Category Archives: The Market Process

Time for a Federal Price Gouging Law?

Amazon’s vice president of public policy, Brian Huseman, calls for a federal price gouging law in a recent post over at Amazon’s in-house blog. This is a bad idea for several reasons.

One is that there are already effective ways to reduce price gouging without regulation. At Amazon, Huseman writes, “We deploy dynamic automated technology to proactively seek out and pull down unreasonably priced offers, and we have a dedicated team focused on identifying and investigating unfairly priced products that are now in high demand, such as protective masks and hand sanitizer.”

This should be a competitive selling point for Amazon, not a call for more regulation. Regulations, remember, are made by the government we have, not the government we want. Amazon’s technology and in-house policies are almost certainly more effective than what Donald Trump, Nancy Pelosi, or Mitch McConnell would enact during an election year and a pandemic. Company-level policies are also more adaptable than federal-level policies as technology and circumstances change.​

In fact, if Amazon isn’t already doing so, it could license or sell its anti-price gouging technology to competitors for a profit. Price gouging is unpopular, and companies that fight against it look good to customers. Amazon does not need federal regulations to force this business opportunity into being.

Looking at price gouging legislation from Amazon’s perspective, but without the public relations filter, they stand to gain three things from a federal price gouging law:

  1. Regulatory certainty. One federal standard is easier to follow than dozens of state standards.
  2. Liability protection. Amazon will face fewer price gouging lawsuits if the company is cooperative with legislators, or even has a hand in crafting the rules.
  3. Rent-seeking, which is economists’ term for using government for unfair advantage. Price gouging legislation is a way for Amazon to raise rivals’ costs without having to improve its own offerings. Amazon has already invested in artificial intelligence algorithms (AI) and in enforcing guidelines for its third-party sellers. Many of Amazon’s competitors have not, especially the smaller ones.

There is something to be said for the first two items, though there are also arguments against them. But the third item, rent-seeking, is anti-competitive behavior at its worst. One of the primary reasons CEI opposes antitrust regulation, for example, is that antitrust regulations themselves are a major rent-seeking opportunity. Big companies routinely game the rules to thwart competition. Price gouging legislation is another example of the same rent-seeking process. These initiatives happen when companies compete in Washington, rather than the marketplace.

Other Factors

Amazon’s call for a price gouging bill might be part of a larger effort to get itself out of antitrust crosshairs. Ironically, such a bill would make retail less competitive. Not only would Amazon raise rivals’ costs, legislation would prevent companies from competing with each other to offer price gouging policies their customers most prefer.

The timing is as bad as the idea itself. Retail sales declined by 16.4 percent in the month of April, the worst ever recorded—for the second month in a row. Retailers have enough to deal with without having to spend resources complying with new rules their competitor helped to write.

There is a federalism angle, as well. A federal rule would impose standards on more than a dozen states that intentionally refuse them.

Prices Are More than Money

As any good economist will tell you, money isn’t everything. Prices are a lot more than money. Every good has a mix of both money and non-money prices. Price gouging legislation is ultimately ineffective because it only reduces ­money prices during a crisis. Tamping down on those means more severe non-money price increases. These cannot be legislated away.

A high money price causes people who don’t urgently need toilet paper or hand sanitizer to hold off until later, when the price goes back down. That leaves more left over for people who need it now. This matters a great deal during an emergency. On the other side of the equation, that same money price increase also induces producers and distributors to go the extra mile, often literally.

What about non-money prices? One example of a non-money price is when a good becomes harder to find. You might have to drive to a store further away or do some deep digging online for some potentially shady sources. Queuing and waiting lists emerge or shipping times might take longer. These things don’t cost money, but they still have a price. They are not measured in dollars, but in wasted time, extra hassle and stress, and lost opportunities. These non-money price increases leave people with less time left over for other things such as job searches, home schooling, or even taking some time for self-care.

Shortages will happen during a crisis. That is unavoidable. The question is how to deal with them. Just as pushing on a balloon doesn’t change how much air is in it, squeezing down on money prices with a price gouging regulation doesn’t actually do anything to stop price increases. It mostly just redirects them to non-money areas.

What is the correct mix of money- and non-money prices? That is a subjective value judgment. There is no truly right or wrong answer, which is another reason why federal price gouging legislation is bad policy.

Public opinion is pretty well set against price gouging. Importantly, though, most anti-price gouging activists have likely not considered the tradeoffs they would pay in steeper non-money prices. Some of them would likely change their mind if they did. Pollsters should find out. Corporate PR departments would likely change their tune quite a bit based on the results.

Federal price gouging legislation would not stop price increases or alleviate shortages. It would sharply increase non-money prices during emergencies and drive some economic activity into black markets. Companies can set their own price gouging policies without regulation, as Amazon has proven with a mix of AI and sanctions against violating sellers. The rent-seeking aspect of potential price gouging legislation is worth considering for people concerned about business ethics and about large companies gaining an unfair advantage over smaller rivals.

In short, a price gouging bill is #NeverNeeded. Congress has already passed enough harmful flash policy. There’s no need for still more.

