Covid and Price Gouging

Tian Xuan, Xue Zhaofeng, “A Distressing Debate:  Is it Perhaps Time for those Experts Still Defending Cashing in on a National Disaster to Wake Up?”[1]
 
Introduction and Translation by David Ownby
 
Introduction
 
On January 1, 2023, the Beijing Cultural Review published on its online platform four texts on pandemic price gouging, reflecting widespread public concern about the issue in the wake of China’s abandonment of its zero-covid policy.  This change of policy predictably led to a wave of infections, and in the new age of “everyone is responsible for their own health,” people took responsibility by flocking to pharmacies in search of medicines and covid-related medical devices.  The sudden increase in demand immediately created the condition for prices to rise, although when a natural market response gives way to price gouging is not always obvious.

Although my general policy is to translate texts in their entirety, I chose to translate only two of the four published by the Beijing Cultural Review, believing that two give the flavor of the exchange while avoiding needless repetition.  The authors are well-known economists.  Tian Xuan, probably in his early 40s (he earned his B.A. in economics from Peking University in 2001), is a professor at Tsinghua’s People’s Bank of China School of Finance, has published widely on economic and financial issues in both English and Chinese (see his CV here).  Xue Zhaofeng (b. 1968) is a “celebrity economist” in China, a free-market Paul Krugman who also stars on popular reality shows.  He earned his Ph.D. in economics at George Mason University in the United States, and subsequently taught at Peking University’s National School of Development before resigning in 2018 to pursue other interests, presumably more profitable.  Tian argues that profiteering off of a national disaster is shameful; Xue argues that such behavior deserves a medal, because it reduces someone’s suffering.

Whether Tian or Xue is right is not really the point.  Taking advantage of someone else’s suffering is shameful, all other things being equal, but when a surge in demand puts pressure on supply throughout an economy, not raising prices often simply means allowing one’s neighbor to profit, in the absence of widespread state intervention, which poses its own threat to markets and businesses.  There are times when gouging is utterly wrong, times when it perhaps helps (rich people) at the margins—and there is surely a vast gray zone where one would have to judge each case individually.
The point for our purposes is that price gouging is but one more stress introduced into Chinese society by the rapid abandonment of Xi Jinping’s signature zero-covid policy, although the end to lockdowns and constant testing will surely ease other strangleholds.
 
Translation
 
Tian Xuan “Memo to those ‘Economists’ who Defend ‘Profiting from a National Disaster:’  It’s Time to Wake Up!”
 
What is more frightening and tragic than the pandemic itself is that at the same time that the broad masses of medical personnel are fighting on the front lines of pandemic relief throughout the country, some people are taking advantage of the chaos to make huge profits. 
 
Recently, a controversy has arisen in academic circles about whether people should be able to “make money out of national disasters.”  Although there are no taboos in academic discussions, the voices of some popular online "economists" seem particularly harsh in the current context. 
 
Their argument is that it is okay to make money from a national disaster, and they even go so far as to quote certain Nobel Prize winning economists in defense of such behavior.  They insist that this kind of profit-taking is the best way to increase supply, and that not only should not be punished, but should be given a medal.
  
They give any number of reasons, one of the most important of which is that making money off a national disaster can make the market more efficient.   This is similar to the viewpoint of a certain popular online “economist” who argued back in the day that "raising ticket prices during the Spring Festival will solve the problem of ticket scarcities" in that both propositions are “miraculous” in similar ways.  If this were merely a question of individuals or individual accounts saying stupid things, then it wouldn’t be worth the bother of refuting them. But this time, in order to prop up their arguments, they cite the opinions of well-known “economists” with whom everyone is familiar, which is exasperating.

Setting aside our reflexive distaste for cashing in on misfortune, let's briefly analyze the economic logic of making money off of a national disaster. The premise is that a national tragedy is no different from a natural disaster or a foreign invasion, which, from the point of view of economics, produces a shortage of supply, which in turn creates a situation in which supply does not meet demand.  According to classical economic theory, in such a context, there is nothing wrong with allowing prices to adjust the relationship between supply and demand.  However, the problem lies in the type of demand.  When a national disaster occurs, demand is vitally important, and because of various obstructions and constraints, supply is very slow to catch up.  Is using only prices to adjust the situation a good idea?   Merchants can assess individual demands and reap rewards by meeting those demands, but this is much more difficult at the social level. 
 
Economics begins from the perspective of individual needs, and such economic behavior is understandable; by contrast, morality begins from the perspective of social needs, and naturally rejects those merchants who make money off of national disasters, because they hurt the interests of society.
 
Let’s take a simple example: 
 
A flood occurs somewhere and ruins the harvest, leaving victims everywhere, at which point merchants accumulate stocks of grain so as to sell at high prices, and at the same time buy farmers' land at low prices, or make usurious loans, making exploitative claims on farmers' future income. Everyone’s first demand is to survive, and this determines price levels, so is it a problem to sell your son, or your daughter, or your wife, for a bowl of porridge?  If we take this road, then the people will have no way to live and no choice but to revolt, and the result is chaos, the fall of the dynasty, and both farmers and merchants are reduced to piles of bones.  
 
