Michael Munger on John Locke, Prices, and Hurricane Sandy
Nov 12 2012

Mike Munger of Duke University talks with EconTalk host Russ Roberts about the gas shortage following Hurricane Sandy and John Locke's view of the just price. Drawing on a short, obscure essay of Locke's titled "Venditio," Munger explores Locke's views on markets, prices, and morality.

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Peter Berkowitz of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the origins of liberalism and the importance of John Locke. Berkowitz defends the liberal project of individual rights and liberty and argues that critics of Locke...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Nov 12 2012 at 8:55am

I thought the discussion about trading the horse for 50 when I’d be happy with 40 potentially problematic. The seller doesn’t know that there aren’t 10 more behind him equally in trouble so maybe that was the signal that the market price was changing. That more supply was necessary. How do you tell the difference between taking advantage and the first price signal?

John Strong
Nov 12 2012 at 9:45am

Aquinas’ position falls short of outright economic Platonism, the notion that everything has a just price that descends from Platonic heaven and is absolute. He does talk of the “just price” of the thing and even states that “all contracts … should observe equality of thing and thing.” But he also makes the following qualifications:

  • “The just price of things is not fixed with mathematical precision, but depends on a kind of estimate.”
  • “The measures of salable commodities must needs be different in different places, on account of the difference of supply: because where there is greater abundance, the measures are wont to be larger.”
  • “The price of things salable does not depend on their degree of nature, since at times a horse fetches a higher price than a slave; but it depends on their usefulness to man. Hence it is not necessary for the seller or buyer to be cognizant of the hidden qualities of the thing sold.”

So already in Aquinas we see some recognition that the law of supply and demand contributes to the value of something, and it is the usefulness of something, not its interior qualities per se, that matters.

Yet there are two senses in which Aquinas’ theory of price does qualify as absolutist.

  • Natural law binds the conscience absolutely. Aquinas believes the imperatives of justice are absolute, because they are knowable by means of the natural law. The natural law is the “participation” of the rational soul in the Eternal Mind of God Himself, so even though that participation is imperfect, it does mean that by reason alone we have some access to absolute truth, including absolute truths about what a fair price is. Once the conscience accesses this truth, it is “bound” and must comply. In other words, what is absolute is not the price per se, but the capacity of the conscience to access God’s instructions about the price!
  • Absolutist Notion of Commutative Justice. By modern standards, Aquinas certainly does express a fairly rigid notion of commutative justice in that he rigorously specifies that the benefits of an economic transaction ought to be distributed equally among the parties of the transaction. A just transaction ought to serve the common advantage, and “whatever is established for the common advantage, should not be more of a burden to one party than to another, and consequently all contracts between them should observe equality of thing and thing.”

If we were to rephrase this principle in the language of modern economics, it would go something like this: “the buyer’s consumer surplus should be approximately equal to the seller’s surplus”. “Surplus” in this context, if you are the buyer, means the difference between the price you paid and the maximum price you would have been willing to pay. If you get something cheaper than the price you were willing to pay, then that’s icing on the cake, as it were, or an extra benefit beyond the fundamental value that the transaction had for you. Likewise, if you are the seller, any money you obtain above and beyond the minimum price you were willing to accept should also be called a “surplus”. Aquinas is saying that no party should harvest more surplus than the other parties to the transaction. If the parties are just, they will attempt to spread the benefit as evenly as possible. That is how you arrive at a just price.

Aquinas’ focus is that of a moralist, not a social scientist. To describe his position as a kind of economic Platonism is not really fair.

Keith Vertrees
Nov 12 2012 at 10:20am

I agree with Brian. Perhaps Locke’s notion of the “time and place” of a potential transaction is inadequate.

When the horse owner came upon a cart which, unaided by horsepower, would fall over the cliff in 5 minutes, with no other horse within 5 horse-minutes, he entered a new environment, and is therefore justified in raising his price.

Nov 12 2012 at 10:34am

The wonderful thing about Locke is how ambiguous his texts are.

Here’s an alternate reading of his essay:

In a transaction that has no life or death dimension the market price(the intersection of willingness to pay and willingness to accept) is the fair price barring discrimination/fraud/lying, moreover there is no obligation for the seller to sell.

In a transaction with a limited life or death dimension(it was after all almost a famine) then the market price remains the fair price, but the seller has some obligation to sell to the more vulnerable party(but not to sell cheaper).

In a transaction with an imminent, unavoidable life or death dimension(the chance of a ship sinking even with all equipment was pretty high all on its own), then the seller not only has a responsibility to make the sale, but moreover he must price it at most as cost-plus. Throughout the ship example I couldn’t avoid thinking of the old (incredibly dumb) socialist notion that products should be sold at a modest increment above the cost of providing them. I don’t think anyone thinks that’s a good way to sell shoes anymore, but I think it appeals to a lot of people when it comes to selling anchors(or healthcare).

But anyway, that’s just one reading of him. It wasn’t for no reason that Marx adapted so much of Locke for his own uses. It’s a rich and fertile opus.

If I had one issue with the podcast it’s that it (not for the first time) treated the problem of price gouging in a somewhat one-sided manner. The argument made being:

Price gouging exacerbates scarcity and misallocates resources therefore price gouging is bad. Moreover, people don’t understand this so they ignorantly support anti-price gouging legislation.

What if people DO understand that these laws exacerbate supply problems and support them regardless? I pretty much side with Locke on the issue overall, but I do not think ignorance is why many(most?) Americans disagree with me.

John Strong
Nov 12 2012 at 11:15am

Locke and Aquinas are actually making a similar moral argument at one level: the focus in both cases is on commutative justice. The “just” price in question is the one that the conscience dictates, and both Locke and Aquinas are providing guidelines for the individual conscience, not for government policymakers. In particular, a moral actor ought to be prepared to “leave something on the table” as Russ Roberts said (paraphrasing the Talmud). One can make these arguments without drawing any inferences whatsoever about what laws ought to govern markets and prices.

Nov 12 2012 at 12:00pm

So – When I was listening to this morning’s podcast regarding John Lock and the morality (basically the reason you ask the price), and the story of the horse, it brought to mind this scene from Planes Trains and Automobiles.

I think I know how John Lock would view this transaction. One of many great scenes from this movie, but it does make an economic statement.


Enjoy and feel free to comment.

Nov 12 2012 at 12:36pm

I’m wondering about the example of paying, say, $100 per gallon for gas in a time of crisis vs. paying with one’s “time” if gas is rationed under price controls. The following is admittedly a ham-fisted example, but consider two people: 1) a hedge-fund billionaire and 2) a welfare mother. Both need a gallon of gas to get to the store to buy groceries for their family. For the billionaire, his marginal value of $100 approaches $0 — he can easily buy gasoline when it’s priced in dollars. The welfare mother simply does not have $100, so she is priced out of the market. However, now consider the “currency” of time. For the billionaire, the cost of his time is quite high (the opportunity cost of being away from his hedge-fund). For the mother, the cost of her time is quite low — now she can afford to buy the gas when it’s priced in “time.” Under emergency conditions, crisis-pricing of gasoline in dollars seems to advantage the billionaire. However, if the state puts in place temporary price controls, doesn’t this in effect establish the second currency of “time,” which allows the welfare mother to bid for a product she otherwise wouldn’t be able to afford?

I would appreciate some help in sorting out this issue.

Greg G
Nov 12 2012 at 12:48pm

There is another reason that anti-price gouging laws are not needed. Most local retailers are led by their own self interest to be reluctant to raise their prices too much in times of shortages. They understand that many of their regular local customers might be resentful and choose to shop elsewhere after the shortage had passed.

The main effect of anti-price gouging laws is to reduce the inflow of additional one time sources of supply – exactly the sources of supply that would be most useful in alleviating the shortage more quickly.

Nov 12 2012 at 1:28pm

St. Thomas Aquinas’ commanding presence in both philosophy and theology tend to draw focus on his arguments; but it is worth mentioning that his writing served as the beginning of Scholastic inquiry into selling and prices (picking up where Aristotle left off), not the end.

The school of Salamanca took it further, the most famous–if that word can be used of someone that almost no one has ever heard of–member was the Dominican friar and philosopher Francisco de Vitoria.

There is an interesting book on this, Faith and Liberty by Alejandro Chafuen, which I must confess to having laid aside before finishing, distracted by other things.

Still, the book was fascinating. I’d recommend it to anyone interested in Scholastic economic theory. Including myself, I really need to finish it…

Nov 12 2012 at 2:51pm

Here is a nice article regarding Judaism, profiteering and the talmud


Nov 12 2012 at 3:07pm

I had the same question as George. Using the price system to ration goods only makes sense to me if everyone is starting from a similar position of wealth. $100 a gallon for gas is the same as $4 a gallon for gas — to a multi-millionaire. The price system MAY be the best system we’ve come up with so far to deal with these various problems, but it’s certainly not ideal.

Nov 12 2012 at 3:33pm

Another question is whether there is an intrinsic moral difference between explicit rationing and implicit rationing by price? Is it simply a prudential judgment on which one is most likely to direct the goods where they are needed with the greatest efficiency?

Mike Munger mentioned that there is no way out of paying the true market cost. That is absolutely true, but here the currency is switched in order to tilt the scales. The rich are better able to pay with dollars; but the poor are better able to pay with time. By switching the currency to time, the “last shall be first.”

While charity for the poor is a moral end, is this the best way to accomplish it? Even if it works, does anyone have the right to impose it by force of law?

Patrick R. Sullivan
Nov 12 2012 at 4:51pm

Munger said, ‘He [Locke] doesn’t have those tools. It’s 1661, he doesn’t have those tools, but has intuited that supply and demand is different.’

If he’d read Shakespeare he’d have had those tools. There’s a joke in The Merchant of Venice, after Shylock’s daughter announces she’s converting to Christianity, that the price of bacon will be going up with all these Jews converting.

And, in Act I, scene 2 of Henry VIII, there’s a clear description of the dead-weight loss of taxation–which has been pointed out to me Shakespeare took almost word for word from Holinshed. So, economic analysis wasn’t new with Locke.

Michał Ty
Nov 12 2012 at 6:04pm

I think there are two problems here: with the reporting, and with the proposed solution.

The problem with the reporting was that you didn’t use the time to explore the problem, but instead you’ve decided that the problem was the anti-gouging measures, and the solution was to do as you think it should have been done. But the anti-gouging measures weren’t the problem — they just were a solution you didn’t approve of — and I don’t think you’ve ever said what you thought the actual problem was. The way to do it was to consider what the problem was (temporary shortage of essential goods), what was done, what problems arose from the used solution, what changes you’d like to have made, and what problems could have arisen from your proposed solution.

As for the problem with your proposed market-based solution, I think it was nicely illustrated at the beginning of the podcast by the story about $30 sixpacks and men who vandalized the store’s power supply. I think that economists tend to consider the market as a constant, immovable and impervious thing, whereas the market is a social construct based on implicit and explicit rules. Price gouging has a tendency to destroy the very markets you’d like to solve the supply shortage problems by creating unrest leading to dissolving of essential social contracts.

I don’t think that the anti-price-gouging laws should enforce a 5% price increase limit. I’d say 50% or even 100% would still be acceptable. For example, if the sixpack’s price rose from $2.50 to $4 or $5, I suppose most people would find it harsh but acceptable, and the store would make good money. But when the price was set at $30 people were upset because they saw it as store owner breaking the social contract, and they took it upon themselves to punish the offender, in effect preventing both the owner from making profit and other people from making purchases.

Free markets work really great when there’s ample supply of non-essential goods, but emergencies are a special economic and social case where free market can lead to worse economic effects for everyone.

Anyhow, I really like the podcast, so please keep doing your good work 🙂

[Spelling correction: “gauging” changed to “gouging” throughout.–Econlib Ed.]

Nov 12 2012 at 10:17pm

I’ll be listening to this podcast tomorrow, but from the comments, I can already tell it will be an interesting discussion.

One fact that people might not understand about the gasoline supply is that there is never enough gas for everyone to have a full tank at the same time. I live in Atlanta where we had a long period of gas shortages because the state put limits on the price of gas, and then at that price, everyone could afford to queue up at the gas station. What you saw, in addition to people completely filling their tanks, was filling of gas cans – effectively hoarding and extra gallon or 5 at a time. All it takes is two three of those people and you’re short a tank of gas for someone else in line.

Setting a high price is the best solution to the problem. Even the “rich” will hesitate at $6 or $8 a gallon. Especially if the get stuck with a $40 can of gas that sits in their garage for a few days after the crisis abates.

It could be true that some people on the low end of the economy won’t get gas, but given they might spend all day driving around hunting a station with gas, and not getting any, I see little long-term harm by letting the price rise. In fact, the vast majority of non-rich people might actually respond to the price by buying only enough gas for the next day or two, hoping the price will start to fall, which it eventually will.

Just to reinforce the initial point: even without storm damage the distribution system is incapable of supplying enough gas for a major city to allow all citizens to have a full tank at the same time. So, unless there is some mechanism that reduces demand to meet supply, shortages will reign. It seems that price is the best way to allocate the scarce resource. Focusing on the millionaires is misleading, especially because they probably have 4 or 5 cars and can last a lot longer than the rest of us without running out of gas.

Nov 13 2012 at 12:41am

Thanks Gentlemen,

Keith Vertrees had a great comment and example. Drawing on his comments here are two aspects of “Venditio” that should be explored further:

Locke appears to assume equilibrium prices. He does not provide for how prices can morally change. Someone has to be the first to test higher prices. I think Locke’s rule of charging what everyone else does could be construed to limit testing the market to see if it will bear higher prices.

There is also a challenge going from the horse story (N=1) where it is immoral to charge more than you would yesterday, to a New Jersey gas station where N may now be 1000 or more, but the gas station would have sold gas for $4 per gallon the day before. The question is what value of N changes it from immoral to moral regarding changed conditions?

I am pro-price gouging, but depending on your answer of N for transition from immoral to moral you could interpret Locke as for reasonable price gouging protections.

Jim Feehely
Nov 13 2012 at 12:54am

Hi Russ,

Thank you again for a very stimulating conversation. I guess you and Mike don’t know how amusing it is to an economics sceptic to hear 2 economists discussing morality.

When Mike said that economists, by and large, ignore morality, he squarely identified the great flaw with neo-classic market economics. Because of the conviction of most market economists that economics (not just markets) are concerned only with ‘rationality’ and ‘efficiency’, social and individual morality and ethics are ignored. But society is, or should be, principally concerned with the morality and ethics of equity. It is, in my view, the reason why economics causes our societies so much harm by the narrow and barren view that markets should regulate almost everything.

