This week Michael C. Munger joins us to talk about voluntary transactions and questions of justice in market pricing.
What would everyone agree is truly voluntary? Are disparities in bargaining power coercive? What’s wrong with using the state to address these disparities? What about price gouging situations? What about sweatshops?
Aaron Ross Powell: Welcome to Free Thoughts from Libertarianism.org and The Cato Institute. I’m Aaron Ross Powell.
Trevor Burrus: I’m Trevor Burrus. Our guest today is Michael C. Munger, the Director of the Politics, Philosophy and Economics Program at Duke University. Welcome to Free Thoughts, Mike.
Michael Munger: It’s great to be on the show.
Trevor Burrus: Today we’re talking about voluntariness which is an incredibly core concept to free market and libertarian thought. I mean probably to all types of political thought. Why is the concept of voluntariness so core to economic thinking as we talk about it today?
Michael Munger: Well, a lot of economists will start with the assumption that exchange is voluntary whereas people who are not economists tend to wonder whether an exchange is voluntary. So right at the beginning, we have economists say since exchange is voluntary whereas everyone else says “if” and that makes a big difference. I think a lot of the reason is that economists are looking at kind of an abstract setting and we call it perfect competition. There are many buyers. There are many sellers.
The reason that it matters is that if something isn’t voluntary, it’s coerced. Now that’s a too trite distinction but if something isn’t voluntary, it means we were in some way forced to do it.
So the reason why a voluntary exchange is important is that we have some reason to believe that both are all parties to the exchange or better off. If we can find a way without increasing the amount of stuff to make at least two and maybe all people who are party to the exchange better off, it sounds like the world will be a better place. So it’s a way of justifying exchange, cooperation and all the sort of things that we value in a social setting.
Trevor Burrus: But voluntariness is also – as you said, it is a cornerstone of economic thought in the sense of we presume that you wanted to exchange if you do – generally speaking.
Aaron Ross Powell: Otherwise, you wouldn’t have exchanged.
Trevor Burrus: It’s hard to think about doing economics without the concept of voluntariness if you’re talking about subjective value and maximizing. But then other disciplines spend a lot of time thinking about whether things are truly voluntary and there’s a lot of ways that they may be aren’t truly voluntary. Some situations or things like this that affect how people think about exchange and – or maybe against markets.
Michael Munger: Right. There’s – what Aaron just said is right. Suppose that we allow people personal autonomy. That means that we credit their subjective desires as being something that if they act on them, no one is going to quarrel with it.
Well, there are plenty of circumstances whereas in fact that’s not true and we think that objectively you’re not better off and so we won’t allow you to do it. We don’t credit your subjective preferences and we think that you’re not really doing it voluntary, that it’s under duress because there’s some big difference in bargaining strength or you’re coerced somehow by circumstances. That is you don’t really have alternatives.
So for something to be voluntary, you had to have a choice. Now this is your only alternative and it’s not very good. It’s just better than the terrible alternative that doesn’t really seem like it’s voluntary and that distinction goes back to Aristotle.
So in The Nicomachean Ethics, Aristotle gives the example of a ship and the ship has a heavy cargo on it but there’s a storm coming. The captain is trying to decide whether to jettison all the cargo to save the ship. The question is, “Was it voluntary?” Well, in a sense, yes because he could have done otherwise. But in another sense, it wasn’t because he didn’t have any other legitimate choice.
So Aristotle says it may depend what you call voluntary. It may depend on kind of the locus of moral agency that you have and in this case, we can treat it as being voluntary. The guy did it, made himself better off.
Trevor Burrus: So he wasn’t brainwashed or a robot or put a gun to a head. It was always a choice in some sense.
Michael Munger: But it wasn’t voluntary in the sense that I had a couple of pretty good choices and I just chose the one that was better.
Aaron Ross Powell: So to clarify this, it depends that you just mentioned of trying to figure out what’s voluntary and what isn’t. You introduced this term “euvoluntary”. What does that mean?
Michael Munger: Well, some people say that it’s a monster word because the Greek prefix “eu” meaning well or truly is tacked on to the Latin root “voluntaris” [0:04:22] [Phonetic] and so you’ve got a Greek‐Latin monster word.
Trevor Burrus: Have you not taken your classics classes? I mean this is important stuff.
Michael Munger: If you’re really worried about that, you need to go to Walmart and get a life. They’re on sale and if that’s the worst problem with the word, then I wouldn’t worry much about it. So my question was, “What is truly voluntary? What would everyone agree is truly voluntary?” and I’ve written a couple of papers about this and in fact I’m going to Chile, Santiago de Chile to talk about circumstances under which people have the sense that something is voluntary.
I think for that to be true, not only do we have to be able to own something and have a sense that exchanging it is legitimate but also have not – not have too many externalities where it affects other people without their permission and it can’t – you can’t have coercion. So I think most economists would say coercion in the sense of having a gun held to my head means not voluntary.
