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‘Efficient’ pricing and social cohesion in disaster recovery

datePosted on 22:17, January 18th, 2011 by Lew

In my view, one of the more shameful episodes in the Canterbury earthquake was the call by some for retailers to implement so-called ‘efficient’ pricing of crucial goods such as water. Among these was University of Canterbury economist Eric Crampton, whose article on the topic was even printed in the papers. Read his blog post In defense of price gouging. I often agree with Eric, but on this topic I just don’t.

I’m no big-city economist, and I seem to have misplaced the argument I wrote on the topic at the time, but essentially the problem is: if nothing is done, the resource just runs out and people who need it can’t get it. Absent some mechanism (rationing, gouging, &c) the criterion for access to the resource is speed and/or ruthlessness — the person who goes down to the supermarket & fills their ute with bottled water wins; everyone else has to rely on other means, such as asking their neighbours or others for help. I see efficient pricing as simply a means to shift the the criterion for access from ‘speed+ruthlessness’ to ‘accessible wealth+ruthlessness’. Those neither speedy nor wealthy (that is, almost everyone) will have to fall back on those same social structures of cooperation and goodwill to get their water in either case, and I don’t accept that privileging those with cash on hand is much of an improvement over privileging those who can get through the gate quickest.

However there is a non-economic factor to consider: in times of disaster, social cohesion is crucial. To large extent it operates on the notion that both the mighty and the humble are brought low; that we’re all in this together, and when the chips are down, Jack’s as good as his master. A resource allocation mechanism which punctures these illusions so as to damage social cohesion, such as by turning the poor against the rich, must deliver an enormous efficiency benefit in order to offset the harm it causes by sapping the goodwill upon which disaster recovery thrives. At a time when the foremost objective should be to promote social cohesion, ‘efficient’ pricing is an ugly imposition of individualism on the collective spirit.

Anyway, the point of this post wasn’t to relitigate that, or to criticise Eric, so much as to say that — by contrast — reports of price-gouging in post-flood Queensland have drawn a firm response from officials. Fair Trading Minister Peter Lawlor warned retailers of the possible strategic consequences of gouging:

“I think traders who attempt to profit from the misery of others during the floods should keep in mind that people have long memories. Even if there’s no official complaint, any quick returns they seek to make will be of little value to the business in the longer term.” [he said]. Mr Lawlor says if there is evidence they are breaking the law, they will be prosecuted.

More robust still was the statement from Ipswich Mayor Paul Pisasale, the same who warned looters that they would be used as flood markers if caught:

Ipswich Mayor Paul Pisasale says the city will remember businesses that try to take advantage of the disaster. “I know I’m not supposed to say [this] – but the health inspectors are on their way and the building inspectors are on their way after we finish this to see if we can help those businesses – [but] like hell,” he said.

This suggests a vigilante streak and willingness to bring the coercive force of the state to bear for social, rather than strictly regulatory reasons, and this is not usually a beneficial trait in a civic leader. However I think in cases like this there is some justification for such a stance. Pisasale’s position is a manifestation of the ‘Queensland culture’ called upon by Premier Anna Bligh in her speeches, and which may now be her political legacy. If it all came to pass, perhaps a disgruntled gouger might take legal action against Pisasale or his agencies for harrassment; but this would be an uphill battle, because Pisasale enjoys the protection of being right in the eyes of his society. After all; the only thing most Aussie battlers hate more than a government bureaucrat is a disaster profiteer. He is on firm ground as a representative of his people, because his representation rings true. His commitment is to the cohesion of his society. He is doing what crisis leaders do; efficiency be damned.

L

12 Responses to “‘Efficient’ pricing and social cohesion in disaster recovery”

  1. Eric Crampton on January 18th, 2011 at 23:46

    I hardly think ten dollar bread threatens social stability by more than the government turning to thuggery to beat on firms acting legally.

    I would have thought you’d not be siding with arbitrary bureaucrats backed by the mob.

    More seriously – I can take the point on social stability. I can even buy it as an external cost argument. But is it plausible that the optimal price, from a store’s perspective, is high enough that that becomes an issue? Customers do seem to punish stores more for raising prices than for running out of stock in these kinds of cases. That point would have to start biting well before social stability were a problem.

  2. Lew on January 19th, 2011 at 08:08

    It’s not that I think social stability would be directly threatened by the magnitude of these price rises — while $10 litres of water or loaves of bread would certainly exclude people at the margin (especially in situations where EFTPOS or credit weren’t available), I don’t think we’d be in for food riots in NZ or Australia. But that’s not the core of my critique. It’s the impact on the shared experience of the disaster which I argue would undermine the recovery. So much of disaster recovery relies on community resilience, the galvanising effect of shared traumatic experience and the illusory sense that everyone’s in the same unenviable situation. Not everyone is, of course — some peoples’ houses were ruined, others weren’t; some people have plenty of food and water laid away, or can live with relatives or whatever else. But that sense of shared experience is important; it’s the ‘we pulled together and got through’ narrative which undergirds every successful disaster recovery, and is notably absent from . (I’m sure I don’t need to lecture you on this; you live in Christchurch).

