Arnold Kling  

Distress, Moral Intuition, and Economics

Bernanke, Orszag, and Kling on... An Econometrics Lesson...

Earlier, I wrote in praise of The Price of Everything, Russ Roberts' latest didactic novel. I cannot recommend it strongly enough. I thought his other fictional attempts to teach economics were decent, but in my opinion this one represents a real step up.

One of the issues that it raises--the very first one, in fact--is the morality of raising prices when something becomes scarce, such as flashlights after a weather disaster. Russ makes the standard case for allowing the price to ration the scarce resource, but I don't think he will necessarily overcome people's moral intuition, and I think it is very important to understand why.

The basic moral intuition is, "Don't take advantage of somebody when they are in distress," and I think it has broad implications. It explains usury laws. It also may explain the way we approach health insurance, which I call insulation.

Back in Biblical times, when somebody came to you to borrow, it was not to build a steel mill or start a social networking site on the Web. Chances are, if somebody needed to borrow it was because of an illness, a famine, or other disaster. Since people in that situation were in distress, moral codes developed that prohibited charging interest for loans. Charging interest would have meant taking advantage of people in distress.

Jews and Christians overcame their aversion to usury when they saw money being lent to businesses and governments, rather than to people in distress. Even today, however, if a destitute person is sick or hungry, religious authorities would frown on your charging interest on a loan to that person. In that sense, the moral opposition to taking advantage of a person in distress persists.

I suspect that the moral opposition to raising the price of flashlights after a storm reflects that same intuition. It's one thing to charge what the market will bear in the normal course of business. It's quite another to profit from distress.

When people seek health care, they are in distress. We are uncomfortable with having the service provider get a profit from that. So we insert a layer of insulation (the so-called insurance provider) in between the doctor and the patient. That alleviates what otherwise might be a sensation on the part of the doctor and the patient that the former is taking advantage of the latter's distress.

The trick for economists is to justify confronting people in distress with market prices. I think we can do that, but we have to persuade our fellow human beings (a) that people in distress should receive support from charity or government, not from suppliers of loans or flashlights or medical care; and that there are reliable mechanisms to ensure that people in distress will receive support from those alternative sources, so that placing the burden on suppliers is as wrong-headed as we always allege it to be.

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The author at Knowledge Problem in a related article titled On the morality of raising prices in an emergency writes:
    Michael Giberson Arnold Kling has some interesting insights on what is sometimes pejoratively referred to as price gouging: One of the issues that [Russ Robert's didactic novel, The Price of Everything] raises--the very first one, in fact--is the moral... [Tracked on June 19, 2008 8:31 AM]
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James writes:

"The trick for economists is to justify confronting people in distress with market prices."

Wow, it's hard enough to justify market prices to those simply observing the distressed person, I can't imagine trying to justify it to someone who is currently distressed.

If I had to justify it to a distressed person, I'd try to explain to them that their choices really are more plentiful than they may appear. In a society like ours, you rarely have to go too far to find help. The first person they come across may have flashlights for $100/each. But, is that their only option?

When the OBX is evacuated for a hurricane, is their only option the closest, safest hotel charging 2x their normal rate or can they drive an extra hour or two and find something for the normal rate? Can they find a church that has opened their doors with free cots? I'd guess most people visiting the OBX live within 5 or 6 hours. Is it reasonable to just drive home? Do you know anyone closer that you can call and stay with?

Whenever I hear about someone in distress searching for help, I'm reminded of how important family and friends are. If a major weather event knocked out my power, I'd rely on my family and friends to help me without charging me $100 for a flashlight. And, I'd certainly return the favor if needed.

It seems that people who are distressed don't see their options as clearly as they would otherwise. I'm no expert on suicide, but I hear they tend to believe "it's their only way out" of whatever situation they are in. They don't see their options...or maybe they just don't like their options. Like I said, I'm not an expert.

When trying to justify this, I'd also change "price" to "value". That may be a good way to help explain that the flashlight's value = X regardless of what the usual $ price tag is.

spencer writes:

The problem I have with the people arguing that rationing by price alone in a time of distress is that it is used as an example of markets working.

Nothing could be further from the truth. the classic example of the guy in a pickup truck selling supplies to victims of a natural disaster is not an example of a market working. Rather, it is an example of a market breaking down.