Aaron Ross Powell: As I was reading the papers you’ve written about this, I was a little bit confused about the terminology or the need for a new term because we’ve now – it sounds like three levels. There’s coerced and then there’s voluntary and then there’s truly voluntary.
But the things that get described as just potentially voluntary but not truly voluntary like the – whether to toss the cargo off the ship or in one of the papers, you give an example of – you’re stuck in the desert, don’t have anything to drink. You’re on the verge of dehydration and some guy offers you water for a thousand bucks.
Does that – I mean it seems – we wouldn’t even call that voluntary at all. That looks like – how would we distinguish that situation? You either pay the thousand bucks or you die or you either throw the cargo overboard or the ship goes under from say the gun against your head example where you pay the guy – give me a thousand dollars. I will give you this water or I will shoot you if you don’t.
Michael Munger: It’s a distinction that philosophers make and I think what’s interesting about it is that it – the role of human agency between coercion. Having the gun to my head means there’s a human finger on the trigger. In the other case, I’m in the desert and presumably the person who is trying to sell me the water also didn’t maroon me in the desert. If he had, that would be something else.
But for whatever reason, I’m in the desert and maybe that morning – the example is a taco truck that shows up and is willing to provide me for the water, but for a thousand dollars a liter. He could have gone to the construction sites and sold tacos and water to everybody else, to the workers of the construction site. But he said, “I’m going to go drive around the desert and see if I can find someone who really needs water, and then sell them water at a thousand dollars a liter.”
So the question is, “Is that person acting badly?” So that really is the – what I want to know is there’s no question if I’m a robber. I hold a gun to your head and I steal your wallet. You make a voluntary choice. The old Jack Benny line was, “Your money or your life.” He’s like, “I’m thinking, I’m thinking.” So he’s trying to decide which one is worth more.
You’re probably going to decide your life is worth more and you voluntarily hand over your wallet in the context of the sort of – we’re ignoring the fact that you have rights to that wallet and I don’t. I’m going to shoot you. I don’t have the right to do that. So the duress there is human agency. The question is – and I’m acting badly. The guy with the gun is acting badly. Is the guy with the taco truck acting badly or is he actually acting well?
Even if he’s acting immorally, we might – many people would argue – Michael Sandel for example at Harvard would say he’s acting immorally. But do you really want to make – to say he’s acting illegally? Because if we outlaw that transaction, you’re condemning me to die of thirst in the desert. It’s hard to say how that makes me better off, that it’s your concern for my welfare. You’re violating a philosophical principle called non‐worseness.
Trevor Burrus: The way you describe it in one of the papers is you said that there are six characteristics of voluntary exchange.
Trevor Burrus: … five are voluntary. You mentioned property and externalities and no coercion from the agent who you’re dealing with. But the sixth one you describe as the best alternative to an exchange or the situation of –the situation giving you coercion but not the actual agent giving you coercion. Maybe it’s not even called coercion. Duress. So yeah, the BATNA, that’s – can you explain the equality of that in the concept of euvoluntariness?
Michael Munger: Well, I was actually trying to grant something that Michael Sandel had written in it. Again Michael Sandel is a philosopher at Harvard. In it he said it’s possible to be coerced but by circumstance. So the objection to exchange as being voluntary because economists just say exchanges are voluntary.
Well, it might not be if you’re working in a sweatshop and you don’t really have any alternative. So if you’re coerced by circumstance, the question is, “Is that exchange something that’s morally acceptable and should it be legal?” so that really is the background. I was granting his claim. What I was trying to do was make it less sort of emotionally‐appealing and give it some technical content.
So what Sandel said was there are two circumstances under which you might be coerced by circumstance. One is that you’re in dire circumstances and the other is there’s too big a difference in bargaining strength. So the BATNA is here’s what happens if I don’t participate in this exchange. The best alternative to a negotiated agreement is what happens if I don’t participate in the exchange.
Trevor Burrus: Which is die of thirst or [0:10:00] something.
Michael Munger: Well, in this case my circumstance is dire. It’s not so much the difference in bargaining strength is so great. So the two kinds of examples are I will die if I don’t – if I’m not allowed to have this exchange, that’s coercion by circumstance or if the difference in bargaining strengths between Nike and the people that they hire at their sweatshop is so large. Now the people at the sweatshop are not going to die. So their circumstance isn’t dire. In that case, it’s a disparity or difference between the two BATNAs.
So if Nike fails to hire this guy, there’s a thousand more. But if the worker fails to get that job, he may end up selling drugs. If it’s a woman, she goes to prostitution. Won’t die but has a much worse employment setting. So the – I tried to give technical content to either the difference in bargaining strengths, which is one BATNA minus the other or the direness of the circumstance and that is the party that’s less well off, how bad off in an absolute sense will they be.
Aaron Ross Powell: And this is where the critique of market exchanges comes in from our friends on the left, right? It’s that they think that the – what free markets do if you don’t have government protecting our interests is allow for these huge disparities in bargaining power.
