Suppose I run a shop selling water.
Suppose further there’s a crisis on and the municipal water supply goes out.
So, as a sensible trader, I jack up the price to $100/litre and make a boat-load of cash. People pay it because well what’s money next to a little not dying of dehydration? as
I mean, sure, they have to deal with the fact that they burned through a significant chunk of their savings after the crisis has passed, but they made a rational and considered choice to participate in this transaction, therefore it’s valid and fair, right?
My neighbour on the other hand believes that raising their prices would be exploitative and continues selling water at the normal price. As a result the first person who comes along goes “Holy shit, water for cheap!” and buys the whole lot just in case. Nobody else gets any.
Which one of us has improved the situation more?
Well, I’ve certainly made sure a lot more people won’t run out of water than my neighbour has. That’s got to be a good thing, even if I turned a tidy profit in doing so, right?
So why are people so angry at me?
My neighbour in trying to do the “moral” thing just ended up making the situation worse, but people are just tutting a bit and saying he should have been more sensible and making helpful suggestions about rationing.
I mean sure, I was charging a lot of money for that water, but people were willing to spend it therefore the water was worth at least that much to them. Should I have sold it at less? I’m not a charity.
And lets not forget that I’m the one who kept the most people in water!
There’s a meme that I’ve seen a lot recently (probably because I follow a lot of rationalists on tumblr) that people are irrational to get angry at people who provide better options at exploitative rates, because there are two possibilities:
- Not have any option to fix your major problem
- Have the option to fix your major problem at an extremely high cost
And the second is obviously better! It gives you options to fix things which you can decide whether they’re worth it.
(Examples of this sort of scenario where this have come up have been PETA’s water thing in Detroit and Uber’s surge pricing. I think there have been a few others).
I have a lot of sympathy for this view. I also think it’s wrong. I think maybe the level of rage is disproportionate, but I think it’s perfectly valid to be angry about these things.
Consider the water sellers above. Raising prices during a crisis is fine. It’s not an unreasonable way to control demand of a limited supply (there are other not unreasonable ways which might be better, but I don’t think it’s intrinsically wrong to treat this as a supply/demand problem given the system we live in). But how high should I raise prices?
Well I could just raise them to what the market could bear.
But the market will bear a lot. People’s alternative is dying. People will pay a lot to not die. As a result I can basically take them for what they’re worth.
In a well-functioning capitalist society (please imagine I said that phrase with a straight face) what would happen is that if I were making an obscene amount of profit someone else would realise that they can basically steal all my customers and still make an only slightly less obscene amount of profit by offering the goods at a lower price. Prices for water would then converge on a sensible value where water sellers still make a profit while people pay a reasonable amount for water that reflects its current scarcity.
But in a crisis we’re not in a well-functioning capitalist society. When this sort of price/value convergence happens it happens over a longish period of time. Crises are happening now and you can’t wait for this price convergence.
And how much will the market bear in a crisis? A lot. When your alternatives are death, major injury, etc. the amount of money you’d be willing to pay is generally very large even if you know it’s going to screw you over later. This means that there is a very large gap between what it will cost to provide your get out of crisis service and what people are willing to pay you for it, and that gap is pure profit.
Is it OK to make a profit here? I mean, sure, I guess. I’m not against people benefiting from helping others – indeed I’m moderately in favour of it because it encourages people to help others.
But by and large I think that if you have a large number of people giving a substantial fraction of their life savings to someone resulting in a very large profit, and you compare it to that person making about half as much profit and people giving about half as much of their life savings, the latter is a much better scenario.
So how do we arrange it so that people don’t exploit crises?
Well, the optimal solution would be to provide good enough crisis support that the opportunity to do so was not there.
But the solution that’s actually available to most of us is to punish people who do by shouting at them, denying them our business, etc. It creates an incentive for people to do better and moves their crisis price point away from the “take them for what we can get” end that it will tend to default to and much closer to the “offer this service which improves matters at a price where we can still make a reasonable profit” end we want them to be at.
So lets do that then. Sure, it’s not the optimal solution, but by adopting the position that anything that improves the situation is better than its absence, you’ve already abdicated the ability to complain about choosing the available solution instead of the optimal one.
So are people improving the situation by offering these options? Generally, yes. Is it OK for us to punish them for this? Yes, because it shifts the incentives so that they will improve the situation more rather than not at all.
(And arguably we should also complain about the fact that we do this, because it makes people think about the motivations and reasoning for this and maybe makes them less likely to punish people who are actually just turning a fairly reasonable profit out of the situation. The recursion never ends)
Note: This is somewhat related to my stance on the correct solution to trolley problems.