And the fundamentals of market economics is plain wrong on at least 2 basic points; ie individuals do not act in their own self-interest because they live in communities in a society and people do not act rationally. Contrast the motivation of corporations: A corporation is bound to act in its own interests and corporations at least aspire to pure rationality. The whole purpose of advertising and public relations is to to induce mass irrationality. So, it mystifies me why so many people subscribe to the delusional theories of market economics. I suppose it demonstrates the enormous power of free market propaganda dispensed by education systems and the obedience required by employment. You could interview Noam Chomsky on that point. I really wish you would.

It seems that Locke and Aquinas were on to those flaws in modern market theory over 400 years ago;ie long before the modern principles were formulated. Why is not apparent to modernity?

We live in communities, in societies. We do not live in an economy. Oh for more politicians that act morally and ethically in the interests of society rather than in the interests of the economy first, and too often exclusively. But while we continue to believe that our democracies produce authentic freedom and equity through markets alone, our philosophical lives will continue to be denuded by the incessant focus on economics.

Price gouging laws remain necessary for the very reason that markets, as we have allowed them to develop, are not concerned with just transactions as described by Locke and Aquinas. In fact, the law of contract is expressly amoral; ie the law will as readily enforce a bad bargain and it will a good bargain. Much of society’s morality and ethics are destroyed by the sanctity of the law of contract. Locke and Aquinas would be horrified by the hegemony of the modern law of contract, the social foundation of markets.

Jim Feehely.

John H.
Nov 13 2012 at 7:35am

I have a disagreement with Locke in the horse trading example.

Look at the horse example from the buyer’s perspective and change the. Suppose I’m the desperate buyer. $50 is a mutually beneficial transaction for me and that is what the seller has asked. Suppose for a minute that I know he would be happy with $40. Is it ok for me to ask if he’ll take $35? Is that morally wrong? It seems that the burden of morality is being put on the seller. In some instances (mine for example, as a real estate investor) the buyer has more negotiating power than a seller. Or more often the situation is a bilateral monopoly (I learned a new phrase) because I’m the only buyer and each piece of real estate is unique.

It is very hard in the real world to gauge what that perfect price is. For many large ticket items there is a negotiation and the price that is settled upon is somewhere between the most that the buyer would be willing to pay and the least that the seller would be willing to accept. I’m sure that they both often leave money on the table but no one knows who left more.

So how does a seller/buyer prevent himself from being immoral with imperfect information?

Walter Clark
Nov 13 2012 at 10:04am

Christy and others who regard government as paternalistic are not anti-free market. They are taking a (voter-approved) egalitarian position. They would like to see welfare to still go on during Sandy. Since Russ and other Hayekians are not purely libertarian about the poor, how would they propose satisfying that part of their statist urge?

Michael Munger
Nov 13 2012 at 12:12pm

Wow! You people are amazing. What interesting comments. I have learned a lot from reading your reactions. Thanks so much!

Mort Dubois
Nov 13 2012 at 1:00pm

If we’re going to have a discussion predicated on the actions of politicians in real life, it would be useful to analyze the actual situation:

1) The hurricane is a short term, unexpected shock to a functioning market system, and political reactions to it are not necessarily designed to continue the functioning of that system. I don’t think that any gas stations have been prosecuted for raising and lowering their prices in response to normal market fluctuations, even if the effect is far more than 5% overly relatively short periods of time.

2) There is no shortage of gasoline. There is a shortage of electricity, and there is a sudden reduction in the capacity of the infrastructure dedicated to storing and distributing gasoline. The situation will be eased when those systems are repaired.

3) Raising the price of gasoline does nothing to hasten or impede the repair of the electrical and gas distribution infrastructure. Putting additional cash in the hands of service station owners will not cause more electrical repair crews to appear, nor will it cause more gas storage depots to spring from the ground.

4) Just because a governor warns against secondary selling doesn’t mean that it won’t happen. See the War on Drugs for the effect of government prohibitions on contraband commerce. If there is excess demand for gasoline, it will be impossible for the government to prevent that market from appearing. It may not take the form of higher gas prices, but might be manifested as people sharing their cars more, or sharing their generators.

5) What’s so great about gasoline sitting in a tank under a gas station, anyway? Mike and Russ extol the great benefits of unsold gas – but why? It doesn’t benefit users who may need it, and it doesn’t provide more money to the seller.

6) The governors, in publicly announcing that their action would take the form of rationing, prevent panic in the marketplace. Public order has real value.

I think it’s worthwhile to consider why, if it’s so irrational, there is such broad support for rationing and anti-gouging laws. Some attempt to explore the opposing side’s argument would be welcome.

As always, a provocative podcast, even if I wasn’t persuaded by the argument.


Nov 13 2012 at 2:07pm

So let’s see, gas goes to $25 per gallon. Can’t afford that so I take the bus/subway. High demand, low supply there too. Bus/subway fare goes from $2 to $10. Can’t afford that so I walk. Costs goes to zero but commute time jumps from 30 mins to 2 hours. Benefit: get lots of exercise. Downside: Less time with family. Vote out the Mayor and the Gov. next election.

The economics may be right so why does it get ignored?

Tyler H.
Nov 13 2012 at 2:34pm

Another excellent podcast.

I do agree, however, that morality is largely ignored by economists. The problem is simply that, economics portends to be wholly rational, despite its several layers of uncertainty. Morality is rational only insofar as law and legality allow for moral decision making. The problem is richer though; morality is supposedly an absolute, established by some unseen “law of nature” (Aquinas); but if we remove abstraction and metaphysics from the discussion, what IS morality? If morality operates in accordance to base relativism, then the Market-view of “self-correction” is really the only way to approach economics, because it assumes that agents will act morally rational; otherwise morality might manifest via imposed action from agents in a society. If then, agents in a society make up the morality, then the market must be morally-bound.

This is all wrapped up in what I call the “agency/morality circularity,” where it is impossible to unhinge the actor from the space within which he or she acts. Contrariwise, it is also problematic from the “perspective” of the moral-space, for that is also generated and contributed to BY the actors.

Can a “market” be anything but a relativist-manifestation of agents in a space of self-generated morality?

Krzysztof Ostaszewski
Nov 13 2012 at 3:33pm

Iustitia est constans et perpetua voluntas ius suum cuique tribuendi.
(Justice is the constant and perpetual will to render to every man his due.)
Gnaeus Domitius Annius Ulpianus

Krzysztof Ostaszewski
Nov 13 2012 at 3:43pm

You are in Danzig in Germany? In 1660? There was no Germany in 1660. There was no Danzig until Prussian occupation. What an immense level of ignorance! Gdansk was in Poland in 1660, and remained in Poland until Prussian occupation.

Nov 13 2012 at 6:53pm

This was a fun podcast with extra-fun comments afterwards.

Several commenters brought up the question of, “Where is morality in economics?” They suggest that economists do not consider morality as they ponder their trade. This is incorrect.

Understanding economics–in a very real sense–is a painful curse. It is not a curse because economics lacks morals, just the opposite. Ignorance of economics leads to breathtaking amounts of immoral conduct and undesirable outcomes. Understanding economics is rather like being chained down and forced to watch well meaning individuals absolutely screw over the very people they are trying to help over and over and over again.

Consider the following: Voluntary-competitive-informed markets (Free Markets) produce Pareto-efficient outcomes where EVERYONE is better off. What could be more moral than everyone being better off? Nothing—by definition. How do Free Markets produce such moral outcomes when all the actors in the market are sinful-by-nature? Simply put, when those 3 assumptions are satisfied, competitors will fight to make sure each person gets the best deal possible under the circumstances AND no market participant will allow himself to enter in any deals that make him worse off. Therefore anything that F__s up market assumptions is by definition IMMORAL, because it guarantees someone–generally everyone–will be made worse off to some degree.

This podcast’s initial question was over price gouging. “Price gouging” is a law that prevents prices from rapidly rising above some random/politically chosen point. To the extent that the market needs prices to go above that point but cannot raise them, the market is now INVOLUNTARY. To the extent that power outages close some of the gas stations, it is also LESS-COMPETITIVE. Normally a rise in prices would quickly draw in more suppliers and increase competition, but the fixed-low prices offer little incentive, so the problem of less-competition is no longer self correcting. In other words, this post-SANDY, price-restricted, electricity-challenged market now lacks the assumptions necessary to guarantee Pareto-efficient/moral outcomes. Someone is going to get hurt because of this law–probably everyone.

Some commenters wondered if preventing upward price changes during a catastrophe might help poor people because, they reason, making them wait for hours in long gas lines is better than paying a higher price for those goods. First, this assumes they don’t value their time very much, which is undoubtedly false. Second, it assumes there is gas, which is false for at least some of them since–by definition—a shortage is a scenario where there isn’t enough gas. Third, it assumes that the other people in the market will continue to treat them with Justice which is NO LONGER GUARANTEED because the assumptions necessary to make that guarantee certain are no longer true. Importantly, it is not the hurricane that interferes with the major assumptions of the free market (the decrease in competition is normally self correcting), it is the law. In other words, the poor—who are by definition the least able to tolerate injustice—get royally screwed by the very laws which were written to protect them…every time.

Russ Roberts
Nov 13 2012 at 8:36pm


I am pretty sure that John Locke writing in the late 17th century knew that Danzig was not in Germany–as you point out, there was no Germany.

I am also pretty sure that Mike Munger knows that Danzig was not in Germany at the time. His mentioning of Germany was to help modern listeners figure out the geography of Locke’s example.

Russ Roberts
Nov 13 2012 at 8:48pm

Jim Feehely,

You write:

And the fundamentals of market economics is plain wrong on at least 2 basic points; ie individuals do not act in their own self-interest because they live in communities in a society and people do not act rationally.

Self-interest does not mean selfish. There is no contradiction between acting in your own self-interest and being part of a community.

People do not act rationally all the time. You’re right. I agree. I don’t think that has any implications for favoring coercive government involvement (led by self-interested imperfectly rational people).

The fundamentals behind favoring bottom-up solutions to humanity’s problems are not what you seem to think.

Eric Tyndall
Nov 13 2012 at 10:14pm

George and Woodah,

The consumers stuck in a queue waiting for gasoline aren’t spending their time, for the station owner doesn’t accept time as payment; they’re actually just wasting it.

And if the rich prefer not to stand in line, they can just pay someone to do it for them. It’s pretty hard to prevent prices from allocating scarce resources. “Price will find a way.” – Jeff Goldblum.

john thurow
Nov 14 2012 at 2:00am

Great discussion. I find it difficult however to translate Locke’s ideas into a legal framework.

Finding the equilibrium price when there is multiple sellers/buyers is easier to establish in a court (public opinion?) then the selling of a lone horse in the country.

For example, I can see the said impoverished farmer that needed a horse entering into the transaction for 40 shillings becoming “outraged” the next time he traveled into town upon finding that he could of bought a horse for 20 shillings there. Obviously he was ripped off and taken advantaged of due to his circumstance. Finding a lawyer (we won’t mention how the lawyer determines his fees) they haul the said seller into court. How then on moral grounds does the said seller defend himself? Locke established that it was moral in the sellers mind to have charged 40 shillings, but does it look that way to everyone else? What would be the rule that the legal system could use to establish justice in this circumstance?

Rob W
Nov 14 2012 at 4:56am

I really enjoyed this.

Shayne Cook
Nov 14 2012 at 6:27am

Michal Ty wrote: “I don’t think that the anti-price-gouging laws should enforce a 5% price increase limit. I’d say 50% or even 100% would still be acceptable.

I concur. And there is precedent for precisely that level of allowed price “gouging” under extraordinary “need” circumstances – the labor supply. I’m fairly certain that the electrical workers and other “first responders” are being paid time-and-a-half or double-time for supplying their surplus labor during this time of community “need”. I’m also fairly certain that neither Christy or Cuomo applied their “price-gouging” limits to first responders and other laborers.

It’s curious Locke and others discuss this market phenomena only in terms of things and not labor.

Nov 14 2012 at 7:09am

John.H touched briefly on my main thoughts while listening to the podcast. Specifically, why is the onus of morality on the seller of the item? This was left unanswered by Locke and both Mike and Russ. If this morality argument were to permeate it’s way into the marketplace today (through legislation or merely societal pressure) would this not just lead to buyer’s claiming to be in a constant state of distress in order to obtain the cheapest possible price for a product as the seller has the obligation not to price gauge? Or worse, would it not lead to market buyers continually placing themselves in hazardous situations knowing they will not bear the full cost of the item in their desperate hour of need as the seller’s conscience will allow them a discount.

Along similar lines, in the example with the horse; why should the seller be morally obligated to sell to each individual at the same price. Say the first buyer that declined to pay 40 pounds for the horse had solely intended using it to take to town as an alternative to walking each day. He may save time but assuming that he is in no rush then the purchase is of little material gain. The second buyer who is able to save thousands of pounds worth of goods from sinking in the river should be more than willing to paying above 40 pounds if push comes to shove. Why should the seller have a moral quandary with raising his price when he knows the sale will lead to the subsequent profit of the buyer? Does this not slide into the same scope as selling the wheat at bellow market price only to have it onsold at the market price? The initial seller only transfers the benefit on. Secondly, the buyer will also have a price in his mind that he will be willing to buy for! If his price is 100 pounds, why should the seller have the entire burden of the moral crisis? Is the buyer not then creating a moral crisis of his own by intentionally underbidding for the horse far less than what it is worth to him in that time and place?

All in all it was a fascinating topic and I would love to hear some responses to my ideas!

Nov 14 2012 at 7:13am

I’m a little puzzled about some of what I see as potential paradoxes that could arise by using the particular introspective criterion proposed by Locke in cases where there is no multi-person market. (I see that Zak just this moment brought up something similar. This is a different spin.)

First: Why does the imperative to act morally fall only on the seller? It seems to me that a buyer in either the horse or anchor stories ought symmetrically look to himself and come up with the minimum price at which he would buy, rather than taking advantage of the particulars of the circumstances of the seller. Fire sales happen. Sellers can desperately need cash–say, to pay for a sick child. A ship captain with two anchors could, for example, desperately need to sell one in order to reduce the ship’s weight or to get cash to assuage his near-mutinying crew who have become fearful that the cargo will not sell for enough in port to pay their wages. Using Locke’s argument, it should analogously be morally incumbent on buyers, when going into a one-on-one negotiation, to consider their own circumstances only and heed their inner voices to arrive at a price at which they would buy.

