WEBVTT NOTE 21. The Ghetto Merchant 1 00:00:00.000 --> 00:00:05.000 Chapter 21 The Ghetto Merchant 2 00:00:05.000 --> 00:00:11.000 How dare he charge such outrageously high prices for such shoddy merchandise? 3 00:00:11.000 --> 00:00:16.000 The store is filthy, the service horrible and the guarantee is worthless. 4 00:00:16.000 --> 00:00:21.000 The installment buying will keep you in debt to them for the rest of your life. 5 00:00:21.000 --> 00:00:28.000 The customers of these leeches are among the poorest, the most financially naive to be found anywhere. 6 00:00:28.000 --> 00:00:40.000 The only remedy is to prohibit the high prices, low quality products, the devious installment plans, and the general exploitation of poor people. 7 00:00:40.000 --> 00:00:46.000 Such is the view of a majority of those who have spoken out on the ghetto merchant problem. 8 00:00:46.000 --> 00:00:49.000 And indeed it has a certain plausibility. 9 00:00:49.000 --> 00:00:57.000 After all, ghetto merchants are mainly rich and white, and their customers are mainly poor minority group members. 10 00:00:57.000 --> 00:01:03.080 Merchandise sold in ghetto shops is often more expensive than that sold in other areas, 11 00:01:03.080 --> 00:01:04.920 and of inferior quality. 12 00:01:04.920 --> 00:01:12.080 However, the proposed solution to compel ghetto merchants to follow the practices of non-ghetto 13 00:01:12.080 --> 00:01:14.680 neighborhoods will not work. 14 00:01:14.680 --> 00:01:22.080 Rather, such compulsion will hurt the people it is designed to help, the poor. 15 00:01:22.080 --> 00:01:28.200 It is easy to argue that if you prohibit something that is bad, something good will follow. 16 00:01:28.200 --> 00:01:33.880 It is simple, but not always true, and it is clearly untrue in the case of the ghetto 17 00:01:33.880 --> 00:01:37.000 merchant and his business practices. 18 00:01:37.000 --> 00:01:43.240 This facile argument blithely ignores the causes of the problem, why prices are really 19 00:01:43.240 --> 00:01:45.840 higher in the ghetto. 20 00:01:45.840 --> 00:01:51.080 Although at first glance it might appear that prices are higher in luxury neighborhoods 21 00:01:51.080 --> 00:01:56.200 As in the ghetto, this is due to the fact that stores in the ghettos and the luxury 22 00:01:56.200 --> 00:02:00.080 neighborhoods do not really sell the same goods. 23 00:02:00.080 --> 00:02:04.620 The quality of the merchandise sold is lower in the ghetto. 24 00:02:04.620 --> 00:02:09.040 This holds even in the case of seemingly identical merchandise. 25 00:02:09.040 --> 00:02:15.260 A bottle of Heinz ketchup, for example, might be priced higher in the luxury neighborhood, 26 00:02:15.260 --> 00:02:21.660 But the product being sold there is the ketchup, plus the decor of the store, delivery and 27 00:02:21.660 --> 00:02:27.540 other services, and the convenience of shopping close to home, or at all hours of the day 28 00:02:27.540 --> 00:02:29.500 and night. 29 00:02:29.500 --> 00:02:34.740 These amenities are either lacking altogether in the ghetto shop, or are present in a lesser 30 00:02:34.740 --> 00:02:36.220 form. 31 00:02:36.220 --> 00:02:41.240 When they are taken into account, it is clear that the ghetto consumer gets less for his 32 00:02:41.240 --> 00:02:45.440 is money than the consumer in a luxury neighborhood. 33 00:02:45.440 --> 00:02:51.480 This must be true because the price charged by the ghetto merchant reflects hidden operating 34 00:02:51.480 --> 00:02:56.840 expenses which the non-ghetto merchant does not have to contend with. 35 00:02:56.840 --> 00:03:01.920 In the ghetto, there are higher rates of theft and crime of all types. 36 00:03:01.920 --> 00:03:07.160 There is more damage by fire and greater chance of damage from riots. 