Thus we see that from the point of view of economics, the grain merchants’ behavior in this example completely follows the laws of economics, as well as reaping economic returns, so from an economic perspective, there is truly nothing to reproach in this behavior.  However, as anyone who has taken Econ 101  knows, prices can maintain their role of bringing supply and demand together only when the market is functioning.  However, in extreme situations like that where a national disaster is looming, the market has completely failed, or we might say that there is no market at all, so that price signals no longer work, at which point you can only rely on the government or institutions of force (the police or even the military) to keep the market working. Once economic problems become political problems, notions like "the invisible hand," "self-regulation," and "efficient allocation of resources" are nothing but empty words.

Moreover, human society is a complex system, governed by a mixture of laws, not just by economics. In a period of normal business activities, increased prices for ride share services is part of a reasonable market adjustment, and there’s nothing wrong with it.  However, “making money on a natural disaster” refers specifically to arbitrary price increases in times of major social crises. Such behavior dispenses with the social convention of public order and baseline moral considerations. In such situations, only the visible hand of the government and the power of social welfare can quickly fill the gap in supply brought about by market failure.  In the face of a major social crisis, human behavior is not governed solely by the laws of economics. If the world were only governed by economics, there would be no way to explain why medical professionals come forward in times of crisis without regard to pay, and without fear of life or death.

The right to life is a basic right of every person, not a higher-order demand.  It is not a luxury car or a luxury house, where there’s no way to decide who needs it more or less—everyone has the same right to life. 

If we use jacked-up prices to achieve what looks like a reasonable distribution, the result will inevitably be that the rich will survive and the poor will die, which means that, after a certain time, the rich will be unable to hire workers or to sell their goods, the efficiency of enterprises will decline, and the country will be greatly weakened.  If we really get to that point, then it will be those who cashed in on the national disaster that will stand out as criminals in the eyes of history. 

Thus I say that what motivates the business world is not merely profit, but also social responsibility and reputation, as well as the persistent sympathy for those who share our fate.

By the same logic, when analyzing and explaining the laws of how the world of economics works, economists should cling to basic moral and ethical bottom lines, in addition to the knowledge of the ivory tower.

As an economist, it is beyond my ability to provide medical analysis and assistance in the context of the pandemic, and all I can do is use my humble words to try to wake up certain people who are sleeping. Those merchants who take advantage of the disaster to make dirty money can only suffer in the face of everyone's condemnation and criticism, which they richly deserve. And the “economists” who endorse such behavior are clearly wrong.  Of course, you can never wake up a person who is simply pretending to sleep.  
 
Xue Zhaofeng, “We Should Praise those who Profit from National Disaster” 
 
Today I will defend an unorthodox view—that we should praise those who profit from national disaster.
 
Taking advantage of someone’s crisis is not the same as highway robbery 
 
Let me use two examples to illustrate the difference between these two cases.

Example one.  You are coming home from work one day, and as you pass by a dark alley, someone holding a knife suddenly rushes out, saying “Your money or your life.”  Your answer will be “My life, of course!” and he’ll say "Fine, then give me 10,000 RMB!" You reply, "I don't have it on me, but my family lives nearby, come with me and I’ll hand it over." The bandit agrees.  Then you get to a crowded place and you run away.  The bandit catches up as says “You broke our contract.”  If you were the judge, how would you rule? 
 
Example two.  This is a different situation, you’re in the desert without water and on the point of death, when someone says to you “I have a bottle of water that I’ll sell to you for 10,000 RMB, are you game?”  You answer “Yes! But I don’t have the money on me.  Wait until I get home and I’ll give you the 10,000.”  The other person agrees, gives you the water, and your life is saved.  But when you get home, you don’t give them the 10,000 RMB because you think the price is too high.  Is this not taking advantage of someone else’s dilemma?  So the person that gave you the bottle of water takes you to court.  If you were the judge, how should you rule? 
 
One of these cases is highway robbery and the other involves taking advantage of someone else’s crisis.  What’s the difference between the two?  If you don’t see a difference, then think about it for another 15 seconds. 
 
The fundamental difference between these two is that in the first case the person is faced with a choice between their money or their life, and both choices were imposed by the robber himself.  In the second case, the dilemma of whether to die or to pay 10,000 RMB for a bottle of water was not created by the person who offered that bottle of water. That person is merely helping the person who needs water so badly by giving him an additional option.
 
Thus, there is a fundamental difference between highway robbery and what we usually call taking advantage of someone else’s dilemma. The logic is actually very simple, but is easily confused in real life. 
 
Everyone criticizes the act of profiting from a national disaster, but think about it—did the profiteer create the disaster? If not, then cashing in on the disaster is actually helping others and giving them additional choices. The one cashing in may be using others, but such exploitation also benefits the other party. 
 
In fact, doesn't a doctor take advantage of a patient's illness? Doesn't a teacher take advantage of a student's ignorance? But the doctor helps the patient, and the teacher helps the student. Nonetheless, this is still not completely obvious, neither for Chinese nor for foreigners.
 