Alvin E. Roth – Who Gets What ― and Why: The New Economics of Matchmaking and Market Design

Alvin E. Roth – Who Gets What ― and Why: The New Economics of Matchmaking and Market Design

Roth co-won the 2012 economics Nobel. His work focuses on solving coordination problems in markets. His most famous work is on matching donors and recipients for kidney transplants. But his insights also apply to other areas from matching college dorm roommates to football bowl game opponents, to marriage matchmaking, to residency and internship assignments for medical school graduates.

He has also greatly improved K-12 school placement systems in cities that allow a limited amount of school choice, such as New York City. In ranked-choice systems, many parents found it in their interest to rank their choices not in their actual order of preference. This level of gamesmanship gummed up the works for both parents and schools, and prevented honest signals from being sent. Borrowing from auction theory, Roth devised a lottery system that worked best when parents honestly ranked their order of preference when applying for schools. This made life simpler for parents, students, and schools, lowered the transaction costs of engaging in the lottery system, and made for better matches all around. Roth advises that similar lessons apply to students applying to college. Apply to the best schools you can, but don’t do early admission unless you have enough information to know that’s your best match. At the same time, apply to some “safe schools” since the better schools tend to be more competitive.

Crucial to Roth’s work is his distinction between thick and thin markets. Thick markets have numerous buyers and sellers with all manner of different preferences. Thin markets are much more difficult to find matches in. Some of the biggest challenges Roth has faced involved thin markets that lack a price system. For example, not only do kidney donations have to match the recipient’s blood type, it is illegal to compensate the donor in every country except, of all places, Iran.

This is where Roth falls short. The obvious solution is to allow price systems to emerge. As numerous economists have pointed out, banning compensated organ donations quite literally kills people. It is one of the most immoral policies a government can enforce. Roth’s work has consisted of second-best workarounds of these bad policies. He has saved hundreds, if not thousands of lives—his Nobel is well-earned. The trouble is that Roth is aware that his matchmaking work treats symptoms rather than problems, and seems content to leave it at that. He does not oppose paid organ donations. But he is also in no hurry to work to change social norms and government policy in a more humane direction.

The astute reader will notice that even in lower-stakes markets where Roth has worked on solving coordination problems, they tend to be either non-profit markets or markets that do not use money. He has devised brilliant systems to work around a lack of a price system, and some good rules of thumb that any non-price market designer can use. But, as with organs, in many cases the better solution is simply to introduce a price system where possible.

At one point, looking back on one of his more successful designs, Roth was proud to view himself as an engineer, rather than a mere student, seeking understanding. This is hubris on his part. Adam Smith famously warned that people are not chess pieces that can be moved around the board as a planner sees fit. The pieces have their own wants and desires. They move on their own in ways nobody can foresee. Roth’s second-best solutions are often improvements. But they are just that—second-best. Even the wisest, most compassionate designer cannot meet peoples’ needs as well as an honest price system can allow people to adapt and create for themselves, on their terms.

Vlad Tarko – Elinor Ostrom: An Intellectual Biography

Vlad Tarko – Elinor Ostrom: An Intellectual Biography 

Tarko is quickly establishing himself as a top-notch economist. In this, his first book, he offers the best available introduction to Nobel Laureate Elinor Ostrom’s work and the concept of polycentrism. Ostrom was the first, and so far the only, woman to win the economics Nobel [Update: I wrote this review before Esther Duflo co-won the 2019 prize in October]. She and her husband Vincent, also an accomplished economist and political scientist, ran a famous Workshop at Indiana University where they paid less attention to disciplinary boundaries than they did to solid theoretical and empirical research.

Elinor Ostrom also popularized the concept of polycentrism. It’s essentially a more finely graded version of federalism. The United States’ federal system has three main levels of government—federal, state, and local, plus a few in-between grades, most commonly counties. But not all services, Ostrom argues, fit cleanly into one of those categories. Services such as parks, police, and schools, have nothing to do with each other. They may also have different optimum characteristics. So why are they often provided at the same fixed level of government? What if a school district’s optimum size extends beyond a city’s boundaries? What if a park district would be better run as multiple, hyperlocal districts? Moreover, these optimum sizes will vary from place to place. A further complication is that these optimum sizes and structures are constantly changing and evolving as culture, technology, and demographics change. Nothing else stays the same, so why should the sizes of government “firms?”

From this polycentric framework, Ostrom teases out some ground rules for institutional design. One is that smaller is usually better. Most federal issues can be more effectively handled at the state level. Many state-level issues can be handled at smaller gradients, whether regional water or irrigation authorities, transportation authorities, or neighborhood-based policing, a term which now means nearly the opposite of what it did when Ostrom began using the term. Two, because times change, institutions need to be designed with flexibility in mind. They need to be able to grow, shrink, merge, separate, and evolve as circumstances dictate. The goal is the service, not this or that corporate structure, so make change easy.

Ostrom was much more than a theorist. She placed a far greater emphasis on field research than most scholars. This empirical backing greatly improved not just her own work, but that of her many students and collaborators. Tarko shares pictures, stories, and the research she conducted across the country and abroad over her long career. For an introduction to her thought and her broader approach, Tarko is an excellent place to start.

