Price gouging-moral insights from economics

Dwight Lee in the current issue of Regulation magazine offers “The Two Moralities of Outlawing Price Gouging.” In the article Lee endorsed economists’ traditional arguments against laws prohibiting price gouging, but argued efficiency claims aren’t persuasive to most people as they fail to address the moral issues raised surrounding treatment of victims of disasters.

Lee wrote, “Economists’ best hope for making an effective case against anti-price-gouging laws requires considering two moralities—one intention-based, the other outcome-based—that work together to improve human behavior when each is applied within its proper sphere of human activity.”

Intention-based morality, that realm of neighbors-helping-neighbors and the outpouring of charitable donations from near and far, is good and useful and honorable, said Lee, who term this as “magnanimous morality.” Such morality works great in helping family and friends and, because of the close relationship, naturally has a good idea of just what help may be needed and when and where.

When large scale disasters overwhelm the limited capabilities of the friends and families of victims, large-scale charity kicks in. Charity is the extended version magnanimous morality, but it comes a knowledge problem: how does the charity identify who needs help, and what kind, and when, and where?

The second morality that Lee’s title referenced is the morality of “respecting the rights of others and abiding by general rules such as those necessary for impersonal market exchange.” This “mundane morality” of merely respecting rules does not strike most people as too compelling, Lee observed, but economists know how powerful a little self-interest and local knowledge can be in a world in which rights are respected. Indeed, the vast successes of the modern world–extreme poverty declining, billions fed well enough, life-expectancy and literacy rising, disease rates dropping–can be attributed primarily to the social cooperation enabled by local knowledge and voluntary interaction guided by prices and profits. The value of mundane morality after a disaster is that it puts this same vast power to work in aid of recovery.

The two moralities work together Lee said. Even as friends and families reach out in magnanimous morality, perhaps each making significant sacrifices to aid those in need, the price changes produced by mundane morality will engage millions of people more to make small adjustments similarly in aid. A gasoline price increase in New Jersey after Sandy’s flooding could trickle outward and lead gasoline consumers in Pittsburgh or Chicago to cut back consumption just a little so New Jerseyans could get a little more. Similarly for gallons of water or loaves of bread or flashlights or hundreds of other goods. Millions of people beyond the magnanimous responders get pulled into helping out, even if unknowingly.

Or they would have, had prices been free to adjust. New Jersey laws prohibit significant price increases after a disaster, and post-Sandy the state has persecuted merchants who it has judged as running afoul of the price gouging law.

Surely victims of a disaster appreciate the help that comes from people who care, but they just as surely appreciate the unintended bounty that comes from that system of voluntary social interaction guided by prices and profits called the market. Laws against post-disaster price increases obstruct the workings of mundane morality, increase the burden faced by the magnanimous, and reduce the flow of resources into disaster-struck regions.

Perhaps you think that government can fill the gap? Lee noted that restricting the workings of mundane morality increases the importance of political influence and social connections, but adds the shift is unlikely to benefit the poor. On this point a few New Jersey anecdotes may inform. See these stories on public assistance in the state:

We often honor the magnanimous, but we need not honor the mundane morality-inspired benefactors of disaster victims.  While the mundanely-moral millions may provide more help in the aggregate than the magnanimous few, the millions didn’t sacrifice intentionally. They just did the locally sensible thing given their local knowledge and normal self-awareness; doing the locally sensible thing is its own reward.

We need not honor the mundanely moral, but we also ought not block them from helping.

Zwolinski: “Is price gouging immoral? Should it be illegal?”

Michael Giberson

Five minutes of Matt Zwolinski on price gouging (from Learn Liberty).

If you think price gouging should be against the law, watch this video. Are you persuaded by Zwolinski? Let me know in the comments.

MORE: Zwolinski has written serious philosophical works on price gouging,which makes the clarity of his position in the video all the more surprising. :-)  See links to some of Zwolinski’s work on the topic in previous KP discussions here and here.

What do the Occupy Wall Streeters care about? Haidt on the moral foundations of OWS

Michael Giberson

At Reason.com, social psychologist Jonathon Haidt writes about the foundational moral concerns that animate the Zuccotti Park protestors.  Working from a Moral Foundations Theory* perspective, which Haidt and several others have developed, he said, “In my visit to Zuccotti Park, it was clear that the main moral foundation of OWS is fairness, followed by care and liberty. Loyalty, authority, and sanctity, by contrast, are very little in evidence.”

