Gouging games

Stop me when someone in this scenario has done something wrong:

1) A major calamity occurs. Infrastructure is compromised, and it's not very safe to travel. It's obvious that food and water in the coming weeks will be scarce. There's no clear, safe way out of the area and situation. Staying put seems the smart thing to do.

Luckily, John and his wife Jane have already taken precautions. They have food and supplies to last a week - or two if they skimp and conserve. They have two infants, so it'll be very tight - especially if new supplies can't be obtained after a week.

Peter, their neighbor, has not thought so far ahead and has few supplies, but plenty of money. He has no family to care for, but is sure to get hungry soon.

2) Peter approaches John and Jane, asking for charity. John and Jane decline, citing the infants for whom they must provide. It's not clear that they will have enough supplies to spare.

Have John and Jane done anything wrong?

3) Peter offers $100 for the equivalent of one day's worth of food. John and Jane decline for the same reasons stated earlier.

Has anyone done anything wrong yet?

4) Peter offers $1000 for the equivalent of one day's worth of food. John and Jane decline for the same reasons stated earlier.

5) Peter offers $10,000 for the equivalent of one day's worth of food. John and Jane decline for the same reasons stated earlier. Peter has no more to offer, and decides to tighten his belt.

Has anyone done anything wrong yet? If it was okay to decline when Peter first offered no money, shouldn't it be okay to decline when he offers a lot of money?

5b) In an alternate scenario (let's call it scenario B) John and Jane relent. They decide (perhaps foolishly) that they can risk going hungry for a few days in exchange for the brighter future they might be able to offer their children (if they survive) with the $10,000 Peter has offered. Perhaps when this calamity is all over, they can invest the money for the education of their children. Note that they are playing with their lives. It's not at all clear that they'll have enough supplies to last until help arrives.

Has someone done something wrong? In the world of scenario A, Peter goes hungry, and dies just one day before help and supplies arrive. The infants survive because John and Jane took precautions, and because they valued their supplies almost as dearly as the lives of their children. They didn't value their supplies at the prices they paid for them. They knew the bread they kept truly was bread of life. It was clearly worth more than $10,000. It kept them alive long enough for help to arrive.

In the world of scenario B Peter has enough food to hold on a few more days until help and supplies arrive. He counts himself lucky. Surely his life was worth more than the $10,000 he gave to his neighbors in exchange for the life-saving meals. Only a miser would have held onto the $10,000 and lost his life. The infants survive, but have an uncomfortably-close brush with death.

Which world is better? The one in which Peter is alive, or dead?

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Using an extreme example is

Using an extreme example is not an effective way to justify "gouging" to Joe citizen. If you are going to make an attempt to explain away gouging, you have to stick to your guns and say that it is the best way to efficiently maximize everyone's desires.

True. That's what I alluded

True. That's what I alluded to when I said that they were playing with their lives. Scenario C, where the children die is also a possibility. That scenario causes us to judge John and Jane potential fools. Though, scenario C could happen even if they don't sell food to Peter.

The possibility keeps them honest - causing them to truly weigh the value of their lives, and the lives of their children, against the probability of death (which can't be known with any precision). It's also what causes the eventual "price" to rise so high.

My point is to "justify" price gouging. To show that it's nothing more than taking a hard look at how valuable something is. If John and Jane sold food to Peter for the price they paid, they'd be grossly undervaluing the supplies while at the same time endangering their lives, and the lives of their children. They'd be opening the door wider to scenario C.

How about: Neither, as there

How about: Neither, as there is no objective standard upon which to judge?

I think it's a false

I think it's a false dichotomy. I don't think you can pose a meaningful question without C: the children die. Otherwise you're looking at the final time-slice of two scenarios in total moral isolation.

I fail to see how scenario B

I fail to see how scenario B is wrong if both agree to the price.

There's no such thing as

There's no such thing as gouging.

If you are a gas station operator with a supply that won't get replenished for possibly weeks, your gas just went up in value. The value TO YOU went up. Why on earth would you sell for $2 gallon?

If you were able to get in line and fill up a tank and some cans at $2/gallon from an operator being foolish and/or charitable, would it be immoral for you to park outside the exit and offer your surplus for $5/gallon?