Joel Mokyr – A Culture of Growth: The Origins of the Modern Economy

Joel Mokyr – A Culture of Growth: The Origins of the Modern Economy

Mokyr’s larger thesis is that technology is the most important driving engine of growth. It’s not the only factor, but the most important one–and it isn’t the direct factor. Lurking one level beneath technology are cultural attitudes about technology and progress. This, to Mokyr, is where the real explanation lies for the origins of the modern economy. The Romans had the technology for the steam engine. But Roman culture wasn’t interested in applying technology to improving production processes the way the 18th-century Britain was when James Watt was a young man. So steam power remained a novelty toy for the wealthy, and was soon forgotten.

Technophobic and neophobic cultures tend to have less technological progress. As such, they tend to be less prosperous and grow more slowly—and even then, much of the growth is “catch-up growth” when technologies long established elsewhere reluctantly enter through osmosis. There is a good deal of intersection here with Deirdre McCloskey’s work, which focuses more on wider bourgeois values. But Mokyr confines himself for the most part to technological norms rather than wider arguments about attitudes about letting people have a go, whether through commerce or life’s many other worthwhile aspects.

Mokyr has written several books applying his technology-and-culture thesis to different historical periods. His thinking has evolved over time, though the general framework has proved sturdy enough to pass the test of time. A Culture of Growth focuses mostly on Europe from 1500-1700, from roughly the end of the Renaissance, through the Scientific Revolution, up to the Enlightenment’s earliest stirrings. Essentially, these two centuries laid the cultural ground the Industrial Revolution needed before it could stand on its own.

See also Pierre Lemieux’s review, which goes into much more detail than this one.

Arthur Diamond – Openness to Creative Destruction: Sustaining Innovative Dynamism

Arthur Diamond – Openness to Creative Destruction: Sustaining Innovative Dynamism

This book reminded me a bit of Wired cofounder Kevin Kelly’s What Technology Wants in its tech- and innovation-centric hyper-optimism. His optimism isn’t quite as sober as the Julian Simon, Deirdre McCloskey, or Hans Rosling variety, but Diamond’s enthusiasm is contagious. Readers interested in this subgenre might also like John Tamny’s The End of Work and Diamandis and Kotler’s Abundance: The Future Is Better Than You Think.

One useful contribution Diamond makes is a deep dive into just how disruptive new technologies are. For workers, the changes are often less severe than commonly thought. When cars replaced buggies, they still needed wheels, frames, and upholsteries, for example. Those workers’ skills did not become obsolete, though they did have to evolve. Many disruptive technologies take years or even decades for widespread adoption.

Ultimately, Diamond makes a culture-based argument for explaining technological progress. It takes more than research and development, or available capital for entrepreneurs. It takes a culture that approves of such things. People need to be willing to try something new and see if they like it or not. They need to have a certain audacity, or at least a positive view of it. People aren’t likely to give it a go if it makes them a pariah. Though Diamond openly admires Schumpeter—hence the phrase “creative destruction” in the title—ultimately his argument owes more to Joel Mokyr and Deirdre McCloskey.

Jean-Baptiste Say – A Treatise on Political Economy

Jean-Baptiste Say – A Treatise on Political Economy

Say was an early 19th century French economist, most famous for what we now call Say’s Law. It is often cynically misunderstood as meaning “supply creates its own demand.” A more accurate statement is that “abundance makes more abundance possible.”

Think of it this way: if you produce more value, have more you can trade to others in exchange for other things you value. If everyone does this, the result is a virtuous circle of growing prosperity. Even if people just act in their own self interest, other benefit. The more people who do this, the more people benefit, and to a greater degree.

Say’s Law is a very deep concept to which this short review cannot do justice; suffice it to say that when it clicked in my head, it gave me a major “eureka!” moment I have only experienced a few times in my life.

Say also roundly refutes the labor theory of value that John Locke, Adam Smith, and later, Karl Marx all used. But Say stops short of the subjective theory of value that Walras, Jevons, and Menger independently developed in the 1870s, and that nearly all economists use today.

In that respect, Say is an important bridge figure in economic history. He also displays much common sense on trade barriers, rent-seeking, and political corruption, and dispels common romance about preserving obsolete industries and jobs. On those issues, he remains pertinent reading nearly two centuries after his death.

Say’s book is also long overdue for a new English language edition–a perfect project for the good people at Liberty Fund. The old-timey edition linked to above (courtesy of Liberty Fund, naturally) has distracting and uninformed editorializing in endless footnotes by the translator and editor. They are less than helpful and beyond irksome–and date from 1830.

Say’s name is not obscure, but his Treatise is surprisingly hard to find. The link above might save interested readers some time. In the meantime, let us hope a new edition will come out sometime soon. Say still has much to teach us.

Pro-Market, Not Pro-Business

Charles Sauer’s new book Profit Motive: What Drives the Things We Do quotes from a paper Iain Murray and I coauthored:

Young Murray cite Sauer Profit Motive

The book is here. See also Iain’s and my paper “The Rising Tide: Answering the Right Questions in the Inequality Debate,” and our companion paper “People, Not Ratios: Asking the Wrong Questions in the Inequality Debate.”