Price Gouging

All of us take great displeasure when the price of a particular good rises. In the deflationary world we live in its very easy to dismiss rising prices as companies simply "profiteering" or believe that we are all being short changed in some form. Persistent price rises as I have explained can only occur when the Government inflates the monopolistic control of the money supply, however price rises can still occur in free market system usually only for short periods of time. Allowing the freedom for price discovery is a vital concept in economics. Never should a Government implement price controls or rationing. 

The theory behind a price is simple. Generally it represents the costs of inputs into producing a product be it the labour, the raw materials, transportation to sell it and so forth. Part of the price represents the a small margin of profit that goes to the owner (or shareholders) or in many cases is re-invested back into increasing production. Prices find a natural point due to competing businesses that offer similar products and a buyers intention to find the best quality product for the price. Costs are lowered, through the freedom of individuals along with the compounding of various innovations over the years.

How can a price rise under these circumstances? Possibly a natural disaster that can disrupt a socieities infrastructure, or as we saw recently in the UK at our petrol stations, a surge in demand caused by the spectre of a Union Strike. With Strikes looming in many segments of industry, the most recent of which was petrol tank drivers, the public did what is usually associated with socialist countries and that was stock up on as much of the product as possible. The direct outcome of the spike in demand was shortages and in some cases mild price hikes (I suspect the price hikes were not as large as would usually be expected in a true shortage situation as deliveries were still due on the normal times later in the week and strikes would have been some way off).

Peoples initial reaction to the price rises were one of the oil companies "profiteering" from peoples misfortune. Lets presume the Government passed a law to forbid price discovery ie fixing the price. In the recent situation people would consume the same amount as before. The product would run out even quicker as demand would not decrease. Even worse as the price remains low, supply would not increase to match the new higher demand as the profit dynamic, which would potentially be reinvested into increasing production, would not occur. As supply and demand are out of balance, either the product becomes available to the first come, first served, with nothing for everyone else, or the Government steps in and rations it to everyone. 

If the price wasn't allowed to rise then we couldn't buy a product under our free will and the decision is taken out of our hands. If the price of petrol rises it gives people options. Suddenly it becomes more economical to walk or cycle places, people may wish to car pool together, use public transport, avoid unessential journeys and so on. This acts to restrict demand as a resource becomes more scarce. Meanwhile on the supply side if the profit margin increases more of socieities resources are mobilised in meeting this new supply demand dynamic. Companies increase investment into getting more of the product to market, investing in production and distribution capacity. 

While all the above occurs the consumer can use as much petrol as they wish (or their wallet can stretch too). What should always occur is the above process, unfettered by any Government with prices channelling resources. "Price Gouging" as people wish to proclaim is part of this process and appears when supply and demand are out of step. 

A recent example of a natural disaster causing "Price Gouging" was the ash cloud that appeared over Europe, grounding many flights. Obviously this created a backlog of people who couldn't go back home and were stuck abroad, in places such as Hong Kong who were getting connecting flights back to Europe. The news reported prices of rooms going for double or triple the normal price and predictably people began moaning about price gouging when in fact this process was helping people. Quite clearly there were not enough B&Bs or Hotels to take in the stranded people, so prices rose to try and solve the supply demand imbalance created by the natural disaster. People would then be incentivised to opt for smaller rooms then they would usually stay in, one of many eventualities that would help control demand. As prices rise new sources of supply would appear, for example local citizens may feel it is worth the inconvenience of taking in a stranger for the night if the price is high enough. If the Government was to fix the price of a room then this option, one of many, would not occur. 

Sometimes companies (forced by political pressure) resort to rationing to solve supply demand problems. In the UK a large section of the country has a hose pipe ban (a country not known for its arid and dry climate). Rather than allowing the price to rise, the companies have resorted to an outright ban that prohibits the use of a hose pipe in the vein attempt to control demand. A ban is politically more acceptable than rising utility prices due to the delusional British peoples view that water on tap should be practically free (Ofwat like many other UK utility regulators put pressure on companies to not raise prices for political expediency).

Rather than a ban the water companies should be using prices to solve the issue. Rising prices would be the outcome, people would then naturally ration the resource under their own free will. People who still felt it was worth the price to water their garden would have the option, others could impose the ban themselves. With a higher price, the companies would have larger profits. Shareholders would either opt for these in the form of dividends, or to maximise their future returns put more capital back into investment to bring more water to market.  If our water market was truly run under free market principles then other competitors would enter the market noticing the profit discrepancy. More innovations would ensue as competition would increase in the sector. Desalination efforts, for example, could be looked at as it would become more viable with a higher price, therefore bringing increased scientific effort into the field. Ultimately this lowers the cost of a product over the long term and benefits the poorest within society. A number of market innovations and events could occur, that's not for me to comment on, that's for entrepreneurship to act and create on.

If you still believe that Governments can ignore prices for the common good, then be my guest, but as history and rational thought proves it always exacerbates supply demand imbalances. Some politicians actual realise this, and seek to introduce prices to solve state induced problems but this does not win votes. A politicians job is to gain power by making unrealistic promises. Arguing against Price Gouging is always a vote winner because without any rigor or understanding of the dynamics, only its primary effect is seen, that of lowering consumers purchasing power of a given product. As detailed, its all for our common good and helps increase supply over the long term thereby making products more readily available to all sections of society.

The Drug War

"It is so easy to be wrong—and to persist in being wrong—when the costs of being wrong are paid by others."

