A few days ago, Chicago Mayor, Lori Lightfoot, released a statement regarding consumer fraud and price gouging. What’s so interesting about this statement is that she lumps together legitimate and illegitimate concerns.
Fraud
Fraud is a crime, and rightfully so. Fraud is coercion through misinformation, misdirection, and deception. Fraud prevents the individual from using their mind, from rationally evaluating all known facts, and from making a rational choice as to their best course of action. It distorts this ability by feeding it invalid information.
All of us have inaeliable rights, which include the right to life, liberty, and the pursuit of happiness. The pursuit of happiness requires that the individual can use their mind to rationally decide on a benefitial course of action. That is the right to the pursuit of happiness, and fraud directly undercuts it. That is why fraud is, rightfully, considered a crime.
Merchants selling vaccines, treatments, and at-home test kits for COVID-19 knowingly deceive their customers. They should be prosecuted under fraud law.
Price Gouging
My issue with the mayor’s statement is that she lumps price gouging in with fraud. She clearly considers it a crime worth prosecution. But I don’t think price gouging is a crime, because it infringes on no one’s rights. And in many case, price gouging is a correct and moral action. Having the government rule on what price gouging is allowed is a frightening case of government overreach and an instance of the government infringing on the rights of the people.
No Infringement of Rights
Price gouging simply does not infringe anyone’s rights. The consumer knows what the price is and what the product is. As opposed to fraud, there is no misinformation, no misdirection, and no deception. The consumer is perfectly free to use their rational judgement in order to judge whether the product is worth the price being asked by the merchant. The consumer’s ability to rationally judge the best course of action for their life remains completely intact.
What if the Merchant Charges Too Much?
Most people’s concern with price gouging is that the merchant will charge “too much.” But what is too much? If the merchant charges more than anyone is willing to pay for it, then no one will buy it. The merchant will have goods sitting on the shelf, doing nothing other than costing them money – instead of making the merchant money.
From the merchant’s point of view, this accomplishes nothing. And the only rational response, is for the merchant to lower prices until consumers start buying the product.
Price Gouging Prevents Hoarding
Most people are also concerned with the hoarding of goods, like hand sanitizer and toilet paper, by people who panic buy and don’t truly need that much. Then, the concern goes, there is no more hand sanitizer or toilet paper for the rest of us. I hold that, if this is your concern, then you should love the idea of price gouging.
Price gouging prevents this type of hoarding.
If merchants floated the price of these goods when the increase in demand became evident, then consumers would not buy these goods in such quantities. Honestly, how many of these people would be buying toilet paper in such quantities if the price was 2x, 4x, or 8x higher?
Clearly, not as many of them would. Which means that there would still be goods left on the shelves for those people who more highly value them. If you’re a healthcare worker, you are going to more highly value protective masks and gloves.
What situation is better for the healthcare worker? The one where they simply cannot buy any masks or gloves because the supplies have all run out? Or the one where they can buy those goods because the ‘price gouging’ has discouraged others from over buying them?
Distribution of Goods
This whole situation arrises because the demand for these goods (at the current price point) exceeds the supply. In a free market, the price would rise until a new equilibrium is reached. However, without the ability to raise prices, merchants turn to other mechanisms to limit sales.
One thing they try is to limit the number of items that an individual can purchase. For example, most stores by me have placed a one item limit on these goods. But does this make sense? Is this ‘fair’?
My brother’s family has two adults and three teenage girls. They are going to go through toilet paper much faster than a single person who lives by themselves. Yet, each is limited to buying one package of toilet paper. This clearly does not make sense, and it clearly is not the best way to distribute these goods in the market. But it’s one of the only methods left to merchants who cannot raise prices.
What is Unreasonable – And Who Decides?
The mayor’s statement states that the city understands prices increasing by a reasonable amount, but that it will prosecute merchants who raise prices by an unreasonable amount. This begs the question, who determines what amount is reasonable or unreasonable?
One is only left to assume that the city will make that determination. And based on what? Is there any clear, understandable, objective definition? There is not. There are only the factors of the price before demand suddenly surged and the prices other merchants are charging.
How much higher can a merchant raise prices in the light of increased demand? It is completely unclear.
How similar must a merchant price their goods in relation to other nearby merchants? It is completely unclear.
How can a merchant use their rational judgement to price their goods? They cannot. They cannot use their mind to determine the best course of action. As with fraud, this directly infringes on their pursuit of happiness – a fundamental right that government should be protecting, not infringing.
In practice, it will ultimately be up to the whim of the city and whatever bureaucrat sits in judgement. Will the bureaucrat apply equal standards to all that come before them? That is highly unlikely. What if the merchant has annoyed the bureaucrat in the past? What if the merchant is the bureaucrat’s cousin? What if the bureaucrat is open to ‘make a deal’?
Ultimately this flies in the face of the rule of law. This is the idea that there is a clear, objective standard of law that governs a people. And it stands in opposition to the rule of the king – where any case could be ruled by the king in any direction he pleased – where the King would rule favorably towards his friends and unfavorably towards his enemies – where the entire standards change depending on who is king.
Being beholden to the arbitrary whim of whoever is in power should send a shudder of terror through any individual.
Profit Motive
Finally, the ability for merchants to ‘price gouge’ in situations of increased demand provides one more essential market force. It provides a profit motive for companies to increase supply of these goods. This can come in the form of existing suppliers ramping up production, and it can come in the form of other suppliers refitting their factories to start producing a different good.
Both of these cases involve suppliers incurring expenses, and they will only incur those expenses if they can recoup them afterwards. And they will be able to recoup those expenses if the price point of these goods rises.
If hand sanitizer starts selling for $20 a bottle, then many more suppliers are going to start producing hand sanitizer. Yes, it will take some time for them to refit and start producing hand sanitizer. But if prices are allowed to rise, then I’ve already explained how the current supply will be sustained until new additional supplies are available.
Price gouging is the mechanism which encourages companies to increase supply of these goods and get them to market.
Wrap Up
I’ve covered a lot in this post, but it essentially consists of the following. Fraud and price gouging are not the same. Fraud infringes on rights by preventing individuals from rationally choosing their best course of action – whereas price gouging does no such thing.
Instead, price gouging does not allow merchants to charge ‘too much’, it prevents the hoarding that so many people are concerned about, it ensures that goods are available for purchase by those who most highly value them, and provides a strong motivation for companies to increase supply while stretching the current supply until new supplies are available.
By threatening merchants, the city of Chicago has taken a step away from the rule of law and towards the rule of kings – the rule of arbitrary whim. In doing so, it is infringing on the rights of its people instead of protecting their rights.
Ryan Sawatzky 