– April 15, 2020
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The first time I truly understood that costs and values are subjective, I was 20 years old. Way too late, I admit, but early enough. Put into an express run-down in a somewhat obnoxious sales job, my hyper-confident instructor rhetorically explained the selling-water-in-the-desert scenario that the Stanford Encyclopedia of Philosophy lists under the subheading “exploitation.”

The story, familiar to students of philosophy and political theory, goes something like this. A hiker is lost in the desert, dehydrated and far away from any source of water. Somebody with a few spare bottles of water happens upon him and charges him the outrageous price of $1,000 for a regular-sized bottle of water – which the hiker naturally accepts, ponies up the money, quickly empties the water and lives to loudly complain about the injustice of the transaction for the rest of his long and beautiful life. 

Who of the pair behaved morally just?

Most say that the seller of water took unfair advantage of the hiker’s dire situation and that we should prevent that kind of awful predatory behavior. 

The interesting thing about this (hopefully) hypothetical scenario is that it claims to trump a standard premise in the economic literature: that voluntary transactions between consenting adults are mutually advantageous. After all, the hiker valued the water more than a thousand dollars and the seller – let’s call him Bob – valued it at less than a thousand dollars. 

Placing the same two characters in a different setting, say downtown Manhattan, both Bob and his unfortunate hiker customer would have entirely different valuations of the same water bottle – a few bucks, at most. 

In a different setting, say a remote desert, those are no more the relevant prices and valuations, and so we should expect prices to change. Besides, surely Bob deserves at least some reward for being out in the desert saving thirsty hikers from an unpleasant death?

My sales job was in rural Norway, so naturally the example my supervisor used wasn’t water in the desert, but gasoline for your car on a trip far up some capricious mountain roads. The essence of the story remains the same: when circumstances change, the value you place on something – what you’d be willing to give up in order to get it – changes with it.

Here’s the thing. People objecting to the immorality of the story operate with other prices in mind than the $1,000 in our story. Perhaps previous prices of water that they’ve seen or a personal memory of buying bottles of deliciously cold water for a dollar or two. They insert into the story other circumstances and scenarios of what water bottles usually cost at their local supermarket. In doing so, they thoughtlessly transfer the prices from that common scenario of plenty to this uncommon scenario of life-threatening shortage. 

As prices in economies are nothing but the aggregation of millions and millions of people’s such valuations and the transactions at which they realize those prices, when something major changes to everybody’s circumstances at once, of course prices should change! Anything else would be silly – What else do you think prices are there for?

Economists have spilled much ink arguing with each other about the role of prices in capitalist market systems, and even more effort trying to explain to the public precisely what the price tags they observe – and the money incomes they receive – actually do in the wider economy. Most of the time I’d like to think that they’ve done so successfully. 

Whenever there’s some threatening event like a hurricane, blizzard, or – completely hypothetical, of course – a widespread pandemic that freezes certain production and keeps people quarantined in their homes, much of this effort was probably for nothing. Customers complaining about price hikes and politicians passing price gouging laws are Exhibit A that economists have more persuading work to do (with rent control or other pernicious instances of price fixing perhaps being a close second, Exhibit B).

For some reason, supporters of these policies refuse to accept that the world with a threatening event is different from the world a few days before without the same event. Something has changed in between; the conditions that brought about yesterday’s prices have changed – often suddenly and without warning. Why would you want to force anybody to operate today at yesterday’s prices?

Prices are the aggregation of local and global information about scarcity, about how much there is available of which goods in what area; how many more we can produce fast enough; or how many we can bring into an affected area from a less-affected area. Prices capture the combination of what people want and how rapidly and in what quantities others can bring it to them. Operating at yesterday’s prices means that people transact with outdated information about the needs and conditions of others, and without the extra payoff to the entrepreneurial people who go out of their way to bring much-needed goods to people who urgently want them. 

In other areas of our lives we seem to grasp this idea of prices rapidly changing to reflect the conditions that face producers on the hand, and the fickle desires from competing consumers on the other. Prices for air fares are one example; stock markets and financial instruments are another. 

Imagine indignantly approaching your stock broker or your travel agent and complaining about today’s prices: “Yesterday, you offered to sell me Tesla shares at $300, but today they’re at $500 – extortion!” or “Yesterday I saw a price quote for $250 L.A.-New York round trip, but today you’re quoting me $400 – that’s unjust exploitation!”

This would be nonsensical. Every customer, supplier, observer, or middleman in these markets knows that their prices fluctuate day-by-day and even minute-by-minute, in accordance with hyper-fast algorithms that reflect supply and demand conditions in their relevant markets. Offers in the past are gone. Water under the price bridge. Each day begins anew, with prices only vaguely corresponding to those of previous days, yet have no direct connection to them. 

In many other aspects of the economy, we’ve forgotten that this is the natural state of all prices where conditions may change – that is to say, every aspect of human life. It’s just that a lot of markets, usually, work much slower than the minutes or seconds of airlines and Apple stock. Some of them are even so stable that both buyers and sellers are happy to contract away short-term changes, like for our salaries or our apartment rents. Others, we renegotiate periodically, like our mortgages or insurance policies. 

For groceries in a pandemic, it’s like an economical mayhem of confusion has invaded our minds. I am entitled, by the Law of the Land and the State of Nature to purchase a 12-pack of eggs at $1.99, for all eternity. Or a large ripe orange for $0.99.

Yes, yes, say most consumers, I understand that prices do and should increase if there’s suddenly a lack of oranges – say a Florida harvest season gone bad – or through the grinding impact of moderate price inflation. But a pandemic shutdown is, after all, the same kind of extreme price-altering shock that a bad Florida harvest is – just much, much bigger. Why, then, should prices change to harvests but not to pandemics? What’s right and just about oranges suddenly becoming much more expensive but unjust and predatory when toilet paper, vegetables, pasta or water bottles do?

When the setting is completely different, prices ought to be too, because prices come from our subjective valuation of needs and wants – valuations that change with circumstances and the goals we want to achieve. That’s as true for closed-off communities in a hurricane or a pandemic as it is for a thirsty hiker who made some fatal mistakes in his desert adventure. 

Don Boudreaux compellingly notes that the argument isn’t between plenty of goods at low or normal prices and plenty of goods at high prices; it’s between a complete lack of goods at yesterday’s (low) prices, and plenty of goods at high ones. High prices make suddenly much-demanded goods obtainable. 

After all, it’s not the sellers of oranges, toilet paper or water bottles that put the “exploited” buyers in their current predicaments. In contrast, they’re the saviors that offer them a way out. 

Joakim Book

joakim-book

Joakim Book is a writer, researcher and editor on all things money, finance and financial history. He holds a masters degree from the University of Oxford and has been a visiting scholar at the American Institute for Economic Research in 2018 and 2019. His writings have been featured on RealClearMarkets, ZeroHedge, FT Alphaville, WallStreetWindow and Capitalism Magazine, and he is a frequent writer at Notes On Liberty. His works can be found at www.joakimbook.com and on the blog Life of an Econ Student;

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