But with moral obligation applying symmetrically to both buyers and sellers, Locke’s suggested method of introspection could lead to a complete impasse in finding a market price. Suppose the captain with two anchors finds in his heart that it would be immoral to accept a price higher than 500. Suppose the buyer, searching _his_ heart, finds that it would be immoral for him to offer a price lower than 1000. Which of them do we ask to behave immorally?

Captain Two-Anchor: I would be happy to sell you my extra anchor for $500.

Captain One-Anchor: Please, but I cannot accept your kind offer! I could not possibly buy it for any price lower than $1000! It would be immoral of me to take advantage of you that way. You must let me give you $1000, else I could not face my conscience ever again.

Captain Two-Anchor: But that is impossible! My conscience will not allow me to accept any offer higher than $500! I cannot bring myself to behave so immorally.


Before you write this hypothetical off as ridiculous and impossible, something not unlike this did happen to me once. I went to the home of a professor who had died, in response to information that his book collection would be sold that day. I had a tight budget and knew what I was willing to pay for the collection. On arriving at the house late in the afternoon, the collection turned out to be larger and more excellent than I had anticipated–certainly worth my top price. However, the relative at the home was clearly in a distressed, fire-sale state of mind and was more concerned with paying someone to clear out the house promptly than with the value of the books. I admit to not behaving completely Locke-morally and to offering her a price that was slightly lower than my top price so I would have some negotiation room if she came back with a higher asking price. (Social custom of negotiation being that it should go two rounds purely as a matter of civility.) However, I was completely Locke-moral in the sense that I was considering only my own interests in buying the books, and heeding the price I’d already decided on before realizing I’d be dealing with someone in distress. To my surprise, she protested that sounded like too much: Think of all the work involved with boxing and removing all those heavy books, and even the few good ones in her opinion couldn’t be worth that much! So, she, too, had a Locke-moral evaluation of what she was willing to sell for.

Luckily, after a few social protests, we came to our senses and found an acceptable middle ground between her maximum Locke-moral selling price and my minimum Locke-moral buying price. (Actually, she agreed to accept my initial price after I pointed out that I was personally confident, because many of the books were in my field, that they and the effort were of at least that value to me. So, the market price–the actual sale price–was between the two Locke-moral prices.)

William Love
Nov 14 2012 at 8:59am

A note, there is an assumption in the surfer example that there is an obligation for responders to save the surfer.

This is not so. In fact there is no such obligation or informal contract, and this is explicitly stated by the courts.

Note the following general discussions:


(or in light of the second amendment,) http://www.youtube.com/watch?v=lb3rAglRsqU

(or more generally,)

Nov 14 2012 at 9:29am

Really well articulated points Lauren – we seem to be having the same sort of difficulties in accepting Locke’s argument. Indeed what is the market but a significant number of buyers and sellers each with their own level of distress? Isn’t it somewhat disingenuous to be asking for both price discovery and moral fortitude when price is obtained, at least in part, by these distresses?

Nov 14 2012 at 11:07am

Regarding the surfer, I don’t think that is a good example, because a surfer is used to taking on danger and clearly knows that surfing a hurricane is dangerous. However, it might also be a once in a lifetime opportunity. So surfers are risk takers.

A better example of hoping to be rescued or bailed out would be people who stay in their homes in violation of evacuation orders.

Regarding Lauren’s story of the two captains, I think it has all the makings of a great Monty Python script. It could go along with the cheese store with no cheese or the dead parrot skits.

Brad Hutchings
Nov 14 2012 at 12:08pm

I see via Drudge this morning, that Christie is warning NJ taxpayers of impending tax increases to deal with the storm. OK for me, but not for thee!

Nov 14 2012 at 3:53pm

This was one of the best econtalk podcasts yet, at least that I have heard. (So far I’ve only listened to the last few plus everything from 2006 to midway through 2008 – I’m slowly working my way through the back catalog).

I would love to hear a follow up podcast to this one on the topic of price discrimination. I think there are a lot of interesting issues there:

* Efficiency – I think price discrimiation raises transaction costs. In some cases, enough to prevent efficient allocation of resources.
* Morality – There are some free market advocates who would say that it is perfectly acceptable to charge a drowning man 90% of his future net worth to throw a life ring. After all, he’s still better off impoverished and alive versus dead. When is it OK to price descriminate versus not okay?
* How accepted is price discrimination today? It depends. Most people hate it the way the cable company does it, but most people accept store loyalty cards, negotating salaries, etc.

John H.
Nov 14 2012 at 8:42pm

Thanks Zak and Lauren for expressing my ideas better than I could have.

Nov 15 2012 at 2:28am

The billionaire and the welfare mom argument.

1) There really are not that many billionaire’s out there filling up their tank to the point where poor people are being denied any gas.

2) Even rich people respond to prices.

3) Yes, there could be a few super rich people who buy all the gas to run a generator for their koi pond and be total jerks. They can do this with anti-gouging laws in place or without anti-gouging laws in place. They probably don’t have to wait in line as they can hire someone to do so. You cannot prevent them from doing this, so why attempt to do so via standing in line rationing?

4) The price signal is important to get MORE supply and thus the price down. Even if billionaires greedily buy up all the gas at 25 bucks a gallon, then more gas will keep coming into the market to get that cash. With price-gouging laws, that may not happen so fast, thus the welfare mom has to wait even longer without gas. so the rich jerk factor is mitigated a bit by this.

Adam Janisch
Nov 15 2012 at 5:47am

Dear Russ, dear Krzysztof,

I’m not sure I understand your comments though. Danzig was not in Germany at the time and is not today. Therefore I don’t quite understand how Mike Munger is helping “modern listeners” to locate it geographical.

I too, was quite surprised by this comment by Munger, so I came here to check if there is some discussion about this.

Great episode though. I learned a lot.

With kind regards,

Adam Janisch

Mike Munger
Nov 15 2012 at 9:06am

Well, there’s no defending the indefensible. I have trouble seeing why it’s important that I misspoke and said Danzig was/is in Germany. But I surely did. I bet there were places where I mispronounced words, too. I got the date wrong, at the beginning. Surely THAT was a more egregious error. Why are you not obsessing about that? After all, it was the actual subject of the podcast, and I got the date wrong!

Still, since there is so much interest: I have always thought of the cities of the Hansa as being incorporated into Germany after 1871. But that’s not true. Full stop: Just. Not. True. And not a mistake like mispeaking, but an actual intellectual error, a sign of stupidity.

Further, this was before 1871, and so even if the above claim were true, it would not be relevant. In fact, mentioning the name of a country called “Germany” in 1665 is itself an error, quite separate from bounaries. It’s not that Danzig was not in Germany, there was no GERMANY for Danzig to be in!

Clearly a mistake to see Danzig as a German city, on at least levels. If I were a geographer, I would clearly be obliged to go back to school.

But I’m not a geographer. I guess the strange thing is that anyone thought an American economist would be incapable of making errors, in a live broadcast in describing the history and geography of cities and countries in northern Europe. I hope we have cleared THAT up. If not, perhaps you should talk to my wife. She has many more examples of errors, in a wide variety of fields and contexts. And she is all too happy to share.

Mike G
Nov 15 2012 at 9:22am

George, Woodah, Eric Tyndall,

The price system is the most efficient way we have of getting gas to Hurricane-struck New Jersey because it minimizes transactions costs and it induces a supply response.

But, lets not get too romantic about it: the more inequality there is, the less just the system becomes. When the supplier sees the line forming and raises the price, the people that get out of line might need the gas but can no longer afford it, while a much richer person could still fill up his/her tank.

In a disaster situation, the system doesn’t prevent rich people from driving up the price of scarce consumer necessities (yeah, I know some people dislike that word), and the disincentive that the system provides might not be strong enough to mitigate the disregarding of lower income folks.

It’s an effective system, but it isn’t sufficient to achieve the just outcomes we might hope for.

Nov 15 2012 at 12:55pm

At the very end of the podcast, the concept of “here and now” came up. It seems to me that context is the fundamental element that matters in every case discussed. In the case of the horse sale, upon reflection (rather than the snap decision to price at $40) the horse owner might understandably think “you know” I really can’t let dear old Daisy go, she’s been a member of the family forever. When confronted with the desperate buyer willing to pay $50, the horse owner could then reasonably consider the merits of keeping family intact or feeling good about helping out the fellow (not to mention the $50 in his pocket).

Who is to say what price a buyer and seller are to agree upon except those two at that time and place. There are some people I wouldn’t sell a horse to for any price!

Nov 15 2012 at 4:37pm

That. Was. Awesome.
I listened to it twice.

Man, I need a life.

Brian, a different one
Nov 15 2012 at 4:47pm

I would argue that a gasoline auction would be the most moral way to help those in New Jersey. If the government wants to be of help, send each gas station an auctioneer and a generator, problem solved.

Nov 16 2012 at 1:15am

I really enjoyed this episode. Thank you.

Brian Gibson
Nov 16 2012 at 2:18am

Mr. Roberts and Mr. Munger,

I listen to this podcast on a regular basis and find it a challenging and thought provoking podcast. I often disagree with the content but I enjoy the debate, as it were.

I find this particular podcast utterly naive.

I live in Hoboken. We got hit pretty hard. Half of the city of 50,000 people were rescued by National Guardsmen. Virtually all of us had no power. Some of us had gas. The day after the storm several of the pizza places opened for limited service because they had gas ovens.

Most of the places were busy simply handing out food at a nominal cost. But some places, such as Molfetta’s Pizza, charged triple or quadruple the cost for their food. At one point they charged $45 for a pizza.

In your world, that is just the price reflecting the market. In our world, that is business gouging local customers who were desperate for a hot meal. And while I realize that pizza isn’t lifeblood, when your home is gone and you are looking for a hot meal it’s pretty damn good.

And while I hope that Molfettas closes down because of this, I have little faith because their business is driven by new customers.

But thank goodness for the free market, right?

Nov 16 2012 at 3:43am

People in Eastern Europe are very sensitive about parts of their country being described as not being parts of their country. Bonus points if they are mislabeled as “in Germany” or “in Russia” 😀 Midgets in a land of giants overcompensate and so on

On topic: I remember an old Munger podcast about this same issue(-Sandy +Some snow storm), where a group of Ice Selling price gougers were banned from selling their product to a crowd…. and the crowd cheered.

Two arguments: Those people were morons. Or, they placed more value on their sense of community, and How People Should Behave, than on having ice.

The reason why I think contemporary price gouging laws are frivolous is that I don’t think the situations they guard against are that serious. A hurricane just hit, absent driving to the hospital(which is flooded anyway) what the heck do you need your car for? If your boss is so insane as to expect you to paddle to work in a large wok you’ve got more severe life problems anyway.

Of course this assumes that emergency services are functioning at an acceptable level.

If the market effect of price gouging would be to encourage businesses to stock up ahead of crises, then the market effect of shortages will be to encourage individuals to do the same. Thus obviating the need for price gouging. See reports out of Louisiana about how people in the area react to storm warnings nowadays. Either way, one object lesson is delivered and society/the individuals in the area adapt.

Mike Munger
Nov 16 2012 at 8:52am

A number of people have made naive objections to the idea of market price as a measure of scarcity.

Objecting to high prices is like blaming the thermometer on a hot day. You can put ice on the thermometer, but it won’t solve the problem of uncomfortable heat outside.

Controlling prices, which result from scarcity, does nothing to solve the scarcity problem. In fact, anti-gouging laws would make it worse.

The best short version of the correct argument is Matt Zwolinski’s video, here.

Now, I recognize that it is possible to make moral arguments that other people “should” just give you the stuff that you want. But anti-gouging laws don’t accomplish that. All they do is keep people from selling you stuff you want.

Nov 16 2012 at 8:55am

Some more local perspective. I live in The Rockaways, we were hit very hard by the hurricane and only got electrical service restored this morning. I listened to (and thoroughly enjoyed) this podcast on my phone while waiting on line for gas in Long Island.
Sebastian – The reason many of needed to buy motor fuel was not to drive around but to keep phones and laptops charged via inverter and to sleep in our cars when we got hit with a Nor’easter a week after Sandy and temperatures dropped below freezing.
Brian Gibson – The free market which you are decrying is the only mechanism for providing the competition needed to alleviate the high priced pizza pie you encountered. You admit as much yourself when you mention other pizza providers selling for far less than $45 per pie.
In my estimation, all of the fuel problems could have been alleviated in an afternoon if certain laws were relaxed (laws, I must point out, that were enacted by rent seeking entities in the fuel business). Allowing sales directly from trucks, allowing sales via hand pump, and allowing sales via pumps that don’t have the vapor capture devices would have immediately provided relief in this situation. Luckily, there are still a few of us in the People’s Republic of New York City who understand markets enough to act. I was a happy fuel reseller; I filled my auto and my jerry cans at $3.85 per gallon then returned home where I sold my jerry can fuel for $5 per gallon to my neighbors who were quite happy to pay a premium to avoid sitting on line for hours. According to my mayor, I am a hoarding Kulak but according to my neighbors who now have fuel for their autos and generators, I am a life-saver. As an aside, i would love to hear Russ address the insanity of utility monopolies in a future podcast. The bulk of our problems in The Rockaways stem from our utility monopoly, LIPA, which has a long history of malfeasance and incompetence when it comes to planning, mitigation, and emergency response. I met some fine gentlemen from Hydro Quebec who were down here to help and their anecdotes about LIPA’s situation were astounding; trees had not been trimmed back for over 6 years, no maintenance of utility poles and no poles on hand to replace the damaged ones, a reliance on rate-payers reporting outages rather than a method for detecting outages at the home office, ad nauseam. All of this while we are charged, IIRC, the highest electrical rates in the nation. The difference between the Con-Ed (serving Manhattan, Brooklyn, SI, and parts of Queens) and LIPA (serving Long Island and Queens) are stark and well worth studying. Thank you again for another wonderful podcast.

John Stock
Nov 16 2012 at 10:55am

To this point above:
>> 3) Raising the price of gasoline does nothing to hasten or impede the repair of the electrical and gas distribution infrastructure. Putting additional cash in the hands of service station owners will not cause more electrical repair crews to appear, nor will it cause more gas storage depots to spring from the ground.

I’m not an expert, but I don’t think I agree. Gasoline infrastructure isn’t necessarily a static thing – either in the short term, or especially the long term.