37 00:03:07.160 --> 00:03:12.880 All this increases the insurance premiums that the merchant must pay, and it increases the 38 00:03:12.880 --> 00:03:19.840 necessary expenditures on burglar alarms, locks and gates, guard dogs, private policemen, 39 00:03:19.840 --> 00:03:26.760 etc. Given that the costs of doing business are higher in the ghetto, the prices charged 40 00:03:26.760 --> 00:03:32.800 there must be greater. If they were not, ghetto merchants would earn a smaller profit than 41 00:03:32.800 --> 00:03:38.800 and those outside the ghetto and they would abandon the area for greener pastures. 42 00:03:38.800 --> 00:03:44.440 What keeps prices in the ghetto high is not the greed of the ghetto merchant. 43 00:03:44.440 --> 00:03:48.720 All merchants inside the ghetto and out are greedy. 44 00:03:48.720 --> 00:03:54.440 What keeps the prices in the ghetto high are the high costs of doing business in these 45 00:03:54.440 --> 00:03:55.680 areas. 46 00:03:55.680 --> 00:04:01.160 In fact, there is a constant tendency for profits in different fields of endeavor to 47 00:04:01.160 --> 00:04:07.820 to become equalized, or to come to equilibrium, given the expected variation in the profit 48 00:04:07.820 --> 00:04:13.300 risk and other non-pecuniary advantages or disadvantages. 49 00:04:13.300 --> 00:04:17.760 And the situation of ghetto merchants exemplifies this tendency. 50 00:04:17.760 --> 00:04:25.560 When profits in area A are higher than those in area B, merchants are drawn from B to A. 51 00:04:25.560 --> 00:04:31.920 When as a result only a few merchants are left in area B, competition there decreases 52 00:04:31.920 --> 00:04:34.360 and profits rise. 53 00:04:34.360 --> 00:04:41.040 And as more and more merchants arrive in area A, competition increases and profits fall. 54 00:04:41.040 --> 00:04:47.400 Thus, even if at some point ghetto merchants realized greater profits than others, they 55 00:04:47.400 --> 00:04:51.800 could not continue to earn greater profits for long. 56 00:04:51.800 --> 00:04:56.680 If there were more profits to be made in the ghetto, merchants would be drawn there, and 57 00:04:56.680 --> 00:05:02.680 the resulting competition would tend to drive profits down to equilibrium. 58 00:05:02.680 --> 00:05:08.400 And in response to the lessened competition outside the ghetto, profits there would rise 59 00:05:08.400 --> 00:05:11.400 to equilibrium. 60 00:05:11.400 --> 00:05:14.880 The Ghetto Merchant as Benefactor 61 00:05:14.880 --> 00:05:21.240 The question of non-pecuniary advantages and disadvantages have not yet been dealt with, 62 00:05:21.240 --> 00:05:26.960 But they exist, and all the non-pecuniary advantages are on the side of the merchant 63 00:05:26.960 --> 00:05:30.240 located outside the ghetto. 64 00:05:30.240 --> 00:05:36.240 The ghetto merchant, apart from the risk he faces to life and property, must bear in addition 65 00:05:36.240 --> 00:05:43.440 the scorn of an outraged public who are angry and resentful at him for, among other things, 66 00:05:43.440 --> 00:05:47.580 selling shoddy merchandise at high prices. 67 00:05:47.580 --> 00:05:52.460 Because of the indignities suffered by the ghetto merchant, the equilibrium profit rate 68 00:05:52.460 --> 00:05:56.180 will be higher in the ghetto than outside. 69 00:05:56.180 --> 00:06:01.560 In other words, profits will remain stable at a point at which ghetto merchants earn 70 00:06:01.560 --> 00:06:07.700 a greater profit than other merchants, but not so much greater that it tempts other merchants 71 00:06:07.700 --> 00:06:10.140 to enter the ghetto. 