Well, if it’s hurricane season, it must be anti-price-gouging season. It’s bad enough for people to be hit by a hurricane. You’d think that statists would show some mercy and spare people some economic idiocy during difficult times.
Alas, it is not to be. North Carolina Attorney General Roy Cooper announced that he would prosecute anybody engaging in price-gouging during Hurricane Irene. Cooper declared, “We’re warning price gougers that you can’t use a crisis as an excuse to make an unfair profit off of consumers. If you think that someone is trying to use Hurricane Irene to justify ripping you off, let my office know about it.”
It’s enough to make you wish that American law schools offered courses in Austrian economics.
What people like Cooper fail to understand is that the price system is simply the free-market’s method of communication. Prices impart valuable information to both producers and consumers that enable them to make rational economic decisions. When the government tampers with the price system by setting maximum prices or prosecuting “price gougers,” it mucks up the communication system on which people are relying.
Let’s take a hypothetical example. Let’s say that a hurricane hits the Outer Banks in North Carolina and that people are desperately in need of ice on the islands. One store has 50 bags of ice on hand. Immediately, it raises its price from $5 a bag to $25 a bag.
Now, we all know what Attorney General Cooper would do. He’d start screaming like a banshee and sending out state troopers to make an arrest.
Actually, however, that’s the worst thing that Cooper could do.
When the price of ice soars, it communicates valuable information to consumers on the island. The new, higher price says to them: You need to conserve your use of ice.
At the same time, the new, higher price imparts valuable information to producers on the mainland: You need to produce more.
And it also sends a message to entrepreneurs: Here is an opportunity to make a nice, hefty profit in a very short period of time. Entrepreneurs buy ice on the mainland at $3 a bag, rent boats, take the ice to the island, and sell it for $20 a bag,
Gradually, as the supply of ice increases on the island, the price starts to decrease, which sends messages to everyone: Consumers learn that the need to be over-cautious on the use of ice is diminishing, and producers and entrepreneurs learn that there is less urgency in getting ice to the islands.
What people like Cooper fail to understand is that there is only a limited supply of ice and everything else during an emergency. All the laws and pronouncements in the world can’t change that fact. The issues are: How are those particular items are going to be allocated and how best to alleviate the situation?
That’s what the price system does. It allocates scarce resources through the price system. When the price system is interfered with through the setting of a maximum price, the wrong message is sent to consumers and producers. It tells them that they should continue consuming just like before and that there is no need to bring new supplies into the emergency area. Supplies quickly disappear and are not replenished owing to the elimination of big-profit opportunities for entrepreneurs.
Most important of all are the concepts of economic liberty and private property. When a person owns things, they belong to him, not to Attorney General Cooper or the state. As the owner, he is free to sell what belongs to him at whatever prices he wishes, just as consumers are free not to buy it.
For the state to order a person not to sell what belongs to him at whatever price he wishes and then punish him for violating the order is the type of economic tyranny that exists in places like Cuba, China, and North Korea, where such laws and decrees are commonplace.
What should the state do about prices during hurricanes? The French gave us the answer: “Laissez faire, laissez passer.” Let it be, leave it alone.” Leave people free to charge whatever they want for their goods and services. It’s the best thing that the state can do for people in an emergency.