Fairness & Respirators

As the fear of covid19 rose and isolation became a need, toilet paper flew off the shelves and entrepreneurs (or hustlers depending on your point of view) bought up all the hand sanitizer for miles around – to sell at many times the price. But, we now have laws to prevent this price gouging. Amazon prohibited sales of “scalpers”. This seems a fair and moral approach. Did it work?

In living memory, we can remember when these laws did not exist. Thomas Sowell, a noted economist, in several of his works, has written about those times and the fairness of it all. As an economist, Sowell points out that economics ponders the question of “distribution of scarce resources.”

Describing a natural disaster, Sowell mentions how the price of flashlights went up five times their usual price and hotels raised their rates. The high costs ensured that those who bought more than one flashlight, really needed it. The high costs of renting rooms made individuals share and bunk together to divide the costs into affordable units. This way, many more found housing than if rooms remained at their original lower prices and were quickly gobbled up by only a few individuals.

In today's cov19 situation, is it fair that people could buy an inordinate amount of toilet paper—way more than they need—and leave others without toilet paper? What has been the result of this approach? People are now bartering toilet paper for eggs! This is what market analysts would call a “market correction.”

As immoral as the hand sanitizer hustler may appear to be and; no one annointed him to be the rationer of hand sanitizer; but as a tool of the market, he would have performed that function. When he would have sold for $6- what he had bought for a dollar; supplies would have been more reasonably distributed and rationed as the higher price would have prevented hoarders—who have no intention of selling or sharing their stockpiles.

Paul Krugman, another noted economist, points out that most of what we know about economics, such as supply and demand, is empirical—we have seen it in action. Sowell, who has written extensive histories of economics has pointed out, that we have repeatedly seen, over thousands of years, that government controls, price controls and tariff wars, do not work. Jim Powell, in his book FDR's Follies shows how, when previous economic slowdowns were left alone, the economy bounced back. The Great Depression however, was the result of unmitigated government intervention to correct a major market failure. Perhaps our price gouging laws fall into this category too.

Sowell discusses the morality of businessmen and the market. He cites Adam Smith's “Wealth of Nations”, a book that is at the heart of the foundation of the United States. The market is neither moral nor immoral. Businessmen will abide by market rules because they must, whether they are evil or angels. Greedy men will lower their prices if they must. Those charging more do so because otherwise they will perish—or actually do go out of business because they refused to raise their prices, leaving just the higher priced sellers. It is not a matter of good or bad. The end result is the appropriate allocation of scarce resources.