I was in the St. Louis area this weekend as several inches of snow fell. A story on the local news (sorry, couldn't find a link) interviewed a young man who was going up and down the streets in a neighborhood shoveling sidewalks and driveways for cash. As I recall, the going rate he charged was $10. It looked like a middle class neighborhood. The people could certainly afford the $10. The young man probably made couple hundred dollars for his day's work. Not an insignificant sum. It really was a significant snowfall for St. Louis, maybe 6-8 inches in some places. (Contain your laughter, King!) So there were a lot of people who don't like to shovel that much snow and were willing to pay to have it done. While it's not a disaster on the scale of a flood or a hurricane, there still is a sense of disruption. A lot of man-hours need to be expended in a short time in order to restore a sense of normalcy.
It was just a man with a shovel--not a professional snow removal firm. I'm not even sure if it was his neighborhood. For all I know, he might have come from across town. (I don't recall if the news story went into that much detail.) Good capitalism? I think so. Self-interested? Absolutely. Is it ethical to engage in this sort of "profiteering" (if we wish to call it that)? Comments are open.
Now, right after the news crew interviewed that young man, they showed a group of citizens going around a neighborhood digging people out for nothing. They were doing it purely out of kindness. I believe that that particular neighborhood had more elderly residents who were the beneficiaries of the volunteers' labor.
So what are we to make of their selfless act? Could they have profited but chose not to? Probably. Are they bad capitalists? Good neighbors? Both?
Does the fact that this is a trade in services rather than goods have any bearing on how we perceive the actions of these individuals? Though the entrepreneur may be charging a little more than what the market for snow shovelers might bear in other times, is it ok since he is providing a labor service? (After all, it's not like he loaded up a pickup truck with shovels and sold them for $20 a piece, right?)
But then, hurricane regions often have guys in trucks swooping in offering their labor services for an exaggerated fee as well. Sometimes they get excoriated for price gouging. What's the difference?
Would it be wrong or unethical to go around charging $10 for shoveling in a neighborhood of poor elderly residents?
This is precisely what I meant in Saturday's post when I said that our attitudes (as well as the law) affect our supply response. So I can be perfectly comfortable saying that I applaud the entrepreneur as well as the volunteers. There are social customs, sometimes at a very local level, that may dictate when it is ok to raise prices in a case like this. Someone charging high fees to the poor and elderly might be met with disapproval from the neighbors (and maybe politely told to take a hike). Yet, people of means are perfectly willing to pay to avoid this unpleasant task that nature has thrust upon them. Few people would have a problem with that.
Honestly, I cannot imagine trying to think through this sort of economic problem without considering these kinds of issues. As Milton Friedman put it this when he wrote his oft-cited article, "The Social Responsibility of Business is to Increase its Profits"
That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. (emphasis mine)
and...
That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
We've had a rather spirited discussion of price gouging on this and other blogs. My position is, as it always has been, that the profit motive induces people to bring goods and services to the areas where they are needed most, and that prices should rise to compensate people for the opportunity cost they incur. How much the price will rise, the exact locations where it will rise, and the length of time it will remain elevated will necessarily depend on the particulars of the situation. Modern supply chains are likely to make the price increases smaller, more localized, and shorter. But it still will happen, often in ways that are hard to predict until that particular disaster occurs. But it will happen.
However, that does not give anyone license for deception or for violating the basic social norms. The question is how best to make sure that the goods and services go where they are most valued while discouraging people from violating those social norms. I do not think that vague and selectively enforced price gouging laws are the answer to that question. Information is the greatest weapon against price gougers. Information helps the process of price discovery happen more efficiently. There are private and public means of providing information that are not always used to their fullest extent. That would be a start.
If you look at anyone who looks to recover their opportunity cost as a criminal, then it will discourage the sort of people you want from coming into the affected area--unless they are large enough to be able to eat the cost. But then what of the people in areas out of Wal-Mart's reach? Will their only choice be the suppliers who are willing to risk the condemnation of society--those with less to lose and less of a conscience when it comes to those social norms?
Those are questions worth thinking about.
We do not get the thirty-inch Nor'easters up here, though. I think fourteen might be the most we've had in St. Cloud.
It is interesting, in my view, that the gouging argument seems to go to motive rather than outcome. Should we as *scientists* care whether the pick up truck is driven by a United Way volunteer or a for-profit construction worker? Why?
'Now, right after the news crew interviewed that young man, they showed a group of citizens going around a neighborhood digging people out for nothing. They were doing it purely out of kindness.'
And there is nothing in that which would be surprising to Russ Roberts or any other economist. Contrary to Spencer's claim that economists say the ONLY way to respond is with higher prices.
King,
The motive of the supplier may be of some interest insofar as it is influenced by the attitudes, social customs, and laws of society.
For example, when something is outlawed (or just scorned by society, for that matter) the people who move in to fill the void will be those who are more willing to risk suffering the consequences. The premium they will demand will be higher. Information problems will abound. They may provide the goods, but the result may not be entirely positive.
Prohibition comes to mind.
If people and governments did not look with such disapproval on "guys in pickup trucks" perhaps there would be more honest and reputable businesses who would raise their prices more modestly to compensate for the costs they incur. Thus, the less scrupulous "entrepreneurs" who lurk at the fringes might be forced out.
Motive doesn't matter in determining whether a given exchange produced mutual benefits narrowly construed. But I think there are some interesting aspects of the problem where motives, attitudes, social customs, and the laws are interrelated.
Patrick,
I agree with you on this point. Anyone who has read both "Wealth of Nations" and "Theory of Moral Sentiments" would agree.
