Disasters and Price Gouging

Yves here. Peter Dorman discusses the importance of altruistic action in response to disasters as important for social cohesion. Notice that he takes as a given that neoliberalism creates a low-trust, transactional society, and how those are particularly ill-suited to dealing with disasters or other challenges to the collective good. From a 2013 article in Psychology Today:

Robert Frank, an economist at Cornell, believes that his profession is squashing cooperation and generosity. And he believes he has the evidence to prove it. Consider these data points:

Less charitable giving: In the US, economics professors gave less money to charity than professors in other fields—including history, philosophy, education, psychology, sociology, anthropology, literature, physics, chemistry, and biology. More than twice as many economics professors gave zero dollars to charity than professors from the other fields.

More deception for personal gain: Economics students in Germany were more likely than students from other majors to recommend an overpriced plumber when they were paid to do it.

Greater acceptance of greed: Economics majors and students who had taken at least three economics courses were more likely than their peers to rate greed as “generally good,” “correct,” and “moral.”

Less concern for fairness: Students were given $10 and had to make a proposal about how to divide the money with a peer. If the peer accepted, they had a deal, but if the peer declined, both sides got nothing. On average, economics students proposed to keep 13% more money for themselves than students from other majors.

In another experiment, students received money, and could either keep it or donate it to the common pool, where it would be multiplied and divided equally between all participants. On average, students contributed 49% of their money, but economics students contributed only 20%. When asked what a “fair” contribution was, the non-economists were clear: 100% of them said “half or more” (a full 25% said “all”). The economists struggled with this question. Over a third of them refused to answer it or gave unintelligible responses. The researchers wrote that the “meaning of ‘fairness’… was somewhat alien for this group.”

Now there may be an element of self-selection, as in those how go into economics are mercenary types to being with. But it’s not hard to find examples of how economist and MBA-type thinking has done societal harm, and to give numerous examples to show that it has become more widely accepted.

By Peter Dorman, an economist and a professor at Evergreen State College whose writing and speaking focuses on carbon policy, child labor and the global financial crisis. Originally published at EconoSpeak

Whenever there’s a natural disaster, a famine or some other such crisis, people zero in on price gouging.  Are grain merchants jacking up prices to take advantage of a food shortage?  What about airlines raising fares to cash in on desperate attempts to flee an impending hurricane, or stores that double or triple the price on bottled water?  And generators that suddenly only the rich can afford?

Most think this type of exploitation is unjust and even wicked, but Econ 101 says the opposite: it’s a rational, socially desirably market response to a change in supply and demand.  Higher prices for goods made scarce and valuable by a disaster encourage both more provision and greater care in use, exactly what you would want in such a situation.  For details, see the writeup in today’s New York Times.

According to the Times, the main flaw in the free market argument is that it allows the poor to be completely priced out.  This is an application of the argument, made by many social theorists, that distinguishes between essential goods, which should be rationed more or less equally among all, and inessentials, which can be left to the market.  There’s a lot to be said in its favor, and I won’t dispute it.

But the Times and most commentators miss a second point, which is about the same issue of social utility as the case for markets.  Societies depend on a general willingness to share, volunteer and reciprocate, especially in desperate times.  When a hurricane or earthquake strikes, or when war or some other spasm of human destructiveness occurs, we depend on friends and strangers to help locate survivors, pick up the rubble, share their homes and meals and generally pitch in.  There have been a number of stories, for instance, about ordinary people from other parts of the country who, hearing about Harvey’s devastation of Houston, made their way their to help out however they could.  Most of us won’t drop everything and head to Texas, but it’s safe to say that Houston won’t recover, or at least not so much or so quickly, unless hundreds of thousands in Texas and elsewhere lend a hand.
The problem with price gouging is that it undermines the spirit of voluntary provision.  Who will make a personal sacrifice to help the community rebuild if those with the most means are using disaster as a golden profit opportunity?  Pecuniary incentives crowd out intrinsic ones.  This is true at the individual level and also socially.  A society in which the market performs rationally but spontaneous cooperation is snuffed out is cold, cruel and ultimately not rational at all.

Disaster relief for sale is not so different from love for sale.

