Harris' proposed ban on price gouging sparks debate over price controls

Democratic presidential candidate Kamala Harris' proposals to combat alleged “price gouging” of food and other consumer goods have drawn fierce criticism online. Many commentators, including former President Trump, accused Harris of promoting “Soviet-style” policies that would impose strict price controls, potentially leading to shortages and empty store shelves as seen in communist economies.

A closer look reveals that Harris has been quite vague about the specific measures she wants to implement. While some of her statements are reminiscent of traditional arguments for price controls, her actual proposals may look more like expanded antitrust enforcement or stronger consumer protections—similar to the Biden-Harris administration's rules to combat “junk fees.” Even if a Harris administration were to avoid direct price fixing, preventing companies from raising their prices at their own discretion would still have significant negative consequences, so it's worth examining the issue in more detail.

While imposing additional fees or price spikes on customers can anger consumers, such practices can also benefit the economy as a whole by allowing more money to flow into productive business investments. A common mistake is not looking beyond the direct impact on consumer welfare today and considering the long-term impact of investments on consumers later.

For example, when companies capture additional revenue from consumers – whether through price discrimination, hidden fees, or other tactics – that money doesn't just disappear. Instead, it's available for the company to reinvest in expanding production, developing new products, or returning it to shareholders who can invest in other profitable ventures. Consumers will ultimately benefit from these activities, but that can be difficult to predict because the process takes time to play out.

By seeking to limit the ability of firms to optimize their prices and thereby extract more revenue from consumers, Harris's policies could ultimately reduce investment in the economy as a whole and thus growth. Of course, saving consumers money could also lead to productive investment. The key question then is who will invest more, firms or consumers, or, in economist jargon, who has a higher marginal propensity to save.

For-profit companies often focus more on how each dollar affects their bottom line, making companies more likely to invest their funds. On the other hand, some consumers also have a high propensity to save. These are usually people with higher incomes or assets who have most of their basic needs covered.

To be clear, this is not an argument for ignoring all consumer protection concerns. There are certainly cases where deceptive pricing tactics amount to fraud or exploitation or otherwise lead to efficiency losses in the economy. However, most of the “price gouging” that politicians find distasteful is an efficient response by companies to scarcity in the market, not an attempt to defraud consumers.

For example, during the COVID pandemic, grocery stores raised prices on essential items like toilet paper or paper towels due to supply chain disruptions, helping to prevent panic buying. Even so, many chose not to engage in “price gouging” for fear of upsetting customers, which led to stores running out of the products.

In fact, from a general economic efficiency perspective, we should generally prefer that companies, employees and customers focus on increasing their own revenues and reducing costs as much as possible. In other words, we should all cut prices when and where we can. Far too much effort is spent on improving non-price attributes of goods and services, such as the “customer experience.” Investments in such attributes often seem wasteful, diverting production from applications that could increase the net worth of companies and customers.

Unfortunately, even many professional economists have difficulty fully incorporating such insights into their analyses. In a recent editorial in the Wall Street Journal, Professor Steven Landsburg lamented the decline of “price theory” courses in economics departments, arguing that students are no longer learning to think rigorously about real-world price scenarios. Landsburg provided a vivid example, asking which is more socially responsible to buy: an apple from a competitive market or a pear from a monopolist, when both are priced the same.

Landsburg's answer – that the pear is the better choice because monopoly prices mean lower raw material costs in production – shows the kind of counterintuitive reasoning he believes economists should be able to do. But his formulation of the problem is not perfect.

Since fruit eating is a form of consumption, the social cost of producing fruit is usually quite high. The most efficient choice in Landsburg's scenario would be to buy neither fruit and instead save the funds associated with it. Moreover, the social cost could well be higher even if the private cost of production is lower for the monopolist than for the competing firm. Ultimately, if we have to choose between the two fruits, we should buy from the firm that – after taking into account how it reinvests its revenues and the extent to which its costs crowd out other production activities – makes the largest contribution to net investment.

The example shows how even relatively sophisticated economic reasoning can be confused by an excessive focus on short-term supply and demand in specific markets, i.e. microeconomic price theory. Many of the economists most committed to price theory come, like Landsburg, from the Chicago School tradition. These economists place great importance on catering to consumer preferences and downplay the importance of saving, which also benefits consumers, albeit at a later date.

The economic ignorance that pervades our public discourse is unlikely to be cured by simply teaching more price theory, as Landsburg calls for. In fact, it might actually make the problem worse. The Chicago School's rhetoric of worshipping consumer preferences could be used to defend countless short-sighted policies. Consider the government social programs that channel trillions of dollars of spending into consumption each year. While this spending may be in line with voters' and consumers' preferences, it leads to runaway government spending and debt. Worse, the spending provides no way to repay the debt because resources are consumed rather than invested. The result is a lower standard of living in the future.

Going forward, both policymakers and economists should broaden their perspectives beyond narrow notions of current consumer welfare. When evaluating proposals to reduce prices, we should carefully consider where funds are most likely to be used for the most valuable purposes. This means that economists should “follow the money” to determine who is most likely to invest, how much to invest, and at what rate of return.

This more holistic view shows that many practices denounced as “usury” or exploitation can actually serve valuable economic purposes. While it is important to protect consumers from truly abusive tactics, ultimately the best way forward is to allow companies a great deal of latitude in their pricing decisions, even if this occasionally harms consumers in the short term.