The guy in the pickup truck can get away with charging high prices because of a complete lack of competition. But one of the conditions for a free market is competition. Thus, the guy in the pickup truck selling supplies to disaster victims is not an example of markets at work. It is just the opposite.

Don writes:

It seems that in Spencer's world, there's only one guy in one pickup truck. Fascinating.

I think the real problem here is the disconnect between good intentions and good results. When we prohibit people taking advantage of those in distress, the result is that we put them in even more distress for longer periods of time. But if we let people take advantage of those in distress, the result is that we create a situation where they are no longer in distress. We have to convince people that they need to be concerned with the ends and not just with the means. Good intentions harm far more people than they help when those good intentions are not coupled with reality and facts.

Jim writes:

we have to persuade our fellow human beings (a) that people in distress should receive support from charity or government

And yet when we try to ensure that people in distress actually do receive the support they need from government, people like you condemn it as creeping fascism.

Ken writes:

The argument I always make when confronting a rationist is this:

Which situation gets the most (and correct) resources to those most in need 1) rationing or 2) markets, with all the gory 'price gouging'?

This question is dismissed by everyone I've posed the question to, but this seems to be THE crux of the problem. While many believe it would be nice if people acted altruistically and gave people what they needed, instead of selling it, the fact of the matter is that this is NOT how people act.

Any policy enacted should be aimed at getting as many resources into an area (I'm thinking of New Orleans) as fast as possible, to those that need them the most, and where the benefits of using those resources will be maximized. Everyone I've ever talked to agrees with that statement. Then when I tell them that letting prices spike in times of crisis is the best way to ensure this, they balk, saying that the means matter. I disagree. The ends are what matters.

SheetWise writes:

I agree with Don -- Spencer's world is very fragmented. You have to understand that a lot of entrepreneurs lose money.

When the entrepreneur in Orlando hears that a bag of ice is fetching $10 in hurricane ravaged Miami, he buys all the ice he can at Orlando prices -- in short time driving up the price of ice in Orlando. Said entrepreneur then drives the ice to Miami and finds out it's now selling for $6, $5, $4 ... and eventually for some number less than the price of ice in Orlando.

Some people make money -- they're the early ones, the people who actually added the most value to the situation. Those that come late, they lose. And there's always losers.

What a beautiful process. It'd be a shame to mess with it.

David writes:

Government and charity really are necessary to provide such things for free or for a discount because of the cost of cheating. If it is merely the store or hotel selling the good, then it is logical to make up a sad story. If for a charity or government, though, it is costlier to deceive the charity (guilt) or the government (prosecution) than a private organization, particularly as they will require more information which may need to be verified.

Jeff H. writes:

It is still important to recognize when it is in fact unethical to charge high prices. I understand that a high market price rations resources to those who value them the most while also acting as an incentive for increased supply, but one can provide example of when this would be unethical, and I think this partly relates to Dr. King’s idea of insulation.

For instance, in a case where alternatives don’t exist and everyone knows each other—say in an isolated rural village or remote island—an owner of some life-essential good might not be able to charge a market price ethically (even on consequentialist grounds).

The vast majority of cases do not follow these conditions, of course, but I think Kling’s idea of insulation is important to consider. Willingness to pay is extremely useful way to ration resources when people are strangers, but sometimes in times of distress people are familiar with one another and the best way to ration resources becomes trickier.

fundamentalist writes:

Nice insights into the Biblical and ancient doctrine of usury. I agree completely.

I have always had the nagging feeling that the medical profession takes advantage of people in distress. Some in the medical profession become wealthy from the pain and sickness of others. In addition, I think the market may be inappropriate for medical care because the patient isn't really free to choose to do without some kinds of medical care or to negotiate prices. In extreme cases, medical care is more like supplying food to starving people. How much profit do you want to make from that?

Kevin writes:

I don't think contributions from government or charity would matter in a situation like this. In a market with suddenly inelastic supply (vertical curve), all the benefits of the subsidy will accrue to the seller, and the same buyers will buy the same amount of product, just at a higher price and a portion of which is paid by someone else.

On another note, in such an environment I'd argue that people should charge as high a price as possible so that the resources go to their most productive uses. Where's the moral high ground in running out of resources by selling to a man for $5 who will get $6 worth of value out of them when a man further back in line would have paid $100 to get $150 of value?