72 00:06:10.140 --> 00:06:15.620 The merchants outside the ghetto will not be attracted to the ghetto by this extra profit 73 00:06:15.620 --> 00:06:20.900 because it will be less than sufficient to compensate them for the extra indignities 74 00:06:20.900 --> 00:06:25.060 and risks they would suffer as ghetto merchants. 75 00:06:25.060 --> 00:06:30.560 The merchants who remain in the ghetto are those who are least put off by the indignities 76 00:06:30.560 --> 00:06:32.820 and risks involved. 77 00:06:32.820 --> 00:06:37.100 For them, the extra profit is enough compensation. 78 00:06:37.100 --> 00:06:43.700 In other words, there will be, and always is, a self-selection procedure whereby those 79 00:06:43.700 --> 00:06:48.660 Those with the greatest tolerance for the risks and indignities of the ghetto will be 80 00:06:48.660 --> 00:06:52.840 swayed by the extra profit to remain there. 81 00:06:52.840 --> 00:06:57.840 Those with the least tolerance will not be compensated by the extra profits and will 82 00:06:57.840 --> 00:07:02.000 head for greener, whiter fields. 83 00:07:02.000 --> 00:07:09.020 If the tolerance of the ghetto merchants decreases, the equilibrium profit rate will have to rise. 84 00:07:09.020 --> 00:07:14.420 If it does not rise, those among the ghetto merchants who have the least capacity to bear 85 00:07:14.420 --> 00:07:17.820 the indignities will leave. 86 00:07:17.820 --> 00:07:22.620 Competition will decrease, and the remaining merchants will be able to raise their prices 87 00:07:22.620 --> 00:07:25.540 and, hence, their profits. 88 00:07:25.540 --> 00:07:30.660 This rising profits will be just enough to compensate the remaining merchants in the 89 00:07:30.660 --> 00:07:34.000 face of their heightened sensitivities. 90 00:07:34.000 --> 00:07:39.240 The reason, then, that prices are not higher than they are in the ghetto is that these 91 00:07:39.240 --> 00:07:45.680 merchants have a great ability to bear the risks, scorn and abuse. 92 00:07:45.680 --> 00:07:50.720 In the light of this, the ghetto merchant who charges outrageously high prices can be 93 00:07:50.720 --> 00:07:57.360 considered a benefactor, for it is his ability to withstand the pressures placed upon him 94 00:07:57.360 --> 00:08:01.980 that keeps prices in the ghetto no higher than they are. 95 00:08:01.980 --> 00:08:06.580 Except for this ability, prices would be even higher. 96 00:08:06.580 --> 00:08:09.740 Another startling aspect should be considered. 97 00:08:09.740 --> 00:08:15.220 The villain, if anyone, is not the ghetto merchant whose tolerance for outrages keeps 98 00:08:15.220 --> 00:08:17.140 prices down. 99 00:08:17.140 --> 00:08:23.260 The villain is, rather, those who heap scorn and abuse upon him and revile him for charging 100 00:08:23.260 --> 00:08:26.820 high prices for shoddy merchandise. 101 00:08:26.820 --> 00:08:33.940 It is these nattering nabobs of negativism who are instrumental in keeping ghetto prices up. 102 00:08:33.940 --> 00:08:40.220 It is these grumblers, usually local politicians and community leaders seeking power and a 103 00:08:40.220 --> 00:08:46.660 political base, who raise the equilibrium profit differential necessary to keep merchants 104 00:08:46.660 --> 00:08:48.540 in the ghetto. 105 00:08:48.540 --> 00:08:55.460 If they were to cease their ill-advised condemnations, the non-pecuniary disadvantages of merchandising 106 00:08:55.460 --> 00:09:02.420 in the ghetto would diminish, along with the equilibrium price differential, and hence, 107 00:09:02.420 --> 00:09:04.060 ghetto prices. 