By Thomas E. Woods, Jr.
A Days Inn on Long Island was fined on December 26, 2001 for having engaged in "price gouging" following the September 11 terrorist attacks. With the nation's airports closed, stranded passengers created a sudden and unexpected rise in demand for lodging.
Under these circumstances, the Hicksville hotel raised its room rates by 185 percent—an "unconscionable" increase, according to State Attorney General Eliot Spitzer.
The Days Inn case, although not extraordinarily significant in its own right, presents an opportunity to consider what exactly happens when a businessman engages in so-called price gouging—and what happens when he is forbidden by the state to do so.
According to a press release issued shortly after the attacks, New York State law actually prohibits price gouging during declared states of emergency: "State law prohibits charging unconscionably excessive prices for consumer goods and services that are vital and necessary for the health, safety, and welfare of consumers during any abnormal disruption of the market caused by strikes, power failures, severe shortages or other extraordinary adverse circumstances."
The "adverse circumstances" to which the state law refers would, in fact, constitute the worst time at which to prohibit such price hikes. When, say, a natural disaster hits, there is sudden and severe pressure on current stocks of certain essential goods. Interference with the market's effort to adjust to the new state of affairs can only lead to the kind of shortages that we associate with any attempt at price control.
Let us take a slightly silly but nevertheless instructive example. Suppose it begins raining in a small and more or less isolated town. Suppose further that the rain continues day after day, with no end in sight. It is altogether likely that the price of umbrellas will increase, even dramatically, in the short run. The price increase reflects the fact that new supplies of umbrellas have not magically appeared since the outbreak of the storm. Whatever supplies currently exist will have to suffice for the present crisis.
The higher prices that often accompany such disasters serve a salutary purpose: they encourage people to economize on those items that are in greatest demand at the time. Had the umbrella price been forced by law to remain fixed, a household of six may have purchased six umbrellas. But if the price is allowed to rise—even dramatically—in the wake of these sudden and unexpected circumstances, the family is much more likely to economize: to purchase, say, three umbrellas, covering two heads each. The three they end up not purchasing are now available for another household to acquire.
This is how a market economy encourages sharing and cooperation during crises: not by central planning, re-education camps, and slavery, but by a price system that is free to fluctuate in response to changing conditions.
The same holds for hotel space. Suppose again that some disaster has struck. At the standard room rate, a family of four seeking short-term lodging may well prefer two rooms: one for Mom and Dad and another for the kids. But if the room rate rises, the family may well decide to settle for a single room for all of them. (Having stayed in a motel room with three or four friends many a time during summer vacations, I can attest that this is more than manageable, if less than ideal.)
Thanks to "unconscionable" price gouging, the family in question economizes on hotel space, and the extra room they might have used under normal circumstances is now available for another family during the emergency. (I suppose it would have been compassionate and humane for the second family not to have been able to find any lodging at all?)
So-called price gouging cannot, of course, go on forever. Generally speaking, the disaster in question subsides relatively quickly, new supplies become available, and the like. But if the market is shackled during the critical transition period from crisis to normalcy, the potentially catastrophic shortages of critical goods and services that may result will only add to the misery of those already adversely affected.
Of course, no one argues that individual businessmen are infallible. It is by no means uncommon for a businessman to make an inaccurate appraisal of market conditions. An Oklahoma gas station made national news when it raised the price of gasoline to $5 per gallon following the attacks of September 11. That particular appraisal of market conditions proved absurd and laughable, and the proprietor doubtless lost business as a result. The market has a way of punishing false appraisals.
This may well have happened in the case of the Days Inn. The proprietor is not infallible and was responding to conditions as he perceived them. After receiving complaints from consumers about the increased rates in Hicksville, the company's central office, Days Inn Worldwide Inc., suggested to him both that he refund the money of travelers who were overcharged and that he make free rooms available to members of the military and the USO as well as workers from the Red Cross.
Thus private forces were already being brought to bear against the proprietor in question, and indeed ordinary market forces more than suffice to penalize the maverick vendor who jumps the gun following some unexpected event or disaster. The problem is that Attorney General Spitzer and his cronies doubtless consider this case a victory for the general principle that "price gouging" is a vicious and anti-social offense, and one that ought to be prohibited, especially during emergency conditions.
The truth, however, is just the opposite: prohibiting such activity across the board only handicaps the market in its effort to make current stocks of goods last during the crucial days following a disaster. The New York law constitutes yet another example of the state, supposedly overcome with humanitarian concern, decreeing what is best for us. No, thanks.
Thomas E. Woods, Jr., is a senior fellow of the Mises Institute and host of The Tom Woods Show, which releases a new episode every weekday. He holds a bachelor’s degree in history from Harvard and his master’s, M.Phil., and Ph.D. from Columbia University.
The above originally appeared in The Free Market 20, no. 10 (October 2002)