Julian Jessop // 11 June 2020

Given that even ‘profit’ now seems to be dirty word, it is no surprise that being accused of ‘profiteering’ during a crisis is about as bad as it can get. But there are some circumstances when an increase in prices in response to exceptional demand can actually be a good thing.

By definition, ‘profiteering’ is hard to justify because the term specifically refers to the act of making a profit in ways that most people would consider to be unethical. This usually includes the act of raising prices to exploit shortages of essential goods and services in times of war, or a viral pandemic. Put like that, I’m struggling to find anything positive to say about it too.

Nonetheless, price flexibility and the profit motive also perform socially useful roles. For a start, the act of raising prices in response to increased demand sends a clear market signal – to producers, consumers and the government – that something is in short supply. Often this may already be obvious, because we can see the empty shelves. But other times it might not.

The prospect of making a larger profit at a higher price also provides an additional incentive for producers and retailers to increase supply. In some cases, it may also be necessary to raise prices simply to cover the additional costs of ramping up output quickly, or necessary to charge more for some goods and services to offset the loss of revenues from other product ranges which, for whatever reason, a shop can no longer sell. Either way, higher prices might literally be the price that has to be paid to ensure that exceptional demand is met.

In the meantime, higher prices are one effective way to ration goods and services which are in short supply. Admittedly, this will be of most benefit to those consumers who are both willing and able to pay the higher price. It may be socially desirable to ration instead by quantity (for example, no more than three packets of pasta per shopper) or controlling access in some other way (special opening hours for the elderly and NHS staff). However, rationing by price may also be socially useful, especially for non-essential items, but also by making it prohibitively expensive to ‘panic buy’ in bulk. (I’ve written more here on panic buying itself.)

Some not entirely hypothetical ‘real world’ examples may help illustrate these points.

At one extreme, it is hard to have any sympathy for someone who buys up hand sanitisers, stores them in his garage, and then tries to sell them at inflated prices on Amazon. In practice this is not adding to the supply of hand sanitisers and is simply allowing someone to make excess profits at the expense of others. The same point would apply to a corner shop selling off old stock of toilet paper at £10 a roll.

A more difficult example would be a sports retailer charging higher than usual prices for exercise equipment, such as skipping ropes, yoga mats and indoor bikes. This behaviour seems easier to defend, to me at least. It might be argued that it is particularly important that people who are now being forced to stay at home have access to the means to keep fit. But these goods are not usually considered to be essential items. Even this week, 88% of respondents to a YouGov poll said that they do not consider selling sports equipment to be an essential service, with only 5% thinking it is.

What’s more, the increase in prices might actually be helpful in encouraging an increase in supply, and thus ensuring that more people can indeed gain the health benefits. It may also not be unreasonable for a retailer to raise prices on some goods to offset lower demand for others, and thus remain in business, protecting jobs and incomes.

There may be some valuable trade-offs too even for the most essential items. Let us imagine that a 10% increase in the retail prices of pasta and loo rolls would be sufficient to guarantee enough supply for everyone during this crisis, with the poorest households being given extra financial support to cover the cost. Would it really be sensible to object to this purely because it might mean higher profits for some businesses along the way?

In summary, I would argue for a relatively pragmatic approach. If an act seems completely unacceptable – such as charging £10 for a loo roll – then it is probably is. But in many other cases, price increases and profit-seeking can be part of the solution to shortages, as well as a logical business response to them.

Today, as much as ever, the usual free-market mechanisms can help to produce desirable outcomes. History certainly provides few examples, if any, where a socialist planned economy has done any better.

The original article was published on the Julian’s blog.