Trevor Burrus: And build them up and make them even more …
Aaron Ross Powell: Right. So the bosses can dictate terms to the employees. So what we need is to set price floors on wages and …
Trevor Burrus: Get healthcare rules on health, provision of healthcare and possibly price gouging laws and all these things.
Aaron Ross Powell: So given that you agree that there’s a “their” [0:11:39] [Phonetic] there, that – I mean that there is something wrong with these widely disparate degrees of power in bargaining, which is something that a lot of libertarians tend to take just the – well, it’s voluntary to act and just not really acknowledge that there’s something problematic about this. So given that, what’s then wrong with using the state to address these serious disparities?
Michael Munger: I think the answer is complicated. So I myself have kind of changed my mind after working on this. I think there’s – I started as an economist and I was one of those people who would say since exchange is voluntary, both parties are better off. Therefore the more of these exchanges that are allowed, the better in any interference is prima facie a problem and so the state ought to stop.
Well, what the – the argument from the left goes and so the logic of it. Let me summarize. If I can find a way that these exchanges are not voluntary, it’s not true that both parties are better off and therefore there’s at least some room for state intervention that might either improve the quality of the transaction or at least protect the person who is weaker.
So that protection of the person who is weaker, in a way it’s kind of Rawlsian. We want to make sure that we take care of those who are least well off and so it might be an invocation of the difference principle. I think – I was trying to do two things.
First, let’s come up with a place of agreement where – if I go to the store and I buy a bottle of water and the liter costs me $1.50, that’s probably OK. So let’s all agree that if an exchange is euvoluntary, the state has no business interfering with it.
Now, what if the exchange is not euvoluntary? Well, the justification for state interference is to improve the welfare of the person who’s less well off. If it harms that person, then that seems like we’ve done something odd. So I’ve made a lot of students at Duke very angry by making this claim and I admit that it’s tendentious. But let me say it. So some of the students from Students Against Sweatshops at Duke had a very kind of naïve idea of what they could accomplish. Duke buys a lot of Duke clothing.
One of the things that you can tell about Duke students is they’re very proud to be a Duke. They have Duke hats, Duke shirts, Duke pants. They probably have Duke undergarments that we don’t see, thank goodness.
These are purchased from companies that buy them in Asian countries and maybe they’re sweatshops, maybe they’re not. It’s certainly true that they pay much lower wages and they have different safety and environmental and healthcare environments than we would have in the United States.
So the question is, “What should we do?” and if we say we’re not going to buy from those countries, then it’s hard to say that we’re helping those people because what we’re doing is firing them. So what we’re doing is taking the moral smugness of rich, white people and then using it as a justification for imposing material harms on the people that we say we were trying to benefit. I said it was tendentious.
Aaron Ross Powell: But aren’t the – I mean – so the people who are selling the sweatshop goods are themselves party to the exchange say between Duke and then when Duke stocks this stuff or then between the students who are buying it, and so …
Trevor Burrus: Is it harming third parties? That would be one question.
Aaron Ross Powell: Well, first, is it harming third parties? But it also seems like they – since these people are party to this exchange, they have something they want for it. So are we really cutting off the workers? Are we really saying, no, they’re not going to get a job? Because if say Nike doesn’t hire them or can’t hire them, it’s not like Nike is just going to say, “Well, we’re not going to make sweatshirts,” right? They’re going to have to find some alternative and that alternative may be to pay workers more or set up better systems that are going to make their customers in the end happy, so that they will buy the sweatshirt.
Trevor Burrus: If the collective action is big enough, if – I mean let’s say you actually do get a ton of people who just stand up. Eighty percent of Nike’s product sales go down because everyone stands up and says, “I’m not going to stand for this anymore.” So then that could fix the problem.
Aaron Ross Powell: Right. So the solution is – there’s a disparity in bargaining power at this level, so we address it with a disparity in bargaining power at a much larger level, which is, look, Nike, we’re not going to buy your sweatshirts.
Michael Munger: Unless you – and then that’s the problem. Unless you buy it from a factory that has certain characteristics that we approve of and so maybe it has wages and safety and healthcare benefits that are only in the United States. So it’s basically a “buy American” program. It’s hard to say how that helps anybody in Vietnam.
If that’s your concern, it’s hard to say – I mean “buy American” is something else. That’s protectionist policy and that’s fair enough. But then you shouldn’t disguise it as concern for those who are less well off. I think the most sophisticated version and you basically said it was negotiate to make sure that Nike at that existing factory increases its wages and has better health benefits.
Now the question is – and this is my economist side acting. Why is it that the people who were working in the factory before were working under those circumstances and at that wage? It’s because they’re fairly economically marginal.
All of us know the term gentrification. Gentrification is what happens when very poor people get priced out of a neighborhood because prices go up. Well, jobs can be gentrified too. So if you go from $2 an hour to $11 an hour, you start to get healthcare benefits. You don’t have a 26‐year‐old woman working there anymore. You have a 35‐year‐old man who graduated from high school.
