Free Pricing: A Christian Direction

As Christians will have to fund the building of the Kingdom of God themselves — and not rely on the favour of the Powerful and the Wealthy (and the strings they love to attach to their “gifts”) — we will have to learn how just and godly economics works.

Among other things, this means that we will have to understand that “price gouging” is not a crime, or immoral at all. The seller has the right to set the price of his wares to any level he wants.

Mises.org has a vast selection of articles and papers rightfully defending the principle of free pricing – as opposed to having Our Betters determine the price of our goods “for the good of society”.

As if Our Betters cared a fig about “society”.

As opposed to a laser-focus on lawlessly and relentlessly extending their own power, for any old justification: popular or not, just or unjust.

But as I review the early days of Chalcedon’s articles, I will instead reprint the arguments used by Timothy D. Terrell in his series “The Ethics of Free Pricing”.

The Ethics of Free Pricing (Part 1) by Timothy D. Terrell

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About two weeks ago a winter storm swept through the eastern part of the United States, covering several states in snow and ice. In the part of South Carolina where I live, freezing rain left many thousands of people without electricity. Some were without power for a full week.

It was a good time to be a seller of batteries, chain saws, ice, and generators, or an owner of a hotel. People needed these things more than usual, and were willing to pay higher-than-normal prices for them. I have not become aware of any cases in which sellers raised their prices because of the storm, but the incentive to do so was certainly present. Disasters of greater proportions, such as a major hurricane, certainly do leave higher prices in their wake. At such times, all the above-mentioned items as well as home repair materials are in high demand. Shortly after Hurricane Hugo hit the South Carolina coast in 1990, chain saws were occasionally sold for $600, ice went for $10 a bag, and plywood was priced at $200 a sheet.

Most people, it seems, would not hesitate to call this an outrage. Public pressure on the civil authorities is usually sufficient to produce laws against “price gouging,” with severe penalties attached. People have become accustomed to paying $1 or $2 per bag of ice, and a price five or ten times that high seems plainly unfair. This sentiment seems no less common among Christians than among others, and is perhaps more common.

The idea that charging an abnormally high price is immoral seems to originate from an idea that specific market prices can be linked directly to the Christian concept of justice. Charging unusually high prices because of an unusually high demand is regarded as unethical. This applies to non-disaster scenarios as well. In normal circumstances, it is common for an individual who seems hurried, wealthy, or ignorant to be asked to pay a higher price. This, too, has long been regarded as unseemly by thoughtful believers. In a commentary on the Shorter Catechism, the 19th century Presbyterian Ashbel Green wrote:

In all matters of contract or traffic, we are to act conscientiously and fairly; to do as we would be done by…. Neither is it lawful to take advantage of the pressing necessities of others, for an immediate supply of some want which, if they could wait a little, or apply elsewhere they might obtain for much less than we demand. …[T]o avail ourselves of the ignorance, or the urgent wants of our neighbour, to take from him any part of his property, however small, which he might and would save, if better informed, or less pressed for immediate relief, is certainly inconsistent with Christian integrity, to say nothing of benevolence or kindness.

The support for this principle appears to be the Golden Rule, and the general admonition to behave kindly toward others. Would we wish to be asked to pay a higher price when we are obviously more willing to pay a higher price because of our circumstances?

In arguing, as I do, that it is moral to ask customers to pay different prices according to their unique situations, it might help to remember that a person who puts a high price on something is not “doing” something to the potential customer. The potential customer doesn’t have to buy that product. He could do without, find a substitute that satisfies the same intended purpose, or go to a competitor. Someone who posts a price on a product is simply communicating an intention to accept any bids that reach that price — he is not compelling anyone to accept the offer of sale.

We should also remember that the Golden Rule does not stand alone in Scripture. My imagination can come up with all sorts of things I wish others would do unto me. I might wish for every merchant I approach to offer me products for free, passing the cost along to other customers or absorbing it in reduced profits. Therefore I might conclude that the best practice for me would be to offer my services as an economics professor for free to all who ask. Yet I know that if society were filled with my benefactors, who gave to me willingly without regard for their own expense, and if I behaved likewise, this would produce a dreadful existence instead of a Christian utopia.