    Price hikes on the grounds of efficiency undermine this sense; it’s not so much about customers ‘punishing’ retailers as the impact upon wider society. That’s true to an extent because people resent retailers’ receiving a windfall profit from their tragedy; but more to the point it draws a distinction between those below and above the newly-established price margin which dispels the illusion of shared experience. To the extent that the harm to this sense of community cohesion harms cooperative efforts toward the recovery it’s a net bad. It’s possible that very modest price increases — such that people wouldn’t notice — might not have this effect, but they wouldn’t be much use as a price signal either.

    It’s true that arbitrary government thuggery isn’t desirable, and I did admit as much. However in a disaster situation social cohesion trumps a lot of other things, at least on a temporary basis. They have discretion, and are free to use it to the extent they can get away with; just as retailers are free to hike prices if they’re prepared to bear the risks which come along with doing so.

    L

  3. Eric Crampton on January 19th, 2011 at 09:25

    If it’s the case that the level of price rises that would threaten all the shared experience stuff is above the level of price rise at which the retailer would get serious adverse reputation effects with regular customers, then governments clamping down on gouging does too much to prevent price increases though, right?

    You’d heard the story of the folks who figured they could make money bringing generators down to New Orleans when Katrina hit? They were arrested for profiteering. That kinda crap means no generators get to places that need ’em.

    On EFTPOS/Credit: I’d expect that stores would take IOUs from their regular customers in that kind of case.

  4. Eric Crampton on January 19th, 2011 at 09:28

    Strange. When I comment from my phone, my Gravatar works. From work computer, not so much.

  5. lyndon on January 19th, 2011 at 09:51

    I’m reminded of John Rawls on politeness – the gist being that (whatever arbitrary form it takes) it there to reinforce the basic social assumption – I will deal fairly with you, and you will deal fairly with me – without which any transaction would be prohibitively cautious.

    To analogise that here, I’m inclined to the idea – whatever one might think oneself – you need to respect people’s perceptions about fairness, otherwise they will stop feeling bound by it.

    Of course, if narrow individualism is your thing, then a disaster is as good a time as any to try it out.

    That said, I obviously don’t think politeness should be enforced by the state.

  6. Sanctuary on January 19th, 2011 at 10:15

    The key sentence in Eric Crampton’s post is the third one.

    “…Because most customers aren’t economists…”

    And after reading his post, one can only say, “Hallejulah to that!”

  7. Eric Crampton on January 19th, 2011 at 10:34

    @Lyndon, Sanctuary: Private incentives to avoid raising prices are already very strong. Nobody much raised prices after #EQNZ despite no law against it and despite that it would have resulted in a more efficient distribution of scarce resources. Given very strong private incentives not to raise prices (for fear of losing long term customers who hold long grudges), we’ll only get emergency price increases when they’re really really needed. Which is exactly when we oughtn’t be banning them!

  8. Lew on January 19th, 2011 at 10:50

    Eric,

    If it’s the case that the level of price rises that would threaten all the shared experience stuff is above the level of price rise at which the retailer would get serious adverse reputation effects with regular customers, then governments clamping down on gouging does too much to prevent price increases though, right?

    I suppose that holds. But the government clamping down on them serves another purpose: it illustrates graphically the extent to which civic leaders are prepared to go to preserve social cohesion and community resilience in time of crisis. That’s valuable too.

    I agree that it’s possible to go too far — as in the generator example you cite. But it’s a matter of balance.

    L

  9. Eric Crampton on January 19th, 2011 at 11:58

    There are lots of ways of illustrating graphically the extent to which civic leaders are prepared to go to preserve social cohesion and community resilience in time of crisis.

    Here are some good ones:
    – pitching in with the volunteers in clean-up efforts
    – redirecting council staff from all but the most essential roles over to clean-up
    – celebrating Stakhanovites – medals and such for the folks who go above and beyond in helping out.
    – helping in some coordination – first radio broadcast out could be “Hey, everybody, use this really short #eqnz hashtag!” (NZ officialdom used a massive long hashtag that nobody else used…idiots.)

    Here are some bad ones:
    – Shooting suspected looters on sight
    – Conscripting private citizens who aren’t volunteering enough
    – Price controls

  10. Lew on January 19th, 2011 at 12:09

    Indeed, Eric, but none of those on your bad list are being implemented, or even proposed in any seriousness. After all, looters actually weren’t used as flood markers.

    L

  11. Eric Crampton on January 21st, 2011 at 15:59

    The policy was inspired more by folks’ musings about the powers accorded Brownlee…

  12. Stuart Mackey on January 23rd, 2011 at 13:51

    Eric Crampton: Your argument is garbage. I saw what happens, it happened in Canterbury after the 7.1, when people cannot get things like water in emergencies; Violence.
    The idea that people will meekly settle for some theory about ‘efficient pricing’ is so far and away from reality its not funny. People will take what they need, if necessary by force, and the weak, young and elderly will suffer.
    Needless to say governments know this and will implement rationing when appropriate to ensure that all people have enough to get by on.

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