So all of the people that you say you care about are fired and it’s gentrified. So job gentrification defeats this perfectly laudable impulse to say I want to make sure that these people have a better job. It won’t be the same people. You cannot do that.
Aaron Ross Powell: When I was asking the last question and for a moment lost my train of thought, Trevor jumped in with an I think also important issue which is third parties because we can be parties to an exchange without having voluntariness enter into the question at all because through negative externalities or if I run a shop and Trevor runs a shop and you decide to buy from him, then I’m being harmed in a sense that I’m not getting your business. Competition harms me. Does that factor into questions of voluntariness or how we ought to think about whether these exchanges are really voluntary?
Michael Munger: Yes. As I said, I changed my own mind about this. So suppose that the reason I’m operating in these countries is that the rules that they have for environmental protection or for the health of the workers are just a lot worse.
Well, under those circumstances, maybe we were creating pollution that wouldn’t be allowed in the United States or we’re using a part of the environment that’s very damaging that wouldn’t be allowed in most countries. That’s actually a violation. You shouldn’t be doing that.
So the company can say, “No, we refuse to do that.” Now it’s true that there – maybe they will lose some profits as a result. But you’re not going to get the same gentrification result. The workers themselves are still being paid the same amounts. The difference is the rest of the nation is not being damaged in ways they didn’t consent to do. So I think the externalities claim – the third parties that are damaged in some of the maquiladoras and places where the environment damage is significant. That’s a legitimate objection and the company is responsible for it. If you want to object, that’s fair enough.
Aaron Ross Powell: But then what about the competition harm? Because one of the arguments that we hear against say the global economy, against – no matter what the impact of buying this stuff overseas has on the environment or whether the sweatshops are good or bad for those workers, the fact is if you’re buying it overseas, you’re not buying at the American side. So we’re losing these good union jobs because of your free exchanges and there’s – I mean not that – the guy who used to work in a garment factory in the US who has now lost his job, that’s a harm to him, right? But that doesn’t – we typically don’t say that’s the kind of harm that matters in the same way that environmental degradation might. Why?
Michael Munger: [0:20:00] One of the things that is a benefit and a harm of capitalism is that we’re constantly trying to find new ways to make better stuff more cheaply. So it’s really about consumer sovereignty. Capitalism isn’t very good at producing jobs. It’s pretty good at producing benefits to consumers. So when I ask someone the – I have a large class, Introduction to Political Economy. How many of you made your own shoes? No one ever raises their hand. Why? Why didn’t you make your own shoes?
Trevor Burrus: Not one? That guy would be the most interesting guy in the entire class.
Michael Munger: I keep hoping.
Trevor Burrus: Yeah.
Michael Munger: No one makes their own shoes because they can buy them much more cheaply than they can make them and Adam Smith makes this argument that in some ways, this scales up from the individual, to the family, to the nation. Why would you make something when you can buy it more cheaply? Now the question is, “What happens to the people who would be making it in your country if you only bought from the United States?”
That means that some of them would have jobs that now don’t and that means though that when you look at how much it would cost consumers to keep that person in the job, it’s usually some pretty big [Indiscernible] multiple three or four times. So to keep this person in this $30,000 job would cost consumers $120,000.
Now we don’t compensate them very well though. It’s true. You could say if consumers are benefited, surely we can have trade adjustment assistance. The problem is that the history of those things doesn’t work very well and to the extent that you try to do it, you’re enslaving generations of people in jobs that aren’t going anywhere.
Trevor Burrus: Like keeping whale oil people, people farming whales.
Michael Munger: There are three counties in Northern Alabama where nearly half of all the hosiery, all the socks in the world used to be made. Those had come from New England where all the jobs had been lost and those had come from Old England where all those jobs had original been. That’s where the hosiery market had started. After about 1985, the factories in Northern Alabama started to close and now two‐thirds of all the world’s socks are made in a – near and around a city in China called Datang and they call it Sock City or whatever the Chinese word for “Sock City” is in Mandarin.
All those counties in Northern Alabama are just devastated. Nobody now has jobs. So the employment in the industry is 30 or 40 percent unemployment, but the result is that socks – the cost of socks has fallen even in nominal terms, certainly in real terms dramatically. Everyone can buy much cheaper socks as a result. Now how do we weigh the cost and benefits of that?
In a market economy, there’s a strong presumption in favor of benefits to consumers rather than benefits to workers. Question is, how can we make that politically palatable?
Trevor Burrus: You hear this kind of dispute a lot maybe kind of from the Bernie Sanders camp or sacrificing workers, quality jobs at the altar of consumer cheapness and having more and more and more better – I mean do you view that as a – at least a cogent objection to the market economy that needs to be addressed in some fashion? And maybe the voluntariness element is worse or we can use some other concept to say this is wrong but it’s at least interestingly wrong.