Explaining this conclusion will take a little time. To create the maximum value for others through our behavior, we have to have some method of ranking the value obtained by all the potential recipients of the good or service we offer, and providing that good or service to the person who places the highest value on it. We are not omniscient, and that knowledge is not intuitive. Of course, in a small group, such a ranking might be approximated with a fair degree of success through our knowledge of the people concerned. If I have a pie to apportion among my children, I can assess the valuations they place on the pie with relative confidence. When it comes to a broader society, I need help in finding out which of those people that want an economist’s services place the highest value on those services.

This task is complicated by the fact that there is no direct way to compare valuations from one individual to the next. There is no device that would reveal units of value when hooked up to a person. Likewise, any individual who makes a verbal claim to place the “highest” value on my services is not providing any useful information, for he cannot directly compare his valuation with that of any other person. Therefore, I ask that the people who want my services reveal their valuations in the only way that can allow me any way to compare across individuals. I ask them to show me how many other goods they are willing to give up in order to obtain what I offer. In an economy with money, the person who offers the highest price is the one who has offered the only credible evidence that he can make better use of my services than anyone else.

Yes, it is true that the price system ensures only that goods and services go to the highest bidder, not necessarily to the person who places the highest valuation on those things. However, we cannot attack the price system without offering a superior alternative — and we are short on alternatives that allow for generalized comparisons of value across individuals. Allowing bidding to high prices (even to “price gouging” levels) means that we are allowing the owners of the item for sale to locate the person who, by the only standard that allows comparison, receives the most benefit from it. Restricting the free movement of prices limits the availability of that information, and therefore makes it less likely that goods and services will go to their highest and best uses.

Adhering generally to a price system does not mean that charity should not exist. Because goods and services can be allocated efficiently by a price mechanism does not mean that we cannot take into account other factors. Prices provide information, and although we would be unwise to completely ignore that information, prices do not dictate our behavior. In a given situation, we may choose to bypass prices. Practicing kindness and generosity means that sometimes we give up that which would maximize our dollar incomes in order to achieve what we perceive to be a greater benefit for another person. However, the fact that we may make such sacrifices from time to time does not imply that exchanges at the market price are somehow sordid and immoral.

So, to return to the Golden Rule: I want others to act toward me in a biblical manner, not with pretenses to the characteristics that are God’s alone. I do not want people to make futile attempts at omniscience in their dealings with me — pretending that they know the values I place on various goods and services. I prefer that others behave in a manner consistent with their finiteness, seeking to obtain that information by the best method possible.

In this essay I have made a case for free pricing by contending that the setting of bounds on what constitutes a “moral” price is a claim to knowledge we do not have. In the next part of this three-part series, I will continue to examine the argument that charging higher prices to those who are willing to pay more is immoral. There are, of course, many more objections that are raised against free pricing, and one or two of these will be addressed in the third part.

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The Ethics of Free Pricing (Part 2) by Timothy D. Terrell

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In part one of this article, we examined the idea that the Golden Rule forbids “price gouging,” and concluded that it cannot. I want others to “do unto me” in a manner consistent with their God-given abilities — and ignoring prices arrived at in free negotiations between buyers and sellers amounts to a pretense to omniscience. To most opponents of free pricing, however, there is not much in part one that is likely to be convincing. An extended e-mail exchange I had with another Reformed Christian about this topic illustrated to me the common, unswerving dedication to the idea that the normal price has a moral virtue of its own. The seller, he said, does not have the ethical right to raise the price of a product when temporary circumstances (e.g., a hurricane) would allow him to successfully obtain that amount.

It seems that this objection to free pricing is equivalent to saying that the price should not depend at all on the circumstances of the buyer. I pointed out that this occurs very frequently in ways that are not considered immoral at all. Colleges make standing offers of scholarships to students who can show that their financial circumstances do not allow them to pay the standard tuition. A Christian bookstore may offer a book to an obviously poor customer for free, or at a steep discount, while another customer who is able and willing to pay more is charged the standard price.

