It’s Not Personal, It’s Just Business: Against Zwolinski’s Defense of Price Gouging
Hayekians argue the issue of economic distribution is dependent upon address of the knowledge problem.[1] In allocation of resources, the question is not necessarily whether or not assistance ought to be provided, but how and by whom. The tradition conceives of the market as exchanges by individuals engaged with one another for the end of their own self-interest. Accordingly, considering these ends “whose relative importance only these individuals know” [2] any effort to establish a centralised distributive plan would fail in virtue of incomplete knowledge. The price system, it is reasoned, is the solution to conveying the “knowledge of a particular circumstances of time and place” to all market players, with fluctuations in price conveying the quality, scarcity and urgency of need, of the particular good. Within the ‘The Ethics of Price Gouging’ Zwolinski utilises such rationale in an argument to establish that ‘we ought to consider price gouging as a morally praiseworthy act’, as it holds the essential function of information signalling. In this paper I claim Zwolinski has ill-considered the difference between emergency and normal market conditions and as such has not only mistaken the success of Hayekian price signals in such a context, but has also failed to explicate a positive argument[3] for the morality of price gouging.
Prior to this however, I note the focus of this paper will be limited to the Zwolinski’s Hayekian defence of price gouging, found in Section Two of Ethics[4], (c), (d) and (e), and will utilise a similar definition of ‘price gouging’- that it entails a seller who in the wake of emergency raises their prices “beyond the level needed to cover increased costs.”[5]
In an argument that positions price gouging as providing a “great benefit to those in desperate need,”[6] Zwolinski employs a case study example of price gouging in North Carolina during Hurricane Fran in 1996, whereby four individuals attempted to sell 500 bags of ice at an inflated rate of $12 each. With no refrigeration, nor generators in the town of Raleigh, and as such, no way of keeping life-saving medications cold, the ‘entrepreneurs’ saw an opportunity, so the story goes, to hire trucks and travel the 1hr distance from Goldsboro where they purchased the ice for $1.7 a bag.[7] Now, in virtue of the higher price, Zwolinski[8] would argue, this in itself provided the imperative function as an information signal in communicating to market actors the new supply and demand of the good. Furthermore, considering “relative to the baseline of no exchange at all, the gouger’s proposal stands (sic) to improve the lot of the buyer, not worsen it,”[9] price gouging is ipso facto rendered as a moral act.
I believe Zwolinski’s positive Hayekian argument for the moral permissibility of price gouging can be summarised as follows:
The high(er) prices of essential goods during emergency convey a signal of:
1. Negative Information – to ration supplies so that those with a higher need for the resource have a higher potential of obtaining it.
2. Positive Information – to direct resources to areas of higher demand, and to produce more and finally, increase competition
Yet, I am not entirely convinced that Zwolinski addresses whether the information signals during an emergency (or disaster) work in a similar fashion to during normal market conditions.
1. Negative Information signal - Rationing Behaviour
Zwolinski argues that the higher price of a resource during emergency situations has two negative information functions; it indicates to those not using this resource for life-threatening circumstances to curtail their behaviour, as well as indicating to stop hoarding necessary-for-survival items. In regard to the situation of ice scarcity in Raleigh, Zwolinski argues that the ice, if artificially priced low during the emergency, or in other words, below the market-clearing equilibrium, people’s need for such that wasn’t urgent, say, beer drinking, would not be disincentivised to purchase. So, the argument follows, the diabetic, needing the ice to cool her life-sustaining insulin medication, would potentially miss the opportunity to secure the resource. As such, it is assumed that as the price rises, more people are excluded from the purchasing pool[10] who do not value the good for such ends.
