Increase at the Gas Pump--Gouging or Capitalism? : Profits: Throughout history, fair pricing has been a subject of concern in civilized societies.

It happens in earthquakes and storms, times of war and times of peace, whenever any product is scarce or threatens to be. Prices shoot up. Consumers fume. Lawmakers charge price-gouging.

The latest furor over prices is playing itself out now at gas stations throughout the country.

“We had a real simple test of belief in the capitalist market economy--and the public flunked, right on up to the President,” argues Alan S. Blinder, a Princeton University economist.

In the outrage over higher gasoline costs, have Americans misunderstood the workings of their own system?

The legal question is one of conspiracy: If energy firms ganged up to raise prices under the guise of the Middle East crisis, they have violated antitrust laws, law enforcement officials say. Otherwise, merchants of gasoline or anything else typically may charge what they please, however galling it seems to customers.

Service stations facing higher costs to replace fuel in their pumps are allowed to boost their pump prices right away to prepare for it. The ticket scalper, the greedy landlord, the vendor who raises umbrella prices during a rainstorm are following a tradition as American as, well, unleaded regular.

“If most people get a chance to make a little more, they’ll take it,” observed Ben M. Enis, a marketing professor at USC. “They don’t think they’re gouging. They think they’re being justly compensated for changes in the marketplace.”

To the public, however, such attitudes may offer little consolation, especially when retailers exploit a difficult situation. “It’s not fair when a company makes an unduly large profit at the expense of consumers,” declares Angela Moskow, a project director at Consumer Action, an advocacy group in San Francisco.

Natural disasters, for instance, routinely spark charges of price gouging. After the 1989 San Francisco earthquake, battery prices more than tripled in some stores, along with sharp increases for flashlights, candles and other necessities. Similarly, when Hurricane Hugo ripped through South Carolina last year, 79-cent ice bags reportedly fetched $12.

Enis, a native of Louisiana, recalls the instant price rises that would occur when a hurricane closed in from the Gulf of Mexico: “By the time you got out of the grocery store, the price of batteries was up. The price of candles was up. The price of rope was up. The price of buckets was up.”

If such increases do not violate the letter of antitrust laws, they clearly illuminate the harder edges of free enterprise.

“There’s something not nice about market capitalism, and that’s what attracted millions of people over the century to socialism and communism,” said Blinder. “But if you follow that path, you pay a terrible cost.”

Even before money was invented, thinkers as far back as Aristotle grappled with the notion of fair pricing. In ancient times, “You might make a pair of shoes and sell it to me for a basket of peaches,” explained Father John F. Killeen, an economics professor at Loyola Marymount University. “I’m happy--but did I cheat you?”

In the Middle Ages, Thomas Aquinas and other European theologians continued to explore the notion of a “just” price, agreeing that workers were due enough compensation to live within their social class and that producers deserved a profit, as well. (Certain profits, notably interest on loans, were viewed as immoral.)

History also is replete with examples of botched attempts to control high prices.

When the Belgian city of Antwerp was under siege by Spanish invaders in the late 1500s, local smugglers provided a lifeline of food for those willing to pay a premium. “The city fathers deemed it price gouging, the smugglers abandoned the practice, and pretty soon the city starved and fell to the Spanish,” said Blinder.

These days, most economists frown on efforts to regulate rising prices. Such controls generally lead to shortages, long lines and black markets, they say. Why? In part, it is because producers lose the incentive to supply a product unless they are adequately compensated.

As the story goes, George Washington’s troops at Valley Forge suffered because of a local food shortage--arising from price controls imposed by the Commonwealth of Pennsylvania.

In almost all cases, “Price ought to be equal to what the market is willing to pay,” said James M. Carman, a professor of business administration at UC Berkeley Business School.

Wartime leads to shortages for other reasons. As a nation mobilizes to supply the military, less is left over for the civilian population. In World War II, the United States rationed 20 key items to the public, including sugar, ketchup and other grocery products.

Yet even a grave military threat was not enough to prevent a black market from emerging in the United States, as people sought out products they wanted, from groceries to nylon hosiery. Officials also sought to restrict price rises caused by the shortages, but these regulations were flouted as well. The Los Angeles Times reported on Dec. 2, 1947, for example, that three local hotel suppliers were sentenced to jail for selling meat at prices that violated wartime price ceilings.

Later, in the 1970s, U.S. officials maintained price controls for energy products--only to worsen the gas lines and oil shortages the nation suffered at the time, many economists contend.

“We’d all like lower prices, but there just is no magic bullet to give them,” said John R. Lott Jr., assistant professor at UCLA’s John E. Anderson Graduate School of Management.

The problem gets trickiest when steep prices exact a painful social cost. Advocates of rent control are fighting the evil of people losing their apartments due to unaffordable rents; critics of rent control cite evidence that such laws hurt residents in the long run by discouraging investment in new apartments.

Price hikes for transportation and other necessities can put an impossible burden on those who are scraping by on the brink of poverty. “In effect, you put them outside society,” said Carman. “They’re no longer the working poor. They’re people who can’t make it.”

Today, of course, the issue is energy. Prices at the pump have climbed 19.9 cents per gallon since Aug. 1, the highest average level in more than eight years. As prices have risen, so have consumer gripes that oil companies are exploiting the crisis. And motorists are not alone: Many independent gas station owners claim they are being gouged by the oil refiners that supply them with gasoline.

In response, energy industry officials argue that the recent hikes have nothing to do with collusion, and everything to do with the free market.

“It’s like the price of orange juice,” said Stu L. McDonald, vice president of distribution at Arco Products Co., which has restrained price increases more than most other energy firms. “If you have a freeze in Florida, the price of orange juice goes up.”

What bothers a lot of people is that service stations didn’t wait to push up gasoline prices, but reacted to the first headlines of the invasion. The usual defense is that they rightfully were looking ahead to the cost of replacing the gas in their pumps--not looking back to what they paid for it before the crisis.

It’s only human, economists say, to hang onto a product today, if it can be sold for more tomorrow--and legal bans are not likely to change it.

Hal R. Varian, a professor of economics at the University of Michigan, gives the example of a person who is about to sell a used car for $500. Suddenly, the seller gets word that a collector, willing to pay $2,000 for the same model, will come to town in a couple of weeks. “Are you going to sell it now for $500?” Varian asks. “Obviously not.”

Moreover, higher prices can play a socially useful role when markets are disrupted, economists argue. The higher prices may attract necessary goods to a disaster area, for example. Or in the case of an oil shortage, they may force consumers to use energy products more efficiently.

The higher oil prices, in other words, function almost like a tax that encourages conservation. “It’s a painful conservation device, but it’s the most effective one we’ve got,” said Murray L. Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis.

The reputed virtues of higher energy prices, however, are of little comfort to those who believe they are being gouged.

Earlier this week, Justice Department officials acknowledged that they are questioning energy company executives about collusion in price hikes.

But consumer advocates are frustrated. “You can’t find the oil companies sitting down the day after the invasion of Kuwait and saying, ‘Let’s push up the price of oil,’ ” said Mark Cooper, research director with the Consumer Federation of America in Washington. “They raise the price because they know they can get away with it.”

Still, many economists believe the upward spiral in energy prices is the sort of thing to be expected in times such as these. Instead of engaging in unfair price gouging, businesses are responding to rising costs they now face to replace their products, the argument goes.

It’s not the sort of argument destined to win many points with the average person. But then again, economists are trained to view the world in a distinct way.

“All the economists I talk to, they get so depressed when they hear the news reports about price gouging,” said UCLA’s Lott. “Every 10 years, when another crisis hits, it seems the discussion starts again back at square one.”