Thomas Sowell

As a child you are told that once you grow up you'll be able to make your own decisions and live life the way you wish. The so called do-gooder's within society have other ideas, becoming your adult paternal replacement in whats known as the 'nanny state'. "You can't eat this, drink that, you should recycle this, don't smoke that", and so on. The machinations of the modern state have become the new religion, giving directives as a set of commandments for how people should live their lives. The war on drugs has been an ongoing crusade for decades for such people, it can never be won and is a prime example of the destruction caused by the nanny state. Rather than doing good, in typical Government fashion it is in fact crippling society. Every drug should be made legal just like alcohol or tobacco for all to use and consume.

Prohibition of Alcohol in 1920's America was a disaster. It lasted just over a decade and acomplished none its objectives. Rather than 'solve' the social ills associated with drink it caused more problems. It was a boom time for Organised Crime creating one of the most infamous Gangsters of all time, Al Capone, who prospered from Prohibition. Corruption was endemic across law enforcement. Alchol was still readily available and was further glamorised by its outlawed image. The American Government backtracked and repealed the law during the 1930's, allowing market forces once more to supply it freely.

The 'War on Drugs' is a repetition of histories mistakes, a war that can not be won and like all wars causes more issues than it seeks to solve. If we allowed the market to supply drugs today it would eradicate many social difficulties. 

The problem with sending products people wish to buy underground is their price inevitably rises. The demand doesn't go away and results in smuggling to get around the authorities. Production can not be ramped up the same way due to the limitations placed on distribution channels. Competition is stiffled as drug barons and cartels can restrict supply much easier and "strangle" competitors out of the business. Prices are just half the problem, you then have the end product and with drugs it becomes a danger to public health. When the government makes drugs illegal they are in fact the ones who cause far more innocent deaths than would happen if it were legal. Alchol is a drug, and a very dangerous one at that. Most of us know the dangers and thousands die every year. Yet due to its legal status we all know (or should know) our limits and what we can drink. This is due to the free market to ensure consistent product quality thereby enabling consumers to drink in relative safety. The problem happens when drugs are made illegal the product quality is driven down. All sorts of pollutants end up in the mix, dangerous substances that makes its way to the consumer. Needless deaths are caused with such reckless product control with the quantity of units also hard to determine, the consumer is never sure what they are taking. You are never quite sure of how potent the portion of drug will be. With alcohol or tobacco there is no such problem, the user is always aware.

The high price of illegal drugs usually lead to many users resorting to crime. These crimes are committed on innocent members of the public, that could be avoided if market forces were allowed to bring down costs. The Government throws more state resources to "solve" the ills diverting police resources to investigate such "wrongdoings". Turf wars within communities erupt caused by the restriction of free trade. Politicians don't live in such areas so are disconnected from such realities but the people who do live in such places are generally unaware that the Government is creating such problems by inciting the fictitious "War on Drugs".

Meanwhile end users continue to use drugs freely, despite having to play roulette on product quality. Teenagers go to clubs and don't even have to ask to find who is selling. Despite being in my late twenties its still the same as when I was a teenager, people asking me do I want any 'gear' (I've even been asked if I was selling which I found amusing). Anyone who has been to University knows someone who did weed, not just once or twice, but every day (possibly multiple times). Just like the old Soviet Bloc outlawing denim jeans people still bought them away from Government eyes. 

So what would a world look like where all drugs were made legal? Wouldn't we all be addicts, our children would all end up in prison and the fabric of society would fall at the seams? Hardly. There would probably be more drug users. There may even be more overdose deaths, but these outcomes would be determined by the action of the individuals themselves and would not effect innocent third parties. Smoking, drinking, eating fast food, joining the Army, doing skydiving, driving a car; all of these activities put an individuals health at risk however the individual knows the risks associated with their actions. There would be no innocent community torn apart from Drug related crimes. No innocent victim caught up in gang crossfire. Organised crimes influence would be greatly reduced to intimidate members of the public. Addicts could be helped more openly and not cast aside by society. The glamour of drugs would loose its appeal to young naive users.

Professional drug companies would take on production and units (like we have in alcohol) could inform the user how much of a substance is safe to use. Product quality would be assured through open competition and prices would be driven down substantially, so low income users would not resort to petty crimes to fund their addictions. This would stop wasting societies resources with repeat offenders (quite often drug related) being sent to prison. Developing Countries could have a legitimate product to sell overseas which assists people out of poverty.

Some people who believe in legalisation also state that it could raise additional Government revenue through taxation. This is where I disagree and think there should be no taxation on any drug (I've already stated that I think the state and tax will one day be obsolete so I think you could guess that anyway). Current Taxation on alcohol and tobacco is amoral. The people who pay the price are generally innocent children who have low income parents who smoke or drink. To make these products it costs next to nothing, however the Government artificially raises prices dictating that its for our own good. It never is. One of my partners Grandmothers smokes around 50-60 a day. She's been doing this for years and like many others the raising of the price due to higher taxes has never slowed her consumption down. In most cases this can lead families to avoid spending money on the children in the family. How can they buy books when they wish to smoke or drink? All essentials become that much harder to fit in when the alcohol price rises. There's only so much people can drink or smoke and generally they will do it regardless of price. The recent phenomenon is continuing to drink the same but at home before they go to the pub (or to drink harder substances). Rather than buy cigarettes it has become more common to buy roll-ups and bags of tobacco, again continuing consumption. The government like to claim they look after you, in reality they are punishing the most vulnerable in society.

So what do we have to fear from making drugs legal? Nothing. We should always give individuals full autonomy over their lives, making things illegal doesn't stop this. Of course if someone were to infringe on someone else's liberty and rights then this not acceptable but how would allowing people to take drugs be an infringement on others. We already allow open use of alcohol and tobacco, why not other drugs? I myself am not a drug user. I don't smoke and only drink the odd Guinness here and there. However I believe people should be free to choose, if not for their own sake but for all of our well-being.