Michael Munger: You and Aaron both made the objection in I think its strongest form. Economists say that in a voluntary exchange, everyone is made better off. Well, here’s an exchange where people are buying socks from China and the result is some people in Northern Alabama are in fact made worse off.
Now it’s not an externality in the usual sense that it’s a consequence of the purchase, like pollution. But it’s a consequence of me buying from you and not someone else. I mean buying not from you and instead from someone else. But …
Trevor Burrus: So it’s the consequence of liberty in some basic sense.
Michael Munger: It’s a cost of liberty. But the advantage of it is that – James Taylor has this song about millwork. So there used to be a bunch of cotton mills and textile mills in North Carolina. They called the people who worked there lint heads and the James Taylor song is “Millwork ain’t easy, millwork ain’t hard, millwork ain’t nothing but an awful, boring job.” So is that really what we aspire to have our children do?
Well, there were a lot of towns where that was the backbone of the culture, of the society. However, now there are all sorts of other jobs. People go to college. They aspire to do something else. If we artificially raised the wages and preserved those jobs, we would basically be shackling people to something that is from the previous century.
Trevor Burrus: Another – to sort of change gears but it’s still the same topic, of a similar type of the effects of trying to stop this or keep it out or mandate it in some way is the price gouging laws, which still enjoy a fairly high level of popularity.
Michael Munger: Oh, it’s bigger than that. I would say three‐quarters.
Trevor Burrus: I think that some of the original reasons you were thinking about euvoluntariness is you were trying to explain something – economists were just like, “Well, yeah. I mean the price goes up. The price goes down. There’s no real price.” There’s a problem with resources but this is obvious. We should not [Indiscernible]. Very few people who aren’t economists think that. One of the stories that you tell is about bringing ice into a hurricane situation. And what happened in that situation?
Michael Munger: So this is the place where I probably changed my mind the most. We tend to think that people have subjective preferences and they can have those in politics. So economists – well, when they look in the mirror, they see the smartest person in the room. So I’m an economist. All is known by me. Anyone who disagrees must be irrational.
So I looked at this example where in Raleigh, North Carolina some people from Goldsboro had brought ice in to sell it. They were selling it for $11 a bag, which violated North Carolina’s price gouging law. The police came to arrest the guys who were selling the ice and some of the people who were standing in line, waiting to buy it, actually clapped as the police arrested them.
So they clearly wanted – by “them” I mean the ice sellers. So the people standing in line to buy the ice from those ice sellers were clapping when the police arrested the ice sellers.
Aaron Ross Powell: And this was just – this was in the aftermath of a hurricane …
Michael Munger: Of a terrible hurricane.
Aaron Ross Powell: And so there was simply no ice available in the local area and people …
Trevor Burrus: Food was rotting.
Aaron Ross Powell: It’s not just food. It’s insulin and baby formula and things …
Michael Munger: They really wanted ice.
Aaron Ross Powell: Yeah.
Michael Munger: They really wanted ice. But they also felt that they were being taken advantage of and in a sense they were. They had the notion that ice was worth – this is kind of like Aquinas’ notion of just price. Ice is worth $1.50 a bag and you’re selling it for $11 a bag. In fact you came here to sell it, knowing that I was desperate.
Now, what’s interesting is that the person who stayed home in Goldsboro and watched TV and said, “Oh, it must be terrible to be in Raleigh. I wonder what’s on Sports Center,” we think that person is more moral than the greedy guy who says, “Let’s go get some ice,” and he rents a refrigerator truck, fills it with ice and takes it to Raleigh.
Trevor Burrus: Yeah, that’s the bad guy.
Michael Munger: That’s the bad guy because in – what’s interesting is that if you were an omniscient, benevolent social planner, you would tell me, “Take ice to Raleigh.” That’s what you would whisper in my ear. But …
Trevor Burrus: You just wake up in the middle of the night and just suddenly have commands.
Michael Munger: But the thing is they did it for the wrong reason. They were doing it for their self‐interest and they were going to sell the ice. I think it’s interesting to ask how the people standing in line were made worse off by having an alternative they wouldn’t otherwise have had.
But those people standing in line were the ones who voted for the price gouging law because unlike my earlier example where I said moral smugness was being purchased for rich people at the price of material harm to poor people, these people had both parts of the consideration in mind. An economist tends to think that people who are autonomous are able to make tradeoffs. So they were trading off the material harm from being denied access to the ice.
Trevor Burrus: For the spiritual vindication.
Michael Munger: Well, the moral fact that these people are taking advantage of me and here are the authorities to say this is wrong. As the people standing in line are saying, “I like the second of those better than the first,” and they should be able to make that tradeoff. So it’s not irrational to support price gouging laws.
Aaron Ross Powell: But it seemed – I mean the fact that they were standing in line is what’s so weird about this because if they were sitting at home, they’re like, “I hear there’s ice for $11. I would really like ice. But I’m not going to pay $11 because that’s highway robbery,” and then you’re watching it on the local news and you see the guys get hauled away by the cops and you cheer.