Specifically in the short term – it’s quite feasible for people or organizations to bring extra gasoline into the no-gas areas with trucks and distribute it. This was done by the US Army in fact, in the case of Sandy. But it could also just as easily be done by private citizens and businesses. I don’t know to what extent, but it could be done some I’m sure.

The extent to what it would be done is in fact driven directly by the price they’re allowed to charge. If gasoline retailers (Shell, Exxon, Sunoco, etc.) were allowed to charge whatever they want in such situations – you can bet your bottom dollar they’d have a few of their trucks set up with a special retail system where they could pump right out of the trucks; and then when a natural disaster came through they’d send these special trucks to this area. It may not even be special trucks for that matter – just some subset of their normal delivery fleet would be outfitted with retail pumps on the side of the truck. At least if I owned a retail gas company that’s what I would do.

As it is though, no such system exists, and the reason it doesn’t exist is because of anti-gouging laws (in addition perhaps to probably some other similar anti-free-market business licensing laws).

So you get what NY and NJ had – shortages that are more severe than they needed to be.

Even without these “mobile retail stations” – it’s not unlikely that gasoline companies would spend a little extra money to ensure that the existing static infrastructure is beefed up to take advantage of the ability to sell at higher prices. Gas stations would be a lot more willing to spend a few thousand dollars to install a generator system if they knew they could recoup this expenditure by selling at high prices after a disaster. But they can’t, so they won’t. So our infrastructure is that much less prepared when a disaster comes.

John Stock
Nov 16 2012 at 11:25am

There are several references being made to the notion that price gouging laws being intended to somehow impact supply – e.g. Mike your statement:

“Controlling prices, which result from scarcity, does nothing to solve the scarcity problem. In fact, anti-gouging laws would make it worse.”

My take is that price gouging laws are not intended in any way, shape, or form to affect the scarcity equation. As such the statement that they “do nothing to solve the scarcity problem” seems moot – that’s not the intent of these laws.

My take is that the sole intent of these laws simply to impart “fairness”; and perhaps with the follow-on effect of heightening the sense of community – vis a vis reducing the conflict that may result from anger directed towards those that gouge.

The the problem is that such a view discounts the *benefit* side of gouging – i.e. the idea that “gouging”* can actually help the community by encouraging those who have the means to supply a given good to the community to find ways to supply more of this good.

* Perhaps more appropriate (less derogatory) terminology can be used? Seems like the term “supply-incentive-pricing” is useful to best illustrate the point. 🙂 Seriously – I’d throw something like that out there in futures discussions on the topic.

Brian Gibson
Nov 16 2012 at 12:41pm


I am not decrying the free market. I’m simply pointing out the inherent weaknesses of it. The free market is amoral and indifferent to the well being of the participants. It simply sets a price.

The demand for hot food was far greater that the availability of hot food thus the price was fairly inelastic on its own. Without laws on restricting gouging or the decency of individuals the price would rise to a level that would simply deny people access to that food since they could not afford it.

The podcast speculates that the price of gas would rise to $35 a gallon without anti-gouging laws. A high price but still accessible enough that those who really need the gas would pay for it. What it the price rose to $350 a gallon? In that case only the very wealthy could pay for it. What would then happen?

Nov 16 2012 at 1:12pm

“The podcast speculates that the price of gas would rise to $35 a gallon without anti-gouging laws. A high price but still accessible enough that those who really need the gas would pay for it. What it the price rose to $350 a gallon? In that case only the very wealthy could pay for it. What would then happen”

Supply would increase to meet demand, prices would fall to the market clearing level.

“Without laws on restricting gouging or the decency of individuals the price would rise to a level that would simply deny people access to that food since they could not afford it.”

So with suppliers being decent individuals, why are the laws needed? Here in The Rockaways, knowing that our food would spoil (I’m a caterer providing craft services for film and television), we had a GIANT neighborhood cookout. Also, perhaps the $45 pie was merely reflective of the labor cost necessary for that restaurant to get employees to come to work to cook pizza for those who wanted that particular restaurant’s fare. Those who paid $45 for a pie obviously felt that they were getting more value from the pie than from the $45 (revealed preference).

John Stock
Nov 16 2012 at 1:43pm

Brian Gibson writes: Without laws on restricting gouging or the decency of individuals the price would rise to a level that would simply deny people access to that food since they could not afford it.

Can you give examples of this?

In a world of such mobility as we have – I simply don’t see this as possible. For example NYC and NJ are not islands in the middle of the Pacific, that simply don’t have quick and easy access to supplies. They’re adjacent to areas that have plenty of supply. If the price goes up beyond a certain point then (as mentioned in the podcast) entrepreneurs will go to extraordinary lengths to quickly import additional supplies. This in turn will bring prices down or (more correctly) just to serve as a cap on how high they’ll go.

I think you (and other anti-gouging law proponents) are seeking to solve a problem that simply just does not exist in our society.

I’ll reiterate my previous statement – anti-gouging laws have nothing to do with “access” or even “affordability” – they’re all about “fairness”, and that’s it. But as with most economic success – supposed “fairness” comes at a price – that being the general welfare of all.

In the end this really boils down to that same core point made by Austrian economic theory – that attempts to make things “fair” only serve to reduce the overall welfare; not only for those who are well off, but usually even for those that are not so well off. E.g. in the case of post-hurricane supplies – the poor fellow who would have otherwise had to pay $50 for a pizza now doesn’t even have that option – he simply has to just do without, because the pizza maker found it not worth his time to go to extra lengths to make pizza and try to distribute it to hordes of people wanting it at the old “market” price.

Nov 16 2012 at 10:22pm

LOCKE MADE A MISTAKE! Two, actually!

Mr. Locke described a case–which was fleshed out a bit in the podcast–of a wagon about to fall off a cliff but for want of a horse.

Locke’s concern, according to Mr. Munger, was Justice and Equity. John Locke did not give a definition of Justice (to my knowledge) but seems to have been trying to argue that an agreement reached between individuals in a ideal Free-market met the requirements of Justice whereas an agreement made in a market where one party had monopoly power was Unjust if it deviated from the price that would have been present had the market been equitable to both parties. He did not use terms like “ideal Free-market” but instead described in detail all of the assumptions which define an ideal Free-market—voluntary, informed, and competitive.

Since no definition of Justice was supplied in this podcast, I will use Adam Smith’s definition from about 100 years later. Adam Smith defined Justice in the “The Theory of Moral Sentiments” as: do not harm strangers, do not deceive strangers, and do not steal from the strangers. Justice, therefore, is a set of negative precepts designed to prevent harm between strangers. Smith indicated Justice was the moral-minimum for a society to exist.

Since no definition of Equity was supplied in the podcast, I will infer that by equity he meant “equality of market assumptions”, since that is how the term was used in the podcast.

With the precepts of Justice, the ideal of Equity, and the assumptions of an ideal Free-market in mind, let us examine Locke’s horse scenario.

The owner of the horse is in a competitive-informed-voluntary market. (There are others who would buy his horse. He is under no outside coercion and he would not be punished for refusing to sell. He is well informed about the prices for horses and also he has an idea what his own horse is worth to him.) Justice requires only that this horse-owner do nothing to make the cart-owner’s position worse and vice verse. Importantly, the horse-owner has no obligation under Justice to make the cart-owner’s position better. He has no obligations under Justice to trade at any specific price or to even trade at all. So from the perspective of Justice, there is no moral dilemma.

On the other hand, the cart-owner’s market circumstances are different—ie. not equitable. His market assumptions are voluntary-uninformed-monopolistic. (Fortunately for him, he is under no outside compulsion and he suffers no outside punishment if he does not buy a horse. Unfortunately, he cannot know if there are other people who have horses within the distance of his critical-time-window or what their selling prices might be or if they would sell at all.) Since at least one of the three criteria for an ideal Free-market are false, there is no guarantee that the outcomes he can achieve through trading will be as optimal for him as they would have been in an ideal Free-market. Justice is satisfied so long as the cart-owner does not threaten, injure, steal from, or defraud the horse-owner and vice-verse. So from the perspective of Justice, there is no moral dilemma.

Justice, it appears, does not care about the outcome of the trade between these two individuals or even if any trade occurs at all. I think it is fair to say, therefore, that Locke was incorrect when he suggested that only the prices reached in an ideal Free-market are Just.

This leaves only Locke’s concern about Equity. Locke was concerned that the unequal circumstances between these potential trading partners could cause harm to the cart-owner, a violation of Justice. He proposed a technique for dealing with this unlevel playing field that is similar to Adam Smith’s “outside-and-impartial observer.” Locke proposes—in 1600’s language–that the seller (who has the monopoly power) imagine that both he and the buyer were in a voluntary-competitive-informed market, and then act accordingly.

Locke is a really smart guy. No doubt about it. His understanding of the world is very contemporary. It is not surprising, therefore, that his mistakes are also very modern. Locke made two errors here.

1st ) It was an error to consider the position of the cart-owner as one of loss. Locke’s scenario guarantees that the cart-owner is going to suffer total loss of the cart and its contents if he does not enter in to a trade for an additional horse. Given that guarantee, this cart-owner’s loss is a “sunk cost” and as such is irrelevant to the question of his future decisions. That means any consideration of saving his goods from falling off the cliff are questions of future GAIN to the cart-owner. There is really no “moral dilemma” once we realize that this horse-problem is a question of two people trying to maximize their respective gains as apposed to one person trying to maximize gain while the other tried to minimize loss. There is no loss going forward. The loss occurred in the past and cannot be changed. That is why the cart-owner is not harmed by any price offered by the horse owner and that is why Justice is not violated if the horse-owner chose not to sell.

2nd ) It is an error to suppose that a single person can imagine even a small fraction of the total information that goes in to creating a market-price. Several commenters have already discovered and explored the limits of that thought exercise. Locke’s idea of imagining a future ideal market price is a fools-errand. It is impossible. A market price contains input from hundreds, thousands, even millions of people in real time. No person can possibly understand, much less imagine, that much information. [Think of the modern stock market and all the people who pretend they can predict its fluctuations. They can tell you what it is currently or what it was in the past, but future predictions of even seconds are, when considered over time, totally random—except perhaps when you are the Fed Chairman…] No person can even understand fully the amount of information two people contribute when negotiating a single price between them.

Even though these errors–the sunk-cost fallacy and the impossibility of accurately imaging a future market price–argue against both Locke’s perception of injustice and his proposed solution, he was right to note that the cart-owner would have gotten a much better deal had he been in a market which was voluntary, informed, and competitive AND the seller would still have been plenty satisfied receiving a much lower price for his horse—a Pareto efficient solution 200 years before Vilfredo Pareto was born (1848-1923). Locke saw the monopoly problem and correctly deduced that an optimal price results for all parties when all parties have large quantities of freedom-information-and competition. Further, it is Laudable that the method he proposed for achieving that optimal price when those assumptions are false was voluntary. Perhaps he knew that any attempt by a third party to force the two actors to behave differently than their nature and their environment determined, violates Justice and violates the assumptions necessary for optimal outcomes through trade. What Locke did not see, and what I think we can learn from this scenario, is that the best way to achieve Pareto efficiency is through changing the environment around the actors, not just pretending that they change. By focusing energy on improving market assumptions, the outcomes won’t improve the current case, but will improve all the cases that follow. For example, install some roadside telephones—or a 1600’s equivalent—to allow stranded people to access market information faster. Or start a company that provides rapid assistance to horse-buggies in distress that increases competition.

Nov 16 2012 at 11:44pm


Watched Matt Zwolinski’s video and agree it’s good. I still see a few potentially complicating issues:

1) The willingness to pay for a scarce good (in the video, the price of a generator to keep your daughter’s insulin refrigerated) is not a function solely of the price of that good (in the video, $1300). The willingness to pay is a function of BOTH the price of that good AND the marginal value of that price to you. In other words, $1300 to a billionaire is marginally much less valuable than $1300 to someone living in poverty. Therefore, the generator might easily be bought by someone with a less pressing need, but much greater wealth — contrary to the point in the video about the high price in effect “reserving” the scare good to be purchased by those with more pressing needs.

2) Even if there might be a willingness to pay, there might not be the ability to pay. For example, if the poor person only has $1000, then no matter how much they want the generator, there is no way for them to compete on price. They are priced out of the market, even though the value of the generator to them might be much greater than to anyone else. In this case, the market doesn’t allocate based on who places the highest value on the good; the market allocates based on financial liquidity.

3) It seems price-gouging can result from two different causes. One cause, as the video points out, is the sudden scarcity of goods in a crisis. The other cause, which I believe the video missed, is market failure under crisis conditions. For example, in a crisis: markets are dramatically more fragmented, information is bad or unavailable, financial liquidity constraints can be imposed suddenly and drastically, etc. This is why I think many lay people look at “price-gouging” and see market opportunists simply taking advantage of temporary market failures.

Mike G
Nov 17 2012 at 2:03am

Observing prices is a lot different than watching a thermometer. There isn’t some collective intelligence calculating what the temperature should be. Prices indicate the terms of agreements, and we can object to those arrangements or the behavior that prompted those terms.

david from montana
Nov 17 2012 at 4:07pm

Thanks for another interesting, thought-provoking podcast. I’ve been listening to Econtalk for about three years and, while I often disagree with the viewpoints expressed, I always learn something. I actually look forward to Monday mornings!

I found the side discussion about the surfer interesting. Recently, on an international flight, I watched a documentary about a group of surfers from Atlantic City — they were an interesting bunch to say the least. Apparently, the waves in New Jersey are small during the summer months, so these guys do most of their surfing in the dead of winter. The movie had scenes of them trudging through the snow in dry suits to surf water that was barely over freezing temperature. When surfing conditions were not good in New Jersey, they went to Hawaii or wherever else they could find big (really, really big) waves.

From my viewpoint, I don’t think the surfer you mentioned was acting immorally. Having in my younger years hung out with a bunch of climbers and extreme skiers, I seriously doubt that he expected to be rescued in case of an accident. He knew the risks. That — together with the accompanying adrenaline rush — is what likely attracts him to the sport in the first place.

Russ, at one point you mentioned a teaching from the Talmud. I’ve also heard mention from time-to-time of Islamic Economics. I’m neither Jewish or Muslim, or for that matter particularly religious, but I would find it interesting to learn more about what Jewish teaching says about economic principles in general and also what Islamic economic theory is about. Maybe other listeners would find these subjects interesting as well.

