Distress, Moral Intuition, and Economics
Earlier, I wrote in praise of The Price of Everything, Russ Roberts’ latest didactic novel. I cannot recommend it strongly enough. I thought his other fictional attempts to teach economics were decent, but in my opinion this one represents a real step up.
One of the issues that it raises–the very first one, in fact–is the morality of raising prices when something becomes scarce, such as flashlights after a weather disaster. Russ makes the standard case for allowing the price to ration the scarce resource, but I don’t think he will necessarily overcome people’s moral intuition, and I think it is very important to understand why.
The basic moral intuition is, “Don’t take advantage of somebody when they are in distress,” and I think it has broad implications. It explains usury laws. It also may explain the way we approach health insurance, which I call insulation.
Back in Biblical times, when somebody came to you to borrow, it was not to build a steel mill or start a social networking site on the Web. Chances are, if somebody needed to borrow it was because of an illness, a famine, or other disaster. Since people in that situation were in distress, moral codes developed that prohibited charging interest for loans. Charging interest would have meant taking advantage of people in distress.
Jews and Christians overcame their aversion to usury when they saw money being lent to businesses and governments, rather than to people in distress. Even today, however, if a destitute person is sick or hungry, religious authorities would frown on your charging interest on a loan to that person. In that sense, the moral opposition to taking advantage of a person in distress persists.
I suspect that the moral opposition to raising the price of flashlights after a storm reflects that same intuition. It’s one thing to charge what the market will bear in the normal course of business. It’s quite another to profit from distress.
When people seek health care, they are in distress. We are uncomfortable with having the service provider get a profit from that. So we insert a layer of insulation (the so-called insurance provider) in between the doctor and the patient. That alleviates what otherwise might be a sensation on the part of the doctor and the patient that the former is taking advantage of the latter’s distress.
The trick for economists is to justify confronting people in distress with market prices. I think we can do that, but we have to persuade our fellow human beings (a) that people in distress should receive support from charity or government, not from suppliers of loans or flashlights or medical care; and that there are reliable mechanisms to ensure that people in distress will receive support from those alternative sources, so that placing the burden on suppliers is as wrong-headed as we always allege it to be.