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  1. The Rev Kev

    This is starting to sound like a modern economist would prefer social Darwinism to organize a society rather than common interest. The word dysfunctionalism for such a society comes to mind here. If you had to be stuck in an elevator, it would be better to be stuck with a bunch of claustrophobics than modern economists. The later would be more likely to resort to cannibalism after a few hours on the grounds that it was a “rational, socially desirably market response” to missing lunch.

    1. cnchal

      Good one! Cannibal = economist. There is a perception problem for the cannibal economist stuck in the elevator with you. They assume they will be doing the eating, because it’s not rational to think of yourself as lunch.

      . . . More than twice as many economics professors gave zero dollars to charity than professors from the other fields.

      This reminds me of my experience and observation as a kid delivering pizza. The tip size is inversely proportional to house size. The bigger and ritzier the house being delivered to, the smaller the tip.

      1. JTMcPhee

        In one past career, I worked as a garbage man in Lake Bluff, IL, on a crew of three — two of us had never gotten further from home than the edges of Lake County.

        At Christmastime, gifts from customers were gratefully accepted by us low-paid minions. Lake Bluff runs west from the pricey shores of Lake Michigan several miles, to embrace the lower-order housing where people like garbage collectors, house servants and groundskeepers lived. I recall one pickup, on the 22-degree F Day before Christmas, from the concealed cans at the end of a tree-lined driveway several hundred yards long, leading to a chateau-like estate perched on the bluffs right on the lake front. A well-dressed woman who seemed to be the lady of the house Summoned me to the service door and presented me with a nicely wrapped box about 10 inches on a side, with a stick-on bow.

        Back to the truck cab, the three of us looking forward to what might be in the fairly heavy package. Sitting bundled in our heavy coveralls and boots, we unwrapped the Christmas paper and ribbon and opened the box — to discover that our “tip” was the contents of an overused cat litter box.

        The remedy was to take the dustman’s revenge on the residents — clashing cans at 4 am, spillling the trash about, and leaving the cans at the pubic-street end of that long driveway. Knowing that we would be dressed down by “management” after the complaining calls from the estate, but still… Better than pitchforks?

        1. cnchal

          . . . clashing cans at 4 am . . .

          Around here, not too far away are some very ritzy mansions and at an ungodly hour in the morning, a guy with a loud bike that trundles along reasonably quietly lets it rip right in front of the richest guys place.

          Still pissed off ex employee?

          One wonders at the thought process that comes up with the idea to call you over, wasting your precious productivity hours paid for by her taxes to give you cat crap? My guess is she wanted whisper quiet trash collection, and that was her remedy to remind you for next time.

          As for the topic of price gouging during disasters, it’s only natural. I wouldn’t even call it gouging, because the pricing pressure comes from the buyer. How do you prevent someone from willingly spending more to buy something? The problem becomes acute when rich guys buy up all the supplies.

          Take bottled water. Everyone knows the price during normal times, but the wealthy can pay any price, so during times of disasters they can outbid everyone else and ensure that they have enough plus a cushion. Leaving some thirsty poor people to suffer.

          With these hurricanes, there was plenty of warning and some preparation was done beforehand, so even a doubling or tripling of prices for necessities wouldn’t have hurt too much, and viewed from the merchant’s perspective, no immediate replenishment of stock was going to happen. I think from a practical perspective, the store managers in the affected areas coped rather well, using higher prices and limiting purchase amounts to stretch supplies.

          Besides, we are talking about not even a shred of a peanut shell, compared to the destruction wrought by these storms.

        2. JW

          Wow. That’s right up there with a [family-blog] business man snarking at a panhandler..”sure, can you break a $100.”

    2. roadrider

      Can we please stop using the term “social Darwinism”? The ideology associated with that term is a corruption of Darwin’s theory of evolution: differential reproductive success by better adapted (by chance) species into a construct that the more successful in human society are inherently more deserving than those that are not.


      1. The Rev Kev

        I’ll have to stand by my reference to the term “social Darwinism” in that as you quite so accurately pointed out, that term is a total corruption of what Darwin was talking about. Humanity got to where it is by cooperative behaviour and not by social survival of the fittest as seems to be the popular belief today.

  2. ah

    Sorry, but I can’t accept any of this. It seems like it’s assuming there is no actual scarcity. But there *is*.