What if as you were pulling out someone in a limo offered you $10/gallon to siphon? Would you sell a little? At a a $100? Are you then immoral for doing so?

"Price gouging" is a nonsense policial term, nothing more.

nmg

nmg, Although I agree with

nmg,

Although I agree with you 100%, most people would say that those acts are immoral because you are profiting from tragedy.

I hope that you are only

I hope that you are only using the term price gouging to echo Bush because in my mind John and Jane's food and water at X price are the market price.

Here is the what I think is the heart of your question from another angle - Would Peter prefer to have food and water at a price of $10,000 or no food and water at a price of $100 (or whatever John and Jane originally paid at the then prevailing market price?

Would you rather pay $10/gallon for gas whenever you wanted it or $3/gallon and wait in 10 hour lines or not get it at all?

As far as the last question, John and Jane should just wait it out until Peter dies and then take his money. It's for the children!

Well I supose I might as

Well I supose I might as well take the minority position- your example is not gouging because the items are neccesities to the sellers. It plays rhetorically on the fact that the value of the goods have increased because of how much they're needed. They haven't increased prices opportunistically as the oil price gougers have. How about this- when supply increases the price because the goods are in such short supply that their value increases, that's not gouging. But if the new price is a result of a demand increase (in the aftermath of a tragedy, let's say) than I would say it's gouging.

Gouging is an intuitive moral concept, that everyone seems to get except economists because (as usual) they can "prove" that it doesn't exist. That's because the definition of price is indistinguishable from the definition of value in Neoclassical economics, and that's a grave mistake. Vlaue in price are different, and the real definition of gouging would probably be easy given a theory of value.

Matt

Matt- Not sure what you

Matt-

Not sure what you mean. Price and value are indeed separate in neoclassical analysis (as well as Austrian). Price is driven by valuation (both sides), which is completely subjective. Price is a way of getting at what someone's values are, but it is impossible prior to an exchange to know how much someone valued X or Y. Interpersonal utility comparisons are still verboten.

MP replied to NMG

MP replied to NMG thusly:

===Although I agree with you 100%, most people would say that those acts are immoral because you are profiting from tragedy.
Comment by MP — September 02, 2005 @ 11:06 am====

I would say you are profiting from mutual satisfaction. The alternative, would be to keep driving and not offer any fuel to any of the other motorists, at any price. In this scenario, you couldn't be accused of being immoral, because you're not profiting from the tragedy, you're just keeping what is rightfully yours (the fuel you just purchased)

Other than that, the only alternative is to give things away (that you have paid for because you wanted them at the price chosen) or to sell them at what could only be considered a loss, to you.
In either event, the roles are reversed, and someone else is profiting/benefiting from the tragedy, at your expense.

So pick your poison...

Price and value are indeed

Price and value are indeed separate in neoclassical analysis (as well as Austrian). Price is driven by valuation (both sides), which is completely subjective. Price is a way of getting at what someone’s values are, but it is impossible prior to an exchange to know how much someone valued X or Y. Interpersonal utility comparisons are still verboten.

The Classical school had a theory of value, which had to do (roughly) with how many labor hours were required to produce the good. Prices would fluctuate around the actual value, but the value would only change would major breakthroughs in production methods. The Neoclassical school contends that value and price are indistinguishable, and that the price paid is how much something is "worth." To give an example- when the Island of Manhattan was purchased for a string of beads, the NC school argues that Manhattan was worth a string of beads, because the indians subjectively valued them as such.

The Classical school, however, would contend that the Indians just didn't have enough to info to accurately gauge the value (by seeing how many labour hours were neccesary to produce the beads) and as such they were taken advantage of. The latter being, of course, a concept which doesn't exist when Value and Price are indistinguishable.

Matt

The labor theory of value

The labor theory of value rears its decomposed zombie head, once again. :wall:

or to sell them at what

or to sell them at what could only be considered a loss, to you.

