Do Economists Actually Know What Money Is?

Economist Gregory Mankiw is very pleased to have been gouged by a scalper, he informs us in a recent New York Times column. Mankiw recently went to see the Broadway musical Hamilton, and paid the going rate for a ticket: $2,500. Yet he was far from dismayed at having paid this extraordinary sum. In fact, he describes those who object to price-gouging as “pernicious.”

That’s because Mankiw adopts the standard economist’s view on exorbitant prices for goods: where the layman sees gouging, the economist sees the sublime operation of the law of supply and demand. As Mankiw says, “terms like ‘scalping’ and ‘price gouging’ are pejoratives used to demonize those who resell tickets at whatever high prices the market will bear.”

People are wrong, Mankiw says, to say that Hamilton tickets are “hard to come by.” In fact, he reports, they are extremely easy to come by. You just have to be willing to spend several thousand dollars to get them. For Mankiw, as for most economists, this means that the market is working. People who are willing to pay the most for tickets are getting the tickets, and “private individuals” are reaping “mutually advantageous gains from trade.”

He gives a parallel example. In 2009, Jay Leno decided that what unemployed auto workers needed the most was free tickets to a Jay Leno concert. So he gave them a bunch of tickets, which many of them promptly tried to sell on eBay for $800 each. Leno was horrified. But Mankiw thinks Leno should have been pleased. After all:

Some unemployed workers, presumably short on cash, thought that the $800 in their pockets was more valuable than an evening of laughs. Similarly, the ticket buyers would voluntarily give up their $800 for a seat. The transaction makes both buyer and seller better off.

Thus the free market reveals what each individual values, and how much they value it. If I keep my Jay Leno ticket, rather than selling it, it is because I value the experience of seeing Jay Leno more than $800. If my coworker sells his ticket, it is because he prefers the money. Everyone gets what they want the most, as the market efficiently satisfies our preferences.

Yet when economists tell this fable, they neglect a single crucial fact: some people are wealthier than other people. The reason Mankiw loves price hikes is that they don’t affect him, because he has so much money that he doesn’t really care what price he pays for a Hamilton ticket. Wealth confers the ability to jump to the front of the line, bypassing those who may want to see the show far more but who have less money to spend on theater tickets.

To return to the Jay Leno example: Mankiw thinks it’s wonderful that the unemployed workers sold their tickets on eBay. Thanks To The Glorious Free Market, Everyone Is Better Off. But this overlooks something crucial: the workers may not be happy about having to sell their tickets. Perhaps one of the unemployed workers was absolutely thrilled when Jay Leno gave him a ticket. Perhaps he and his wife met at a Jay Leno concert in the 80s, and he couldn’t believe his good fortune in having been handed the perfect anniversary present. But then he realized that his child’s medical bills were more pressing, and the tickets would have to go. Perhaps he cried about it that night, thinking about the gift he wished he could given his loved one.

The situation surely differed depending on the unemployed workers’ personal finances. Others might not have given the slightest crap about Jay Leno, but might have had savings to live on and enjoyed the opportunity to have a night out. In each instance, the outcome does not reflect how much the workers want their tickets, but how financially desperate they are. Thus what Mankiw sees as a measure of preference is in fact largely a measure of hardship. Economic outcomes aren’t a product of what people value, but how much money they have to throw around. If I am a rich fart who likes setting paintings on fire, I might buy up a set of van Goghs and barbecue them. I might get an ounce of enjoyment out of this, but really not particularly care very much. It’s certainly hard to argue that because my bid was the highest, the paintings went to their most-valued use. And yet this is the logic of economic efficiency.

Another example: you see a man drowning. You are about to toss him a life preserver. But then you remember Mankiw’s words: there is no shame in figuring out what the market will bear.

“How much would you pay for me to toss you this life preserver?” you shout to the man.

“Blub,” he replies.

“I’m afraid ‘blub’ just won’t do,” you call back, beginning to walk away. Through mouthfuls of seawater, he manages to spit out the words: “I’ll pay whatever you want, just toss the damn life preserver!” As he thrashes about, struggling for his life, you manage to strike a deal. You will toss the life preserver, and he will turn over all his worldly assets to you as soon as he hits land.