Even so, do I think that occasionally people (even economists) get a little carried away with the "Wealth of Nations" side of the story? Yes. But as I have tried to explain to Spencer, I think that most economists who have spent much time teaching this issue have thought about it an awful lot and probably do a better job than he thinks.
Patrick Sullivan you said that:
And there is nothing in that which would be surprising to Russ Roberts or any other economist. Contrary to Spencer's claim that economists say the ONLY way to respond is with higher prices.
Here is what Russ wrote:
"You have a theory that the only way to get new supplies into a disaster area is through higher prices."
It's not a theory. It's an empirical regularity throughout most of human history. When there's a sudden increase in demand, certain things get very scarce. The result is high prices. Sometimes the prices are essentially infinite because there are things that simply aren't available. The high price reflects the scarcity of those things and encourages suppliers to import supplies into the area.
Posted by: Russ Roberts | Dec 12, 2007 3:41:55 PM
I read this exact quote from his blog a lot different then you do. I read it is Russ saying prices have to go up.
Why do you read it as him saying something else?
I think William Polley has the true beliefs of most economist, that typically prices do respond to shortages, but that is not always the case. Moreover, he is willing to listen to my thesis that modern computers and management techniques of the big box retailers means that the need to have very high prices after a disaster in the US is not what it use to be. Responsible capitalist corporations do not need to raise prices to get additional supplies into disaster areas and in real life they don't.
What Polley says is very different from the quote of exactly what Russ said.
Yes, I will admit that I have made some extreme statements and have oversold my argument, but the reason I did it was idealogs like that at Cafe Hayek take the position that there theories are all that matters, and that the reality of the situation plays second fiddle to their theories.
I was taken aback by your comments about my hometown, St. Louis. For anyone who has grown up there would know, it is a tradition for young people to make extra money by mowing lawns in the summer and shovelling driveways in the winter. I see that the rate charged is not much different than it was when I was a kid, and that would go along with the stagnation in wages in the overall economy. I doubt that the St. Louis residents would have felt betrayed for paying a young person $10 to lift the snow off their sidewalks and driveways, a task taking a bit of time if done correctly.
The other point I take issue with is that "6 inches of snow" would throw St.Louis for a loop- and that the tone of your article is that the citizens are somehow inferior. Well, it turns out that it is not very cost effective to have a fleet of snow removal equipment on hand, sitting idle most of the winter, for St. Louis is a river town, in the middle of the country. They just don't get the kind of snow that their northern neighbors have. I take it you are somewhere in Wisconsin, so it would make sense for your state/city/town to invest heavily in equipment, you use it more.
So before you make assumptions, and disparaging remarks about a town, think of it from their perspective first- you might learn that you are in the midst of some enterprising young entrepreneurs following a tradition and in practical, not parsimonious, citizens.
'I read this exact quote from his blog a lot different then you do. I read it is Russ saying prices have to go up.'
As I have already explained to you, Roberts is making a CETERIS PARIBUS statement. Your tossing in Wal-Mart's amazing ability to respond, thanks to their capital investment, violates the 'all other things remaining equal' constraint, and is irrelevant.
You really didn't understand my point in showing you pictures of flooded I-5 and a Wal-Mart surrounded by water, did you.
eyesonthestreet,
You totally misunderstood me. First of all, I come down to St. Louis all the time. I love the place. I'm a member at the St. Louis Zoo. Two of my favorite eating joints are Fitz's in the Delmar Loop and Ted Drewes on old Route 66. And you haven't had Italian food until you've been to the Hill. For the record, I have lived in Minnesota, Iowa, and now Illinois. Never Wisconsin. (Before I get any comments from Badger State citizens, let me just say that I think it's a lovely state.)
Second, it really was a significant snowfall for St. Louis. It was the 5th highest snowfall on record for December and the highest for any time in the last 5 years. My parenthetical comment to King Banaian was due to our living in or having once lived in places where 6 to 8 inches is considered paltry. Sort of like someone from hurricane country saying that you don't really know wind until you've stood out in a hurricane. A little playful humor, but a touch of truth to it. No more inferiority is implied than when someone from KC visits here and says that we don't know how to bar-b-que properly.
To be honest, the drivers in St. Louis did quite well during the storm. Better than I've seen them do in.... well I won't go there. But the roads were better on the Illinois side. That's just an empirical observation.
Now, third, and most importantly, about the substance of my post. Here's where I really want to correct any misunderstanding. The essential point of my argument is this:
"So I can be perfectly comfortable saying that I applaud the entrepreneur as well as the volunteers. There are social customs, sometimes at a very local level, that may dictate when it is ok to raise prices in a case like this. Someone charging high fees to the poor and elderly might be met with disapproval from the neighbors (and maybe politely told to take a hike). Yet, people of means are perfectly willing to pay to avoid this unpleasant task that nature has thrust upon them. Few people would have a problem with that."
In other words, I'm totally fine with people charging $10 in middle class neighborhoods. It's a mutually beneficial transaction. I'm also totally fine with volunteers shoveling out the poor and elderly for nothing. What I'm trying to illustrate here (in the context of a conversation that has been going on this blog and others for some time now) is that social norms matter. That is to say, I'm recognizing the very thing you point out about the traditions in the neighborhoods. You actually confirm my point.
My pointed questions about the ethics of charging for snow removal were rhetorical questions (mostly meant for Spencer) in which I meant to illustrate that it may not be as black-and-white as he made it sound in some of his previous comments.
I hope this clears things up. Fact is, I almost consider St. Louis like a second (or at least a third) hometown.