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Samizdata quote of the day We also want to increase supply, though, and being able to sell in Houston for $99 something bought for $9.99 in Beaumont (again, just to invent an example) might well get a few boats carrying loads in – although quite possibly not from Beaumont. Thus, by allowing prices to rise, we’ve at least potentially increased supply.
Our price system, operating without constraint, is thus achieving the two things we desire, a curtailing of demand through rationing to only truly important uses, and a rise in supply.
“But,” goes the cry, “this isn’t fair!”
Indeed it isn’t, and ain’t that a shame, fairness not being a notable feature of this universe we’re struggling to inhabit. All we can do is the best we can. Which is, again, why I insist that there should be variable prices, why there should be no laws against price-gouging. Because this really is a disaster, there really are significant shortages in Houston right now, we really do want to solve them. Which means that we should be using all of the tools at our disposal.
– Tim Worstall
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We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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The thought occurs to me is that any company that really exploits this damages its brand – badly.
Any company that acts like an angel of mercy enhances it.
Any company that doesn’t care about its brand (in general) is writing a suicide note.
Not necessarily, Nick. Many of those who respond quickly to emergencies, trucking in bottled water, generators, whatever, aren’t “companies” in the sense you mean. Sure, if Home Depot jacked up its prices on generators people would likely remember and punish it later, but if I were to buy all I could find locally (1,000 miles away), load them into a U-Haul truck and sell them in Houston at a 1,000% markup my reputation would be unsullied (or rather, it would be irrelevant in Houston). And it’s independent entrepreneurs who will be filling much of the emergency need while FEMA, big companies and large charities are getting their act together. The guy with a truck selling bottled water at $10 each at a street corner can go exactly where he’s most needed; FEMA makes people come to a central distribution point.
Worstall is exactly correct. People who decry “price gouging” have absolutely no understanding of simple economics, or price theory, and operate purely on emotion.
In 1980 there was a large tornado in Wichita Falls, Texas. Most of the stores quickly increased their prices for necessaries such as batteries and bottled water.
Albertsons, however, kept their prices at the normal level and simply shipped in several truckloads of supplies.
Twenty years later, one could still meet people in Wichita Falls who would only shop at Albertsons because of that event. And they would tell you about it eagerly. Brands do matter.
Having said that, I will conclude by saying that if you acquiesce to calling it “price gouging” then you have already lost the battle for the hearts and minds of the unconvinced.
But then, see the many postings about the benefits of non-interference when supplies are rushed to — Knoxville? — during the dreadful flooding in Tennessee a few years back; or listen to Mike Munger discussing it on EconTalk. (Sorry, no links readily to hand.)
Very, very worthwhile comment, Ferox. In context of this discussion, it presents the other side of the story. Thanks.
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Economics, no less than any other field of human activity, is very far from one-size-fits-all.
What people see is that their three little kids are thirsty while that little bottle of water costs $10 so they have to share a bottle and their kids remain thirsty while their richer neighbor buys the rest of the case and his kids spill theirs and open a few more.
That’s the stuff that memories are made of.
Economic theory works great until you use it on humans. This mirrors how libertarians argue that shipping lower-middle-class jobs overseas is an efficient thing, ignoring the short-term human costs that then end up sullying the libertarian brand forever amongst the population.
Well, I agree with everybody, and you don’t get too many of those to the pound.
Tim W and Laird are obviously right on the economics of supply and demand, and y’all are right that there’s more to life, and indeed more to economics, than supply and demand.
Perhaps the answer lies in the market after all. A clever corporate executive might see a disaster as an opportunity to build goodwill with customers rather than as an opportunity to make a little short-term profit.
The goodwill might end up being worth a lot more in the long run.
As in Wichita Falls, the market will decide which approach is better. There is no need for laws to try to “fix the problem”.
Re: the water bottle dilemma mentioned above – I think that is more likely to happen if the price of water is NOT increased. Your kids are thirsty but some lady with two lapdogs just bought a case (at the normal price) so that her little Fifi and FooFoo can enjoy their doggie pool in the heat. Increasing the price tends to drive out the marginal consumers … and parents trying to get water for their kids are not marginal consumers.
Ferox: Absolutely agree that there should never be laws about prices in general, and in particular not in this sort of situation.
As for possible good will as the result of a business’s exercising self-restraint rather than raising prices, half the public will remain loyal to Albertson’s for the rest of their natural lives (I know, terrible grammar!), and the other half will go, “Yeah, but Wally’s only did that for the sake of P.R. They don’t really give a duck about the people.”
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See, bobby, I can out-cynical you the worst day you ever saw. 👿
Lets just use the gas station owner… The price he needs to sell his gas in the tanks below his forecourt is not the price he paid for it plus a “reasonable profit” it how much will he need to buy the next tank load (plus a “reasonable profit”). In a natural disaster where the owner knows the roads aren’t going to be repaired and new supplies able to reach him at any price for n months then he needs the current tanks to feed his family for those next n months while his station is closed with no gas but he still has to pay rent, etc. So his raising the price on his current tank load to n times may seem, in the short term to those who say he only paid x dollar for it, “unreasonable.”
In less strained times you price so that your “clearing rate price” matches your “replacement rate price.”
Ferox, I completely agree with you that the market-based swing of price/supply/demand ought to be left untrammeled to give the optimal result re: utilization of scarce resources.
But the emotion-driven perception that your rich neighbor could give her kids water while poorer you could not yields a much harsher result than when your quick neighbor beats you to the store. You had the chance to get there earlier, while in the first example, you had no chance because your pockets were smaller.