OK. We might disagree that it would be better if they can keep selling the ice, but you can – that makes sense but to say, “I really need this ice and I’m willing to pay $11 for it. I want it more than I want the $11.” So I’m going to stand in line and presumably stand in a long line.
Michael Munger: A reasonably long line.
Aaron Ross Powell: And then you’ve made it some way through the line. So you’ve already got the sunk cost and then they arrest them and you start cheering. Then that seems just completely bizarre.
Michael Munger: No. It took me five years to understand it.
Trevor Burrus: I see your point. But are we OK with that, with saying that if you want to vindicate your moral beliefs about price gouging by voting to use the apparatus of the state, to use coercion against people who are making voluntary exchange or – I guess that’s the [0:30:00] big – maybe raise the question itself. Then you’re not allowed to do that. There are many things you might want to make your morality and play it out and then use the state to keep people from smoking marijuana. But if we’re generally libertarian like you – we don’t usually make that calculus.
Michael Munger: Well, that’s a fair point but it’s a different point. So one of the things that a – sort of a property rights purist would say. That ice belonged to the seller. He can charge whatever price he wants as long as he’s not using coercion. That’s fair enough. But suppose you don’t believe that that’s true and that we can put some restrictions on what people sell and what they do.
I once thought even then price gouging laws are just irrational. But what’s interesting about Aaron’s example, well, he put a fine point on it, they didn’t stay home. They actually left home and went to stand in line. I think the explanation is that the $11 exhausted almost all of the expected consumer surplus from purchasing it.
So probably they’re really not willing to pay much more than $11. The benefit of the transaction is not very much.
Trevor Burrus: But you’re only making the claim that it’s not irrational to support them, but it’s wrong. Why is it wrong?
Michael Munger: It’s wrong two ways. One, it’s morally wrong in the sense that it violates the property rights of the seller. They’re not doing anybody harm by bringing in this needed stuff and selling it. So it’s a violation of property rights and I think that should be – that’s a good argument against it, just that not everybody buys that.
But second, it’s wrong because it doesn’t recognize that there’s a supply response. The only way to have a low price is to allow a high price. There’s this inducement. So people tend to think of this as if it’s a lifeboat example. In a lifeboat, there’s a fixed amount of stuff. I’ve really got to be kind of a jerk if you really need water and I have some, to say, “Well, how much are your children worth?” because you’re never going to see them again without this water.
So you have to promise that when we get back to port, if I share this water with you, that you will pay me a million dollars and you say, “OK, I have no choice.” We get back to port. You say it was an unconscionable contract. It was under duress and the judge would agree. It is an unconscionable contract.
So the question here, what’s interesting I think is even if you – let’s put aside the question of it belongs to the seller. There’s a consequentialist argument for getting rid of price gouging laws because it dramatically increases the amount of ice that’s available to desperate people. The only reason why the price is $11 is that we basically made it illegal to sell this stuff. You get rid of the price gouging law and there would have been a parade of trucks, bringing ice and other needed materials to the beleaguered city.
So we saw this after Hurricane Katrina. The US Army basically laid siege to an American city, which is pretty remarkable. They had trouble keeping control inside but they surrounded it and prevented needed supplies from being brought in. That’s what a siege is. So a lot of trucks bringing supplies were headed towards New Orleans.
Trevor Burrus: Some people just got up and decided to drive down there. Yeah.
Michael Munger: The reason they were turned away was they were told, “We can’t be sure you won’t sell this.” So the main thing – we don’t need to protect people against hunger, thirst. Forget that. We can protect them against price gouging. That’s the main thing that we should do. That’s just wrong. Many more things would have been brought to the city if it had not been surrounded by armed troops with their guns facing outward.
Aaron Ross Powell: Economists though I mean continue to be often baffled by this kind of behavior. So whether it’s people being opposed to the price gouging even when we can make a pretty clear case that they’re hurting themselves with these laws or rent – or …
Trevor Burrus: Minimum wage …
Aaron Ross Powell: But even so, anti‐discrimination – like there’s the story that the market would get rid of racial discrimination because you’re – by refusing say blacks, you’re giving up customers or you’re giving up potentially good employees yet this stuff sticks around. Is it because – well, or is it – are there things that economists are failing to take into account in there utility functions?
Yes, we’re not getting the ice but we are getting a level of satisfaction from a moral indignation or the racist gets something valuable to them out of excluding blacks. So if we pretend that sort of thing doesn’t exist, then it looks strange or wrong, but if we take those values seriously, then those count at the same way as like getting the ice or whatever else.
Michael Munger: I think economists tend to undervalue people’s moral intuitions and how much they will pay to have policies that satisfy in accord with those moral intuitions. That’s what I think we need to do a better job of engaging. It’s not that we can’t. It’s just that we don’t and we tend to say, “Well, markets will solve this.” Well, markets won’t solve some of those problems. Perfectly competitive markets over the long period just make it more expensive for me to exercise a taste for racism.