Nathan R writes:

Several hotel operators were accused of “price gouging” during Katrina. Suppose they profited from distress by charging $500 for a room that usually rents for $50. But what if one individual offered $500 to another individual who had already rented the room for $50? Is it immoral for one distressed individual to profit from another distressed individual? How is this morally different from the hotel operator charging $500? When my wife and I evacuated Katrina every hotel was booked between Baton Rouge and Dallas. If hotel operators were allowed to exploit the rents created by evacuating gulf coast residents would more hotels have been constructed in northern Louisiana? A similar dilemma for gasoline: what is the best way to ration the limited supply of gasoline during an evacuation? You can’t simultaneously expect station attendants to remain at the pumps until everyone has evacuated and require them to charge the same pre-evacuation price. A gas station attendant who stays to serve evacuees isn’t really profiting from others’ distress because he has assumed a considerable amount of risk in return for a higher return on his gasoline sales. I suggest it is immoral not to allow the attendant to charge higher prices in such a situation. How else do you decide who needs gas now and who can wait until further out of town? The only problem I see with letting prices ration gasoline is the poor information about the availability and prices of gasoline further out of town; thus there’s an incentive to fill up as soon as you can regardless of price or your need, and the limited supply of gasoline will go to those with the most money (the cost of running out of gasoline during an evacuation is extreme!). I see this lack of information being less of an issue in future evacuations because gas prices can be posted on portable GPS units. (By the way, we evacuated about 12 hours before the majority of the city, so we had no traffic, plenty of gasoline, and our pick of hotel rooms had we needed one.)

Brad Hutchings writes:

I agree with you that the moral reaction against price gouging tends to be very strong. Education on this issue is up there in difficulty with getting an addict into rehab. A few summers ago after some hurricane hit Florida and the AG was on TV warning would-be price gougers he was going to be watching them, while at the same time, all the gas stations on the coast were out of gas, I made the point at family dinner that of course that's what happened. My Dad said I wasn't worthy of my last name for having such ideas. But I convinced him that if those local station owners had jacked prices up, people would buy what they needed to get inland and more people would benefit. And station owners might even have an incentive to stock up before the next hurricane hit, improving overall preparedness.

When asked how this coordination could take place without the price signal, my Dad described a command and control system that would make Hitler and Stalin proud. That's about when he had his epiphany on this. Anyone who rejects the power of the price signal just hasn't given it any thought. You might as well be against gravity or for spitting into the wind if you're going to reject the power of pricing.

leishman writes:

To fundamentalist: Speaking as a physician of 35 years, I would ask: Unless you're talking about a "routine checkup", most patients choose to see a physician BECAUSE they experience one kind of distress or another. If doctors were considered evil for asking payment to treat someone in distress, then an "ethical" doctor would only charge to treat "well" people. Should plumbers or auto body mechanics go unpaid because the customer was "in distress" when requesting service? As service providers, we all invest in training and experience so as to provide "value" to the person requesting our services. And value usually goes hand-in-hand with price.

fundamentalist writes:

leishman: "And value usually goes hand-in-hand with price."

I didn't mean to sound like I was condemning all doctors. I realize that they perform a valuable service and should be rewarded for it. I just have problems with some, mostly surgeons I think, becoming wealthy at it.

Alice writes:

To fundamentalist: generally, "the worker is worth of his hire".

Alice writes:

Sorry--"worthy". Should have reviewed more carefully.

Tom Grey writes:

While the idea of gov't as 'automatic insurance of last resort' is not so bad, it would be better to be far more codified. Gov't insurance power and responsibility should be part of an explicit social contract, specifying generally what an American can expect from their gov't when in distress.

I would suggest one thing they could get would be automatic gov't emergency loans of X%, to be repaid with positive but low interest (equal to IRS rates?). This would allow them the cash to pay higher prices in emergency, but also an incentive to minimize their distress purchases to be only what is really needed.

While there's no way society can 'guarantee' charity action, it can set up such a gov't program. With guarantees! (Altho the gov't can still, easily, fail).

None have mentioned above that price-gouging is still peaceful, voluntary exchange, while laws against it would require force to be used to stop such peaceful exchange. It's important for minimal gov't advocates to always remind the listener that gov't actions = force, not peace.
Gov't action supporters say:
The end justifies the means -- for good gov't, force is OK.
Price raisers support the inverse:
The means justifies the ends -- even in distress, when trade is peaceful, big price hikes are OK.

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