The answer given me was that the colleges and bookstores have lower prices and normal prices, not normal prices and higher prices. Yet this seems only a matter of perspective. The fact is that there are at least two sets of prices, and what one chooses to call them matters little. At one college where I taught, very few students paid the full tuition. Most students received substantial discounts through scholarships. This is common at colleges. Are colleges taking unfair advantage of those who do not receive scholarships? Legitimizing two price lists when they are called “discounted” and “regular” and de-legitimizing them when they are called “regular” and “higher” is arbitrary and can provide no moral guidance.

Furthermore, the objection to this common practice of charging a higher price to customers who are apparently willing to pay more is subject to a significant inconsistency. The inconsistency arises because of the focus on the price paid instead of the value received by the buyer. The focus is understandable, for the price is easily observed while the value, as noted before, is not. However, charging equal prices to different customers does not mean that the different customers receive equal value. People find fault when the seller obtains more benefit from those who are willing to pay more than from those who are willing to pay less. Yet the same people who raise this objection do not see a problem with customers who have a higher demand for a product obtaining the same product at the same price as those who have a lower demand.

Suppose I have a consulting business. Suppose it costs me the same in time and materials to provide consulting services to company A as it does to company B. Because I provide the services, company A is able to increase their profits by $10,000 a month, and company B is able to increase their profits by $1,000 a month. Company A gets 10 times the value from my services as company B, or 10 times the value per dollar that B receives. Why would it be unfair for me to ask a higher price of Company A?

The response might be to argue that the cost to me of providing the services was the same in both cases, so that the price should also be the same. Yet basing a “just price” on the cost of production is problematic at the very core. The true cost to me of selling any product is the highest-valued alternative that I forego in order to provide that product to the customer. If I sell a service (as I in fact do), the highest-valued alternative might be the value of the leisure time I forego in order to provide that service. Or, it might be the value to me of the salary that another employer might be willing to pay me for those same services. Thus, cost is not objective — it depends upon the alternative uses of my time, or the alternative uses of the goods I offer for sale. Selling my consulting services to company B for $500 a month might be prohibitively costly to me if company A stands ready and willing to pay me $5,000 a month for the same time commitment.

The canonist Cardinal Hostiensis, writing late in the thirteenth century, recognized this idea of cost. In setting out conditions under which the usual usury prohibitions should not apply, he argued that the lender should be allowed to charge interest on a loan to compensate the lender for foregoing alternative investments. He called this fee lucrum cessans (“profit ceasing”). Later, other theologians (such as Conrad Summenhart and Martin de Azpilcueta Navarrus) expanded the lucrum cessans loophole. Reformational thinkers, such as John Calvin and the Dutch Calvinist Claude Saumaise, turned the numerous loopholes in the usury prohibition into a more general legitimacy for the charging of interest.

Another way of addressing this opposition to free pricing is to remember that the customer is actually a seller, too, in a sense. The customer is selling dollars. The goods vendor is buying dollars. Objecting to a high dollar price because of some perceived injustice to the customer is equivalent to asking the goods vendor to pay more in goods for each dollar obtained. A low dollar-price on goods is the same as a high goods-price on dollars. Why should we not object that there is an injustice being done to the goods seller whenever the price drops below the “fair” price?

Again, we are back to this idea of the “fair” price, and have attached an unwarranted virtue to the “normal” price. Only this time, we see that there must be not only an upper bound to the dollar price, but a lower bound. Earlier in this series, I pointed out that free pricing provides information to market participants, without which we would be left groping in the dark for the best allocation of goods and services. Here we see again the impossibility of making good allocation decisions in a complex economy unless we have prices. Who can know the value received by a buyer, or compare the value per dollar received by multiple customers? Who can know the highest-valued alternative of the seller, and thus the cost he incurs in providing the good or service? Who can claim to be well-informed enough to set upper and lower bounds of moral prices? When faced with these questions, we must assume an attitude of humility. Identifying the fair price as the normal price does not answer these questions, and puts morality up to a majority vote.