    So, ok, you have 100 gallons of water. How do you distribute it? First come, first serve with no price increases? ok, so I have more than most, so I have no problem buying it all. Is that good?

    Or, we increase the price to try measure the actual demand. If I am desperate for water, I pay $100/liter (or whatever).

    Or, we base it on need. But how the heck do we measure need? How do you prevent corruption? How is that any better than $100/liter water?

    1. Yves Smith Post author

      Why are you positing that someone should pay for water in a disaster? Who has access to money? You can’t collect anyhow.

      And you are also positing that the person with the water has all sorts of choices and knowledge as to where and how to distribute it. Did you see the photos of Houston? People could barely get in and out. If you have 100 liters of water, you are probably going to distribute it to the first people you encounter until you run out of it.

      1. JTMcPhee

        From what ah posts, i doubt s/he would “distribute” any of it. Waiting to sense the downward inflection of the price-point curve. As today’s post implies, this is how societies die. And maybe, if the people needing water to survive happen to get pushed past that dysbelieving edge by ah’s Shkrelic behavior, the “owner of scarcity-priced necessities” might learn what it feels like to get shot or stabbed or, that other “neo” notion, “neolithically clubbed.”

        1. Jonathan Holland Becnel

          At the restaurant where I work at in the French Quarter, my CO worker and I had a similar discussion. Turns out, he believes in the “market!” He says we don’t need liberal arts majors anymore because of the scarce demand for jobs. No regulations. No government. Just the market, bayyybayyyy, yeah ✌

          The dignity and value and worth of every single human being is somehow getting trampled out there. The idea of helping poor people is anathema to them. They made the mistake, or they shouldn’t be so stupid as to stick a needle in their arm. Pull yourself up by your bootstraps, because the jobs are out there! Cut taxes to free businesses to create jobs!

          So I respond to each argument my coworker, who is male and in his mid 20s, tells me and lo and behold they are ALL MYTHS AND FALSE MISINFORMATION.

          To me this is as great a threat, this lack of empathy and compassion (secular ethicism is what the Dalai Lama calls it I believe), as Climate Change.

          100 liters of water. Bah!

          Every city in the country should have great beautiful public fountains like in Rome. Fresh and cold and FREE

          1. Outis Philalithopoulos

            It’s frustrating to hear tropes that are beaten into the ground. At the same time, your comment ends up sending mixed messages on its key ethical points.

            In words, you are arguing for the dignity and value and worth of every single human being, and against a lack of empathy and compassion. But within your comment itself, the concrete human being represented by your young coworker exclusively serves the purpose of a proxy for negative ideas, and is set up as a person that your audience will find distasteful and disturbing.

            It seems to me that there are two rather different topics that could be discussed here: (1) an empathetic account of how worthwhile human beings can come to be trapped, often for considerable periods of time, in mental dead-ends, (2) how to move towards a society in which every city has fresh, cold, free water fountains (etc.).

          2. Synoia

            No regulations. No government. Just the market.

            No cognitive dissonance there, no none at all.

            I’d had that discussion with libertarians, and it ends up with a discussion with “Rule of Law” vs “Hatfieds & McCoys,” or if you wish to pick another bloody feud, ‘McDonalds & Campbells,” well documented by Shakespeare.

            Churchill in the “History of the English Speaking Peoples” describes it as a desire for “The King’s Peace,” (not the King’s Piece!).

            1. skippy

              I just point out De Soto: State – Laws – Markets – in that order.

              If the cog dis does not burn some synaptic pathways, causing vapor lock, they have a bad tendency of eating their own in a tight spot.

        2. Irrational

          Looking at water supply in developing countries, often pricing is a combination of a certain volume, based on family size, of water at a low rate and thereafter moving to charging at a market rate. This ensures that low income households are not priced out, while making sure that wasteful users get incentives to reduce use of an often scarce good. In other words, it is possible to come up with mechanisms that are fairer.
          Of course, this has no bearing on a disaster situation where price gouging is immoral in my view.

          P.S. Amongst other things I did study economics, but struggled to take the science envy seriously.