It’s all based on emotion – on marketing – on feelz – and until someone comes up with an explanation supporting freedom of pricing that makes people – I mean voters – understand viscerally that they’d ultimately be better off, it merely makes us into those weird guys down the block who think that corporations ought to have no rules.
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What people see is that their three little kids are thirsty while that little bottle of water costs $10 so they have to share a bottle and their kids remain thirsty while their richer neighbor buys the rest of the case and his kids spill theirs and open a few more.
That’s the stuff that memories are made of.
So, misery for all is better than misery for some? Because without the extreme mark-up the people won’t bring in the water at all.
The whole of the USSR’s economy was built on this basis, because capitalism is “evil”. It did share the misery magnificently too.
I’d rather suffer a few extreme cases in extreme situations than “fix” a system that works best most of the time.
Nope. You forgot my last two paragraphs.
Moving from east to west, most of my contacts these days are in the middle two-thirds of the geographic US. Rural. I don’t even go into most of the cities. Wouldn’t want to .
Libertarians (large L) tend to be smart, proud people, who accept the unspoken presumption that all smart proud people accept, which is that everyone else isn’t. Smart and proud, I mean.
There are a lot of smart and proud but poorly-humanities-trained people in the US who, daily, live the libertarian life that we speak about here so fluently. They live it and naturally expect it to be so while we describe it to others. And then we go home and feel superior to them, and discount that they may well be more central to the eventual sway of libertarianism (small l) than we’ll ever be.
Yes, this basic economic truism is true. We do all benefit when the market controls itself. Or doesn’t.
But the most productive thing libertarians who want to proselytize about libertarianism to the world in an effective manner can do right now is to find a way to explain libertarianism, not to each other, but to all of the people I run into all across my chunk of the USA.
They’re already there. They just haven’t connected the labels. We need to work on that. That would be the most efficiently productive use of our time right now.
What few people understand (because economics is so poorly taught) is that prices send many important signals and help optimize markets; price controls (of which prohibitions on “price gouging” are merely one example) mute those signals and always end up with sub-optimal results, for everybody (including the poor). High prices optimize utilization by driving out (or minimizing) less-important uses, encouraging conservation, and diverting resources toward higher-priority items. They tell suppliers that there is a need for the specific product in that particular area, which any profit-maximizing businessman will rush to fill (and generally far faster than any relief agency or government bureaucracy could hope to match). That is especially true during emergencies, when prices should rise to extraordinary levels. And such prices attract new entrepreneurs to the field, which quickly expands supply far beyond that which would otherwise have existed (and, at the same time, drives prices back toward more “normal” levels; the ability to “price-gouge” is an extremely short-lived phenomenon). Artificially forcing prices down destroys all those incentives, and inevitably results in shortages, lines, and waste. Even if most people react emotionally to unusually high prices, political leaders and policymakers have an obligation to understand incentives and economic reality and ignore the complaints; it is by far the best way they can serve their constituents.
A prime example of an idiotic response to an emergency was Jimmy Carter’s actions following the “Arab oil embargo” of 1974 (anyone else remember that?). He imposed rationing and price controls, which resulted in long lines, being able to buy gas only on alternate days of the week, colored flags at gas stations indicating whether they had gas or not, and a host of other problems including rampant cheating and the rise of a black market. And the worst thing of all was his imposition of a “windfall profits tax” on oil companies (which took us decades to eliminate). As a result of all of this the crisis lasted far longer than it should have and caused great (and mostly unnecessary) hardship. Indeed, it is difficult to imagine anything Carter could have done which would have been worse than what he actually did; he was 100% wrong about everything. (This country has suffered through some very bad presidents, but Carter has to be near the top of anyone’s list.)
One final point: Bobby b says that “Economic theory works great until you use it on humans.” That betrays a very shallow understanding of what economics actually is. At its core, economics is simply applied human psychology. Is doesn’t exist apart from humans. Of course, he is correct in the very narrow sense that much of modern economics focuses on complex mathematical formulae and attempts to reduce it to a hard science, which is absolutely wrong, but the classical economists knew better. (Read any 19th century book on economics any you’ll find almost no mathematics.) Of course economics has to consider the effect of human emotion; that’s part of psychology. But the laws of supply and demand respond very little to emotion, whereas even emotional people respond entirely predictably to incentives. And permitting market forces to operate freely (including allowing prices to respond to external events) provides just those incentives needed to emerge quickly from the emergency.
As a society, we generally agree that free markets and competition provide the best products at the lowest prices. Yet somehow we abandon our principles in times of crisis, and claim that price gouging represents a “market failure” to be corrected by government. But the contrary is true: it is precisely at such times that the market should be permitted to operate freely. We might not like it when we have to endure higher prices for necessities, but the reality is that this approach results in the greatest good for the greatest number. Even if the ignorant don’t understand that.
No. I believe all the things that you do. I’m just frustrated that I can’t communicate these beliefs to people who already believe it but don’t know it.
If only there were philanthropic organisations funded by voluntary donations that could swing into action.
Sarcasm is so cheap.
But sometimes so well-aimed.
Then, to what better use could we put ourselves than the teaching of economics?
Focus on how we can better market our views. I could use well-constructed words when I speak to cattlemen and feedlot managers. They already know we’re right, and just need cover. And they represent lots of electoral votes.
At its core, economics is simply applied human psychology. Is doesn’t exist apart from humans.
No !
Economics is the study of scarcity. It applies, of course, to humans engaging with each other in commercial transactions. But it also applies to humans allocating their own time (a scarce resource) and energy (another scarce resource) where the trade is with themselves. Likewise saving and consumption is a trade with yourself across time.