John Berg
Nov 18 2012 at 3:24pm

The Talmud (I am told) also contains a prohibition against “Show-rooming” which is using one shop to provide all the information needed to make a “buy” decision then buying the thing from another cheaper (Internet) shop. This is NOT comparison shopping since one never intends to buy from the physically available shop.

John Berg

John Berg
Nov 18 2012 at 3:37pm

Excellent podcast; great comments.

Not much discussion of the role the Internet provides in establishing a large market; nor discussion of Auctions (EBAY)in providing a Market price. I also missed the impact of Price Tags on shelved products. Do independent book stores have to monitor Amazon’s prices?

John Berg

Dale Eltoft
Nov 18 2012 at 7:36pm

This was a great conversation but as usual the more I learned from you and your guest the more questions I had. I’ll limit myself to three.

1) In the horse example suppose the owner did agree to sell the horse to the needy guy for 40. What if a rich dude then offers 80? If the seller accepts that 80 is it more or less moral than having gouged the needy guy for 50? You discussed the morality of the seller but not of the buyer. What if rich people choose to defeat equitable distribution by over paying for stuff they don’t really need?

2) There was a passing mention of the effect that when prices for scarce commodities caused the price to rise poor people would be unable to pay regardless of need. This reminded me of something I’d heard before which went something like this. For poor people who must spend almost of their income on necessities a dollar is worth more than it is to a rich person who spends only a trivial portion on necessities. So I’m wondering, how valid is it to have discussions of market value simply in terms of dollars? It seems to me that economic theory often makes the simplifying assumption that everyone is competing on an equal footing which is obviously not true.

3) In the examples there was always a reference to a market price set by a group of others and to charge more would be immoral. In the grain example there were two prices 5 & 20 shillings each correct for its market. Presumably there was a time before the famine when the price was 5 shillings in both cities. So how is it that the price could be raised from 5 to 20 without at some point someone did the immoral thing of charging more than the current market price? How do we distinguish between price adjusting to reduced supply and price gouging?

I have a suggestion for a special podcast. You should invite a few of your best guests over and have each bring a couple bottles of wine. Then just record the whole evening for however long the conversation remains coherent.

Jim Feehely
Nov 19 2012 at 9:50pm

Hi Russ,

Just got back here and saw your rejoinder to my comments.

To put my comments into a larger perspective, my general philosophical perspective is the following:

– I am not convinced of the social utility of economics where it absolutely dominates social policy. Market economics has been proven wrong too many times.

– I do not believe in planning for the unexpected. If it is truly unexpected, it cannot be planned for. All prediction is pure guesswork. The future cannot be changed by planning it.

– I do not advocate big or coercive government. I favour decentralised more local authentic democracy. But my aspirations for society will always be defeated by the the hold corporate capitalism exerts on what we call democracy.

– I reject the hegemony of competition because it is anti-collaboration and anti-cooperation and too often produces unneeded and expensive duplication. Competition inevitably produces winners and losers and I do not believe that society generally should be divided that way. Therefore, my view is that markets should be confined to social activity in which markets produce the most effective results. In other areas cooperation and collaboration should be preferred.

– I am staunchly anti-ideology. Therefore, I am not capitalist, socialist or communist. If anything, I am pro-anarchy (properly defined). All ideologies suggest effective solutions and all also create great injustice. But I am sure that the hegemony of corporate capitalism is bad for society.

– Finally, for this little diatribe, I think the greatest social cancer is the obsession with economic growth. Sure, economic growth has in recent centuries has been quite effective in obscuring massive economic mistakes. But it can no longer be a tool for that purpose. If China and India alone develop middle classes on the same terms as Europe, the USA, Australia etc, then all the good in the world will be consumed in my lifetime, and I am 57. We must, in my view, examine what acceptable prosperity, security and equity is achievable in a low, or no, growth economy. But that would be pretty bad news for Europe and the USA. It would make stark the issue that is obvious – there is too much debt to ever be re-paid. But economists and politicians can claim it will be paid, or at least obscured, by the pursuit of economic growth for its own sake.

Jim Feehely.

Nov 20 2012 at 3:17am

Actually, you can read Venditio for free on Google Books:


[Please note: Although Locke’s words are not under copyright, the reproductions and edited reprints of his text are. Therefore, we are unable to reproduce them on Econlib at the present time. (Thanks to all the folks who are emailing us copies, but we are unable to reprint them. Of course, each of you is entitled to your own personal copy that you have made for your own use.) There is an inexpensive paperback and an ebook on Amazon containing the piece. The pages available via Google Books are likely to have some pages suppressed because of the copyright matter.–Econlib Ed.]

John Barker
Nov 20 2012 at 11:32am

Great Podcast, sorry I am a week late.
The surfer example is horrible. There is no moral hazard here and public servants. It was winter, no lifeguards, surfers know the risk. Also most big wave surfing is done where beach access is not possible and it is certain there is nobody to help or even likely see you. You rely on your training and or friends. I doubt any surfer would expect to be saved when surfing in extreme conditions even if there was a team of lifeguards waiting.

Nov 21 2012 at 12:41am

I got bad news for the people who think the surfer was putting the lives of rescuers at risk. I used to be one of those rescuers and we don’t risk our lives – no matter what. If the waves are such that we can’t get to you that indicates to us that it’s your time to die.

Nick Hurliman
Nov 21 2012 at 11:42am

I would agree with John Baker on the surfer in the story. I am avid surfer and we know the risks and rewards in the situation. It is a chance we are all taking every time paddle out.

Many times surfers are doing the same thing in very remote areas where there is no form of safety net and weak healthcare at best.

Otherwise, it was a great episode. My goal is to get surfing’s best Kelly Slater into listening to econtalk, based on his instagram posts…

Mike Munger
Nov 21 2012 at 4:40pm

I think we all lost our way on the surfer example. Isn’t the question who should pay? Like in this example…

Two years ago, I started a small fire to burn off the gravel parking lot at my property out in the woods, south of Pittsboro. Thirty-five acres, and I use it for hunting.

The fire quickly spread out of control. They had to call 30 fire crews from different counties to stop the fire before it burned neighboring woods and even houses. (Yes, houses. It was bad).

Several of the firefighters suffered mild injuries. And a lot of people used trucks and expensive equipment. The cost had to be $10,000, maybe more.

I expected a substantial fine. But I got a written warning. “Don’t! Do! It! Again!” I took a stupid risk, and I didn’t have to pay for it. Everyone else did.

Now, perhaps they want to make sure people call it in. If I had waited an hour, the fire may have been totally out of control.

Matthew Bogosian
Nov 22 2012 at 12:29am

As I was listening to this, I couldn’t help but remember this story from 2000. Here’s an excerpt:

Amazon.com Inc. founder and CEO Jeff Bezos said today it was “a mistake” for the Seattle-based online retailer to experiment with charging different customers different prices for the same products. But Bezos said the tests, which were halted earlier this month, didn’t utilize any customer demographic information to determine the discounts offered to customers. “We’ve never tested and we never will test prices based on customer demographics,” said Bezos. “What we did was a random price test, and even that was a mistake because it created uncertainty for customers rather than simplifying their lives.” He said the company’s new policy is that if it ever again tests differential pricing, it will subsequently charge all buyers the lowest price.

It is interesting to think of Locke’s arguments in the context of internet retailers who, in effect, aggregate many different submarkets which may be subject to geographic fluctuations….

Jakob Engblom
Nov 25 2012 at 4:34pm

This was a truly brilliant show – or rather, the argumentation by Locke was truly brilliant. I think it still makes perfect sense as a guide to pricing in markets. And “gouging laws” do not sound like a good idea at all.

Tony Levitas
Nov 28 2012 at 11:21am

The moral of the probably apocryphal story that introduces this episode is far from as obvious as you two make out (and all and all is a little smug.)

The store owner feels justified in charging what the “market will bear” for beer because he is the only one willing to either brave the storm, or for whatever reason, open up just after it.

The utility men feel justified in shutting off his juice because unlike the store owner they do not have a way to jack up the PRICE OF THEIR LABOR –which is also certainly more valuable either during a storm or in the demand created for it by the storm’s aftermath.

So outrage that you guys think is silly has a foundation in the fact that for lots of reasons we do not have a spot market for most kinds of labor, to say nothing of utility workers acting as first responders. The price of the labor of these workers is regulated by a long term contract, while those of most retail commodities is not. It seems to me then that much of the “gauging problem” that you guys dismiss as moral frothing is the product of a real disjunction between long and short term contracting, or the price mechanism used for retail sales vs the price mechanism used for labor.

Nov 29 2012 at 7:50pm

You sure, Tony? Someone commented up-thread that a lot of police and fire department personnel probably got paid overtime at a minimum. It’s unlikely that anyone would argue that first responders’ weekly pay should be capped at 10% above what it was the previous month. Apparently some utility workers in NY don’t get paid overtime, though some in RI do. The (unionized) workers in NY are suing for more pay, of course.


Dec 1 2012 at 8:23pm

Adam Smith brilliantly showed that you can participate in (normal) markets, negotiate as hard as you like, and the invisible hand will ensure your actions are moral. No need to worry about “just” prices.

But I would say that in abnormal markets no rules will help. You are in a moral mazem. Morality, the ability to live with your fellow citizens, trumps ecomomic theory

I think moost seasoned business owners would take a much more cautious view than you two economists on raising prices in a disaster scenario.

And can yoo be serious that you would not offer an anchor freely at cost (or pay me later) to a ship in distress. How about diverting course to help a ship such as Titanic that has issued a mayday signal.

Good discussion that dhould form the basis of all ethics courses at Bus Schools.

Dec 4 2012 at 5:32pm

I wish that Locke essay were available online. It sounds like Locke did nail the common sentiment for why and when discriminatory pricing can be immoral.

But that popular sentiment is irrational. Price determination is always on the margin. The “right” price can only ever be the best price two parties voluntarily agree to. It makes no sense to say that the “right” price is the price that would be if the one (and who knows how many more) person at the margin were hypothetically removed from the market.

Price is price. Price is a reflection of scarcity, and scarcity is a function of individual human desires and means. Price has nothing to do with morality. Charity has to do with morality, but to be moral must be the choice of the charitable.

Russ Wood
Dec 5 2012 at 1:07pm

Good podcast. Lots of interesting issues. I don’t agree with the concept of a “just price,” but realize that I’m in the minority.

Here’s my question: why is the focus always on selling above a just price? Wouldn’t it be equally appropriate to ask whether it is just to buy below the just price?

Does anyone discuss this side of the coin?

Dec 9 2012 at 1:11am

After Mike mentioned price discrimination, I was surprised not to hear it addressed again. By Locke’s logic, practically every retail item sold today is sold at an unjust price – airplane tickets, groceries, clothes, etc. Much of these pricing changes are basically methods to separate buyers into groups, based on how much trouble they are willing to go through to capture price decreases.

Ironically, much of this effort effectively produces a kind of pro-rated pricing schedule, where people with fewer resources, so that their utility per dollar spent is greater, are given avenues to reduce their costs. This might even be considered a morally superior pricing method.

So, while I agree that Locke is introducing some brilliant insights here, I’m afraid that he’s only bringing us to more questions.

Comments are closed.


About this week's guest:

About ideas and people mentioned in this podcast:Books:

      • Book III, De Officiis, by Cicero. Online Library of Liberty. See paragraph 12 for Cicero's Rhodes/Alexandria ship example of the moral obligations of a merchant during the famine in Rhodes. Locke uses his ship examples to illustrate different moral questions.


Podcasts and Blogs:



Podcast Episode Highlights
0:33Intro. [Recording date: November 5, 2012.] Russ: It's been almost 11 months, which is your longest hiatus, if I may use an entertaining word, from the show. Guest: I think I'd like to be like Mr. Ed. He only talked when he had something to say. Russ: That puts you in a very small group in the academic community. It's a very propitious time for us to talk. Tomorrow is election day in the United States. A week has passed since Hurricane Sandy struck the East Coast. So, there's a lot going on--politics, prices, gouging, shortages. Let's start with the aftermath of Sandy. As we write this, many people have been without power for a week, and there are severe gas shortages in the Northeast, particularly in New Jersey and New York City. What are your thoughts on that? Guest: I wish that it weren't so predictable. In the run-up to the hurricane, as the hurricane approached, Governor Christie and other public officials tried to reassure their citizens that the anti-gouging laws would be enforced to the fullest extent possible; they would make sure that the harm that comes from gouging would not be done on their watch. And it hasn't been. All these gas stations are closed and empty. There's no gouging. Russ: Yeah. Not much gasoline. Somebody forwarded me the statute in New Jersey: I think you are allowed to increase your prices by 10% during some kind of natural disaster. Of course, a 10% increase is not going to get it done as a market-clearing price under the current situation. Guest: I heard an anecdote that may be an urban legend. But I thought I would relate it just quickly because it's kind of funny. Apparently--and they had updated it, so it was about New Jersey now--a crew that was working on electricity, a utilities crew with their truck, comes in. They see a store with the power on; they'd been working hard; it has been sort of sunny. They stop and they want to get a cold beer at the end of a hard day trying to restore power. The store owner says: That'll be $30 for the 6-pack. And they say: What?! $30? Are you serious? That's too much. And he said: Well, I'm the only store that's open. If you want a cold beer, this is going to be the place. And so they paid the $30 and they went outside and climbed up the pole and turned off the power. Russ: I hesitate to ask you the source for that story. Word of mouth, I assume. Guest: A friend of mine who was talking about a friend of hers who had heard it. So, I'm sure it's an urban legend. But suppose for the sake of argument that it's true. My first question is: Suppose the price had not been $30. How much beer would there have been in the store? And the answer is: None. The only reason there was any beer was that people earlier had said: No, that's too much; I'm not going to pay that. Otherwise he would have been sold out right away. And so the very premise of the story shows the flaw in the reasoning. And, it isn't particularly nice that because these people felt that they had been offended at having to pay this price, they prevented anyone else from being able to buy anything from the store. So, my loyalties are entirely with the store owner. Was he acting morally, is the interesting question. This was more than 10%. Russ: For sure. Guest: So, he violated the New Jersey law. In North Carolina--we did talk about this before--it says: The price cannot be unreasonably excessive under the circumstances. That's the statute. And that means 5%, Russ. Russ: Yeah. Guest: Who would have guessed that unreasonably excessive turns out to mean 5%? Russ: It's hard to imagine a statute with less precision and more open to a lawyer's interpretation. Guest: It's enforced a way that's very precise. They actually will come up with measures, and if you have receipts showing that you paid more than that, they changed the law to say that even with receipts it doesn't matter; all that matters was the price before. This price was apparently announced by God himself as being the correct price. Russ: The previous price. Guest: Yeah. Whatever the price was a week ago. Russ: Well, your story about the people from the utility company--actually, I have to confess, a little bit embarrassed--my first thought was that they had shut off the electricity not as a punishment for the greediness of the owner of the store, but rather to raise the value of the commodity they had just purchased and eliminate a competitor. So, they'd only have to be competing with warm beer in the future. Guest: You actually have a direct cortical shot to the U. of Chicago, don't you? Russ: Yeah. Guest: No one thinks that, Russ. No one. Russ: I know. But actually the reason I did think about it: it's not my training. It's actually the reading we are going to turn to in a little bit, the 17th century insights into price gouging of John Locke. That's our reading for the day. And you'll see why in a minute. He actually encouraged me to think that way. Which surprises me.
6:21Russ: Before we get to Locke, though, let's talk a little bit more about what's going on on the ground in New Jersey and New York. They actually had a giveaway of "free" gasoline in I think New York in 5 different spots in the city. This was on, I think the same day that the New York Marathon was scheduled to be run. Which was cancelled at the last minute--it was considered gauche. I think it was maybe a political decision: it was gauche to have generators running the electricity for the journals covering the race. I read that each generator would light up 400 homes and warm 400 homes on Staten Island where there is no power still. Guest: Or they would just run one gas station. Russ: Yeah. I don't know where those generators ended up. That would be a good piece of journalism. I hope someone has found out who owned them, whether it was the city or the running foundation that was formally running the marathon. But let's talk a little bit about what's going on with that "free" gasoline. What are your thoughts on that? Guest: Well, it was interesting that New Jersey and New York responded differently. Governor Christie, bless him, decided that he would ration gasoline. Which, given that they decided not to let the price mechanism work--because prices can ration scarce resources--they decided that because they were going to enforce the anti-gouging laws, that prices would not be allowed to rise to the point where they would ration and make sure that there was some left. Because the problem with low prices is: I'm first in line, I fill my tank; I'm second in line, I fill my tank. Whereas if it's $25/gallon, I leave some for the people behind me. So, high prices actually lead me, because of my self-interest, to act what a moral person would do, and that is: Leave some for the others. Don't take as much as you can fill, as much as your tank can hold, just take enough to tide you over, and leave some for the others. So, since the price was artificially low--it wasn't $25, which I think is a natural, reasonable estimate of the value of gas--it was $4/gallon. And so they have a two-part problem. First, it's $4, but you can't buy more than 5 gallons. So, we'll force you to act morally and we'll just keep prices low. Okay, fair enough; at least that leaves--I'll give one cheer out of three to Governor Christie. Governor Cuomo decided that: We'll just give it away. Wouldn't it be nice if people could have free gasoline? And this very quickly collapsed because too many people showed up. Russ: Well, they didn't listen to him. Guest: Too low a price; everybody showed up. Russ: The reason they showed up was because they aren't good listeners and we obviously need some form of a special listening program to help people deal with these kind of crises, because Governor Cuomo asked people not to hoard. Which I took to mean: Don't buy gasoline unless you really, really, really need it. Which of course is what a $25 price tag would do. That would certainly get you to consider only buying gasoline if you really, really, really needed it. But when you price it at $0 and then tell people to only get in line if you really, really, really need it, a lot of people felt: Better safe than sorry. It's $0, zero money price; and they got in line. Guest: And so many of them got in line that the price of acquiring gasoline was probably pretty close to $25/gallon. If I have to wait in line for 5 hours, and you take into account the value of my time, there's actually no way to suppress the workings of the price mechanism. The question is: Are you going to pay it in dollars? Are you going to pay it in the value of your time? Because the combination of queuing and the dollar price per gallon is going to be pretty much the same across a broad spectrum of prices. At $25/gallon, I may not have to wait in line at all. At $0, I may have to wait for 5 hours. But it's going to be pretty similar across those different pricing schemes. There's no way of suppressing the fact that you are going to have to pay. There's not enough for everybody to have it at a $0 price and a 0 wait time. Russ: I think it's useful to point out, and I try to think about this a lot--a lot of people believe, as Bastiat said, that the essence of the good economist is somebody who sees the seen and the unseen. There's never enough to go around. We just notice it when we suppress the price mechanism. If gasoline were free every day without a hurricane, we'd still have people waiting in line because there wouldn't be enough to go around. Well, free there'd be zero. The suppliers wouldn't bring it out. But if we had prices held below the market price there would be not enough to go around. Guest: And part of the reason is less would be produced, and countries that do this see this all the time. So you have, in Venezuela, it's 25 cents a gallon--there just isn't any. Russ: And it's useful--unfortunately; it's a tragic example of a side-benefit of these kind of things: It peels back the curtain, the veil of what is going on underneath. We see prices working. We don't notice what they're doing. And what they're doing is making sure, without anyone's intention--it's a beautiful example of Hayekian emergent order--no one's intention is that there should be a reliable supply of gasoline so that you can plan your life. You may not like the price--outside the hurricane area it's about $3.50, $4.00 a gallon right now in the United States. But certainly when there is a hurricane you see very quickly what price it takes for people to be in a situation where they can plan. And right now we're in a situation where you can't plan. And it's very depressing. Guest: But part of the reason that you can't plan is our insistence on suppressing the price mechanism precisely at those moments when it would be most helpful. Russ: Yeah. It's true. And for those of you who are outraged by this discussion, I want to reassure you that we are going to get to the moral aspect of it. Right now we are just talking about how the world works when you suppress the price mechanism. There may some things you do like about it, don't like about it; but one of the things it surely does is it makes it harder to get gasoline if you are willing to pay for it--if you do want it, you have to pay in time. The last thing I want to mention before we move on to John Locke is that in the distribution of that 0-price gasoline on Sunday, there was quite a bit of--there were tempers flaring and other problems because there was confusion about whether first responders had access to the gasoline or the general public. In some spots that was enforced; other spots it wasn't enforced; other spots there were multiple lines. There was a lot of uncertainty about what the rules of the game were. Again, very different from the everyday situation we've totally become used to and take for granted. And one of the things we forget about the virtue of the price system is its ability to avoid these kind of conflicts. Guest: It's so orderly. It's so-- Russ: Civil. Guest: It gets people to be able to get what they want fairly quickly and predictably. They don't hoard. They don't keep their tank constantly full because they know if they run it down to a quarter of a tank they can stop almost anywhere and get gas. Another thing that would be interesting about the $25/gallon price problem is that buyers would become sellers. If I had a full tank but I didn't really need it, I could sell it to someone. If I had those red cans of gasoline and someone stops and says: You've got 3 gallons there; I'll give you $75--a lot of buyers would become sellers. So, you don't even have to say: Okay, who needs it more? First responders; which ones of you are first responders? Raise your hand. The gasoline would naturally move to those people who had the greatest need for it. Now, there's distributional consequences. So, very poor people wouldn't be able to buy it. But if they had stood in line, as it stands, they could resell it. But they can't even resell it under a price gouging law. The problem with price gouging laws--it's a very thorough-going attempt basically to lay siege to the beleaguered city. To make sure no one is going to sell, at a price that's greater than it's worth. Because we have this moral wish that you shouldn't be able to sell at more than it's worth, and that's going to be our topic for today. But it's nice to establish the sort of setting where--we actually have police that are preventing the people from getting the stuff that they need because they are worried that somebody's going to sell it at a price that exceeds the anti-gouging limit. Russ: But I assume, and I haven't seen any stories on this yet, there is a great deal of black market transaction and activity going on. I assume people are reselling that gasoline. And in fact actually I did see a story about it: a guy who is hoarding it, who collected a large number of gallons by going from place to place or having a team of people work for him, and he's waiting to resell it or he's planning to resell it. But I don't know what the legal issues are there. Guest: The thing about the former Soviet Union was they actually came to rely on the black market to improve the allocation of resources. That's a pretty bad argument, that people can get around the law. It would be better to just not have the law. Russ: Yeah, I think so.
15:49Russ: So, let's turn to Mr. Locke. It's always nice when EconTalk can have a highbrow reference to one of the great names of Western Civilization. So, John Locke, 17th century philosopher, is someone I know very little about. So, Mike, you are going to have to help us out here and tell us about Locke, why he's important and what particular reading you are going to lead us through today. Guest: Well, there's two readings that I wanted to think about, and one just quickly is from Thomas Aquinas. And Thomas Aquinas famously wrote a series of answers to questions, and it's called Summa Theologica. And in that he asks himself questions and then he responds. And Aquinas famously is the author of the Just Price Doctrine that we so often encounter just in everyday life. People think that it's unjust to charge too high a price. The question that Aquinas asks was: Is it a sin to sell a thing for more than it is worth? Is it a sin? Is it wrong? Should it be illegal to sell something for more than it is worth? And an economist confronted with that says: Well, I'm not sure I understand the question. How can you possibly sell something for more than it is worth? Well, to Aquinas's credit, there's two things he takes out and says: Well, if you have force or fraud, that I hold a gun to your head and say you have to give me $1000 for this pencil--that's not really a voluntary exchange. Nobody would defend that; of course that's wrong. Or, I say: This pencil is made of solid gold, it's $1000; I pay it and it turns out to be made of wood. Force or fraud, we can take out. So, Aquinas is careful to say there is something else. And the just price is sort of intrinsic to the good itself. We may not know exactly what it is, but we have a sense that the nature of the good itself is how much it should cost. And the anti-gouging laws that we've been talking about instantiate that. It's the price last week; whatever the price was last week, that's the just price. And it is not just to charge more than that. Now, if you ask someone why, they have a hard time explaining it. But we've had that intuition since the 11th century, when Aquinas was writing. Russ: The irony of that of course: the price a week ago was something like a market price; and it's interesting that that's the benchmark. Even though the market price today is very different. Guest: Well, but there's a difference between the market price and a market price. So, the market price is actually under the usual assumption of competitive equilibrium. And the reason, now turning to the Locke reading, which almost no one knows about this--it's a very rare thing that Locke wrote. It's called "Venditio." So, it's about selling. Russ: It's about four pages long. I knew it by heart, Mike. No, actually, I hadn't known about it either. It was great that you came across it. And it's very interesting reading. Guest: It's not available anywhere online. It's from a book called John Locke: Political Writings, edited by David Wooton. It's not available anywhere online. I think it's one of the most interesting pieces on economics, in terms of its length. It's so short. Raising the question--and re-raising the question--this was written in 1760. Russ: No, I think before that, actually. Sorry to correct you, but since I didn't know anything about it--you found it. But I think it's 16-something. Guest: Yeah, I said 17, didn't I? It's 1660. So, it was written in 1660 and it was published in 1695 in a book of letters. And it's almost unknown, even by Locke scholars. I've been surprised how many Locke scholars have not ever heard of this. So, as you said, it's 4 pages long. And the question that he asks is: When am I allowed to sell something at the market price? And that's almost the opposite--he's inverting Aquinas's question. Aquinas wants to know: Is it ever moral for me to sell something for more than it's worth? Well, I couldn't sell it for more than it's worth unless I use force or fraud, because if you are a subjectivist, you think the price that you and I negotiate, that's what it's worth. Because the two of us are doing this voluntarily. Locke is saying: Maybe not. Maybe that's not right. Russ: Another way of putting it--I just want to clarify. A different way of saying this is: what the market will bear. Which is a little bit different I think from what economists here think of as the market price. We often--foolishly, I think--assume that there's a single market price. Of course, there's not. There's a distribution of prices for virtually every good. But I think what the case that Locke's looking at is what the market will bear. Right? Is that true? Guest: Right. Can I charge the highest price that I could get for this commodity, knowing what I know about the commodity and the person who is trying to buy it. That's a good distinction. Let's call that what the market will bear. And then there's another thing that we haven't defined yet that's called the market price. And what Locke is trying to deal with here: What is the market price? Because he says: The market price is always just. The market price at the place where the person is selling it at the time that the person is selling it is always just: "Whosoever keeps to that in whatever he sells, I think is free from cheat, extortion, oppression, or any guilt in whatever he sells, supposing no fallacy in his ware." So, again, he's saying: No fraud. If I try to sell you something and it's not really that, if it's fraud, that's no good. So, this really is: I tell you it's what it is, and it is. The thing is wholesome and good and useful.
