Magnanimous Merchants?

by Don Boudreaux on December 28, 2004

in Myths and Fallacies

My recent post opposing restrictions on price gouging brought some objections: this one on another blog, and a few by e-mail.

Suppose that a natural disaster hits. It causes demand for staple goods (lumber, bottled water, fuel, etc.) and certain appliances (for example, household electricity generators) to rise appreciably while simultaneously destroying existing supplies in the devastated area – and destroying supply lines. The underlying reality – the unfortunate but undeniable fact – is that the marginal value of staple goods and many appliances in this area is now suddenly much greater than it was before the disaster struck.

Left unregulated by government, prices of these goods will rise correspondingly, to reflect this higher value. In other words, these higher prices will tell the truth about the underlying reality.

But many people dislike truth-telling in these circumstances. It smacks of greed and – being presumed bad and unsocial – greed should not be tolerated, apologized for, or rationalized using cold-blooded economics. Greed should, in the view of many, instead be roundly condemned and emphatically prevented from operating in the aftermath of disasters.

………

Suppose that all merchants who regularly sell staple goods in the area now devastated voluntarily act as moralists would have them act. That is, merchants refuse to raise their prices above pre-disaster levels.

By doing so, these merchants would certainly avoid being labeled "greedy." But would they serve the public good as well as they would serve it if they raised prices to the levels that the market would bear?

Maybe.  But if so, these magnanimous merchants would have to possess immense amounts of knowledge, much of it about the personal and intimate circumstances of their actual and would-be customers.

Remember, the fact is that the quantities demanded of many goods far exceed the quantities immediately available to sell. Many people who want to buy these goods at the pre-disaster prices simply must do without. The question is – which people will get the now-scarcer goods and which won’t?

First come, first served? Few would agree that this method ensures that those who most need the goods actually get the goods. It’s too infused with chance.

So the magnanimous merchants take it upon themselves to choose which of the many aspiring buyers will be lucky enough to become actual buyers. A magnanimous hardware-store owner might, for example, survey his many potential customers, asking them – what? – "How much do you really need an electricity generator?" What answers would a customer who really needs, say, an electricity generator have to give in order to enhance his chances of actually enjoying the opportunity to buy it?

Would some potential customers lie? ("My new-born, sickly twin daughters will freeze to death unless I get a generator fast!" says the bachelor who merely wants to keep his illegal marijuana plants warm.) Knowing of the possibility of lies, perhaps the magnanimous merchant will devise some means of checking upon the truthfulness of his customers’ claims – or, as suggested above, this merchant will already have such intimate knowledge of his customers that he is really better described as a magnanimous and nosy merchant.

And regardless of how the magnanimous merchants acquire their knowledge of the different needs of customers for the now-scarcer goods on hand, what logic – what scale – does each magnanimous merchant use to rank these different needs?

Whether nosy or not, each magnanimous merchant must also be arrogant, cocksure, self-important – and, for a time at least, quite powerful.

These merchants, to avoid disturbing others with their greed, might indeed be magnanimous, but also possibly nosy and inevitably either brilliant in a god-like way or arrogant – and, to avoid taking advantage of their power, also somewhat saintly.

Sound like a reasonable alternative to ‘greedy’ price increases?

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