But humans are not the only critturs which have to solve scarcity problems. Animals have saving and consumption problems too. And they also have other economic trade offs to worry about. Dung beetles have to decide how much dung to roll up in a ball to balance the ease of pushing the dung ball, with the number of trips required to accumulate a stack. All sorts of animals face the scarce resource problem of how much time and effort to spend hunting for new stuff as against defending the stuff they’ve already got. And evolution itself is substantially affected by economics. Animals with good eyesight have to trade that benefit off against a worse sense of smell. Because sight and smell compete for brain space.
Sure we usually come across economics in a human context, but it’s out there influencing all sorts of non human things.
As I think the whole notion of overtly libertarian parties is a self-defeating idea, I do not think libertarians even need a ‘brand’. I think my job is to try to gradually move the meta-context of political discussion in the appropriate pro-liberty direction, but there is a reason this blog started out as ‘Libertarian Samizdata’ and then later dropped the ‘libertarian’ from the title after about a year.
I agree with Perry de H that overtly libertarian parties are liable to do no more than take votes away from mainstream parties that are more friendly to libertarian ideas, and hand electoral victories to the dark(er) side. But :
1. IMHO liberatarians have a tendency – like those other lovers of theory over practice, socialists – to yell “Traitor !” loudly at politicians willing to offer them half a loaf, and then flounce off into abstention claiming there’s no difference between the half a loaf guy and the no loaf at all guy
2. But if you’re a ‘sure thing” for say the Tories, on the basis that the Tories are 70% awful, but Labour are 90% awful, then the Tories have no incentive to move in your direction. So the occasional flounce out may be the right game theory move. After all, it was the UKIP flounce that persuaded Cameron to offer a referendum.
3. So I think the best thing for libertarians to do (not me, I’m not a libertarian) is to influence the climate of opinion with argument. But as bobby b suggests, putting arguments in a way that ordinary folk who are generally sympathetic will appreciate is better than pronouncing high theory from the steps of the Temple. Tilting at windmills like disaster price gouging is not the way to win friends and influence people, even when you’re right.
At its core, economics is simply applied human psychology. Is doesn’t exist apart from humans.
I suspect “economics” will be/would be found across the galaxy/universe, wherever organisms have had to evolve. There may well be aspects of it that are tainted by the host species psychology, but there will also be universal principles.
If supply and demand are not allowed to set prices (including wages – a wage is the price of work) then the result is economic chaos and destruction.
The doctrine of “fair prices” and “just wages” is a lie – and the lie hurts most the people it is presented as helping.
As for the laws of logic – no they are not just dependent on humans, they are universal Another species could not make 1 plus 1 make anything other than 2, and could not make A be not A.
Both forms of German Historicism (the view of the “right” that different races have different basic laws of reason, and the view of the “left” that different social classes have different basic laws of logic) is wrong – as is theory of Historicism that different rules of economics apply in different “historical periods” or “historical stages”.
By the way…..
The whole idea that “law” is something created by the “will of a legislator” or the “will of a legislature” is wrong – such a top-down view of law leads to the state take over of society and general societal decline. Legislation is an evil – whether it is from the Emperor Diocletian or the Texas State Legislature (which is why Texas is wise to have this body only be in secession for a few days a year – as Mark Twain said “no man’s life or property is safe – when the legislature is in secession”). Although, yes, a mess created by a legislature can sometimes only be repealed by a legislature – which is why the hopeless weakness (if not actual sabotage) by the Republican leaders in the American House and Senate is NOT a good thing (it is a bad thing – a very bad thing).
Law is the effort to apply the basic rules of Natural Justice opposing force-and-fraud (rules which are NOT created by a “legislator” or a “Legislature”) – and “just prices” and “fair wages” are not part of an opposition to force and fraud. See Frederick Bastiat “The Law”.
And I said “lie” rather than “mistake” because statism is normally based upon deliberate lies – and not just from the Marxists (who lie about everything).
Take the most encyclical on “Social Teaching” ever produced by a Pope – the 1891 one produced by Leo XIII, he was not a socialist but he would be open to this stuff about “fair prices” and “just wages” – and what does he say in the VERY FIRST PARAGRAPH of his most famous encyclical – the bed rock of the “alternative” to socialist totalitarianism in much of the world.
In his very first paragraph Leo XIII says that capitalism has impoverished the masses and produced moral degeneracy.
How was 1891 more morally degenerate than 1791 or 1691 or 1591 or 1491? If anything most people were less morally degenerate in 1891 than their ancestors had been in the past – and Leo XIII was an intelligent and well informed man, he-knew-that. He knew how cruel and savage things had been in the past – how people had murdered each other over minor differences in doctrine, or just for money (crime has been much HIGHER in the past than in 1891) and how people had sold each other as slaves. Even in terms of sexual depravity – 1891 was a time of some sexual depravity (yes indeed), but LESS than in the past (for example the rate of births out of wedlock was lower than it had been in the past).
And how were people in 1891 impoverished compared to 1791 or 1691 or 1591 or 1491? Again Pope Leo XIII (the great interventionist “alternative” to socialism) was an intelligent and well informed man – he KNEW that wages and conditions of work were BETTER (not worse) in his time than they had been in the past. And his very first paragraph, of his most famous Encyclical pretends the opposite is true.
The above is not an ant Catholic point – as one can find Protestant writers presenting the same falsehoods (for example the Protestant religious writers of the Social Gospel movement in the United States or in Britain) – I picked the most famous example which is still being taught to people to this day (especially in Latin America). Protestant and atheist writers come out with the same false stuff – time and time again, but it is less famous.
So it is not unfair to say that not only socialism is based upon lies – interventionism (with its “just wages” and “fair prices” set by the state) is also based upon LIES.
“Why do so many socialists and interventionists lie?”