They don’t make it impossible unless the market is perfectly competitive. So you can say that it helps. When people look at what look like desperate results and attribute it to racism and then they can pass a law saying, “We’re not going to have that,” it makes them feel better. So I think it would be better if we say, “This really is a problem. What is it that we can do to address it? How would we make markets better at solving problems of racism, discrimination, making sure that poor people have access to housing?”
Rent control I think is the one –almost all people who are trained in economics are going to say rent control is a bad idea. There’s just no defense for rent control. The main thing it does is hurt poor people.
Trevor Burrus: In your essay, one of your essays on euvoluntariness, you discussed a John Locke piece which you had once told me was – it’s almost lost – before you had written about it, it was almost lost where John Locke is ruminating on the questions that we’re talking about today and particularly what would be – it’s almost just price theory in the desert‐water example or some other examples he comes up with and how – maybe what the moral thing there should be. But then it also – the legal thing of whether they should prohibit. So it’s everything you had been kind of talking about here. What is this essay? Where did it come from? What is the general gist of it?
Michael Munger: Well, I’m awfully excited about it. So let me give you the brief version. John Locke, when he was pretty young, in the 1650s wrote a little squib and at the top he entitled it Venditio and it was handwritten. It was found in its handwritten form in a folio in the 1690s. It was – this was owned then by a family that had bought some of Locke’s papers. It was printed a couple of times but it was unknown to economists and it was really unknown to most philosophers and even Locke’s scholars because it’s obscure.
So someone had suggested it to me and on reading it, I was shocked at how modern a conception it has of a particular question and that is we all have a notion of when prices are just or unjust. When is the market price just? Which is an amazingly terrific question for the 1650s. So this is more than a hundred years before Adam Smith published The Wealth of Nations. It’s long before we had any notion of market price.
In fact Locke’s notion of market price is pretty close to ours in the sense that it’s that – that it’s generated by a market with many buyers and many sellers and that we can agree on what the commodity is. So it’s an amazingly modern, forward‐looking conception of this. He gives four examples and if I may, one of the places you can now find it, because it is in print, we got permission to print it, is the new Philosophy, Politics, and Economics: An Anthology of which I’m a co‐editor that was just published by Oxford. I’m also happy to send anybody a PDF if they want to send me an email.
Trevor Burrus: It is interesting because as you said, so much of this depends upon the competitiveness. Your ability to take – to extract or coerce or – whatever word you want to use. The guy in the desert, when you’re the only person there, and then there’s someone else who also has – it’s what defines that market. It’s the lack of other people who are also selling water to the guy in the desert. So I think Locke uses the example of a ship that loses its anchor and is happened upon by – what is that example? How does that click for you?
Michael Munger: He gives four examples and each of them is worth looking at. The ship example is the hardest I think. These are sailing ships and the – if you don’t have an anchor in a sailing ship at night and you’re anywhere near a coast or rocks that you don’t know about, you’re likely to drift on it. The ship will be wrecked and all the cargo and crew will be lost. So what’s the value of an anchor?
Trevor Burrus: Life.
Michael Munger: If you don’t have any, it’s the sum of the value of the lives of all your crew, the value of the ship and the value of the cargo. It’s a lot. Well, suppose that one ship that has multiple anchors, let’s say three, encounters on the high seas another ship that has lost all its anchors. The ship that has no anchors hails them and says, “Will you sell us an anchor?” The guy who has three anchors, what price would he be justified in charging?
Trevor Burrus: [0:40:00] He can almost charge anything he wants.
Michael Munger: Well, he can. Well, I didn’t say, “What price will he charge?” I said, “What price would he be justified?” and by “justified,” I mean literally just. So what would be the morally just price to charge? The theme that Locke has developed throughout this is that you’re not obliged to do anything supererogatory. So an erogatory act is one that you’re obliged within a market setting. Supererogatory means to sacrifice. I’m going to do something more.
So I’m not obliged to give him an anchor. If I had 30, maybe I would have some obligation. It’s like somebody is drowning. I have a life ring and I can throw it. It doesn’t cost me anything. Then I might be obliged. But I have three anchors and the reason I have three anchors is that sometimes you will lose them and losing them is bad.
So if I were to ask myself, what price would I charge for an anchor? It might be a lot. But then when I find this guy, I can’t use my particular knowledge of his desperation to jack the price up even more.
Trevor Burrus: That’s what Locke says or something.
Michael Munger: That’s Locke’s claim. So Locke’s claim is you have to conduct a kind of hypothetical bargain where this person maybe has one anchor or doesn’t need it quite so desperately. And then would an exchange take place? So if there is no market price, you have to come up with a way of saying, “What would the market price be if there were a market here?” And he’s careful to say the price of an anchor back in port is almost irrelevant because where the particular – and this is very Hayekian. The particular circumstances of time and place actually matter for the setting of the market price.
