Monday, April 9, 2012

Don't Go Chasing Windfall Profits

Please stick to the normal returns and cash flow you’re used to.

A while back, Sam introduced us to Trolley Problems. I refer to Trolley Problems as a proper noun, since it’s a category of thought-experiments (Gedankenexperimente) that I will be using to test our moral intuitions vis-à-vis euvoluntary exchange.

As Sam put it, “The purpose of these thought exercises is to get at justice or fairness heuristics.” I’d like to engage you, dear readers, in a conversation about a particular Trolley Problem I’ll call “Water in the Desert”. Be forewarned, however, that the gods of rhetoric will smite thee mightily if you refuse to take these Gedankenexperimente as-is. Since the optimal amount of smiting is in the neighborhood of zero, I humbly suggest you take on the role of an interested conspirator, and refrain from poking holes in the thought-experiment.

Continuing to borrow from Sam (he’s a talented communicator, no?), “These trolley problems help us tickle out moral intuition.”

The classical Trolley Problem introduces us to one scenario and asks us for our hypothetical response, then changes the problem slightly and asks us again for a response. When the problems are well-constructed, they show us some of the subtleties of our moral intuitions; in the case of the trolley, we’ll kill people remotely (for the greater good), but wouldn’t dream of putting our hands on another to do harm. Experimental philosophers love this stuff.

Water in the Desert

We’ll be working with “Water in the Desert” (or the desert scenario) a lot in the coming weeks, so we’d best get the classical formulation under our belts. I first heard the desert scenario from Walter Williams in the first course of the GMU PhD micro sequence. After telling the story, Walter concluded that “there’s no such thing as exploitation” or that it’s all “just utter nonsense”. I’ll try to be less incredulous here, and I’ll borrow TGM’s plot devices.

It goes like this. There’s a guy dying of thirst in the desert. We’ll call him Jimbo. Jorgé drives up in his Taco Truck (because street food is awesome), and offers Jimbo a bottle of water for $10,000 (the exact amounts don’t matter, here; it’s just a boat-load of cash). Jimbo protests that the water is too damn high, but Jorgé just shrugs his shoulders and starts to drive off. Jimbo happens to have ten grand in his wallet, so he shouts for Jorgé to stop, forks over the cash, and narrowly escapes death.

This clearly isn’t euvoluntary, since Jimbo’s BATNA is terrible, but it is voluntary. Jimbo isn’t explicitly coerced into purchasing over-priced water, but he is coerced by circumstance.

When I can get my wife to talk to me about economics, I usually ruin it by picking fights over moral intuition. She says the thing a normal person would say, like “Jorgé is an evil man for taking advantage of Jimbo,” and then I parrot back what I learned from Walter, “That’s not exploitation; Jorgé saved Jimbo’s life!”

I started to repeat this drama when visiting Sam a few months back. What I didn’t expect was that Sam would ask my wife to elaborate her thoughts. Instead of preaching the econ gospel, Sam was interested in my wife’s thought process. Obviously, I have a lot to learn about marriage.

This gave me an idea for something I’m tentatively calling “Clinical Economics”, which is only different from Experimental Philosophy in its problem domain. I want to play Aristotle and catalog peoples' reactions to these kinds of scenarios in order to look for patterns.

So, dear reader, will you please step into my office, and give me your thoughts on “Water in the Desert”? Here are some questions to get you started:

  1. Did Jorgé exploit Jimbo?
  2. Did the story make you feel indignant?
  3. Was Jorgé in the wrong? How do we weigh the good he did against his means of doing it?
  4. If you were in Jimbo’s position, would you be thankful or indignant, overall?

In future posts, we’ll be changing the thought-experiment slightly to see how that affects your evaluation of the scenario. We’ll be exploring the effects of initial endowments, pure luck, and bargaining power, with an eye keen to judgments about distributional justice.

For now, I’m all ears. Let’s hear what you have to say.

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  1. I think the answer depends on Jorgé's expectation of encountering other dying people in the desert.