      2. The Infamous Oregon Lawhobbit

        “Human needs are infinite. Human resources are finite.” Granted, that’s from my sociology degree and not any sort of formal economics class but let’s take a look at some possible 100 liter water scenarios and I’d be interested in comments from those who more on the “…to each according to his needs.” side of the economic / social spectrum. Presuming 100 1 liter bottles:

        1. Altruism: I give the 100 liters to the first person who asks for them? The first ten? The first fifty (two liters being a minimum for one day in moderate conditions)? The first 100 – half a day each? How do I decide “who gets the water?”

        2. Regular market: Do I sell the 100 liters to the first person who has $98 (presuming a 98 cent bottle of water, obviously)? Ten people who have ten bucks each? Ration it to two bottles for a day’s water per person? Or half a day for 100 people? And if I do any of the above, a) how do I get water for tomorrow’s people who need water and b) if the water costs Lawhobbit Emporium 94 cents per bottle (it’s a small store, ~ 5% markup) during “normal” times, but I can’t GET water during disaster times because MY costs have gone up, is there a reason I should front that increased cost to me when I’m darned sure NOT going to recover it?

        3. Disaster market: Like any other market, the seller is having to guess. Maybe the 10 dollars charged for a bottle of water is going to have to be barely enough to pay for the next bottles to come in. If they do. But it is also going to keep people who don’t need that much water from over-buying.

        A couple of other concerns that always nag me during these sorts of conversations.

        1. The false dichotomy assumption that it HAS to be one way or the other. That the Lawhobbit Emporium, selling water for 10 bucks a pop, somehow would never consider giving water away to those who truly need it. Which takes us to:

        2. Sorting out the truly needy. There are, without doubt, any number of people out there who need some help to get by. I deal with them every day. But I also deal with – and agorapaths don’t like this being pointed out – a fair number who can best be described as predators and scavengers. People who have no tie to the social group other than seeing it as a cow to be milked for their own personal benefit and who give even less of a rat’s patoot about The Other than the most diehard scroogian neoliberal out there. What is (yes, the question was coming) the group’s obligation to predators and scavengers? I would prefer answers that don’t start with denying the existence of such anti-social human beings, and, really, any discussion of the root causes of such individuals is best left for a different thread. Do I altruistically give water to a person who will simply dump the water out in order to go get the deposit on the container?

        3. I am also concerned about the ongoing drumbeat that somehow agoraphiles are utterly uncaring and disinterested in non-economic social relationships and are incapable of recognizing the need for social bonding outside of cash transactions. That they don’t understand what, if I recall correctly, Adam Smith called a “brittle society.” In that regard, I could stand to hear a little more explanation as to how the thought process to quickly and neatly label people according to one belief therefore forecloses out any other possibility for actions that do not fit within the stereotype.

        Anarcho-capitalist popcorn in hand, I await any education that may be offered.

    2. nonclassical

      …”social darwinists” (von Mises, Hayek, Friedman and his “chicago boys” have historically demonstrated privatization…no “sharing” involved…

      (“Shock Doctrine-Rise of Disaster Capitalism”)

  3. larry

    I completely agree with Dorman and you. The evidence is rather clear that neoclassical econ allied with a neoliberal political frame leads to the results depicted. While self-selection could be a factor, it would be difficult for this to account for all the results that have been obtained.

  4. Eustache de Saint Pierre

    I read this around a week ago on the subject, written by an angry Bill Mitchell whose main ire was directed at Tim Worstall who is a UKIP supporter & a senior fellow at the Adam Smith Institute. Tim’s words of wisdom which I believe would have found favour with those involved in the ultimate historical price gouging at ghettoes of the like of Lodz & Warsaw :

    ” Hurricane Harvey has hit Texas and is doing a great deal of damage to both life and property. Which is exactly when we need, positively desire, there to be price gouging, instead of the laws we have against it. The basic underlying economics being that we want whatever scarce resources there are to be applied to their most valuable uses. Further, we want to encourage the provision of more supply of them–both of these being the things which the price system manages for us. That is, allowing prices to rise in the aftermath of a disaster does exactly what we want to happen “.


    1. jsn

      A perfect example of a money lover confusing price with value. The price surge from disaster will not function as a demand signal for investment and increased production in any meaningful time frame so the signaling feedback of capitalist production is irrelevant in short term disaster situations.