“Why?” is a big question – and not one I am even going to even try to answer here. It is enough that we keep in mind that they do lie – that this is NOT all a matter of honest mistakes.
In short telling interventionist that price controls in disaster hit areas will do harm will not convince them to drop their price controls.
Because they (NOT all the interventionists – but many of them) already know that the price controls will cause harm. They are not making some innocent intellectual mistake.
The whole argument depends on the rather futile hope that price-fixing laws will fix prices.
They don’t of course. They merely drive the trading underground, to a black market.
The buyer is denied all consumer rights, all warranty, all protection from being cheated.
The seller is excused all need to comply with health, safety, quantity, environmental laws or pay any taxes.
Since both parties are denied all legal recourse, and the protection of state-monopoly violence (law) is available to neither, they will in time build their own “protection” and feel the need both to use it and make examples, to demonstrate that they are not to be messed with.
Of course, this is just theory. If only we had a real-life example to prove the theory: some widely traded commodities that are forced to trade illegally….there must be an example, surely!
I keep trying not to be amazed by the stupidity of politicians, but making the sale of water as illegal as the sale of heroin must be an achievement.Not.
@ NickM August 30, 2017 at 10:40 pm
If I were dying of thirst, anyone who sold me a bottle of water for $10 would be an angel.
DP
But what about someone who lets you die of thirst because you only have $9?
I am a passionate advocate of voluntary exchange, but I think it behooves us to ask the hard questions of ourselves. I submit that markets are grand, that prices are the symptom and not the cause, and also that there is a point where the niceties of market pricing no longer apply.
Or to put it another way, if my child is dying of thirst, and you are trying to sell me water for more money than I have, you had better be handy with your firearm.
Paul:
“Why do so many socialists and interventionists lie?”
It’s not that long of an answer. They lie because there is no truthful way of explaining their position, because it is incorrect.
But what about someone who lets you die of thirst because you only have $9?
What about someone who lets everyone die of thirst rather than let someone sell them water for $9?
Yeah, neither of those is very good. So? Do we have to have one or the other?
And more importantly, if you needed the water to survive, and were a dollar short, what would you do?
Free markets do not make feelings such as compassion unnecessary – quite the opposite.
Goodwill is a balance sheet asset.
Yes, as has been discussed elsewhere, one of the benefits of price-gouging is it stops the first five customers clearing the place out “just in case”. They buy what they need and no more, leaving supplies (albeit expensive supplies) for the next customers. I read that during Hurricane Sandy price gouging was outlawed but some people just bought as much as they could and flogged it at the side of the road at a huge markup. It’s the old ticket-tout problem: if something is worth more than the tag price, somebody will profit from it eventually.
Yes, as has been discussed elsewhere, one of the benefits of price-gouging is it stops the first five customers clearing the place out “just in case”. They buy what they need and no more, leaving supplies (albeit expensive supplies) for the next customers. I read that during Hurricane Sandy price gouging was outlawed but some people just bought as much as they could and flogged it at the side of the road at a huge markup. It’s the old ticket-tout problem: if something is worth more than the tag price, somebody will profit from it eventually.
Exactly. The point being missed by most people discussing economics is that the water bottle is by far not the only product being exchanged in the transaction.
When we got hit with a combination ice storm and high winds (in NC, which rarely gets either) our state was shut down for about 10 days. A guy drove down from Boston (!!) to sell Husky chain saws for $500 (cash) each. On sale at Home Depot for $250, but who could get there, their POS wasn’t working without power, etc, etc. I was happy to pay it. IIRC, he sold about a thousand units out the back of his truck in a few hours.
Keep in mind he had to get a truck, buy 1000 chainsaws, drive 14 hours (min), and then drive home. Good payday but a LOT of risk.
I bought ten gallons of gas for $150 from a guy from SC, happy to have that too – no electricity for the pumps so no other gas.
Then my neighbors and I sawed and jacked threes for three days to clear streets and peoples driveways. (I was one sore MF as I am a desk job guy.)
So you can really have “price gouging” and communitarian responses happening at the same time.
-XC
Alisa,
Which is presumably why the Federal government is so keen to appear to be helping.
Not sure I get your meaning, Watchman…
If good will is being transacted, then the government needs to act to get some of this, at the risk of losing legitimacy.
Heh.
Cliff’s example is splendid.
So you can really have “price gouging” and communitarian responses happening at the same time.
The guy from Boston didn’t have to worry about goodwill, as it was a one-off for him. And even if in these internetty days he’d been identified back in Boston, his activity probably wouldn’t have been seen as price gouging, because he’d have been visibly bringing new supplies to a faraway place. Which looks different from an existing local supplier jacking up prices for the stock he’s already got.
Whereas Cliff and his mates did have to worry about their (social) goodwill. Cos they’re locals. No doubt Cliff himself is the sort of good hearted fellow to whom this thought will never have occurred at the time. But I’ll bet you that crusty old Don from No.43, who really didn’t want to do any more after he’d cleared his own driveway, realised that if he stayed inside smoking his pipe and leaving his neighbours in the lurch, well he’d be social toast. So he pasted on his best smile and went out chopping with the rest of them.
“Goodwill is a balance sheet asset.”
Sophistry. That’s a toxic combination of irrelevancy and error. “Goodwill” as a balance sheet asset is a (wholly fictitious) asset created by accountants in order the make the balance sheet, well, balance. And it only occurs when you purchase it. It’s merely the purchase price premium, the difference between the price you paid for another company and the net market value of its assets. You don’t create balance sheet “goodwill” by being kind and charitable, or by selling goods for less than you could. Whether you create some sort of “good will” (two words) among your customers by such actions is an entirely different matter, and one for management to consider, but it’s non-quantifiable and most definitely does not appear on any balance sheet. And it doesn’t belong in this discussion, either.