22:02Russ: Now the way I understood that quote is that he's saying that if around town, if I can get--not if I can get. If around town, people are selling this gasoline for $25/gallon, then I'm okay selling it for that price, too. Is that a correct interpretation of what he's saying when he's talking about the market price? Guest: Yes. Russ: He's thinking about what's the typical price these days, where I live. Guest: And it requires--it's actually quite close to our conception of a competitive price. If there's several--not infinite--buyers and several sellers and all of them are selling at around that price; there might very well be a distribution again, but there's a tendency towards a single price. There are other places where I can buy it; there's other places where you can sell it; and in every case, that would be $25--the market price today, if there's several buyers and several sellers, it is just to sell at that price. And that's certainly what would be happening in New York and New Jersey. And--we're just making this up; I should emphasize I haven't done any estimates--but let's say $25/gallon is what gas station owners could get. And if you don't buy it the guy behind you or the guy behind him would pay $25/gallon--maybe he wouldn't fill his tank, would get 3 or 4 gallons. That's the price that a lot of people would pay, that a lot of people would sell at. Locke is saying that that price is just because it's the market price for this stuff at this time. Russ: So, that's a pretty radical--I mean, I think there are two things that are fun about this piece. One is: That kind of statement is unusual for what we think of as a non-economist. And secondly, it's a very sophisticated understanding of economics and pricing for 1695 and 1660. And a lot of the example he's going to go on to talk about is equally interesting--I think more interesting than that one. But that's his starting place. Guest: Yeah. Well, he makes a statement--he's barely 5 lines into it. Well, 6 I guess. Six lines into the little paper, he's made an extremely radical claim. And the definition of market price is: the price where you actually observe transactions among different people taking place in this place, in this time, for this stuff. And then he starts with an example. In this one is easiest. And it's about: I have a bushel of wheat, and how much can I sell it at? Well, you know that last year I sold it for 5 shillings. Do I have to sell it again for 5 shillings this year? Russ: And suppose everyone else is selling it for 10. Guest: Yeah. Everyone else is selling it for 10, but I know that last year I myself sold it for 5. Well, he says, the market price right now, here, is 10. And so of course I can sell it for 10. That's the market price this year. I think most people would go along with that. A whole year has separated it; we all recognize there's different amounts of wheat, different demands for wheat. Probably no one's going to disagree with that. So he says it only requires that we should sell to all buyers at the market rate, "for if it be unjust to sell it to a poor man at 10 shillings per bushel, it's also unjust to sell it to the rich for 10 shillings. For justice has but one measure for all men." Now, he may be wrong about that. But that's his claim. The market price means that I will sell it to anyone at that price. I don't look at them, I don't look at their particular condition. So, if I see someone starving and I raise my price for wheat, that would be wrong. Maybe I could get away with it. Maybe the market would bear it. I see this guy; he's not going to be able to walk another hundred yards to the next wheat seller, and so I jack up my price; he has to eat it or he'll starve. That would be wrong. But it's fine for me to sell it at the market price so long as I would sell it to anyone. And there's that kind of anonymity, the modern thing that you mentioned--the anonymity of the buyer. This buyer is standing in for any other buyer. I'm standing in for any other seller. We have many buyers; many sellers; that's what makes up the market price. This is an extremely sophisticated view of economics. Russ: Then he goes on to say something I found even more sophisticated, which is he concedes the point that it's the same wheat as last year. It's not better wheat, it's not more tasty. The way he says it: "It will not feed more men nor better feed them than it did last year. Yet it is worth more in its political or marchand"--which I assume means marketing or selling--"value as I may so call it, which lies in the proportion of the quantity of wheat to the proportion of money in that place and the need of one and the other." Meaning the other time. So he's basically trying to say, without using it, that supply and demand is different. Guest: He doesn't have those tools. It's 1661, he doesn't have those tools, but has intuited that supply and demand is different. As long as there are many buyers and many sellers, the market price is just. Russ: And is it here that he talks about the reselling? Oh yeah. He says, at the top of this section--it's unbelievable: If you sell it for 10 when it sold for 5 last year, he says if you sell under that rate he would not do a beneficial thing to the consumers. "Because others then would buy up his corn at his low rate and sell it again to others at the market rate, and so they make profit of his weakness and share part of his money." So, what he's saying is-- Guest: And they do no benefit to the poor. Russ: Right. He's saying all you are doing is transferring the gains from one group to the other. There's no real change. And it's a deep understanding of arbitrage, the law of one price. It's a spectacular point. Guest: And you just gave an example where a guy was buying it up, the gasoline, and he was going to resell it. So, there's nothing you could do about the price. The guy that was buying it up and was going to resell it, that's going to be the new black market price. All that happened was the gas station didn't get it. Russ: Who gets the gain? Guest: The consumers are ultimately going to pay it. Russ: And by the way, we are leaving out--the other thing we left out is the New Jersey story. This is the part that really depresses me: if there weren't price gouging laws in New Jersey, the price wouldn't be $25 for very long. People would be loading up gasoline into containers and driving to New Jersey from states that weren't hit by the hurricane. It's a very localized effect. The import effect alone would destroy any price gouging that took place. But they've ruled that out. Guest: Well, I don't think you would even require that. There are many gas stations that have plenty of gas. They just don't have electricity. All I would have to do is pay $1000 a day for a generator and I would be able to sell gas for $25/gallon. Since I can't raise the price of my gas, I can't pay for a generator. There's gas in the ground, right there. Russ: That's a good point. Guest: They can't get it out because they can't raise the price enough to be able to afford to pay for a generator. The supply side of that really is depressing, that we don't recognize that this is not a lifeboat situation. There's a big response. If you just let the price go up, the price will come right back down again. Immediately. Russ: And some day we'll live in a world where Governors Christie and Cuomo will be called monsters for doing that rather than hailed for their compassion. But I skip ahead.
29:35Russ: Let's stick with Mr. Locke, because his next page is about horse trading. Guest: The second example is about a horse. And it's remarkable. Because in the first case, I think most people would probably go along. So, he was careful to put his simplest, least offensive example first. Most people say: I understand that. The market price, you have lots of buyers, lots of sellers. It's a different year. Of course you can sell it. But then he says: Suppose you have a horse. And you don't actually want to sell the horse. You like the horse. And there's this other guy that comes up and says: Man, great horse; can I buy this horse from you? And you say no. Russ: It's not for sale. Guest: You know that if you were to go to a market or a fair and try to sell the horse, it's worth £20, what somebody would pay you for it. You want more than that. You like the horse; you don't want to sell it. It's not for sale. But then the guy presses you and you finally say: Okay, tell you what: £40. This is an outrageous price. £40. And the guy says, No, I'm not going to pay you that. All right, I told you it wasn't for sale. What do you want? I'm paraphrasing. But that's basically the conversation that takes place. So, the guy says I really want the horse; you quote £40, and he says that's too much; I'm not going to pay that. Now, another person comes up. And this person really, really needs this horse, for some reason. Locke doesn't really say why. But he says that he has such a necessity that if he should fail of it, it should make him lose a business of much greater consequence. And this necessity, I know. So, the seller knows that if you, this third guy, comes up and can't buy the horse, he's going to lose thousands of pounds in lost sales, for some reason. Russ: He's got some shipment of something that's falling into the river and he needs to haul it out; he needs an animal urgently. Guest: Yeah. So it may be the cart is on the edge; you bring this horse by and you didn't sell it to the other guy because you asked for £40 and he said no. You have the horse. He says: Please, help me, help me. I'll pay for the horse. And you say: £50. So if in this case he makes Z pay £50 for the horse, which he would have sold to Y for £40, "he oppresses him and is guilty of extortion, whereby he robs him of £10 because he does not sell the horse to him as he would to another, at his own market rate." Which was £40. "But makes use of Z's necessity to extort £10 from him above what in his own account was the just value." So, the other guy asked me, what would you sell the horse for? And I think about it and I'd say: Well, I'd sell him for £40. And the guy says, no. But that's not important. The point is: I said £40. Now I see this guy who really needs the horse and I raise my price because of his necessity. I'm taking advantage of my knowledge of his necessity. I'm price discriminating. I'm charging different prices to different people depending on the desperation of their need. So, that means there is not a single market price. And the nice thing about this, he says, was at his own market rate. So, I set my market rate at what I know in my own mind that I said I would sell the horse for £40. Now, should it be illegal for me to raise it to £50? Maybe not. But it's immoral. Locke is saying: That's wrong because you are charging more than the market price. Russ: Yeah. Locke's opening line of the essay--he's concerned with two things: Equity and justice. He's not concerned with legalities. He's concerned with what we would call morality. And what he's saying is what we would call, to use the economics jargon--there's a distinction made in economics between willingness to pay and willingness to accept. Their meanings are obvious. So if you are willing to accept 40 and a guy comes along who is in desperate straits and says I'll pay 50; or if you say to him, well, I'll take 50, and you know how desperate he is, knowing that you would have taken 40 before and been better off--that you were willing to accept 40--that's immoral. It's a fascinating distinction. Again a very subtle one. And to put it into a modern jargon, he's saying: If it's a mutually beneficial transaction at 40 for you and this desperate person, and you've expressed that willingness to accept 40, then to ask for 50 is what he would call gouging. Or exploitation. Guest: The £40 was not my minimum willingness to accept. That 40 was what I quoted when I was thinking: What would make me happy? I would be happy to sell this horse at 40. So it's not that I'm indifferent between selling and not selling at 40. That might be 30. Russ: Good point. Guest: Or 25. I'm making a significant premium because I got to think, well, I don't want to sell the horse but I'd sell it for 40; I'd be happy to sell it for 40. So, in terms of willingness to accept, that's pretty far up there in terms of being a mutually beneficial exchange. If somebody paid me 40 I'd be happy; this guy, let's suppose, would pay up to 50. Is it legitimate for me to charge 50? Not morally. Locke is saying: Not morally. And he's resting this on the idea of a market price. But here the conception of the market price is quite different. Market price is: I can't charge different prices to different people based on how desperate they are. I can't take advantage of my knowledge of their situation to extort the most of their willingness to pay. Russ: There's a classic story in the Talmud that has the exact same moral judgment, which I'll dig up. I forget the details and I don't want to try to remember them by heart. I'll try to find that and post it as a link. It's an interesting argument. It's really saying: leave some money on the table. You could get 50, but you are going to be very happy with 40. Don't take that extra 10 out of the hide of your fellow man given that you have expressed in your own heart a willingness to accept 40 before. Which of course the new guy doesn't know. The new guy doesn't say: Hey, wait a minute, you offered that other guy 40. Guest: Nope. He would never find out. Russ: That's the whole point, is that you know that; he doesn't; you know how in extremus he is, and if he'd walked up and tried to offer you 40, you would have taken it. That's not the case he is talking about. You see the desperation on the guy's face and you ask for 50 or he offers 50 and the transaction takes place. He's saying that that's wrong. Guest: It's wrong. It's asking a lot in terms of my own honesty to myself. What if he said: I'll give you £50? And you have to say: I'll take £40. Forty's okay. Russ: I've seen that. It's really rare. Guest: It's asking a lot of the person. Russ: Yeah, it is. It's a very high level. That's absolutely right. Guest: But it's a consistent definition. The nice thing about it is it's a consistent definition. There's a Latin word, erogate. And to erogate is to pay or to give what is due. So, I spend what is due. And if something is erogatory, it is me doing what I owe the other person. Something that's supererogatory is something beyond that. Russ: Gravy. Guest: So, the usual example we might have in philosophy is: Suppose I have a life ring and I see a drowning person; I know I can throw the life ring; the life ring isn't that expensive; I know I can get it back. I can save the person without much trouble to myself. It's an erogatory task. I'm obliged to throw the life ring. You'd have to be a terrible person to say, I'm not going to throw the life ring. But, the current is flowing; I'm not a very good swimmer: I'm not obliged to go in and try to go out and save the person. That would be supererogatory. So, in this case Locke is making an argument that it is erogatory for me to sell the horse at the price that I actually would be willing to sell the horse to anyone. I don't have to give him the horse. That would be supererogatory. I don't have to be heroic. But I am obliged to engage in a market transaction. And so in my own work I was surprised to come across these Locke examples. In my own work, what I was trying to show was that in a market setting you may have an obligation to engage in a voluntary transaction that's actually analogous to the guy who throws the life ring to the drowning person. I may have to sell him the horse. But I don't have to sell him the horse at a price that hurts me. I can sell him the horse at the price where I would say I would sell that horse to anyone. It would be wrong, though, for me to withhold the horse. It would be wrong for me not to sell it just as it would be wrong for me not to throw the life ring. I'm not obliged to engage in a supererogatory act of sacrificing myself. But it's erogatory; it's the normal level of what I would have to pay or expend in a market setting to say: Yes, I will sell you the horse at the same price I would sell it to anyone else; I'm not going to use the fact that I know you are desperate to take advantage of you.
38:52Russ: Your example of the life ring reminds me of another example from the current tragedy of the hurricane. As the hurricane was about to arrive, I think, on the New Jersey shore, there were some extraordinary waves being generated before its arrival. And somebody got a picture of somebody surfing. An East Coast surfer who gets to surf the equivalent of a West Coast wave. Doesn't happen very often in Asbury Park. And I mention Asbury Park because I kept thinking of the Bruce Springsteen song, "4th of July, Asbury Park (Sandy)"--"...the aurora is rising...". It's a beautiful song. Something like that. But anyway, this guy's surfing and somebody tweets the picture and says: What a jerk, putting responders at risk by going surfing. We're so--the morality of putting somebody at risk--I mean, it's dangerous. But the idea that it's immoral to go surfing in high waves because if you founder you would put other people's lives at risk is to me a very strange morality. And a surfer responded to it saying: Are you crazy? Most first responders couldn't get through those waves. It takes an incredibly strong swimmer to be out surfing in it, and that person probably can take care of themselves and would be okay. But it's just interesting to me that that would be considered an immoral act, to risk one's own life--because, of course, you were risking others'. Guest: Now you and I are having opposite reactions again. I completely agree that he was putting the first responders at risk. I would say that the only reason he was taking those risks was he didn't feel like he was bearing the full risk; because if he got in trouble, somebody--the government--would come and rescue him. So, I actually see that as an almost perfect analogy to the bailouts after the Financial Crisis of 2008. Interesting. You and I have very different reactions. Now, I agree that he was taking risks. But I don't think it was because he could take care of it. He thought somebody would rescue him if he got in trouble. Russ: But suppose he is a fabulous swimmer. Have we come to a place in the world where I am not allowed to take risks on my own behalf because I have implicitly--not explicitly--entered a contract I cannot disavow. That contract being: If I get in trouble, I know that people employed by the state will be sent to find me. I'm also thinking about the book Into Thin Air, which is about a bunch of crazy people who climb Mount Everest and of course put a bunch of other people's lives at risk. Because they are not particularly prepared for this experience. And I think it's-- Guest: Well, you have answered with the key point; and I think this is a contract I can't disavow. And I might want to. So, we'll never know whether he would have or not. Russ: Well, maybe he left a note on the shore saying: If you see me struggling-- Guest: Don't save me. Russ: Don't come out. I'm on my own. I sign a waiver, which is of course a waiver that the courts never enforce any more. Guest: Well, Goldman Sachs did not leave that waiver. Russ: I'm with you there. You know that. You know we're on the same page for that.