See Part 3

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The Ethics of Free Pricing (Part 3) by Timothy D. Terrell

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Parts one and two of this series addressed the question of whether or not it is moral for a seller to charge different prices to buyers who are in different situations. A system of free pricing, it was argued, is the only way to effectively rank the value received by all the potential recipients of the good or service offered. Without freely moving prices, it becomes impossible (in a complex society) to gain the information necessary to direct goods and services to those users who will gain the most from them.

In this final part, let us examine one further objection to free pricing. This objection argues that market prices are often high on items that have low value, and are low on items that have high value, and that the price system therefore has no logical connection to value at all.

Suppose a Christian bookstore has Bibles for sale, as well as books by J. Gresham Machen. The Bibles sell for $20, let us say, and the Machen books for $40. Some would say that the price system is certainly flawed, for how can the Bible be rightly priced at half the price of a copy of one of Machen’s works (as great as Machen was)? Surely the price system can have no relationship to value!

This reflects an old error in economic thinking that has become known as the diamond-water paradox. For centuries, economists wondered: why is it that water, which is necessary for life, has such a low market price; while diamonds, which are clearly unnecessary for existence, have an extremely high market price?

The answer lies in the principle of marginality. The first gallon of water a person obtains each day may go to satisfy the most urgent needs: relieving thirst, perhaps. The second gallon may be devoted to relieving thirst, or to cooking. The third may be devoted to cleaning, and subsequent gallons of water go to less and less urgent uses. The 100th gallon may be used for watering potted plants, or some other use that is obviously less “necessary” for human existence than using it for drinking water. As economists such as Eugen von Bohm-Bawerk were to point out in the late 19th century, the price one is willing to pay is determined by the value to the user of that last or marginal gallon of water. The purchasing decision we make is not: how much would I be willing to pay to have the quantity of water I now enjoy? It is: how much would I be willing to pay to have one more gallon? Since we already have large quantities of water to satisfy the most urgent uses, water usually has a low price because the marginal gallon is going to satisfy low-value uses. Diamonds, on the other hand, are much less plentiful than water, so the price paid reflects a higher marginal valuation. If diamonds were as plentiful as, say, sand on a beach, we might find people using diamonds as the aggregate in concrete. While the total value received by using water might be much higher than the value from using diamonds, the marginal value is much lower for water because of its higher quantity.

The price of a Bible, then, is related to the quantity of Bibles already available. Most likely, the vast majority of Americans who purchase a Bible already possess at least one copy. The additional (marginal) value of another copy is less than the first. While the total value of God’s Word is extremely high, the relevant factor in determining the market price is the marginal value. Machen books are much less common than Bibles, so it is understandable if people are willing to pay more for them than for Bibles — even though we would be far worse off without Bibles than without Machen.

If printing were more costly than it is today, people would probably find other ways to gain access to God’s Word than having a personal copy. There might be only one copy per family, or it might only be available in churches or libraries. This was certainly the case before Gutenberg and his printing press. Memorization, and hearing the Word read, would have been even more essential than it is today. When Christ was performing His earthly ministry, I suspect neither He nor His disciples carried about a personal copy of the Law and the Prophets.

So the observation that a category of necessary goods (like Bibles) has prices lower than a less necessary good (like a Machen book) does not indicate a flaw in the price system. What, then, of the argument that the price system does not work because the market places positive — even high prices — on items that should have a low or even negative value? For example, we see that pornography sells in the market for a positive price, when such items should not be valued at all.

The price system is very effective at seeing that valuations are reflected in prices. Yet to blame the price system for revealing high values on repugnant items like pornography is to “shoot the messenger.” It is not the price system that is to be faulted — it is the value structures of sinful human beings. Conversion of the soul (and subsequent sanctification of the individual) will bring about a radical change in valuations, and thus in the prices one is willing to pay.

The objections to free pricing are many, and they cannot be addressed fully in these short essays on the subject. Hopefully, however, this will serve as a start for some to continue looking into the ethics of economic issues. Economic education has been sadly lacking in Christian schools, colleges, and seminaries, and until this changes we would do well to pursue individual study. There are some excellent resources available on the price system and broader economic issues. Some of these are posted at the Center for Biblical Law and Economics site: http://www.christ-college.edu/html/cble/, but there is much more that a diligent search will turn up.

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