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The Ethics of Free Pricing (Part 3)

Another objection to free pricing 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.

  • 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.


  • Timothy D. Terrell

Timothy Terrell is associate professor of economics at Wofford College in Spartanburg, South Carolina. He is assistant editor of the Quarterly Journal of Austrian Economics and is an Associated Scholar with the Mises Institute.

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