108 00:09:04.060 --> 00:09:09.500 Paradoxical, though it may be, those who are most vociferous in their complaints about 109 00:09:09.500 --> 00:09:15.420 the high prices charged by ghetto merchants are actually responsible for keeping those 110 00:09:15.420 --> 00:09:19.580 prices higher than they would otherwise be. 111 00:09:19.580 --> 00:09:25.060 This analysis is not restricted to cases in which the ghetto community is Hispanic or 112 00:09:25.060 --> 00:09:31.820 black and the merchants are white, for the risks of theft, fire and damage by vandalism 113 00:09:31.820 --> 00:09:38.500 and riots would cause a black or Puerto Rican merchant to charge higher prices too, and 114 00:09:38.500 --> 00:09:44.460 the resulting abuse to which he would be subject would drive the prices even higher. 115 00:09:44.460 --> 00:09:50.400 If anything, the minority member merchant would have a more painful criticism to bear, the 116 00:09:50.400 --> 00:09:54.260 charge that he is a traitor to his ethnic group. 117 00:09:54.260 --> 00:10:00.880 The analysis then will become even more applicable when and if blacks and Puerto Ricans begin 118 00:10:00.880 --> 00:10:06.380 to replace whites as ghetto merchants. 119 00:10:06.380 --> 00:10:09.620 Restrictions can only be harmful. 120 00:10:09.620 --> 00:10:14.580 The effect of a law prohibiting the ghetto merchant from charging higher prices than 121 00:10:14.580 --> 00:10:18.520 those charged elsewhere can now be appreciated. 122 00:10:18.520 --> 00:10:22.280 It would simply drive merchants out of the ghetto. 123 00:10:22.280 --> 00:10:28.180 Higher costs of doing business with no opportunity to recoup them through higher prices means 124 00:10:28.180 --> 00:10:30.100 lower profits. 125 00:10:30.100 --> 00:10:34.540 No merchant would voluntarily remain in such a business situation. 126 00:10:34.540 --> 00:10:40.140 In fact, merchants will not remain in ghettos unless they can earn a higher profit than 127 00:10:40.140 --> 00:10:46.880 can be earned elsewhere to compensate them for the non-pecuniary disadvantages. 128 00:10:46.880 --> 00:10:52.380 If the prohibition was strictly enforced, virtually all the merchants would leave the 129 00:10:52.380 --> 00:10:58.860 ghetto and seek their fortunes elsewhere, with a minute fraction remaining. 130 00:10:58.860 --> 00:11:03.280 Customers would then be forced to queue up at whatever shops were available, thereby 131 00:11:03.280 --> 00:11:08.960 by reducing costs and increasing revenues to the point at which the merchants might be 132 00:11:08.960 --> 00:11:14.140 compensated for the higher costs of operating in the ghetto. 133 00:11:14.140 --> 00:11:18.700 But this would mean that residents of the ghetto would have to wait in line for long 134 00:11:18.700 --> 00:11:22.440 periods of time in order to make a purchase. 135 00:11:22.440 --> 00:11:27.280 And it is more than likely that customers would heap even greater abuse upon ghetto 136 00:11:27.280 --> 00:11:32.260 merchants for the even poorer service they would be receiving. 137 00:11:32.260 --> 00:11:35.700 Such crowds might even prove uncontrollable. 138 00:11:35.700 --> 00:11:41.020 In such a situation, the few remaining merchants would be forced to shut down. 139 00:11:41.020 --> 00:11:46.540 The citizens of the ghetto, the community leaders, pundits and commentators, would then 140 00:11:46.540 --> 00:11:51.060 blame the ghetto merchants for leaving the community. 141 00:11:51.060 --> 00:11:56.540 The departure of the ghetto merchants would cause pain and suffering on a truly monumental 142 00:11:56.540 --> 00:11:57.960 scale. 143 00:11:57.960 --> 00:12:02.880 Ghetto residents would be compelled to travel great distances to make purchases which were 144 00:12:02.880 --> 00:12:05.480 formerly made in their neighborhoods. 145 00:12:05.480 --> 00:12:11.320 They would pay slightly lower prices for goods of slightly higher quality, but these gains 146 00:12:11.320 --> 00:12:17.960 would be more than counteracted by the increased car fare and time lost in transit. 