0:33 Intro. [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.

6:21 Russ: 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.

15:49 Russ: 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.

22:02 Russ: 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.

29:35 Russ: 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.

38:52 Russ: 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.

42:05 Russ: 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.

48:00 Russ: 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.

52:37 Russ: 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.