42:05Russ: Let's move on to Locke's next example. Guest: This is the coolest thing. It just makes me happy. Because there are things about this example that reflect an understanding of markets and the obligations that you have under markets that relate to our supply response to price gouging in New Jersey, in New York. Well, it's just wonderful. So, there's a merchant of Danzig. It sounds like an opera. Russ: or a limerick. Guest: And he has two ships laden with corn. And by corn, what English people mean by corn is any grain. So, it could be wheat, it could be--they normally call corn "maize." So, let's call it corn. And there are two cities, Ostend and Dunkirk. Now it happens that Ostend and Dunkirk are pretty close together, close enough that a horse cart could go between them in about a day. So, the example may be a little hard to sustain. But he's saying that in Ostend the corn will sell for 5 shillings per bushel; but in Dunkirk there is almost a famine for want of corn. And there you can sell your wheat for 20 shillings a bushel. So, Dunkirk, almost a famine; 20 shillings per bushel. Ostend 5 shillings per bushel. And so the first question you would ask is: Where should I send my ship? And the second question is: What price should I charge? So, here it will [?] be demanded whether it not be oppression and injustice to take advantage of their necessity at Dunkirk? Well, surely it's better if I send my ship to Dunkirk than to Ostend. There's a famine in Dunkirk; I have food. Surely I should send it to Dunkirk rather than Ostend. The only question is: How much should I charge for it? Russ: Yeah. I'm going to be guided as if by an invisible hand, if the only thing I care about is making a lot of money. Guest: Or, if I cared about the welfare of the people. Russ: Correct. Guest: At this point, you don't know which reason I'm doing it. Maybe I want to donate it because there is a famine. Maybe I want to make money. Either way, I do the same thing. There's no conflict in the decision about where to send the ship. The question is: How much should I charge for it? Well, the question he asks is: Am I doing an injustice when the market price in Dunkirk is much higher than the market price in Ostend to sell it at the market price? Russ: And our listeners, from what they know of Locke so far, may be able to answer this question. That is: What does Locke say? Guest: And so, what we're asking you, Listener, is: Can you actually say that the price of 20 shillings a bushel in Dunkirk is a market price? And could you say that the selling for 5 shillings a bushel in Ostend is a market price? Well, the question is: Are other people buying and selling at that price. And he says it's almost a famine. I'm not sure what that means, but presumably there are other people bringing in corn to Dunkirk and they are selling it for 20 shillings a bushel. Can I sell it for 20 shillings a bushel? We've already established I should send it to Dunkirk, not to Ostend. Yes! Yes, I can sell it for 20 shillings a bushel, and the reason is-- Russ: And sleep well at night-- Guest: And think I have done the right thing. Because if I try to sell it for more than 20 shillings a bushel, they are going to say no. I can't sell it for more than that because it's the market price. If I try to sell it for less, then one of these buyers is going to buy it and then resell it, and make all of the difference. So, it can't be that I'm obliged to take a loss when it doesn't even benefit the people who need the food, because there's going to be a secondary market. So I can't sell it for less than 20 shillings a bushel in any important sense. I can't actually donate because all that's going to happen is that a secondary market is going to take it up. So, Locke says: "He is so far from being permitted to gain to what degree that he is bound to be at some loss and as part of his own to save another from perishing." So, that's kind of hard to parse. Russ: That's why you are here. Guest: I can only gain to the extent that the market price there is more than the market price in Ostend. I can't sell it for more than the market price. But I'm going to sell this--the result is, I will help save other people from perishing. I don't have to give up--it's not supererogatory. I'm not obliged to make some sort of heroic effort, but there's nothing wrong with me selling at the market price. So, above that: "For though all the selling merchant's gain arises only from the advantage he makes of the buyer's want, whether it be a want of necessity or fancy, that's all want, yet he must not make use of his necessity to his destruction and enrich himself so as to make another perish." So, I'm not selling at a price that they can't afford to pay. That's already the market price. So, the understanding--we talked about this before--but the understanding of the role of secondary markets in taking up any attempt to use charitable means to send the stuff--I actually can't give it away. I can't sell it at 5 shillings. I can't sell it at another price than 20 shillings. It is fine for me to sell it at 20 shillings and, as you said, to sleep well.
48:00Russ: This gets back to our--we'll put up links to what we did on euvoluntary exchange, your paper and podcast that we talked about a while back, and also the middleman conversation we've had about--which is, basically what he's saying is if you sell it cheap in a place where its market price is high, you are just creating a middleman, who is not going to pass on those savings. He's going to take advantage of it, and a lot of people would. Somebody will. And you won't have done anybody a good turn. You'll just have thrown away money. Given it to somebody else. Guest: And Locke recognizes this in a way that, in this paragraph that I've been reading from. I keep going up; I want to try to reveal the parts of it that I think are so cool. He proposes a thought experiment, that everything so far is: Right now I have a ship and they are far away. They're in Liverpool and I'm in Danzig. I'm in Germany. And I'm thinking this is going to go all the way around the coast of Belgium. I have Dunkirk and Ostend. Which one should I send it to? So, right now all the grain is far away. But then he says: "Suppose I have the corn and I am in a town that's pressed with famine. Yet if he carry it away, unless they give more than they are able or extort so much from their present necessity as not to leave them any means of subsistence, he offends against the common rule of charity." So, once the grain gets there, if I say: well, I'm not going to sell you this grain. I'm going to take it away unless you pay me everything you've got. They're going to say, No, please, okay yes, we'll do it. Because they will starve otherwise. So, once I have it there, I'm actually obliged to sell it. This is why markets are like a life ring. It would be wrong for me to take it away. Once I take it there, I have to sell it at the market price. And the market price is one that is sufficient to induce me to bring it there in the first place. The premise is it was sufficient to bring it there in the first place. But if I get there and say, You know, I could charge even more, then I'm behaving immorally, according to Locke. Russ: I took that a little differently. I thought what Locke was saying there--and you could argue this as some form of behavioral economics or maybe Locke misunderstanding the logic of the behavior of markets--but if I get there and its been selling for 20 and all of a sudden I realize I've got a lot more market power than I thought, and I decide I can get 50 for it, and I realize that some of the people who are going to pay 50 really "can't afford it," not just in the sense that it's not a great transaction for them, but in their emotional distress they are going to impoverish themselves so much it's going to kill them. Now that's irrational. You would say: Now that will never happen. But let's suppose it's possible. And it's hard to understand why the seller would be more aware of this than the buyer. But the argument is that if that did happen--again, this is a thought-experiment--if by making the transaction at this price I would threaten the life of the person, out of an emotional, distressful decision, that's immoral. Even though it's what the market would bear right now. It's not just me; he's really talking about the market price in that situation. That's what I took him to mean about that that's immoral. Guest: Well, I guess I see this as what you just said fits pretty well with the horse example. I'm charging a different price because I know these people to be desperate. Whether they are objectively or subjectively desperate, whether they are making a mistake, it's wrong for me to take such advantage of their desperation. What he says is "Although all the selling merchant's gains arise only from the advantage he makes of the buyer's want." Not the fact that I'm bringing something and selling it at the market price, but I'm taking additional advantage of the buyer's want. Then I can't use that necessity to his destruction. I don't know how literally to read "destruction." Russ: That's true. Guest: I thought this was interesting that he has the role that high market prices play in eliciting a supply response. And far from saying that people who try to take advantage of high prices are doing something wrong, they are actually saving the people from a famine. Which seems to me self-evidently true, but doesn't seem self-evidently true to Governor Christie about gas prices.
52:37Russ: Let's turn to Locke's last example, where two ships meet at sea. One is in desperation. It's lost its anchor, which is a very dangerous situation to be in. The second has the luxury of an extra anchor, which is a very valuable luxury. It's an insurance policy against losing your anchor, in which case you are very vulnerable to a bunch of stuff. How much can the boat with the spare anchor charge the anchorless boat, the boat that doesn't have an anchor? And Locke's answer is quite interesting. Guest: Locke starts with the premise that I'm not obliged to sell, but I'm also not allowed to charge the maximum price that I could get--essentially gouging the person. So, all along, he's been interested in: What is the market price? And what he does here is try to say what the market price is, and therefore what it should be. So, it is interesting to think about the example he's come up with, because a sailing ship without an anchor is in desperate trouble. In a storm, they are going to hit shore. At night, if it's cloudy, they can't tell where they are. So having no anchors--and presumably it's been stripped away in a storm, the ship started out with anchors but doesn't have them now. And this other ship, it has an extra anchor. Let's assume that there are two. So, I have two anchors, the other person has none. He comes up and he says: Will you sell me an anchor? And what Locke is asking for the captain of the ship with two anchors to do is to think: Now, how much of a price could I charge? And the first thing he should think of, according to Locke, is: Would I sell at any price? Would I sell this at any reasonable price? I have an obligation to the crew. As captain, I have an obligation to the owners. The cargo was valuable. And we might lose an anchor. So, if I'm down to one anchor, I've actually sold off something pretty significant. It might be that I wouldn't sell this anchor basically at any price. Maybe I'd sell it for a million dollars. But given the lives of my crew, the danger--maybe it's stormy--I have to think about this hard. How much would I be willing to sell this anchor for? And basically that's an opportunity cost argument. This has nothing to do--and this is Locke's point; this comes to the second point--it can't have anything to do with the desperation of the other person. I can't look at his ship and say: I bet his ship is worth about £3000. I'm going to charge him £2950. It has to be internal. I have to think how much would I be willing to part with an anchor for, and then that's the price at which I'm allowed to sell, because that's the market price. That's the price I would sell to anyone. And he's careful to say: I can't charge more to this ship in distress than I would to any ship. And so that's how he gets it to market price. It's actually a brilliant logical argument. Because there's just two ships out on the ocean. Russ: Right; in theory it's a bilateral monopoly--not bilateral, that's the wrong word. The ship in distress is very vulnerable, obviously, and I should be able to extract virtually the entire value of the ship and the lives of the sailors in exchange for this anchor. Guest: It is a bilateral monopoly in a sense, because there's one buyer and one seller. I can't sell my anchor to anyone else. But I don't want to. Russ: I don't want to. That's why I started to put a little footnote there. But thinking as a monopolist who is only interested in, who may or may not be interested in selling, this desperate buyer is willing to pay a lot; and I'm not morally able to charge his willingness to pay. I have to charge my willingness to accept. Guest: But Locke is very careful. He says I don't have to sell. I really do get to think: What is this really worth to me? Not: What did I pay for it in port? Now it's: What could I replace it for? It's the opportunity cost. It's the particular economics. It's very Hayekian, I think, a sort of precursor. The particular economics, the circumstances of time and place. It has to be here and now. I decide how much is this anchor worth to me right now. And once I decide that, that's the most that I can charge. Russ: And he's very--he uses market price in a very rich way here. I think that's one of the points of this article. He says: "And here we see the price which the anchor cost him"--meaning the potential seller; he's talking about the ship with the extra anchor; he says--"which is the market price at another place, makes no measure of the price which he fairly sells it for at sea." Guest: No part. Russ: So, to me the point of this whole essay is: The market price is the right guide to what is just and equitable, but you have to define it carefully. It's not the market price somewhere else. We had the wheat example where it's not the market price last year. It's not the market price back at port where I bought this anchor. It's what it might be right now if there were lots of buyers and sellers. Guest: Yeah. It's an extremely modern argument. So, the market price is what it is if there are many buyers and sellers. But it has to be here and now. You can't say: Well, a year ago it was different. Or it's different a hundred miles from here. It has to be right here and right now. Maybe I'm too excited about this and I read too much into it. But I actually think this is an extremely modern argument for the three reasons we just talked about. It's that there are many buyers and many sellers. So, there's a conception of the usual welfare properties of a competitive equilibrium. Which we didn't really think much more about until the 1950s. And then the question of time. And then the question of place. Those three things all sort of rely on a deep understanding of the way market price is derived.
58:42Russ: And the other thought I had, just thinking about modern jargon and the way we talk about fairness sometimes as economists, you could interpret a lot of what Locke is saying as the point I made earlier: The fair, equitable, just price is "what the market will bear." But what Locke is careful to say here is that what the market will bear is not literally to be taken as the role of justice, because in the case of the horse, or this case of the ship, although you are able to extract a lot more money out of the buyer because of the buyer's distress, morally you should not. And so he's really saying, when he says, we use the modern lingo, not so modern, what the market will bear, that doesn't apply, Locke is saying, in these one-on-one cases where you have a specific situation of incredible urgency or distress. And obviously sometimes people do gouge, or let's say, using less judgmental language, extract from the buyer more than they are willing to accept; and it could be a lot more, in the case of the horse or this anchor. And Locke is saying you really shouldn't. If you want to be just, you should charge the market price. But the market price has the caveats we've been talking about. Guest: But the particular circumstances of time and place might--this is what I was wondering; I was thinking about this this morning: What would Locke think of anti-gouging laws? And so, we put him in H. G. Wells's time machine; we bring him forward; we bring him out of the time machine; we describe the situation. There's been a terrible hurricane. Not every place has electricity. People need gasoline, so they can move around, maybe get to work, get supplies. And there's the gas station here and it's not selling any gas because we have a price gouging law and they couldn't raise their price above $4/gallon. And that meant that it sold out in the first day. There's no gas left; they had to close because they couldn't raise their price, because it would have been immoral for them to raise their price. And he would say: Well, that's not what I meant. The hurricane changed the local circumstances. The market price was actually much higher. Let's say it was $22, $25/gallon. All the gas stations would have been charging that. All the sellers would have been paying that. It wasn't because there was just one gas station and they were taking advantage of the desperation of the buyers. What it changed is the availability of gasoline to all these people. So, in a way, I would go so far as to say it's immoral to charge a low price for the gas, because then, the first 100 people in line fill their tanks and they don't leave enough for everybody else. One of Locke's concerns was that there was "as much and as good" for other people. So you are overtaking a commons. If the price is too low, you take too much; you don't leave anything for anybody else. So, Locke's argument actually cuts two ways. Not only is it not immoral to charge the market price when the market price is high because of the local circumstances of time and place, it's actually immoral to charge a low price. So, price gouging laws force gas station owners to do something immoral. Which is to encourage people to take too much and not leave gas for other people behind them in line who desperately need it. Russ: And his wheat case, the Dunkirk/Ostend case, is clearly that case. You have an area where there is a famine and an area there isn't. In one case wheat's really expensive. It's twice as much as in the other place. And he very clearly says it's not immoral to sell it for twice as much in a place where there is a famine. Guest: Yeah. That's why I'm pretty confident. Obviously I'm trying to put words in his long-dead mouth. But I'm pretty confident that he would say: No, it's the Ostend case; I wrote about this. Russ: And then, for those who are only interested in efficiency, or market process, he clearly limits it in these two other cases of the horse and the ship, where he says: it's not what the market will bear every time; and it's not what the anchor would have sold for back in port. It's something in between and you have to look into your heart--always a challenge--and see what you'd accept to part with it; and you can't charge more than that. And that's not exactly what the market will bear, either. Guest: What I like about this piece is he says there are some circumstances under which the actual price at which you observe a transaction is going to be moral; but there are others for which you actually have to take the problem of morality seriously. Now, that is more along the lines of the original moral philosophy that economists were concerned with. I think we as a discipline, as economists, have made a mistake by saying, just holding our fingers in our ears and going "la la la la la" whenever someone talks about morality. Because it means we are being left out of an argument where we actually have something important to say. And Locke has reminded us of that.