147 00:12:17.960 --> 00:12:23.400 We know this because these options are always open to ghetto inhabitants. 148 00:12:23.400 --> 00:12:28.840 Since local people patronize neighborhood stores presently, they must feel they do better 149 00:12:28.840 --> 00:12:31.320 closer to home. 150 00:12:31.320 --> 00:12:36.200 The ghetto dwellers could not even make deals with one another by which some would do the 151 00:12:36.200 --> 00:12:38.400 shopping for the rest. 152 00:12:38.400 --> 00:12:43.720 This would implicitly convert some of them to ghetto merchants, and the same choice would 153 00:12:43.720 --> 00:12:49.020 be open to these new ghetto merchants as were available to the old ones. 154 00:12:49.020 --> 00:12:54.040 There is no reason to suppose that they would be oblivious to the financial incentives which 155 00:12:54.040 --> 00:12:57.460 would sweep the old ones out of the ghetto. 156 00:12:57.460 --> 00:13:03.420 The only reasonable way for ghetto dwellers to handle this unruly situation would be to 157 00:13:03.420 --> 00:13:10.340 form a shopping collective, with members helping one another in the arduous task of shopping. 158 00:13:10.340 --> 00:13:15.760 But to do this would be to revert to a way of life in which food gathering becomes a 159 00:13:15.760 --> 00:13:18.940 very time-consuming activity. 160 00:13:18.940 --> 00:13:24.540 Instead of developing skills as producers and pulling themselves out of poverty, ghetto 161 00:13:24.540 --> 00:13:30.660 dwellers would be reduced to working on collectivist schemes made necessary by the disappearance 162 00:13:30.660 --> 00:13:33.020 of the ghetto merchants. 163 00:13:33.020 --> 00:13:39.300 The proof that this is an inefficient alternative is that it is not presently used in the face 164 00:13:39.300 --> 00:13:42.980 of competition from the ghetto merchant. 165 00:13:42.980 --> 00:13:48.580 If this came to pass, the progressive forces of city planning would undoubtedly come forth 166 00:13:48.580 --> 00:13:54.100 Both with an alternative solution of letting the government take over by nationalizing 167 00:13:54.100 --> 00:13:56.780 the ghetto merchant business. 168 00:13:56.780 --> 00:13:59.820 The logic here defies analysis. 169 00:13:59.820 --> 00:14:05.900 For since it is clear that government intervention would create the chaos by prohibiting price 170 00:14:05.900 --> 00:14:12.900 differentials in the ghetto in the first place, how can the solution lie in still more government 171 00:14:12.900 --> 00:14:14.840 intervention? 172 00:14:14.840 --> 00:14:19.680 The first problem with the suggested solution is that it is immoral. 173 00:14:19.680 --> 00:14:25.280 It involves forcing everyone to pay for a nationalized food industry whether or not 174 00:14:25.280 --> 00:14:26.960 they wish to. 175 00:14:26.960 --> 00:14:33.700 It also curtails the freedom of citizens by prohibiting them from entering this industry. 176 00:14:33.700 --> 00:14:36.720 The second problem is pragmatic. 177 00:14:36.720 --> 00:14:41.120 Based on the evidence available, such a solution would be unworkable. 178 00:14:41.120 --> 00:14:46.960 Up to the present time, all government involvement in the economy has been marked by inefficiency, 179 00:14:46.960 --> 00:14:54.160 venality and corruption, and the evidence suggests that this is not merely accidental. 180 00:14:54.160 --> 00:14:59.200 The inefficiency is easy to explain and rather widely understood. 181 00:14:59.200 --> 00:15:04.720 A government enterprise can be expected to be inefficient because it is immune to the 182 00:15:04.720 --> 00:15:08.240 selective process of the marketplace. 183 00:15:08.240 --> 00:15:14.120 In the market, the entrepreneurs who are most able to satisfy consumer desires reap the 184 00:15:14.120 --> 00:15:16.000 greatest profits. 