The Occupy Wall Street protests and its progeny are famously leaderless and consensus based, meaning the exact meaning of the movement remains a bit hazy. Politicians left, right and libertarian have stepped into the resulting void to explain what it all means (usually the explanation is that the politician has been right in his views all along, and the explanation seems to serve left, right and libertarian politicians whether the politician is speaking in support of or in opposition OWS).

Haidt attempts a somewhat less self-interested attempt at understanding the basic moral feelings that are motivating participants in the protests. I remark on it here mostly as a complement to Lynne’s thoughts collected here: “A political economy model for Occupy Wall Street.”

*Haidt explains Moral Foundation Theory as, “outlin[ing] six clusters of moral concerns—care/harm, fairness/cheating, liberty/oppression, loyalty/betrayal, authority/subversion, and sanctity/degradation—upon which … all political cultures and movements base their moral appeals.” More information is at www.MoralFoundations.org.

 

For libertarians and those who love them

Michael Giberson

A new blog explores the world of Bleeding Heart Libertarians. Matt Zwolinski created the blog as “a forum for academic philosophers who are attracted both to libertarianism and to ideals of social or distributive justice.” He has attracted a top-notch group of collaborators, and the first two weeks of operation has produced a torrent of thoughtful posts and some pretty good comments as well.

As Steve Horwitz has said, “This blog is quickly becoming a must read.”

“Economizing on Virtue” research bleg

Michael Giberson

Quick question for academics in moral or political philosophy or political economy: Is it worth a little extra effort to turn up the Geoffrey Brennan/Alan Hamlin article “Economizing on Virtue”?

The article appeared in Constitutional Political Economy Vol. 6, no. 1 (1995): 35-56. My library has easy electronic access to CPE back to 1997, but apparently getting to 1995 is going to cost me something extra.

I want to make quick reference to the “economizing on virtue” argument, and this article seems like the place to go. If you’ve read it, let me know whether it is worth a little extra effort to acquire. (Either a comment here, or email me at my ttu.edu email address.)

Tinderbox

Michael Giberson

The blogosphere is a tinderbox and an errant spark can trigger a storm of fire. In this case the spark was a news story about a city fire department refusing to put out a house fire for a home outside the city limits.  For Salon writer Alex Pareene, curiously, this story implies something about the moral absurdity of libertarianism. EconLog‘s David Henderson objects that policies of government-run fire departments are probably not illustrative of libertarian ideals.

Many, many other writers chime in: Tyler Cowen at Marginal Revolution, Jonah Goldberg at NRO, Paul Walker at Anti-Dismal, Ed Lopez at Division of Labour, E.D. Kain at Balloon Juice, the Huffington Post and more can be found with a little effort (<= a Google blog search currently showing over 7,000 results).

Zaid Julani at ThinkProgress gets the political story a little better, seeing it an example of conservative, no-frills government and the consequences of inadequate provision of public services. Julani, on the other hand, claims a progressive outlook and “believes in an American Dream that works for all people, regardless of their racial, religious, or economic background.” More to the case here, the progressive view seems to be that Obion County Tennessee residents should tax themselves more and buy some firefighting services, whether local voters and local elected officials prefer such policies or not.

There are some interesting angles here – moral hazard, duty to rescue, scope of public service, the enforceability of contracts signed under duress, local governance, and so on – but they ought to be informed by the local experience with other policies. If, for example, you are going to advocate a policy that has failed in the past, you ought to know it failed in the past and have a story as to why “this time it’s different.”

So for a local perspective, a statement from the Union City Fire Department (not the fire department involved directly in the story, but from a nearby city):

The Truth about Subscription Fire Service in Obion County TN.

Due to the large number of information requests and emails from individuals who have only heard one side of the story from local and national media, we have included a statement from the Union City Fire Chief to try to educate the public on the situation with the rural fire subscription service in Obion County. The following is that statement:

The events of the Cranick fire in Obion County Tennessee on Wednesday September 29th, 2010, have with no pun intended; created a “media fire storm.”

So much “finger pointing” has ensued, that the true facts of the incident have been blown out of proportion.

The first point that needs to be noted is that Obion County Tennessee does not have a county fire department.  Secondly, no county tax revenues are even ear marked for county fire protection.

The county is made up of 8 municipalities which do provide fire protection to its city residents, through city property taxes, which fund their respective fire departments.

Three of theses cities, South Fulton; Kenton and Union City allow their departments to respond outside the city limits by way of a Subscription Service which charges a $75 yearly fee to receive fire protection.  After they respond to a “members” fire, the member is billed $500 for the response.

