Un-Locke-ing Markets

Un-Locke-ing Markets

Is price-gouging a problem?

US Postage Stamp. Source: Wikipedia

John Locke is an important source for the ideas that went into our Declaration of Independence. But he also has a keen sense of economic justice.

During his time in Europe the price of wheat would vary by location. What was available in one city might be scarce in another. Locke noticed two towns—one where grain was plentiful and the price was five shillings a bushel, and another where people were practically starving and the price was 20 shillings. If it costs me the same to transport the grain to either town, Locke asks, which should I ship to and what should I charge?

The answer seems obvious to us: go to the 20-shilling town, and charge the market price. Not only do we maximize our own profit, but we help folks who are hungry. But if it only costs us 3 shillings to grow and transport the wheat, is it moral to sell grain for 20 shillings, when we could only get 5 shillings somewhere else? Locke says yes: not only are we satisfying a contract, but if we tried to sell the grain for less, others would snap it up and sell it at the higher price. We would impoverish ourselves without helping anyone else.

Grain silos, Western Australia. Photo: Darren Hughes. Source: Wikimedia

There’s a lesson here about price gouging. Many States have anti-gouging laws that make it a crime to raise prices more than 10% after a natural disaster. When hurricanes hit the East Coast, many gas stations don’t have power and their pumps don’t work, so there’s a gasoline shortage. People sometimes wait hours to get gas. If the price were allowed to rise, owners could rent generators to get their stations going. Or they could bring gas in from other locations. The storms don’t cause a shortage, price controls that set the price too low lead to a shortage. There’s too much demand and not enough supply. You can’t repeal the law of supply and demand.

People aren’t heartless. It’s wrong to charge more than the market price. But market prices can vary by location. Voluntary, informed, competitive markets produce efficient outcomes, and everyone is better off. Locke understands this. It would be great if our lawmakers did, too.

Douglas R. Tengdin, CFA

Chief Investment Officer

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