      Real wealth has real value and in disasters essential needs are the most real of wealth, that is to say food water and shelter. In a sane society these would all be cooperatively produced and equitably distributed according to social values.

      For those who have never been motivated by anything but money, this is very hard to understand. Having never cooperated just because it was the right thing to do or having never recognized the benefits one’s received from others cooperation makes the distinction between price and value incomprehencible.

      1. Barry

        Neoliberalism is a moral framework as much as it is anything else, concerned with who deserves what. In this framework, people who can’t afford resources don’t deserve resources. Giving resources to people who can’t afford them is immoral.

        From outside their moral framework, the failure to produce general prosperity and well-being is an indictment of neoliberal reasoning, as is the failure to help those who are suffering after a natural disaster. From inside the framework, feeding and sheltering the undeserving is a sin, and by rewarding behavior that is against what the market wills this fails to teach people how to behave righteously so that they too can become deserving.

        In this framework, price IS value, value more precisely measured than it is in any other moral framework.

          1. Barry

            If we are to put neoliberalism to rest, we’re going to have to expose its underpinnings and refute them. I don’t think branding and dismissing neoliberals as morally bankrupt will be sufficient to the task.

            1. Barry

              … that is to say, I prefer my phrasing because I’m serious about it being a moral framework. It is only amoral when perceived from another moral framework.

              I don’t believe neoliberalism is a science pretending to be a moral framework; I believe neoliberalism is a moral framework pretending to be based in science.

              Showing the science to be bad doesn’t seem to convince neoliberals of anything because science is the window-dressing.

              Showing neoliberals the outcomes are bad by pointing to the inequality and the number of people suffering as a result of neoliberal policies also doesn’t seem to work because that is evaluating the outcomes from a different moral framework. What if they don’t agree with you about who does and does not deserve to suffer? In a morally consistent way which is nevertheless alien to you?

              1. jsn

                NeoLiberalism postulates that markets are always right and that the way markets are right is a just morality.

                Markets are tools made by people and don’t exist in nature outside of where people make them. As tools, they necessarily lack moral agency. They exist as agreements between people who are moral agents.

                Morality is part of who we are as humans, it does not exist elsewhere in nature as we experience it, though I’m inclined to believe all socially evolved animals are governed by impulses like our moral feelings which are instinctive manifestations of the social evolution of their species.

                NeoLiberals setting up markets as a “moral framework” are like a psychopath imagining his weapon as a moral framework: because it keeps him alive and slays his enemies, to the extent he kills rather than being killed, it and he are just.

                Money exists only as an agreement between people. Markets exist only as agreements among people. Neither exist where there is no government, both require government among people in order to exist. NeoLiberals need to be confronted with these simple facts. If money and markets cannot exist without government, then the nature of that government as an agreement among people is what gives money and markets whatever moral meaning they have making the morality of that government the key consideration as that is where the agreement between moral agents arises.

                To say “we don’t need government” let markets be free is to profess a profound ignorance. To insist on the position is to profess a willful ignorance. Reason and argument will not reach such a person so long as they are talking about abstract ideas. Only direct demonstration through their own lived experiences will convince them to change such thinking. It won’t happen in an argument.

                1. nonclassical

                  “The term neoliberalism was coined at a meeting in Paris in 1938. Among the delegates were two men who came to define the ideology, Ludwig von Mises and Friedrich Hayek. Both exiles from Austria, they saw social democracy, exemplified by Franklin Roosevelt’s New Deal and the gradual development of Britain’s welfare state, as manifestations of a collectivism that occupied the same spectrum as nazism and communism.

                  In The Road to Serfdom, published in 1944, Hayek argued that government planning, by crushing individualism, would lead inexorably to totalitarian control. Like Mises’s book Bureaucracy, The Road to Serfdom was widely read. It came to the attention of some very wealthy people, who saw in the philosophy an opportunity to free themselves from regulation and tax. When, in 1947, Hayek founded the first organisation that would spread the doctrine of neoliberalism – the Mont Pelerin Society – it was supported financially by millionaires and their foundations.