I took that as a metaphor, Laird – but YMMV.
Lee, Cliff’s example would most certainly have been statutory “price gouging” in my state (South Carolina). It’s defined here as “a gross disparity between the price of the commodity * * * [which] exceeds the average price at which the same or similar commodity . . . was readily obtainable in the trade area during the thirty days immediately before a declaration of a state of emergency, and the increase in the amount charged is not attributable to additional costs incurred in connection with the rental or sale of the commodity.” [SC Code §39-5-145] And that is deemed to be an “unfair trade practice” which is punishable by fine and/or imprisonment. Whether or not the person engaging in the practice is local or foreign, and whether or not he’s bringing “new supplies” into the area, makes no difference.
Social pressure (whether on an individual or a business) is a powerful factor, and I don’t object to its application in emergencies or any other situation. It most certainly can induce local businesses to maintain, or even reduce, prices during the emergency. (There’s a chain of tiny restaurants called Waffle House, ubiquitous throughout the South, which has a well-deserved reputation for remaining open and rendering assistance to all during the worst of emergencies.) That’s great. I have never denied that there are reasons other then purely economic ones which drive human action, and which may cause a business or individual to refrain from price gouging. My only objection is when government mandates such action by force of law. That is both economically counterproductive and morally wrong.
@ Ferox August 31, 2017 at 12:24 pm
How about an IOU? Or any of a hundred ways to exchange value?
No guns required, and if I had one, I could offer the bullets from the gun. (Winchester .38 rounds can be bought (sans gouging) for USD170 for 500, so six would be about USD2-worth. I could keep three.)
The point about free trade is that it is voluntary.
Not sure why some people seem to think everything has to devolve to violence or the threat of it.
Perhaps we have become inured to the concept of all transactions requiring an element of force or threat, simply because we are subject to it by our beloved government™ all the time.
DP
@Laird: August 31, 2017 at 5:44 pm
As a qualified, lapsed accountant, I feel obliged to confirm that the accounting definition of goodwill, as described by @Laird, would seem to be quite correct and is unchanged. The current textbooks continue to to define it as such, and it is still used in practice as described by @Laird.
I was amused but not too surprised that somebody could imply in a comment that “goodwill” on the balance sheet was anything of greater significance in any context, and I presumed that its use as such was probably attributable to crass ignorance, but, maybe it was sophistry, as @Laird suggests.
Either way, it was an egregiously incorrect comment to make.
What I do find surprising though is that the error was promptly agreed with or compounded by the comment by @Alisa August 31, 2017 at 1:39 pm:
Then, after @Laird had called out the original error, @Alisa went on to attempt to substantiate the nonsense with comment,
(August 31, 2017 at 5:51 pm):
I could be wrong, of course, but that comment would seem to smack of stubborn infantilism and denial of the obvious.
If a person offers for sale a plastic bottle containing potable water, and someone buys it, then the only product that is being sold/purchased is water. Anything else – e.g. (say), branding, a fancy bottle design – that the purchaser may consciously or unconsciously feel to be of value, is imaginary or a cost-of-sale (i.e., the bottle) – as is the goodwill on the balance sheet, which is a notional amount necessary to provide an arithmetic balance which has to be equivalent to the excess of the price paid for a company over the the net asset book value of that company. Once the company has been purchased, any goodwill is to be written down, as it is an artificial construct and – if it remained on the books – would artificially inflate the net asset book value of the purchasing company (which not good accounting practice as it conceals the real worth of a company).
Accountants and marketing people understand the differences between product cost, cost-of-sales, and sale price, and the effective differential between them in the shape of gross/net profit.
I probably should mention here that “markup” – which is defined as “the amount added to the cost price of goods to cover overheads and profit” is the bit that gets beefed-up if price-gouging takes place in (say) exploitation of scarcity situations. I do not comment on the morality of that, other than to say that virtue-signalling by the vendor keeping prices down to a reasonable level and not exploiting a situation does not of itself necessarily earn the vendor any revenue, but it will tend to keep the government regulators off their backs. This would be particularly relevant in the case of the sale and delivery of potable water, which is a basic necessity for human life and is typical of cases where the economic concept of “marginal utility” can be seen/applied.
Wow Slartibartfarst, I do hope that you feel better having taken all that off your chest… Cheers 🙂
Since FEMA is in fact charging the taxpayer at least a 1000% markup on everything it delivers, here’s my solution.
Eliminate FEMA. Eliminate all price gouging laws. Require price gougers to give receipts. If the event is declared a disaster, reimburse those who bought from a noble, hard working capitalist supplier taking great risks to deliver into a disaster zone.
Sure, there will be some inflation in the price of stuff like gas and bottled water as people expecting reimbursement won’t worry too much about what they pay. FEMA’s annual budget is $US13.9 billion. I’m guessing most of that goes to bullshit. People can only pay what they have so won’t pay too much, the event may not be declared a disaster and getting reimbursement from any government is a pain.
We’ll also get to tax the “gouger” on his well earned profits.
The White House warned Thursday that price gouging “would not be tolerated” in Texas as tens of thousands of displaced individuals seek food and supplies in the wake of intense floods that have devastated the Gulf region.
“Anybody that’s going to go out and try to take advantage of a disaster victim ought to expect the law enforcement to come down [on] them with a hammer,” White House homeland security adviser Tom Bossert said at a briefing.
“That’s not acceptable on a regular day. It’s certainly not acceptable when people are suffering. We’ll use the latitude under the law and provide a fair market value, rental rate that’s a little bit higher than a 100 percent to accommodate the natural demand and supply.”
