Un-Lockeing the Morality of Markets
John Locke is usually remembered as a source for the Declaration of Independence. But in a small pamphlet written in 1660 he also displays a keen sense of economic justice.
In 17th-century Europe the price of wheat would vary by town. What was available in one city might be scarce in another. Locke noted two towns—one where the price was five shillings a bushel, and another where the price was 20 shillings, where there practically a famine. If it costs me the same to transport the grain to either town, which should I ship to and what should I charge?
The answer seems obvious to us: the 20-shilling town, and we should charge the market price. Not only do we maximize our own profit, but we help avert starvation. But is it moral to sell grain for twenty shillings, when it would only bear a 5-shilling price somewhere else?
Locke says yes, because not only are we satisfying an arms-length contract, but if we tried to sell the grain for less, intermediaries would snap it up and sell it at the (higher) market price. We would impoverish ourselves without helping the poor townsfolk.
Through this Locke has something to say about Sandy, New Jersey, and price gouging. New Jersey has an anti-gouging law that prohibits retailers from raising prices more than 10% in the aftermath of a natural disaster. After Sandy struck, most gas stations didn’t have power and couldn’t pump, so there was a shortage. People waited hours to get gas. If the price had been allowed to clear, owners would have rented generators to get the other stations going—or they would have trucked in gas from Pennsylvania. The gas shortage wasn’t caused by Sandy, it was caused by a government price control that set the price too low—so there was too much demand and not enough supply. There’s no legislature that can repeal the law of supply and demand.
Locke isn’t heartless. If a buyer is especially desperate, he says it’s unjust to charge more than the market price. But voluntary, informed, competitive markets produce efficient outcomes where everyone is better off. Locke understood this. It would be great if our lawmakers did as well.
Douglas R. Tengdin, CFA
Chief Investment Officer
Follow me on Twitter @tengdin