Why the $75 and a charge of $500?  This can be compared to any insurance.  You have a premium; the $75 and then you have a deductable; the $500.  The policy, of these cities is that if the fee isn’t paid, then the fire department does not respond.  The only exception being; life endangerment. (A report that someone may be inside the home.)

These fees help offset the cost of equipment and manpower, paid for by the city tax payers to help fight fires in the county.

The remaining 5 city fire departments have for years responded into the county without a subscription service, banking on collecting fees for their services, “after the fact.”  The problem has been, that once those people have been provided the service; they often seem to choose not to reimburse.  Attempting to charge on a per call basis does not generate the needed funds nor does it give county residents an incentive to support the cities, if they can wait until they actually have a fire to pay anything….

“Price gouging in the Auction House”

Michael Giberson

A complaint is posted to an online forum:

… something needs to be said. I have always noted that price gouging is something that occurs on the [Auction House] and notion seems to be prevalant that “If there is someone out there stupid enough to pay that much, I’m going to charge that much.” Okay, I can see making a sweet bit of profit even though I disapprove of price gouging as being simply wrong. However since the inception of F2P, I have noted that the price gouging has gotten wildly out of hand. Take for example the one auction I came across on the [Auction House], a pair of recipes, a Heavy Elven Cotten shoes recipe with starting bid of 5 gold and a buy out of 8 gold. Or the Elven Travellers recipe for 950 silver starting bid and a by out of 1 gold. And neither one of these recipes were anywheres near being at supreme level. Something seriously needs to be done about the price gouging… If people cannot be honest and regulate themselves perhaps it needs to be done for them with caps on pricing.

… As a matter of fact I have seen quite a number of people taking the items they get in their ‘gift boxs’ when they start a new toon and immediately sell on them on the trade channel or the ah for outrageously high prices. Consideration, at the very least, needs to be given to these immoral and unethical offenses. Thank you.

The setting is the Lord of the Rings Online [LOTRO] game. “F2P” is the September 10 switch in online business models from subscription-based to “Free to Play,” no cost to download and play the game (you can subscribe and get additional benefits and they’ll be happy to sell your character items in the LOTRO stores, but you can get started for free; see also this assessment).

I don’t play LOTRO, the forum post simply showed up in a Google News search on “price gouging”; I don’t know the auction house rules. The description in the complaint makes it sound sort of like eBay. Probably the switch to F2P brought in a bunch of new players, anxious to accumulate resources and not so familiar with prior market prices. Experienced players trying to pick up an item or two in the auctions, and accustomed to lower prices, may find the price boom unpleasant. I’d predict that prices will settle back into ranges that experienced players can live with once the initial F2P-inspired boom in demand has been accommodated.

The forum post inspired a significant back-and-forth discussion. It is an interesting application of the term “price gouging,” but my response would be more or less the same as the first commenter:

lol at trying to apply morals to prices in a video game.

Price gouging, ethics, markets, and the corrupting influence of Econ 101

Michael Giberson

Last I checked, James Kwak had 147 comments on his blog post on price gouging and the corrupting influence of Econ 101. Other bloggers have jumped into the fray: Adam Ozimek at Modeled Behavior, the Undergraduate at Observations of a Naive Undergraduate, and David Beckworth at Macro and Other Market Musings.  Quite a firestorm of activity.

Kwak ignited this firestorm with commentary on Kahneman, Knetsch, and Thaler‘s classic question of the fairness of a snow shovel price increase the day after a snowstorm:

Today in class, the professor posed the first question from the paper:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”

In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50.

As the professor said, this is probably because there are a lot of business school students in this class. Business school students are classic Econ 101 robots.

What follows, in the post and in the comments and the other blog responses, is a delightful jumble of conversations over morality and markets (and rich people vs. poor people and WWJD and shortages of organs for transplants and sudden needs for vaccines and free market ideology and zero-sum games and more, more, more).

Most of the analytical problems in the post and in the comments comes from assuming a fixed supply of snow shovels and a zero sum game, as if the hardware store (vaccine producers, organ donors and transplant facilities, etc.) had no past and no future.  Also, the moral analysis provided is lacking in subtlety.

So here is your test question:

Consider two hardware stores: one prices snow shovels at $15 when there is no snow and at $20 when there is snow; the other maintains a fixed price for snow shovels under both no-snow and snow conditions. In equilibrium, the second store will carry a smaller inventory than the first and offer it a price between $15 and $20. Which pricing policy is more moral?