    The reason "price gouging" is justifiable is that it reserves scarce resources for those most willing to pay for them, a set of people closely correlated with those who need them most.

    If Jorgé had a near-infinite supply of water, I'd argue he was most definitely being immoral. Likewise if he knew for certain that Jimbo was the only dying man in the desert, in which case denying him a little bottle of water would be the equivalent of failing to rescue a child drowning in a puddle for fear of getting your clothes dirty. Yes it's more difficult to criticize voluntary exchanges, but those choices are going to be dependent on an institutional structure that must be justified, and in a world with infinite water I don't think price gouging on water could be justified.

    If we're in a world where there are a thousand people dying in the desert, only one bottle of water, and efficient capital markets and contract formation (so nobody has to have the cash on hand), Jimbo should be falling to his knees and blessing Jorgé's holy name.

  2. I'll leave my ideas half baked because I'm procrastinating anyways...

    Did Jorgé exploit Jimbo? No (my economist is coming through here), although Jorgé did not act in a way that would make him many friends. If I were in his position I would consider my choice between two lotteries: A certain $10, or giving the water away for free and potentially gaining the lifelong gratitude and/or friendship of Jimbo (or at least a fat tip). Perhaps the expected value of the lottery is $10,000?

    Did the story make you feel indignant? No; again, I'm a soulless economist.

    Was Jorgé in the wrong? How do we weigh the good he did against his means of doing it? He's not in the wrong--at most he's an asshole.

    If you were in Jimbo’s position, would you be thankful or indignant, overall? Thankful. Life trumps getting cheated.

    Quick comment on the price-gouging aspect. Jorgé could have let Jimbo die and just taken his wallet. That would have been wrong (not necessarily more wrong than letting him die and leaving the wallet). But asking a high price (and playing hardball) is only immoral in a one-shot game.

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  4. Three cheers for price gouging. In a perfect world, everyone would cheer when Jorge was paid $10k. Because only then would Jorge be there to save not just Jimbo's life but whoever else found themselves out there, as the $10k would cover his costs and keep him desert driving.

    I am selfish as all heck, so I try to look at things from my perspective. I may one-day be Jorge. Finding myself lost in the desert is already a disaster. Losing $10k on top of that is not the end of the world. However, losing my life would indeed be the end of the world.

    Therefore, as long as you cannot guarantee me that a water bottle will be available without price gouging, I will be in favor of price gouging. My life and comfort is too important for me not to be allowed to pay whatever they are asking.

  5. Was he exploiting Jimmy? I am going to go with Swimmy on this one:

    "The reason "price gouging" is justifiable is that it reserves scarce resources for those most willing to pay for them, a set of people closely correlated with those who need them most."

    Also, to pull in a remark from Loneshark about Jorge being able to cover his costs at 10K: What if there was only one person dying in the desert every month? Evey other month? There is Jorge, driving and driving, week after week to only sell one bottle of water. That bottle is going to cost 10K. I am sure Jorge would not be happy to see Jimmy die, but he can't afford to give away his livelihood. Again, there has to be some further justification to the price gouging.

    As to Jorge being in the wrong, as long as he sells the man water in this story he is not wrong, and probably not a jerk either. If Jimmy did not have cash on hand, or let's say only 5k, to deny the dying man water would have been wrong if Jorge did not at least bargain with Jimmy. He could have sold the water for 5K now for a promise of 7K later or something. Jimmy was not buying a horse or a bike or an umbrella, he was buying his life. The story would be different if Jorge let Jimmy die because he could not afford the water up front.

    Jimmy could feel happy or cheated, depending on the assumptions above. If Jorge was driving with a thousand gallon water truck, Jimmy would feel cheated, but he would feel alive. Jimmy chose to spend all his money to save his own life, which I am sure he would deem worth it.

    And on another rambling note: Jorge could have definitely been exploiting a man who is severely dehydrated, has a changed LOC (Level of Consciousness) and is therefore not a rational consumer...


Do you have suggestions on where we could find more examples of this phenomenon?