Vice President Kamala Harris proposed new programs to curb increases in rent and grocery prices as … [+] she seeks to convince voters that she would act swiftly to address rising consumer costs. Photographer: Rachel Jessen/Bloomberg
Democratic presidential candidate Kamala Harris’s proposals to combat alleged “price gouging” on groceries and other consumer goods have come under fire from online critics. Many commentators, including former President Trump, have accused Harris of promoting “Soviet-style” policies that would impose strict price controls, potentially leading to shortages and empty store shelves like those experienced in communist economic systems.
A closer examination reveals that Harris has been rather vague about the specific policies she intends to implement. While some of her rhetoric echoes traditional arguments for price controls, her actual proposals may end up looking more like expanded antitrust enforcement or more stringent consumer protection regulations—similar to rules emanating from the Biden-Harris Administration targeting “junk fees.” Nevertheless, even if a Harris Administration avoids outright price fixing, restricting businesses from having the freedom to increase their prices as they see fit would still yield significant negative consequences. So it’s worth exploring the issue in more detail.
Targeting customers with extra fees or surge pricing can indeed make consumers angry, but such practices can also benefit the economy as a whole when the result is more funds channeled into productive business investment. A common mistake is to fail to look beyond direct impacts on consumer welfare today to consider longer run implications of investment for consumers later on.
For example, when businesses extract additional revenue from consumers—whether through price discrimination, hidden fees, or other tactics—that money doesn’t simply vanish. Instead, it becomes available for the company to reinvest in expanding production, develop new products, or return to shareholders who can invest in other profitable enterprises. Consumers will eventually benefit from these activities, but this can be hard to see because the process takes time to play out.
By seeking to constrain businesses’ ability to optimize their pricing and thereby extract more revenue from consumers, Harris’s policies could well end up reducing economy-wide investment and by extension growth. Of course, saving consumers money could also yield productive investments. The critical question then is who will invest more, firms or consumers, or, in economics jargon, who has a higher marginal propensity to save.
Profit-driven businesses will often be more focused on how each dollar affects their bottom line, making it perhaps more likely that funds would be invested by corporations. On the other hand, some consumers also have high saving propensity. Typically, these will be higher income or net worth individuals for whom most of life’s necessities are taken care of.
To be clear, this is not an argument for ignoring all consumer protection concerns. There are certainly cases where deceptive pricing tactics equate to fraud or exploitation or otherwise lead to efficiency losses in the economy. However, most “price gouging” of the sort politicians find distasteful is an efficient response from businesses driven by scarcities in the market, not an attempt to defraud consumers.
For example, grocery stores raising prices on necessities like toilet paper or paper towels during the COVID pandemic occurred because of supply chain disruptions and helped prevent hoarding. Despite this, many still chose not to “price gouge” for fear of angering customers, and the result was stores ran out of products.
In fact, from the standpoint of overall economic efficiency, we should generally prefer that firms, employees, and customers focus on increasing revenues for themselves and reducing costs to the maximum extent possible. In other words, we should all price gouge when and where we can. Far too much effort is put into improving non-priced attributes of goods and services, like “customer experience.” Investments in such attributes tend to look a lot like waste, redirecting production away from applications that could increase businesses’ and customers’ net worth.
Unfortunately, even many professional economists struggle to fully comprehend these kinds of insights in their analysis. A recent Wall Street Journal op-ed penned by Professor Steven Landsburg lamented the decline of “price theory” courses in economics departments, arguing that students are no longer learning how to think rigorously about real-world pricing scenarios. Landsburg offered an illustrative example, asking which is more socially responsible to purchase: an apple from a competitive market, or a pear from a monopolist, if both are priced the same.
Landsburg’s answer—that the pear is the better choice, since monopoly pricing implies lower resource costs to produce—demonstrates the kind of counterintuitive reasoning he believes economists should master. However, his framing of the problem is imperfect.
Given that eating fruit is a form of consumption, the social cost of fruit production actually tends to be quite high. The most efficient choice in Landsburg’s scenario would be to purchase neither type of fruit and to save the associated funds instead. Beyond that, even if the private cost of production to the monopolist is lower than the competitive firm, the social cost could well be higher. At the end of the day, if we must choose between the two types of fruit, we should buy from the firm that—after taking into account how it reinvests its revenues and the extent to which its costs displace other productive activities—will contribute the most to net investment.
The example highlights how even relatively sophisticated economic reasoning can become muddled by an excessive focus on short run supply and demand in particular markets, i.e., microeconomic price theory. Many of the economists most wedded to price theory come, like Landsburg, from the “Chicago School” tradition. These economists put heavy emphasis on catering to consumer preferences, downplaying the importance of saving, which also benefits consumers, albeit at a later date.
Simply teaching more price theory, as Landsburg advocates, is unlikely to cure the economic ignorance that pervades our public discourse. Indeed, it may make the problem worse. Chicago School rhetoric venerating consumer preferences could be used to defend untold numbers of short-sighted policies. Consider federal entitlement programs that direct trillions of expenditures toward consumption year after year. These expenditures may well be in line with voter and consumer preferences, but they lead to runaway government spending and debt. Worse, the spending provides no means of paying the debt back, because resources are consumed rather than invested. The result is lower living standards in the future.
Moving forward, both policymakers and academic economists should broaden their perspectives beyond narrow notions of current consumer welfare. When evaluating any proposal aimed at reducing prices, we should carefully consider where funds are most likely to be directed toward their highest-valued uses. This means economists should “follow the money” to determine who is most likely to invest, how much they invest, and at what rate of return.
This more holistic view reveals that many practices decried as “gouging” or exploitation can serve valuable economic purposes. While protecting consumers from truly abusive tactics is important, allowing businesses significant latitude in pricing decisions is ultimately the best path, even if it occasionally pinches consumers in the short run.