The White House statement comes amid reports that the prices of some everyday goods have been raised significantly as those affected by flooding from Hurricane Harvey seek food and water.
* * *
Boldface mine. Source:
http://thehill.com/homenews/administration/348750-white-house-price-gouging-of-harvey-victims-will-not-be-tolerated?roi=echo3-46373265414-44015327-ed4f8ce50878dbc261cb58795fb3f881&
@Alisa: August 31, 2017 at 8:59 pm:
My apologies, but I do dislike seeing seeming non sequiturs remain unchallenged in an otherwise potentially useful discussion. Once we have accepted a false premise, we can easily accept 100 more – a slippery slope to absurdity – e.g.as in (say) an alt-left driven discussion, where the truth or reasoning around a counter-argument might be inarguable, so the trick then could be to variously chide, mock, stigmatize or shame the person providing that argument rather than address the argument per se… Cheers. 🙄
Aw, c’mon. Do you take a triumphal exultation in finding typos, too?
Yes, the term “goodwill” has a specific and narrow definition within the accounting vernacular, which many nonaccountants do not know.
They misused the term. So maybe look at what they thought the term meant, and deal with their argument from that point.
In a situation where one retailer resists the urge to boost prices during a hurricane cleanup while everyone else is charging $10 for a water bottle, the retailer undoubtedly gains . . . something . . . from its decision. Whether we call it consumer love, or “likes”, or (incorrectly) goodwill, it exists, and that is what they were describing.
A balance sheet includes goodwill, and gives a snapshot in time. What they describe has to do with trend, which isn’t shown on the the balance sheet. But it makes a difference in an entity’s future. And the point, I think, was that in accurately judging the merits of charging less than the market might bear in an emergency, this shakily-named effect is a relevant consideration.
Yeah, don’t you hate it when people do that?
Bobby b, as I’ve already stated, the actions of a business (at any time, not just during emergencies) can indeed enhance its reputation among the community (its “good will”, if you like) and lead to greater long-term success. But the statement to which I objected was specifically about goodwill being a balance sheet asset, with the clear and (I believe) intended implication that the two concepts are somehow related. They are not, and to suggest otherwise is not helpful to this discussion. That is why I took exception to it. And frankly, I do not believe that someone who has enough familiarity with corporate financial statements to be aware of the existence of “goodwill” as a balance sheet asset would “misuse” that term accidentally. But of course I could be wrong about that.
Coincidentally, I saw this today. Might be useful food for thought and transferable across this and other discussions.
Amazingly helpful and concise post on a Princeton University website for students (and concerned parents, I presume), made by a group of ivy-league professors in the US:
(Hat-tip to JoNova in Australia: Ivy league profs warn of the vice of conformism: “Think for yourself”)
The post on the Princeton University website is: Some Thoughts and Advice for Our Students and All Students
I feel moved to comment by Laird’s and Slartibartfarst’s comments to, er , disagree.
The reason why, on the purchase of a business, there is often a balancing item representing the difference between the price paid for the business and the accounts value of the net assets, is that the business is actually worth more than the accounts value of the net assets. The difference being an intangible asset (or a collection thereof) to which accountants give the name “goodwill.” But it isn’t just reputation, customer recognition and good will; it includes knowhow, customer lists, a trained workforce and so on. This is a REAL asset, not an imaginary one. The fact that it doesn’t appear in the accounts of businesses that haven’t been sold is that accountants draw up accounts using the historical cost convention. And organically grown goodwill hasn’t cost you anything. Or rather it hasn’t cost you anything under the conventions for drawing up historical cost accounts. In fact, of course, when you spend $31,968 on an employee’s wages and $2,344 on training her, some amount of those costs is really going to build up your “goodwill” because you’re getting a better trained employee for the future. But since you expense the whole lot in your annual profit and loss account, there’s no accounting goodwill created.
The fact that goodwill is a REAL asset is shown from the other side of the park, when a business is purchased. The seller’s view. You offer $1 million for a business, which earns annual profits of $350,000, and whose net assets appear in the balance sheet at $1m, and the seller will tell you to go forth and multiply, but not in so many words. The business is worth a lot more than $1 million, because there’s a fat asset that doesn’t appear on the balance sheet. Which businessmen, as well as accountants, call goodwill.
If you’re uncomfortable with calling it “goodwill” on the basis that lots of it isn’t “good will” fine, call it mulligatawny soup if you like. But it’s stlll a thing.
Oh my. Well, what do you do when some normally reasonable person leaves a comment that is totally OT, only partially correct, and of little interest to you – but your name figures in it, and so you feel compelled to acknowledge it for fear of coming across as rude by ignoring it altogether? Sometimes written communications do suffer from lack of physical presence and simple eye contact…
Laird, like you, I have always considered “goodwill” to be to a fairly narrow term. But it’s been decades since I was schooled in it and used it, and so I Binged the term to see if maybe the common usage had outstripped my education.
Apparently, I’m a dinosaur.
At Intuit’s Quickbook site, “goodwill” seems to have widened from what I learned:
I note that they call it “goodwill” and not “good will.” I also note that “reputation” and “brand recognition” are included in their list. According to this, the warm feelings that your company name inspires in potential customers (and the resulting higher future sales) stemming from keeping prices low during an emergency are directly recordable as value (if you can figure out how to value it, I assume.)
So, I’m thinking that (if one takes Intuit’s word as correct) the earlier disputed uses of “goodwill” were correct. Except maybe to us dinosaurs. And even if they misused the one word, their overall concept was correct, and of direct relevance to the post topic.