Of course, such an argument rests on the assumption that those who purchase a product with a higher price tag value the good more than those who do not. Whilst Zwolinski concedes that need, value and “willingness to pay” do not often correlate, and thus distribution as such will be imperfect, he has in fact, created a false Archimedean point that assumes ability to pay correlates positively with value. He assumes, that if someone is purchasing the ice at the inflated price gouged rate, even if using for beer drinking, and not necessarily for an urgent need, they too must value the ice. Whilst this is a digression from my main thesis, I believe it pertinent to mention that whilst it may be true we bid for items in direct proportion to the value it holds for ourselves, it does not follow that if someone is willing to pay the $12 for ice, they necessarily value it at all.
Now, in returning to Zwolinski’s account of Hayekian signals, I ask, was it the price system itself and the signalling mechanism therein that was responsible for communicating the scarcity of ice in our case study?
Firstly, I find it highly improbable that there were any beer drinkers in Raleigh, leaving their houses in 120mph winds[11] to obtain ice. However, if I am mistaken, and there was indeed a rush by beer drinkers and the like during the hurricane to obtain ice for their non-emergency needs, I am not sure that having faced such dangers, the $12 price tag would persuade them to return home empty-handed. Secondly, and more pertinent to my argument, it is dubitable that it was the price system that curtailed the behaviour of residents of Raleigh, indicating to be conscientious of their ice intake. And this is where it is clear Zwolinski assumes price signals work essentially the same from normal market conditions to situations of disaster or emergency, an unfortunate oversight. In the case of Hurricane Fran, weather watch was issued six days prior, and an official warning one day before the worst of the storm in North Carolina.[12] These communications, which I assume where broadcast on news, radio, and media outlets, may not have, by themselves, curtailed behaviour. Afterall, surely some missed the weather warnings. Yet, when residents of Raleigh began to experience the storm physically, the wind, rain and mayhem that followed were surely the first signal to mitigate non-essential behaviour. However, still, this curtailment of behaviour might not necessarily have been directed towards ice intake. Afterall, at this point, it would not have been evident to residents’ ice was in scarce supply. But the weather wasn’t the only physical clue, the storm created a power outage, and it was this necessary physical phenomena that triggered a need for ice. There was no power nor generators in the town to maintain the physical state of ice (frozen water), and as such everyone in the town would have been alerted to the scarcity well prior to the entrepreneurs arriving. In fact, I argue even stronger, that considering price-gouging is always with regard to necessary-for-survival items, and a need for such will only be triggered by the specifics of the disaster or emergency in question, negative information exchanges about the scarcity of such will never originate from the price system itself. And yet, for Zwolinski it was the price of ice issued by the Goldsboro entrepreneurs that was responsible for these ‘negative information’ behavioural changes. Of this, I am highly doubtful.
2. Positive Information signal – Distribution of Resources
In the above I have argued how the negative signal of the price system does not convincingly or necessarily function as communication in economising behaviour in the context of disaster.
Yet, according to Zwolinski the price system signalled an even more important, positive incentive to the entrepreneurs that profit could be made by distributing the good (ice) from an undervalued market (Goldsboro) to a more productive market (Raleigh) that given the circumstance, valued the resource more. But, again, was it necessarily the price system itself that was responsible for this signal?
Whilst the entrepreneurs noted the “brimming freezers” of ice at Circle P’s, and Stop Marts in Goldsboro[13], surely this price information alone would not have possibly incentivised their travel to Raleigh. I suggest if they were not privy to, and exploited the local knowledge of the emergency, as Goldsboro too was hit by Hurricane Fran, but did not experience the same power outage, how would have the individuals been signalled there was a potential profit advantage in the town of Raleigh? The simple answer: it is just not possible that the price system itself generated such market action.