185 00:15:16.000 --> 00:15:21.920 Obversely, the entrepreneurs who are least efficient, who provide the fewest satisfactions 186 00:15:21.920 --> 00:15:24.960 to consumers, suffer losses. 187 00:15:24.960 --> 00:15:30.560 They tend, therefore, to drop out of the market and make it possible for those most adept 188 00:15:30.560 --> 00:15:35.060 at consumer satisfaction to grow and expand. 189 00:15:35.060 --> 00:15:42.260 This continual process of the selection of the fittest ensures the efficiency of entrepreneurs. 190 00:15:42.260 --> 00:15:49.180 Since the government is immune to it, it fails to regulate governmental economic activity. 191 00:15:49.180 --> 00:15:55.420 The venality and corruption of the government is, if anything, even easier to see. 192 00:15:55.420 --> 00:16:01.220 What is difficult, however, is to realize that corruption is a necessary part of governmental 193 00:16:01.220 --> 00:16:03.980 operation of business. 194 00:16:03.980 --> 00:16:09.420 This is more difficult to comprehend because of our basic assumption about the motivations 195 00:16:09.420 --> 00:16:12.180 of those who enter government. 196 00:16:12.180 --> 00:16:18.720 We readily concede that people enter business in order to gain money, prestige or power. 197 00:16:18.720 --> 00:16:21.220 These are basic human drives. 198 00:16:21.220 --> 00:16:26.260 But when it comes to government, we lose contact with this basic insight. 199 00:16:26.260 --> 00:16:33.760 We feel that those who enter government service are above the fray, they are neutral and objective. 200 00:16:33.760 --> 00:16:39.760 We may acknowledge that some government officials are venal, corrupt and profit-seeking, but 201 00:16:39.760 --> 00:16:43.200 these are considered exceptions to the rule. 202 00:16:43.200 --> 00:16:50.240 The basic motive of those in government is, we insist, selfless service to others. 203 00:16:50.240 --> 00:16:54.560 It is time to challenge this erroneous concept. 204 00:16:54.560 --> 00:16:57.960 Individuals who enter government are no different from any other group. 205 00:16:57.960 --> 00:17:02.560 They are heir to all the temptations that flesh is heir to. 206 00:17:02.560 --> 00:17:08.640 We know we can assume self-seeking on the part of businessmen, unionists and others. 207 00:17:08.640 --> 00:17:14.200 It can be assumed just as clearly to be operative in government officials. 208 00:17:14.200 --> 00:17:17.800 Not in some of them, but in all of them. 209 00:17:17.800 --> 00:17:23.160 It is hardly necessary to point out the significance of all the government failures in the food 210 00:17:23.160 --> 00:17:24.960 area. 211 00:17:24.960 --> 00:17:30.720 Agricultural subsidies, tariffs, minimum prices, maximum prices and the don't grow on this 212 00:17:30.720 --> 00:17:32.720 and Land Policies. 213 00:17:32.720 --> 00:17:38.720 Clearly, these programs are not merely inefficient attempts to provide for the public wheel, 214 00:17:38.720 --> 00:17:40.720 although they are that. 215 00:17:40.720 --> 00:17:45.720 But the giveaways to big business farmers and the payments for not growing food 216 00:17:45.720 --> 00:17:53.720 are also thinly disguised attempts on the part of government bureaucrats to bilk the public. 217 00:17:53.720 --> 00:17:56.720 If the government became the merchant of the ghetto, 218 00:17:56.720 --> 00:18:02.000 The situation would be far worse than that under private ghetto merchants. 219 00:18:02.000 --> 00:18:04.440 Both groups are seeking profits. 220 00:18:04.440 --> 00:18:11.840 The only difference is that one has the power to compel us to obey, the other does not. 221 00:18:11.840 --> 00:18:15.640 The government can compel our patronage. 222 00:18:15.640 --> 00:18:18.480 Private merchants can only compete for it.