Cliff Elam @ August 31, 2017 at 2:00 pm:
Interesting example, but I would say it misses the point. Chainsaws are not necessities of life. The buyers could have waited. They paid extra for immediate delivery. Also, 100% markup, for immediate delivery in the middle of a disaster, wouldn’t really be seen as gouging, I think.
But 1000% markup, for something people will die without – which means they have no choice – feels intolerable.
People have been commenting that economics and/or libertarianism is poorly understood and we should try to fix this. As regards …
… anyone who has ever watched the antiques roadshow recalls conversations along the lines of
The ‘insure it for’ is the replacement price. The difference is often not just (or at all) inflation. The people who smile as the expert tells them this are not usually denounced as ‘price gougers’. 🙂
I mention this as one of the examples we could use when having to remind people of the ‘replacement price, not paid-for price’ idea.
Just my 0.02p FWIW.
I have been thinking about this problem today, and it occurs to me that if there is a shortage of X, then some people are not going to get X. All the different means of distribution do is to change who gets left out.
There are any number of distribution schemes – “women and children first”, “eldest first”, “youngest first”, “first in line”, etc. And one of those distribution schemes is via the normal market price mechanism – the highest bidder gets the goods. It isn’t necessarily any more moral than the others, but it’s not less moral either. If someone is going have to do without, why is it better for a rich person to do so than a poor person?
The advantage the free market has over all the other distribution schemes is that it will tend to lessen the shortage by encouraging producers to increase the supply – not appealing to their sense of duty or charity, but rather to their self interest. And I think that is the argument to make to non-libertarians: someone is going to do without in any event, because there is a SHORTAGE, but only free market pricing will help to alleviate the shortage in addition to distributing the goods.
Re: the commenter who claims he would trade ammo for water in a crisis situation – I bet you wouldn’t either. In that situation, no checks would be taken, no promissory notes, and no exchange of services (except perhaps by the comely and willing). When it’s life and death the normal rules of ownership will break down. If my child was dying of thirst and some guy was sitting there washing his dog with potable water from a gallon jug, he would give it up, sell it, or have to fight for it. Property rights be damned. And if he offers to sell it for a dollar more than I have, he had better be willing to negotiate something, or it’s back to fighting.
The truth is “price gouging” saves lives. The problem is that most people don’t understand how pricing works. What we should care about is justice, not fairness. Fairness is an artificial construct made for games and children…and leftists of course.
Reality leads to inequality of outcome. Therefore reality is unfair.
Ferox : I have been thinking about this problem today, and it occurs to me that if there is a shortage of X, then some people are not going to get X. All the different means of distribution do is to change who gets left out.
I would quibble this into “then some people are not going to get as much X as they usually consume” – water, for example, is very very important to the extent of a couple of litres a day to drink, but surprisingly unimportant when it comes to car washing, laundry, swimming pool filling, watering lawns and so on. Most of which can be deferred.
@Rich –
Well, a way to cut wood *was* a necessity. That’s what people were using to heat their houses with the electricity out. While we all had means to split wood, we had no way to cut enough to create the heat. (FYI: you have to burn about 2x more greed wood than dried/seasoned)
Don’t forget the $150 for 10 gallons of gas – IIRC gas was $2 at the pump, not $15 in a can.
Water may feel more immediate, plus people think of it as a “free” (or very cheap) good, but that makes the example more emotional than necessary.
I’d also note that we need much less water than our modern culture has insisted.
-XC
@Lee Moore September 1, 2017 at 6:40 am
I don’t think I’d disagree with most/any of what you wrote there @Lee Moore. When we were parcelling-up SOEs (State-Owned Enterprises) for sale (privatisation), we would focus on maximising the premium (goodwill) on sale, of course. To do that, the for-sale company would be financially re-engineered after RFI and prior to RFP and due diligence, so as to maximise its attractiveness to the buyers who had identified themselves as being in the bidding/tender process.
Only this happens, roughly, never – first because most people are not selfish bastards, and second because societal pressure is there to check on those few who may have a marginal tendency towards such bastardly selfishness. This is just another one of those man-eats-man scenarios socialists (obviously not you, Ferox) tend to bring up against free markets – maybe this perception of the human nature is what makes them socialists in the first place? I really hate it when people who generally know better buy into this line of argument, as it has very little to do with reality, if at all.
Only this happens, roughly, never – first because most people are not selfish bastards, and second because societal pressure is there to check on those few who may have a marginal tendency towards such bastardly selfishness. This is just another one of those man-eats-man scenarios socialists (obviously not you, Ferox) tend to bring up against free markets – maybe this perception of the human nature is what makes them socialists in the first place? I really hate it when people who generally know better buy into this line of argument, as it has very little to do with reality, if at all.
This also rests on the unsubstantiated premise that a rich person must be a selfish bastards just because he’s rich. Sure, some rich people are like that, but so are some poor ones as well. Regardless, if I was a very rich person who wanted to help out the poorer ones by supplying them with some water in an emergency, I would have two choices: give out money to the poor people so that they can buy water from the “price gauger”, or I could buy all the water I could and give it to the poor people who could not afford to buy it at the “gouged” price. To me, the second approach sounds more reasonable. And speaking more generally, I have not been on either side of such situations personally, but I imagine that reality would tend to be a mixture of this and of that – nothing rosy to be sure, but again, not necessarily the man-eats-man scenario socialists like to imagine.
Sorry for the incomplete comment there – I thought I deleted it…
If it doesn’t happen then it doesn’t matter. I only mention it because there are certain commodities (which point has been made earlier in this thread by someone else) which are survival commodities. We shouldn’t try to pretend that food and water are the same as chainsaws in shortage situations.
Or to put it more concisely, people will not let themselves be priced out of surviving – fairness AND justice be damned. Not even the most hardcore, dedicated libertarian will do that. So when we are having this discussion with others, I believe it is a point worth keeping in mind.