But it is wrong for me to use my knowledge of your desperation. Now, that’s controversial but what it has going for it, the brilliant part of it is if one of us is really desperate, it’s not a market price in the usual sense. It’s an emergency. It’s something else.
So a market price is when there’s relatively many buyers, many sellers, then the consequences of failing to exchange are not catastrophic. So I’m always justified in charging the market price. The question is, “What would it be?” He has this very tantalizing, interesting claim that mentally you construct what a bargain would look like and maybe you still wouldn’t sell it. Maybe you think – you know, look, I’m sorry. I’ve only got three and I can’t risk the lives of my crew, the value of the cargo, all my investors. So I still can’t sell you one.
So I’m not obliged even to sell at all. But what I can’t do is say, “Absolutely. Your ship is worth 100,000 pounds. I would like 99,000 pounds please.”
Aaron Ross Powell: You mentioned that this is somewhat – there’s this Hayekian question in here of trying to imagine what the price would be in this market that doesn’t quite – I mean we can’t just say like what’s the price on the other markets, the emerging prices. But how does that play into the other Hayekian notion of prices and knowledge? Because it seems like you’re almost asking this person to play the role of the impossible central planner.
Like we don’t have a market to see what the prices emerge from. So just use your intellect to figure out …
Trevor Burrus: Maybe some econometrics.
Aaron Ross Powell: … what the price ought to be. I mean does it – Hayekian thought preclude the very possibility of what Locke is asking us to do?
Michael Munger: Well, there’s no question that these two people are going to come up with a bargain. A bargain might be I refuse to sell because you can’t possibly pay me enough. That seems unlikely because I would be willing to pay quite a bit.
What Locke is saying is I can’t use the difference between what I would take – what I’m willing subjectively. Not my reservation price and most of us can come up with, “Here’s something that I would be happy to accept.”
Now the question is – I then compare that to the market price and I have no idea what that would be. That’s right. But that’s – in this case, it’s the best that I can do. The alternative is that I say, well, it’s too hard a problem. I’m not going to sell it to you.
Trevor Burrus: In these situations, we’re just sort of discussing all these and of course I find it interesting that more and more – you called them a few minutes ago lifeboat situations. A lot of public policy is like – this is discussed in sort of lifeboat situations type of things which just seems like they’re trying to invoke this euvoluntary type of – or the lack of being euvoluntary. Healthcare, minimum wage is now discussed as a lifeboat type of situation.
Many other price gouging, obviously things like this. What is the best way for libertarians to – I mean we’ve been talking about it all of a sudden. What is the best way to respond to this? The tendency is to just say, oh, well, they really don’t need – how much do you know – how much healthier does one actually need? Everyone can say they need this and everyone says dire straits and all this stuff like that. But then the other side is saying, “Well, we need a heart transplant. You need a heart transplant.” It’s not euvoluntary. You’re basically being coerced into any price you will possibly pay. What is the best way to talk about these very difficult issues?
Michael Munger: I think the thing that we have to do – and it’s really hard. So I’m not saying it’s not. But it’s really hard. It’s to get people to understand the distinction that Bastiat made so well between the seen and the unseen. So John Stuart Mill famously has this formulation where he says that when it comes to production, we have to use the physics of markets. There’s not really an alternative. But the things, once there, we can then use the rules of morality to decide how to distribute their benefits.
Well, it’s a mistake to say that those two things can be separated and you hear this all the time and one of the most egregious examples is from pharmaceuticals. So we have this drug that somebody went through clinical trials and there are nine drugs they tried that didn’t work. They now have one and it costs $300,000 per year to do this. That can’t possibly be right. They shouldn’t be able to charge $300,000 per year. Well, that confuses the things once they’re a problem. The reason that they were created, the reason that the guy in the taco truck went looking for people who needed water was the recognition that there might – this might not work. So they undertook a risk. We don’t look at the failures. We don’t say, “Well, all the drugs that didn’t work, we’re going to compensate you for that.”
All of their efforts to create a new drug that admittedly – the reason it’s important is that by premise, this drug is extremely useful, more useful than any other drug we have for treating this very dangerous diseases, whatever it is. Well, but you don’t get to charge as much as we thought you were going to get to.
That doesn’t make any sense and you have to ask not – well, the things once there, what it seemed. You have to say, “What would have happened if we had known in advance?” You couldn’t charge more than what we now think as a reasonable price. A hundred dollars a year. Well, they wouldn’t have come out with the drugs in the first place. But that’s hard to recognize that there’s a – and it’s the same supply response.
The reaction of markets is to create things that don’t now exist and it’s a very hard argument to make because we tend to be materialists and look around and say, “How can we allocate the fixed amount of stuff around us? How can we do better?” Not let’s take advantage of the dynamism and creativity and entrepreneurship of people who are admittedly motivated by profit.
Aaron Ross Powell: Thank you for listening. If you have any questions, you can find us on Twitter, @FreeThoughtsPod. Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at www.Libertarianism.org.