Cochrane on Price Gouging
Price-gouging is now a topic in politics. Kamala Harris has put it there. Naturally there has been the predictable outcry of opposition coupled with and equally predictable sneer of disapproval: how could she say something so uneducated? Has she no grasp of Econ.101? Oh the illiteracy!
Perhaps even more predictable is that someone like John Cochrane has felt it necessary to write an article in praise of price-gouging. After all, hard core libertarian economists are proud of their adherence to the often counter-intuitive claims of economic price theory.
In his words:
“We should praise price-gouging. Yes, pass a new federal law, one that overrides the many state laws against price gouging.”
There’s not much to say. From within the straightjacket of price theory economists have no ability to comment on the morality of a price. It is, as they say, what it is. Provided that said price is a consequence of the playing out of the logic described in economics.
It all has to do with scarcity. As Robbins famously put it:
“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
That sentence, first written in 1932 in his “Essay on the Nature and Significance of Economic Science”, has been littered throughout economic literature ever since. It has become the iconic definition of what economics is about.
Robbins was, we must all recall, engaged in hand-to-hand combat at the time in an attempt to give economics a definition that was resistant to what he saw as fallacious efforts to expand it into discussions of material welfare. Such things were, he argued, beyond the remit of economic logic. In fact in his ardor he sometimes comes across as quite haughty in his dismissal of people who wanted to broaden economics. It was to him both futile and ignorant to undertake such a task. It could reveal no laws. It was doomed to wallow in vagueness and unnecessary conversation. No. In order for economics to be truly scientific, economics had to be entirely neutral with respect to the ends to which resources were allocated. Indeed, “economics is not concerned with ends as such”.
Since Robbins economics has no morality.
Within this restriction price-gouging is a good thing. No, really. Sudden spikes in prices are simply logical or rational responses to equally sudden changes in the relationship of supply and demand. Whether it is a loss of supply or a surge in demand is irrelevant. The result is the same. The relationship needs to be restored. The gap between supply and demand may be fleeting, but the logic is inexorable.
Cochrane gives the example of his experience in locating a hotel room on an evening where a local concert had absorbed most of the hotel capacity and he ended up paying $400 for a room that usually went for $50.
And he loved it. His mother was, apparently, less impressed. She felt aggrieved. Angry even. And this despite being, according to Cochrane, “amazing, smart, wise, and well-travelled.” Clearly uneducated, though, at the level of Econ. 101.
Cochrane applauds the hotel owner for the surge pricing and ends his article by saying:
“It is surely morally worthy to give what you have to your neighbors in time of need, especially the less fortunate. But we should not demand gifts. And appropriation of property by threat of force, turning off the best mechanism we know for alleviating scarcity, does not follow. Moral feelings are a terrible guide for laws.”
We can imagine Robbins smiling at that last sentence. Moral feelings are a terrible guide for economic laws. Don’t forget Robbins wants economics to be scientific in the manner of physics, and no one suggest that the laws of physics have a moral basis. This is why critics of economics are so sniffily set aside by economists. Those critics make the mistake of imagining that economics has a moral core. Or that it can comment on the efficacy of the distributions that its logic suggests are “optimal”.
It cannot. It is morally crippled by its method and its conception of human behavior. Economists can make a statement supporting “the best mechanism we know for alleviating scarcity” without having to reflect on the deeper meaning of those words. The original scarcity still exists. There is no additional supply. All that has happened is that demand has been restricted to match the existing supply. The new price reflects this restriction. Because there is a new matching of supply and demand, albeit briefly, scarcity, in the eye of economists, has been “alleviated”. The inescapable logic of price theory produces such a blinkered view.
This logic can sometime be thought of as being inhumanly rational. But Robbins was quite nuanced on this. Towards the end of his essay he says this:
“This, then, is the sense in which economics can be truly said the assume rationality in human society. It makes no pretense, as has been alleged so often, that the action is necessarily rational in the sense that that the ends pursued are not mutually inconsistent. … It relies upon no assumption that individuals act rationally. But it does depend for its practical raison d’être upon the assumption that it is desirable that they should do so.”
In other words, economics does not assume people are rational — it just wishes they were so that its logic would then reflect reality.
Parenthetically, it is the blind pursuit of this logic that leads to severe limitations for economists. Robbins, for instance, devotes a lot of space in his essay to explaining why it is both impossible and not desirable for economics to have a deep theory of production. Economists can live in splendid indifference to the “arts” of organization because the only relevant “theory” of production allowed into economic discourse is that governed by price theory. This is why, I suggest, economics has had such a hard time responding the famous Coase challenge: Why do firms exist? The eventual solution to his challenge was to recapitulate the problem as one of costs and not organization. This allows it to be brought back under the rubric of price theory untainted by the thoughts of those who might imagine organization itself was worthy of study.
More recently I came across the even more radical suggestion by an eminent price theorist that there is no such thing as supply. There is only demand. This is an example of the absurdity of blind logic. Apparently, according to this view, manufacturers only sell their products because a consumer has a higher demand as expressed in a willingness to pay a price that overcomes the manufacturer’s own demand to keep hold of the product. This, as I have pointed out before, suggests that Ford Motor Company only manufactures vehicles because it likes to collect them. It only sells them when a consumer offers a price it cannot refuse.
When you have no theory of production you can twisted up in your logic like this.
In the words of Tim Walz, these people are weird.
Which brings us back to the election and the Harris comment on price-gouging. Our libertarian friends have eagerly taken up the challenge and are decrying her lack of sound economic logic. She is, we are told, economically ignorant. Her policies are merely “populist” and lack sound economic judgement.
So, at this point I feel the necessity to use another comment in the Robbins essay. This towards the end, so perhaps our libertarian friends didn’t get that far in their reading. The comment is this:
“This is why in countries where the level of education in economics is not high, there is a constant tendency to the approval of more and more protective tariffs.”
In the interest of maintaining that famous neutrality economists so pride themselves on, I look forward to the Cochrane article critiquing Trump’s evident economic illiteracy.
I am waiting …