For economists, what has just occurred is an efficient transaction. Each person has been made “better off.” The person who tosses the life preserver gets paid, and the drowning man gets saved, by paying someone to toss a life preserver. Everyone is happy.

Of course, in reality, you have extracted a person’s entire wealth from them by threatening to let them die, and callously refused to engage in the most basic of moral human behaviors unless you get paid for it. You have acted like a total sociopath. (Or, in other words, like an economist.)

Many economists might object to the example. “Well, that’s different, that’s coercion, because someone’s life is at stake.” That’s certainly a fair distinction: there is something different, and worse, about increasing prices when withholding goods from someone will actually kill them. In fact, though, economists frequently do defend precisely this kind of gouging. The classic example of highly inflated prices is the market for essential supplies in the wake of a disaster. Many economists simply do not see the problem with charging $500 for a jug of water or a gallon of gas after a hurricane. As Matthew Yglesias writes, “letting merchants raise prices if they think customers will be willing to pay more isn’t a concession to greed,” rather, it “creates incentives for people to think harder about what they really need.”

And high prices for essential goods certainly do create an incentive not to waste them. That is, unless you’re rich. It doesn’t create any incentive for rich people to think about what they really need, because a rich person could buy a dozen $500 bottles of water after a hurricane and pour half of them into the street. If everyone had the same amount of money, high prices for scarce goods would indeed cause us to have to bid to see who was willing to give up the most, and therefore who valued the goods most. But everyone doesn’t have the same amount of money, which means that those who are willing to “give up” the most aren’t really giving up anything at all, because their wealth means they think nothing of paying a price that you or I might balk at.

What is most bizarre is that economistically-inclined thinkers like Yglesias and Mankiw, who argue that price-gouging efficiently allocates goods, seem not to have any idea what money is. They do not realize that, the greater the inequality, the less true it is that “the price someone can afford to pay” constitutes “the relative value they place on the item.” I might be a high-school theater kid who would give my entire savings to go and see Hamilton. But Greg Mankiw, who is just bored in New York for an evening and wants something to do, is so rich that he can easily outbid the pitiful piggy bank of crumpled bills I have spent months working overtime to collect.

The economic argument for price gouging demonstrates a fundamental ignorance of what wealth actually is to begin with. Yglesias thinks it is silly to give post-disaster supplies out first-come, first-serve rather than to the highest bidder, because this “allocates them arbitrarily to whoever shows up first.” He doesn’t mention that gouging allocates these goods non-arbitrarily to whoever has the most money. The same oversight occurs in much of the discussion around Uber’s “surge pricing.” Financial journalist James Surowiecki, in dismissing consumer concerns about Uber’s practice of multiplying prices during times of scarce supply, speaks disparagingly of “people’s implicit assumption that prices should be set, in some sense, independently of supply and demand.” Yet this assumption is based on a perfectly rational instinct: the feeling that it is unfair when certain things that should be accessible to all can be had only by the rich. People who actually need Uber rides might have to forgo them, so that people who do not need Uber rides (but have lots of money) can have them.

Yet Mankiw, who served on the Counsel of Economic Advisers, does not actually even see the most basic implications of his position. As he writes:

It was only because the price was so high that I was able to buy tickets at all on such short notice. If legal restrictions or moral sanctions had forced prices to remain close to face value, it is likely that no tickets would have been available by the time my family got around to planning its trip to the city.

Of course, the reason no tickets would have been available is that they would have been distributed more equitably, to those who showed up first, rather than to the jackass Harvard professor who strolled up to the theater five minutes before and plopped down a few grand. Yet for Mankiw, a good world is one in which he gets Hamilton tickets, and a bad world is one in which he does not. He cannot conceive of the possibility that it might be otherwise: that the best of all possible worlds is the one in which Gregory Mankiw is gruffly refused admission to Hamilton, as he desperately wails and throws handfuls of bills at the ticket-taker. That the best world is the one in which each is rewarded in accordance with what they need and desire, rather than what they have or own.