teach the grasshopper a useful lesson.
Even if the disaster was not predicted and occurred entirely out of the blue, there may be some people in the area, such as survivalist “preppers,” who would be deterred by anti-price gouging laws from helping both themselves and society.
Another great point is that a disaster can last a number of days, and things may go from bad to worse. The market, when permitted to function, will tend to allocate the extremely scarce resources over the entire time period the disaster lasts and cleverly so, as Murphy demonstrates.
Finally, high prices promote efficiency in rationing even a fixed supply of goods. The use of a bottle of water for drinking is usually more valuable than its use for cooking. Faced with high prices, a family may choose to buy just enough water for drinking and leave the rest for other people who would in their turn also shell out just enough to satisfy their most urgent desires. The market thus effects a certain equality of distribution according to “need,” as it will not pay a family to up and grab a huge part of the limited supply so it can bathe or water the lawn, while other families are dying from thirst.
(The word “need” has two senses. First, it can describe a means to an end. If you want to buy food, then you need to drive to the store. Second, and more pertinent to this discussion, it can mean “essential for physical survival.” Pleasures can be traded off for each other; some can be set aside for the sake of more valued ends. One cannot “need” a pleasure, only want one. But survival is before pleasure, since a corpse does not pursue happiness. In a disaster, there can therefore be a need to be rescued.)
Murphy’s example of conservation of gasoline is especially instructive.
Here are a few more reasons why market prices during a disaster are socially virtuous. First, I have supplied a proof of an economic theorem that “the most efficient thing to do with an item you’ve produced is to sell it to the highest bidder.”
Further, if prices are kept artificially low, then what determines, during the inevitable disequilibrium shortage, who gets the goods? It may be the quickest or those who live closest to the store who will get them, which of course begs the question, “What makes these arbitrary fellows the most deserving?” But if there are lots of people in the store yet not nearly enough goods at the enforced low prices, the lucky recipient may well be he who is the most violent. “Why,” such a person may think, “should the things I want be obtained by the person in front of me in line? If I were to shove him aside rudely, or beat him unconscious, or even kill him, then I’d get the stuff.” A sense of community is especially important during a disaster, where people may sometimes need to risk their lives heroically to save others. Yet anti-price gouging laws pit people against other, encourage unjust violence, and hurt the “one for all, all for one” public spirit.
Further, high market prices in the affected area encourage not only the migration of goods from the outside into the area, increasing the supply, but also the migration of people from within the area outside, decreasing the demand. Both of these put a downward pressure on prices. Government price controls create an illusion that the situation is better than it is and delay the realization that goods are in short supply. Under interventionism, people may end up leaving, too, but only after they’ve become convinced that all the available goods have been consumed. This may take some time. High prices, on the other hand, offer an immediate and highly visible signal to the people that they could benefit financially by running away, such as to stay for a while with members of their extended families elsewhere in the country. This signal also conveys the market’s sense of exactly how severe the crisis is expected to be.
During a natural disaster, a shopper is upset at the Kwik-E-Mart owner that he is selling bottled water at high prices. Perversely, the shopper is not upset at the other shoppers in line who are not only not selling bottled water at all (and who therefore pathetically made no preparations for the disaster and proved themselves useless to society) but are competing with him for the existing water, thereby showing that they failed so much as to bother to leave the area while making explicit demands to be served by society and arrogantly daring to insist that the poor Kwik-E-Mart owner sacrifice for them.
Regarding Murphy’s final question, namely, whether it is moral to profit while others suffer, I don’t think a natural disaster establishes communism, abolishes property rights, or suspends the Constitution. We might even argue that such hard times test the people’s willingness to obey the law. If they viciously and with malice in their hearts report “price gougers” to the authorities, in order to get revenge against their slightly better-off fellows, they demonstrate only that their morals are a pathetic facade that the storm has swept away as surely as it did their cars. And if Murphy’s (and perhaps my own) arguments fail to persuade them of the social value of the free market, then their minds, too, are as weak as their moral fiber. They would then fully deserve their misery.
Lastly, while heroic works of mercy may occasionally be called for during a disaster, and we honor those who thereby risk their lives, the principle of every man for himself in fact works wonders in saving lives. It is precisely when each person knows that he alone is responsible for the safety and well-being of his family that he exercises maximum diligence and effort in providing for it. If everyone imagined that the “community” would take care of them, then I think a disaster would have truly terrible consequences.