Forgoing profit is not the same as a loss. Ask most any person in the general public, and they will tell you that a loss is only when something is sold for less than its purchase price. Joe Public does not consider opportunity costs or other such concepts discussed by Economists. And trying to argue in Economistspeak to Joe Public is a dead end. My point is that arguments supporting "gouging" as a morally permissible act are difficult to construct in a way that is acceptible to Joe Public. Using extreme cases like the initial post is not an effective way to go about it.

Value is subjective. That

Value is subjective. That there are relatively constant things over time that people tend to value does not change this ultimate fact.

Thus any theory that purports to tell us what something’s “true” value is (from a 3rd party, objective standpoint), is false.

well thanks for providing us with a nice example of begging the question. Now seriously, what's your argument?

Less Jocularly though, I just think Adam Smith should be rescued from Karl Marx. Marx so distorted the "theory of value" in order to prove that Capitalism was doomed to fail, that people just wrote off the completely reasonable theory of value which, emphatically, is not a labor theory. It's not all Marx's fault- Ricardo was the first one to assert really that only Labor could be a source of value, whereas smith allowed, correctly, that machinery and animals could contribute as well. Here's Smith's reasoning for a theory of Value (he uses the example of Labor here):

"In that early and rude state of society which precedes both the accumulation
of stock and the appropriation of land, the proportion between the
quantities of labour necessary for acquiring different objects, seems to be
the only circumstance which can afford any rule for exchanging them for one
another. If among a nation of hunters, for example, it usually costs twice
the labour to kill a beaver which it does to kill a deer, one beaver should
naturally exchange for or be worth two deer. It is natural that what is
usually the produce of two days or two hours labour, should be worth double
of what is usually the produce of one day's or one hour's labour."

I think this is quite reasonable, and imminently preferable to the idea that value is just in people's heads. Value exists in a commidity, and prices in the long term reflect this value.

Matt

Matt, Value is subjective.

Matt,

Value is subjective. That there are relatively constant things over time that people tend to value does not change this ultimate fact.

Thus any theory that purports to tell us what something's "true" value is (from a 3rd party, objective standpoint), is false.

Doink- Do you realize the

Doink-
Do you realize the fiancial implications of the proposed idea? what about overhead? Overhead costs you interest. And time. And effort. Shouldn’t Habib at the Shell station be allowed to account for his overhead costs, and net a little for Habib Jr’s college fund?

What is morally reprehensible is that you (or others) cite your own need/desire for a product as a legitimate reason to force me to provide it to you at a price that only one of us agrees to.

They don’t have to understand Economistspeak, but they need to realize taht the vast majority of their decisions are made based on principles that they are utterly unaware of.

No it isn’t. Value is subjective, determined for each and every individual by their personal preferences.

Value is "the innate worth of a commodity, which determines to normal ("equilibrium") ratio at which two commodities exchnage." That's more or less David Ricardo's definition. According to economics historian Steve Keen "one essential correlary of this concept is that value is unrelated to the subjective valutation which purchasers put upon a product." In sum: your definition is very wrong.

Prices are objective, determined by the aggregate preferences of consumers and availability of supply.

that's not really objective, is it? The functioning of supply and demand are the workings out of consumers' subjective preferences. How those would aggregate to produce something "objective" is a mystery to me. This debate seems rather harsh in tone, which is too bad, but I feel like you've had a really short fuse lately- look at your last couple of posts directed at me, as they're actually quite harsh and insulting.

If prices and value were the same thing, no one would ever purchase or sell anything, because the price of the sale would be equal to the value they place on the commodity, and they would be indifferent between holding the money and holding the commodity.

again, I don't think you're getting what Value means. Don't use the colloquial definiton of value; it means something different in Econ.

No neoclassical economist contends this, because it would destroy the concept of consumer and producer surplus. The price paid is necessarily less than and not equal to the value the buyer places on the commodity given the information he has prior to the exchange, and necessarily greater than and not equal to the value the seller places on the commodity given the information he has prior to the exchange.

again, value resides within the commodity. I think you're assuming that Value, has to do with what's sometimes called "the buyer's subjective valuation" which is approqimately what lies behind the demand curve, so I understand the error. However a theory of value is a theory of long-term prices, more or less.

Of course it exists. Austrians and neoclassical economists merely contend that action reveals preference given the information available prior to the act. Neither contends that consumers or producers are omniscient and infallible.