Interfering with someone who is profiting from a national disaster will only worsen the plight of those who are suffering 
 
There was once an incident in the United States, a hurricane disaster known as "Katrina," which caused massive power outages near the Mississippi River. 
 
Once the power outage made the news, one guy got an idea about how to make some money. With his savings, he bought 19 generators, rented a big truck and drove more than 1,000 kilometers from Kentucky to Mississippi.
  
Once he got there, he sold the generators at double the price, because many residents at that time were in desperate need.  But the police showed up at just that moment, arguing the man had violated local anti-gouging laws, or in other words, he had raised the price too high in the hopes of making windfall profits.  
 
So the police put the man in jail and confiscated his 19 generators.  He was released after four days, but his 19 generators remained impounded in a government warehouse.
 
ABC has a news show called "20/20" that reported on this story.  By the way, the program is called 20/20 because in the United States, optometrists refer to perfect vision as “20/20,” the equivalent of 1.5/1.5 in China, so the idea is that the show lets us see things clearly.  
 
The host of this show is named John Stossel, and his question was:  in the final analysis, who was it that harmed the people, the guy who wanted to help the people by getting rich, or the police who wanted to help the people by impounding the generators in a government warehouse? 
 
When the host interviewed local residents, they all said, "We want generators, we want electricity, we want food."  It's natural to think that it's not right to make money on a national disaster, but if you can't cash in, how can you get people to travel more than 1,000 kilometers, and use their savings to buy generators and deliver them to where people need them?  When we study prices under normal conditions, we feel like we can accept ups and downs, but once something concrete happens, we often overlook the role of prices. 
 
The host of this program, Stossel, is quite funny. He ran out into the street asking everyone, "Is it right to get rich off of a national disaster?" to which everyone responded, "Of course not, what are you thinking?"  Immediately thereafter, Stossel interviewed three Nobel prizewinners in economics and asked them the same question. 
 
The first of these was the 1992 Nobel Prize winner Gary Becker, who said that cashing in on a national disaster is the best way to increase supply, so of course it should be encouraged.  The second was Vernon Smith who won the Nobel Prize in 2002, who said it was a good thing to make a fortune off of a national disaster. The third was the well known 1976 Nobel Prize winner Milton Friedman, who said: "These people cashing in on the national disaster are saving other people's lives, they should get a medal instead of being punished."
  
A similar thing happened in China a few years ago. There was a drought in Guizhou and thus a shortage of water.  Some volunteers hastened to deliver water to the people that needed it, and I myself certainly admired this behavior.  But what was the result? I think it was limited.  Think about it, if you travel a long way to deliver water, you’re going to wind up drinking a fair bit of it, and even if you give the rest to those who need it, it’s a good thing, but the effect is limited.  What's more interesting is that when the volunteers delivered mineral water to the locals, they didn’t drink it. 
 
Can you guess what they did? They sold the mineral water, and with the money they earned, they bought some dirtier water. Why?  Because they did not need small amounts of very clean water, but instead larger amounts of slightly dirty water. 
 
This is what Hayek called “knowledge.” Not in the sense of scientific knowledge, but rather specific information about who is where, what they need in terms of quality and quantity, and the goods they are willing to buy at what price.  We can admire the volunteers, but such behavior has a limited effect. Whether or not you want to hand out mineral water for free, what is important it that you should not stop people who want to sell mineral water at high prices. 
 
Because if you stop people from cashing in on a national disaster, and stop them from selling mineral water at high prices, then such people will not show up.  The result of this is very simple:  the supply of water will be even less.   So the direct consequence of stopping some people from profiting from the disaster is that it makes the situation worse for those who are suffering from the same disaster.  Thus we often say that economics is the study of things going against seeming obvious laws. 
 
Prices are not about treating someone to a meal; prices always serve to regulate supply and demand
 
So those who making money on natural disasters are increasing supply through their behavior, bringing the price of goods down, and easing the conflict between supply and demand.  This year many people went home early for New Year's, and the price of ride share services went up. Some people said that it was awful that they did this during a peak period, but I thought to myself, don’t consumers hate all price increases? However, if the price doesn’t go up, how are you going to get a ride, or how is someone going to provide that service to you? 
 
It's not easy to understand the role of prices, and some students always say, "Mr. Xue, why are you always saying you want to raise prices, that price increases are not a cure, but only a symptom, the real problem is to increase supply?"  There is never enough supply, which means that prices should always play their role of regulating supply and demand.  The point of a price is not to offer you a free meal, let’s be serious. 
 
In terms of practical effects, people who cash in on natural disasters are providing more help, and more options, to those who are suffering from the disaster. Encouraging people who do such will make the problem better, and they should be rewarded, not punished.
 
Notes

[1]田轩, 薛兆丰, 一场扎心的激辩: “还在为发国难财辩护的专家, 该醒醒了”? published on the online platform of 文化纵横/Beijing Cultural Review on Jan. 1, 2023.