(Yes, the problem is underspecified – so make any necessary assumptions about frequency of snowstorms, the distribution of income, desperately ill children, number of infirm widows living in the area, the costs of carrying inventory, etc. – that are relevant to your moral analysis and then get on with it. List your assumptions in your answer. Does it matter if the second store’s pricing policy is due to the owner’s preferences, due to the owner’s concern over patron reactions, or due to state law? Does it matter if the fixed price is closer to $15.01 or closer to $19.99? What if the fixed price were $25? Please note: your answer will fail to satisfy if it fails to address Zwolinski’s non-worseness analysis.)

Price gouging in Haiti

Michael Giberson

Reports from Haiti suggest that prices for many useful and necessary goods have jumped considerably since the earthquake.  Candles, matches, ice, water, food items, bus trips from the capital, petrol, plastic sandals, charcoal, rice, sugar – the list of items now selling at dramatically higher prices seems endless.  Last week I suggested that claims of price gouging that were heard in Venezuela and Alaska were stretching the meaning of the term a bit, but if anything represents pure price gouging it is sharp price hikes on necessary items amid the current devastation in Haiti.

I don’t know whether or not Haitian law prohibits or limits price increases on necessary goods during emergencies, but surely the ethics of price gouging are the same in Haiti as in other places.  Consider some of the episodes that are described as price gouging in news articles.

  • Wall Street Journal: “The Hotel Oloffson, where many journalists are camped out, was charging up to $100 per night — for a mattress in the parking lot. A bottle of Gatorade at the hotel was going for seven dollars.”
  • New York Times: One vendor mentions was a Manouchka Wendiwou, described as “a vendor in La Saline who raised her candle prices by 60 percent and made no apology for charging what the market would bear.”  The article also notes that matches, foodstuffs, gasoline, and ice are showing dramatically higher prices in Haiti.
  • Philadelphia Inquirer: Mentions “price-gouging for gas and water” hampering relief efforts.
  • Boston Globe: “Price gouging was rampant at the main bus terminal. Fortune and others said the cost of a ticket out of town more than doubled since the quake hit. But it was a price that hundreds were willing to pay after nearly a week of living on the streets….”
  • Ottowa Citizen: “About 30 per cent of gas stations in Port-au-Prince have opened, and officials say there is no longer a fuel shortage. But prices have tripled from pre-earthquake levels.”

If price gouging is unethical, then we ought to condemn these reported behaviors right?

But I find it hard to condemn these actions, which generally appear to be pro-social commercial responses to abnormal social and economic conditions. Higher prices motivate more careful use of existing supplies as well as extraordinary efforts to secure additional supplies. Changing relative prices help guide the efforts of suppliers and merchants to the most vitally needed items. Both the incentive and information aspects of prices are critical to guiding decentralized responses to human needs in this rapidly changing situation.

The New York Times article observes that, “Haiti’s huge informal sector reacted faster to the quake than did established companies and banks. Outdoor markets like La Saline are already filled with goods from the countryside, including salt, cornmeal, fruits like mangoes and used clothing from the United States.”  How fast would that informal sector have reacted if the government felt an obligation to enforce some notion of anti-price gouging policy?

NOTE: Chris MacDonald discusses a bit of the ethics of price gouging in Haiti at his Business Ethics Blog.  See Business As Usual (plus Price Gouging) in Parts of Haiti.

Ignore the smiling photo – Arnold Kling is bitter

Michael Giberson

In the photo accompanying Arnold Kling’s EconLog post, he is smiling, but in his recent post “Market Failure” he does not sound like he is smiling:

I want to propose a new definition of market failure. … This post ties together a couple of recent bitter themes. It is not intended in any way to persuade people who disagree with me (if you disagree with me, you may just want to skip the post). It is simply a grand unified theory of my bitterness.

… Suppose that we have a group that wants enormous political power. The group rewards people who justify its power by calling them “experts.” It punishes those who question its power by dismissing them as “hacks.” If you want money and status, you want to be labeled as an expert. In order to be labeled as an expert, you produce analysis that justifies concentrated political power for the elite group.

This process is self-reinforcing. It is like the Harvard-Goldman filter. That filter says that only “reliable” people are allowed to be bank CEO’s or policymakers. A requirement for being “reliable” is sharing the views of other “reliable” people as to what constitutes reliability.

It is like the tenure system in academia. Who gets tenure? Above all, it is people who support the existing tenure system.

There is more – he ends by agreeing that “our moral rot is not as bad as it was in the Soviet Union” and” and he grants that he doesn’t “foresee gulags and mass murders,” but he also doesn’t come across as very optimistic about the direction of public policy.

All in all, Kling offers one of the most analytical and insightful rants that I’ve come across lately.