Fair enough.
I’ve been in shortage situations. In my experience, the essentials – clean water, food, first aid, a place to sleep – are usually quickly supplied, mostly by government and the red cross and salvation army, etc., and if not by them then by private actors like the churches and just folks. People do look out for people.
If you’re going to have friction, it’s usually in things like plywood and tarps, transportation, chain saws, generators (so you don’t lose the food you have and can preserve food you get and maybe power a pump), pumps, fuel, and the like. Not stuff you’ll die without, but still stuff you need unless you’re just going to leave and call your insurer.
In other words, our system is usually smart enough to make sure we get the things that we might otherwise pull out guns over, and leave us to fend for the rest.
@Ferox
> And more importantly, if you needed the water to survive, and were a dollar short, what would you do?
What you do is you get together with your neighbor and come up with the $10 between you and share the water. Or, if you don’t, then you are lucky, me, the nasty exploitative capitalist bastard is sitting next to you and I do have ten bucks, so I buy the water, sell half to you for six dollars, half to someone else for six dollars, and make a profit.
I do this a few more times, then I then use that profit to buy a boat, sail to Walmart in Alabama and float back with a boat load of water and start selling it. Unfortunately, I’m not alone in doing that, and these damn competitors although still trying to gouge prices, but now water is down to six dollars a bottle. Bastards. Still, I make a profit, sail back to Walmart and get another boat load. But now prices are driven down to $2.50, so I sell off my load, and don’t make enough profit for another trip.
(BTW, I also try to get together with the other price gougers to keep the price high via a cartel, but anyone can enter the business, and so the cartel quickly collapses…. obviously we need to license water suppliers so that these piddly little competitors can undermine our high quality cartel, you can’t just have some random guy bringing in water you know…)
Lesson learned? Price gouging created entrepreneurial activity to solve the problem. Increased prices increase demand. People make money by providing for the demand. Price gouging, when not interfered with, is a self correcting system. Absent government coercion such as licensure, cartels quickly collapse.
Price gouging is not a sin, it is an almost unfettered blessing. Preventing it will lead to death and destruction. Which is to say, stopping price gouging is a great evil.
Oh, follow up to my post… me selling a bottle of water for $10. Price gouging laws are in place. What happens?
Cop sees me selling water for $10 and arrests me. Cop throws me in jail, takes my water and drinks it. Water sells for 50 cents in Alabama, but nobody bothers transporting it to thirsty kids.
You watch your child die of thirst.
This is true price gouging laws in action.
There are only three possible things: auction, lottery, queue.
A sound-bite-y way of saying what Fraser Orr is saying, I think: If you allow someone to “price gouge” water at $10 a bottle, the price will not stay at $10 a bottle for long.
Alisa wrote, “maybe this perception of the human nature is what makes them socialists in the first place?”
Yes, most Leftists, aka statists, consider themselves morally superior to everyone else. THEY want to help the unfortunate, but think that they need the government to save everyone else from starving in the streets, because everyone else is evil enough to watch them die.
Rob, yup. People often think that scarcity causes shortages, when in truth shortages don’t occur in a free market. Charging $10 for a liter of water means that the water will only go to people who need the water more than the $10. That is, they really need it.
Paul:
“Why do so many socialists and interventionists lie?”
Because its easier to paint inquality of outcome as a gross injustice rather than an excuse to increase micromanagement and control over people’s lives. It’s easier to pretend that totalitarianism is a moral nesessity than to tell the truth.
@Rob Fisher (Surrey)
> A sound-bite-y way of saying what Fraser Orr is saying
Maybe Rob, but if you want to summarize my loquaciousness I think I’d rather you used a pithy remark from a fellow Scot from a few hundred years ago:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
Adam Smith, 1776.
Even if the butcher is an evil price gouging SOB.
As long as he’s not stupid, the rest of us non-butchers are unlikely to become unwilling vegetarians 🙂
Alisa is correct – compassion is vital.
And compassion is, by definition, voluntary – forced compassion is not compassion.
There is a vast difference between “I will give you some of my food” and “I will force that person over there to give you some of his food – or sell it to you at a price I (not they) set”.
People who can not tell (or pretend they can not tell) the difference, and call government spending and regulations compassion, are (at best) deluded.
Laird wrote, “
I would say that free markets results in the greatest good for the individual. That is, participating in a self-correcting economic system. The effect isn’t simply utilitarian. Much like participating in a system where one gains a job by having the most merit even if one doesn’t get a particular job on any particular day. Or participating in a system where our property rights are respected even if it means that we don’t have that convenient bypass or Super Walmart built five miles down the road. (But unfortunately eminent domain does exist.)
Slartibartfast @5:22am, thanks. There might be hope for Princeton. Then they wrote this: “…acquire the virtues necessary to be a lifelong truth-seeker.” “Think for yourself” is almost a motherhood statement and the fact that so many “Named” professors would have to write such an article should be jaw dropping to every parent paying their salaries.
But the claim of virtue (they must possess virtue or at least know how to find it, if students are going to find it, right?) sent a chill through me. I don’t want any university thinking it is responsible for instilling virtue in students. Not because they shouldn’t, but because of what they’ve become. Apart from the motherhood plea “think for yourself”, I’m only aware of vice motivating and populating these institutions, at least outside of STEM departments. And even there the only virtue is (some) hard work on (some) relevant subjects.
Thailover, I selected the phrase “greatest good for the greatest number” intentionally. But of course I agree with your comment.
Prof. Boudreaux at George Mason University offers an explanation of another (second-order) adverse consequence of laws prohibiting price gouging.