                  With their help, he began to create what Daniel Stedman Jones describes in Masters of the Universe as “a kind of neoliberal international”: a transatlantic network of academics, businessmen, journalists and activists. The movement’s rich backers funded a series of thinktanks which would refine and promote the ideology. Among them were the American Enterprise Institute, the Heritage Foundation, the Cato Institute, the Institute of Economic Affairs, the Centre for Policy Studies and the Adam Smith Institute. They also financed academic positions and departments, particularly at the universities of Chicago and Virginia.

                  As it evolved, neoliberalism became more strident. Hayek’s view that governments should regulate competition to prevent monopolies from forming gave way – among American apostles such as Milton Friedman – to the belief that monopoly power could be seen as a reward for efficiency.

                  Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that “the market” delivers benefits that could never be achieved by planning.

                  Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised.

                  Where neoliberal policies cannot be imposed domestically, they are imposed internationally, through trade treaties incorporating “investor-state dispute settlement”: offshore tribunals in which corporations can press for the removal of social and environmental protections. When parliaments have voted to restrict sales of cigarettes, protect water supplies from mining companies, freeze energy bills or prevent pharmaceutical firms from ripping off the state, corporations have sued, often successfully. Democracy is reduced to theatre.”


  5. Larry

    The Economics mindset has reached many levels of society. Look no further than the mega-church preacher Joel Osteen who had to be publicly shamed into opening up the doors of his stadium, errr, church in the face of Hurricane Harvery. The man of God uses the good word to fleece his followers into an extravagant lifestyle and then couldn’t even be bothered to pretend that he believes in anything more than personal profit.

    1. JTMcPhee

      Osteen’s PR people have been hard at work providing excuses and rationales for why the Great Humble Man of God and the business entity and rest of his executariat (do they call themselves the “vestry,” or “elders”?) didn’t “do unto others” and “see the hungry and feed them, or naked and clothe them.” Doubling down, even: http://www.dailymail.co.uk/news/article-4836498/Joel-Osteen-defends-decision-not-open-Houston-church.html

      And notice how all the rest of us adopt the syntax that says Lakewood Megatemple is HIS church — not He, as in God the Father, God the Son, but “him,” little rich grifter Joel Osteen…

      1. Outis Philalithopoulos

        Osteen’s claims, like those of anyone else, should be critiqued based on evidence, not by adopting a tone that implies that the rest of “us” already understand that he’s a suitable object of hatred, and so the trial is merely a formality before the conviction.

        On your final sentence, there is some relevant material on shadings in the meaning of the possessive adjective in the Screwtape Letters. As a practical matter, what kind of syntax would you prefer that news organizations adopt? Something like “the Lakewood church that has a particular association with Joel Osteen”?

  6. Jane

    The quoted economists take on price gouging makes sense if you believe, as they do, that profit is the only viable motivation behind any human action.

    There are other economists, who, along with the rest of us, know that is not true; otherwise, how do we explain the million acts of kindness that have occurred during disasters over the last few decades, let alone centuries? Ask the New Yorkers who rushed to help strangers during 9/11 what motivated them, or the Cajun Navy who went to Houston, or the Greeks who help the refugees landing on their beaches, by the thousands, in rubber dinghies. It wasn’t the thought of monetary gain that moved them to act.

    Greed can always rationalize a reason for its actions but that does not make the reasons, or the acts, rational.

  7. Bunk McNulty

    From the Times/Dealbook story:

    “Prior to a natural disaster,” Mr. Carter wrote in a blog post last week, “individuals and families could apply to receive government-provided vouchers that would cover the cost difference between the normal price and the emergency surge price for a specific basket of essential goods and services.”

    That sounds an awful lot like a non-free-market Intrusive Big Government solution to me. /s

    1. justanotherprogressive

      Jack Carter and the utterances from a “right wing think tank” ivy tower. I seriously wonder if you must exhibit a complete lack of common sense and knowledge of the world to get one of those jobs……

      “Prior to a natural disaster” – yea……Hint for Carter – not all “natural disasters” announce themselves in advance…..

      Nice of him to find a way for his “set” to benefit from natural disasters though – complements of all of the rest of us…..while of course, bemoaning Big Government. I read Jack Carter’s blog and I note that he tries to justify himself using his “Christian values”. It makes me wonder what kind of truly heinous mental gymnastics those people must be capable of doing. Is that also a job requirement?

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