Zwolinski may object however, claiming it is the signal from the gouged price that is more pertinent for distribution in emergency. But is this necessarily true? Can a gouged price in the context of emergency actually signal to others, outside of the emergency area to increase distribution to Raleigh? Afterall, the entrepreneurs sold the ice out of a back of the truck in suburban areas. Considering Zwolinski’s positive argument rests on the assumption that others would follow suit, as this is the only factor that would lower the high market-clearing price to a new fairer equilibrium, due to the presence of competition, I argue he needs to explicate this process further than “outsiders would hear of the potential profit to be made.”[14]
If I concede however, that others would follow suit, given the entrepreneurs hadn’t been arrested for their actions[15], and thus, the issue of ‘fair’ price becoming a nonissue, I still doubt again that such market action was driven by the gouged price itself. Most probably it was via telecommunication of the disaster situation, be it a news report, weather warning or from local first-hand knowledge of the emergency. In fact, Zwolinski in assuming the similarity of normal functioning and disaster markets, fails to mention the Hayekian positive information function of signalling to producers to make more. Yet, in the context of disasters and emergency, production signals surely become less relevant, there isn’t time nor opportunity, and resources are needed immediately, and hence depend more on the signal of distribution. This difference seems of little significance to Zwolinski. Following from Hayek who asserts “there can be no distributive justice where no one distributes,” the moral permissibility of the price gougers follows from the fact that if it were not for them, there wouldn’t have been any ice in Raleigh. Ipso facto, they are providing something, and therefore are moral in their actions. Whilst this may be true, I have established how such action did not originate from the gouged price. And as such, it becomes unnecessary for prices to be raised to an amount over and above pre-disaster rates, plus increased costs[16], as neither the (1) negative or (2) positive information signalling functions operate similar in disaster as non-disaster contexts.
Stating “It does not matter for him why at the particular moment more screws of one size than of another are wanted” and “the causes which alter their relative importance are of no interest to him,” Hayekian economics strongly assert that the only signal needed is one that directs resources to the most productive use. However, I am not so certain such a statement holds truth in the case of emergency or disaster markets. Surely, in an emergency, in virtue of definition, the biggest concern becomes subsistence. Returning to our case study in Raleigh, the diabetic ice customer was not needing for ice per se but of something that would keep the insulin medication cold. I am certain that there were potential other goods available that would have generated a similar end, say for example, self-activating cooling gel. As such, in an emergency, theoretically the conceptual cause of the needs generated by those effected is of bigger concern. And unfortunately, Hayekian signals are inadequate in transferring such information. Questions of morality of distribution ought to take such into consideration. Afterall, there could have been a more efficient, economic, innovative, or immediate solve for the diabetic in Raleigh. Purely communicating the material end of a conceptual need in emergency seems more than fraught with problems.
In the above argument I have displayed that Zwolinski has failed to establish an argument in favour of the moral permissibility of price gouging in emergency situations. Neither the (1) negative or (2) positive Hayekian information signals proved essential in curtailing behaviour or increasing distribution, respectively. As such, Zwolinski’s moral defence of price gouging rests heavily on his explication of whether such acts are coercive or exploitative, of which is weakly conclusive.
[1] F. A. Hayek, “The Use of Knowledge in Society,” The American Economic Review 35, no. 4 (1945): 520.
[2] Ibid., emphasis added.
[3] See: Section Two, c, d, e : (360-366)
[4] Matthew Zwolinski, “The Ethics of Price-Gouging.” Business Ethics Quarterly 18, no. 3 (2008): 347-378
[5] Ibid., 347.
[6] Ibid., 348.
[7] Michael Munger, “They Clapped: Can Price-Gouging Laws Prohibit Scarcity?” The Library of Economics and Liberty. Published January 8, 2007.
[8] As does Munger in his original piece. See Above.
[9] Zwolinski, “The Ethics of Price-Gouging,” 355.
[10] Afterall, Zwolinski concedes Raleigh was a zero-sum game.
[11] See: https://www.weather.gov/ilm/HurricaneFran
[12] Ibid.
[13] Munger, “They Clapped”
[14] Zwolinski, “The Ethics of Price-Gouging,” 363.
[15] Ibid., 372-376
[16] In the case of Raleigh’s ice, this would equate to $1.7 + increased costs (cost of travel, hire of truck etc.) + no more than 5% surcharge