Monday, September 11, 2017

Selling People Their Own Need: Hurricane Irma, Price Gouging, and Martin Luther

There were numerous complaints of  "price gouging" in connection with Hurricane Irma putting Florida in its sights. Although some of these complaints were unfair, the basic pattern of dramatically raising prices for essential goods in a crisis situation is basic economics in a free market system, absent government regulations to prevent it: As demand increases for a fairly fixed supply of some staple, people with the means to do so are willing to pay more for it if it means access. It becomes a kind of bidding situation. The seller of the staple can therefore ask more for it--and, barring other considerations (such as concern about maintaining long-term goodwill among consumers), they will ask more.

If we're talking about a long-term increase in demand and a situation where it is possible to increase supply by re-directing production resources, this feature of the free market works magic: others see how much the seller of the product is making and wants a share in the profits, so they begin making it, too. Supply rises to meet demand, and prices begin to go down again until they hit their "natural price"--the price that represents their real value to society.

But in a case like Irma, there is no such magic. Skyrocketing demand for airline tickets, for example, was a short-term reality, existing in that short time between the emergence of Irma as a significant threat and its landfall. It does not appear that airlines were engaged in predatory price-gouging, by the way. Rather, airlines build supply-and-demand considerations into their price-scheme from the start: they have a set of cheap seats and more expensive seats, and as the cheap seats sell out only the expensive seats are left, meaning only those with more urgent need, or for whom the higher price isn't a big deal, will buy them. As demand for flights out of Florida rose in the face of Irma's impending landfall, all the cheaper fares were quickly sold and only the high-price seats remained.

But even if this isn't opportunistic price-gouging, it has something in common with such price-gouging. The reformer, Martin Luther, captured this common theme in a distinctively powerful turn of phrase, when he bemoaned the tendency of markets to "sell people their own need." (Thanks to John Kronen for pointing out to me this remarkable rhetorical flourish from Luther.)

Here's the idea. When an emergency situation arises and the need for some product increases, the price shoots up. But in many such cases (if not all) the cost of production hasn't gone up. The labor costs haven't gone up. The distribution costs haven't gone up. The quality of the product hasn't gone up. Nothing has changed from the standpoint of the seller, who was happily selling the product at a lower cost yesterday. So why are people suddenly required to pay more? Because their need has gone up.

And so, as Luther puts it, they are paying for their own need. And this makes sense when you think about it: If price goes up when the only changing variable is the consumer's increasing need, that increase in price is paid simply because of greater need--as if the business owner were selling them their own need. The practice, a staple of modern capitalism, horrified Luther. And when it shows up in moments of predatory price gouging, it horrifies most people today.

But the relationship between free market capitalism and human need is more complex than just the risk of price gouging, even if we simply focus on crisis situations. Because let's be clear about something. The very wealthy have more resources for weathering a natural disaster than do the poor. If they're stuck in the path of a hurricane and are injured, they're more likely to be able to afford medical care. They're more likely to own a home that is sturdy and able to weather the storm. If they live right where the worst effects are likely to strike, they are more likely to be able to afford a hotel room in a secure building where they can ride out the storm in comfort.

And when it comes to evacuation by plane, for the wealthy this might be just a luxury, since they have a reliable, fuel-efficient car that's got a full tank of gas, while the poor might have no car or an unreliable clunker that is always riding on nothing but fumes, since they never have enough to fill the tank.

The rich can't buy resurrection if killed, of course; and they might have bought a home right on the beach that the poor couldn't afford, but you get my point: the poor may need a seat on a plane more urgently than the rich; but it's the rich who can afford the seat, and so they're the ones who get it. Especially when prices go up, the market tends to distribute essential goods to those who need it less, rather than to those who need it more.

Put another way, as general need increases, the rich are willing to spend more because of their increased need, and sellers are happy to "sell them their own need." But the poor are left with more need and less ability than ever to satisfy it. The tendency for businesses to sell people their own need means that those with limited ability to buy will be priced out of the market altogether as soon as the rich start needing the same things with enough urgency.

What this shows is one final truth about free markets that we all must wrestle with seriously. Markets are not actually responsive to need as such. What they are responsive to is marketplace demand. And while need affects marketplace demand, it only affects it if those in need can afford to buy what they need in the market. The poor can't, and so their needs get ignored. At the same time, the mere whims of the rich get satisfied, because they have the resources to satisfy those whims in the marketplace.

This is why we live in a world where limited natural resources are directed towards making luxuries while masses of human beings don't have enough to eat. And if you think this is a tragic misallocation of resources (as I do), then we can't look to free market capitalism to correct for it. It is a great tool for correcting misallocations of resources when farms are growing more potatoes than people want and fewer lima beans.

But when it comes to responding to the reality of human need, free markets are often predatory (when those in need can scrape together the money to pay for their need) or indifferent (when those in need cannot). Of course, we can and should all work as we are able to meet out needs--our dignity calls for no less. But sometimes we our needs are so great they disable us. And even when that doesn't happen, desperate need is something the market exploits in another way: if there are enough needy people, the supply of people willing to work will exceed the demand, enabling businesses to exploit laborers for a pittance of what their labor is worth on the market. And so we have poor people working multiple jobs who are barely able to pay the bills--in part because their wages are depressed by the scope of human need, and in part because they are forced not only to pay for the goods of life but for their own need.

In a pure free market society, having needs is a liability--and the needier your are, the more you are prone to exploitation and marginalization. And Luther didn't just come up with a pithy phrase for capturing what is going on. He found it morally egregious.

The only viable fix for this problem that I can see is government intervention in the market in two ways: regulations that impose constraints and requirements on businesses to limit exploitation, and government programs that spend tax dollars on behalf of those in greatest need, thereby making the market responsive to those needs in a way that it wouldn't otherwise be.

This is why I think a mixed economy, that combines free markets with the right sorts of government regulations and programs, is the best solution for our human situation--and why I think that the more extreme libertarian deferrals to the free market to solve all problems is naive at best. The debate, for me, is about what sorts of government regulations and programs are the right ones. That is no easy question, but it seems to me the question we need to focus on.


  1. My thought is why don't we look at the examples of democratic socialism, especially in many European countries. They are doing some great things that address these kind of situations. Certainly we don't have to take these socialist implementations "as is". We would most definitely have great leeway to adopt this type of economic value system to fit our "American" needs. Unfortunately, the pejorative association with communism jades many people from even thinking this is an option. Thank God for Bernie Sanders et al taking the discussion forward.