The neoclassical school defends such a purchase on the grounds that it was rooted in each parties subjective valuations at the moment of exchange. To argue otherwise is to assume an actual innate value to the product like I'm arguing exists.

Matt

The labor theory of value

The labor theory of value rears its decomposed zombie head, once again.

no, it's not the labor theory of value. Sraffa blowtorched that argument long ago. I don't contend that labor is the only thing that adds value- all inputs to production can be sources of value (which marx denies). I just think that value exists.

Marx actually seemed to realize this too, but then denied it because was an ideologue, and the more broad theory of value can't prove that the rate of profit will tend to fall and Capitalism will eat itself.

Matt

Neoclassical school contends

Neoclassical school contends that value and price are indistinguishable, and that the price paid is how much something is “worth.”

Again, no. No neoclassical economist contends this, because it would destroy the concept of consumer and producer surplus. The price paid is necessarily less than and not equal to the value the buyer places on the commodity given the information he has prior to the exchange, and necessarily greater than and not equal to the value the seller places on the commodity given the information he has prior to the exchange.

The Classical school, however, would contend that the Indians just didn’t have enough to info to accurately gauge the value (by seeing how many labour hours were neccesary to produce the beads) and as such they were taken advantage of. The latter being, of course, a concept which doesn’t exist when Value and Price are indistinguishable.

Of course it exists. Austrians and neoclassical economists merely contend that action reveals preference given the information available prior to the act. Neither contends that consumers or producers are omniscient and infallible.

That’s because the

That’s because the definition of price is indistinguishable from the definition of value in Neoclassical economics

No it isn't. Value is subjective, determined for each and every individual by their personal preferences. Prices are objective, determined by the aggregate preferences of consumers and availability of supply.

If prices and value were the same thing, no one would ever purchase or sell anything, because the price of the sale would be equal to the value they place on the commodity, and they would be indifferent between holding the money and holding the commodity.

If you buy gas for $3 a

If you buy gas for $3 a gallon, and you spent an hour in line at the pump to get it, selling it to the next man at $3 is certainly a loss for you. It may not be a financial loss, but it is certainly opportunity cost.

Arguing that Joe Public doesn't think in terms of econospeak is spurious. Joe Public absolutely thinks in terms of econospeak, he just doesn't realize he's doing it. This is why you go to the U-scan lane at the grocery store, instead of waiting in line, or the drive-thru instead of walking in and having a meal at McDonalds. This is why I order books from Amazon, so I don't have to deal with idiots on the road, in the bookstore, waste my time, etc.

Again, as others have, I would argue that "gouging" doesn't exist, it is just a term that people made up to express their dissatisfaction with the current state of affairs.

But even assuming your definition, that gas ought to be sold at cost--

Do you realize the fiancial implications of the proposed idea? what about overhead? Overhead costs you interest. And time. And effort. Shouldn't Habib at the Shell station be allowed to account for his overhead costs, and net a little for Habib Jr's college fund?

What is morally reprehensible is that you (or others) cite your own need/desire for a product as a legitimate reason to force me to provide it to you at a price that only one of us agrees to.

Disclaimer: I am not arguing

Disclaimer: I am not arguing for, nor is it my intention to imply that I favor, price controls and/or anti-gouging laws.

doinkicarus, you are attempting to introducing information regarding the result of price controls (i.e. rationing) into a moral argument about gouging. Try making that argument to someone who is not strong in finance or economics and you'll get blank stares. Most of Joe Public that is arguing for gouging laws accepts that profit is ok. They have a harder time accepting windfall profits that can occur at a time of large supply/demand shifts, particularly when the shifts are related to an event that resulted in human tragedy.

They don't have to

They don't have to understand Economistspeak, but they need to realize taht the vast majority of their decisions are made based on principles that they are utterly unaware of.

Sometimes you do have to resort to extreme arguments to get a point across. Becaus unfortuntely, as the evidence (per News reports coming from LA) seem to indicate, many of the people down there are proving that the diamond-water paradox is not really a paradox at all, and in fact they prefer diamonds (or flat-screen TVs) in a situation when something life-sustaining like water is hopelessly scarce.

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