The Ethics of Free Pricing (Part 1)

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.