Tuesday, March 15, 2016

"Price Gouging" Helps Those In Need: Learning from Joseph

I have written elsewhere about the economic benefits of what is often called “price gouging.” The function of prices in a free market is, among other things, to convey information about the world. When a hurricane ravages a state and the price of ice rises dramatically, that is not the result of greedy capitalists taking advantage of a crisis. Rather, it is a signal about reality. It is easy to say “price gouging is bad,” but the more accurate statement is “hurricanes are bad.” The badness of the hurricane has made goods relatively more scarce, and the prices reflect this reality.

Suppressing price signals by freezing prices and relying on forced rationing in such a case not only misdiagnoses the problem but also delays solutions to the problem. When a hurricane makes the price of ice rise, the price signal incentivizes other’s to increase the quantity of ice supplied. It is as if the bat-signal goes up to people in the surrounding areas to say “we need ice!” The high price means that others can make a profit by supplying ice to the victims of the storm, so many will incur costs themselves (getting the ice, figuring out how to transport it without it melting) in order to avail themselves of the profit making opportunity.

Now it is possible to respond at this point by saying that we, as Christians, should seek to help the poor and victims of disaster for reasons other than personal profit. To a certain extent this is true. There is nothing wrong with individuals loading up their refrigerated trucks, traveling to the affected area, and giving away ice. But when we look at the bigger picture, there are additional benefits to utilizing the price mechanism rather than unconsidered altruism.

First, when our upstanding Christian ice deliverer gives out his cargo, there are multiple possible uses for it. Ice has various important functions especially in a community that has lost electricity, but some are more essential than others. Most would agree that serving the most essential needs of people should be the primary use of this scarce resource. We should seek to make sure medical supplies and food are kept from spoiling before worrying about keeping everyone’s beer at the right temperature. It is difficult, however, for an individual showing up with an essential resource to perform this kind of triage for all those vying for a scarce supply of ice. The price mechanism, is able to perform this function automatically. We can easily see that people who need to keep their insulin refrigerated will be more eager buyers than those who want to make margaritas. By incentivizing people to economize on scarce resources, prices ensure that ice will be available for those who need it most and is not used recklessly by those who happened to make it to the front of the crowd.

Second, if our goal as Christians is to help those in need, then we should ask which mechanism actually helps them the most not which one do we feel best about. Relying on Christian altruism works until we realize that not everyone is a Christian or altruistic (there is significant but far from complete overlap between the two). If we can get even the most greedy, self-centered person to provide an essential good to people in need, that is progress toward our goal. We should not let the presence of bad intentions influence our evaluation of a good outcome (and vice versa).

Lest you think that this is merely economic esoterica lacking biblical support, turn to Genesis 41. Here we have an actual example of a natural disaster causing a shortage of an essential resource: food. There is a famine in the wider region, and in Egypt Joseph is in charge of the response. He has prudently saved up food which is now needed throughout Egypt and Canaan, but what does Joseph do with it. He does not establish an equal ration for everyone and give it away. Instead, he utilizes the price mechanism. There are not many details of the economic design of Joseph’s system, but the text says over and over than he “sold” the food and that people came to “buy” it. See verses 56-57:

And since the famine had spread over all the land, Joseph opened all the storehouses, land sold to the Egyptians, for the famine was severe in the land of Egypt. Moreover, all the world came to Joseph in Egypt to buy grain, because the famine became severe throughout the world.

I suggest it is because Joseph was wise enough to allow prices to reflect the harsh reality of the situation and allocate food in a way that served essential needs while incentivizing economization of its consumption – it is no coincidence that Jacob tells his sons to go buy only “a little more food” when the famine becomes severe (43:2) – is the reason why his policy was successful in sustaining the people through the seven year famine. We should learn from Joseph’s success and do likewise.