21. The Ghetto Merchant

0:00Chapter 21 The Ghetto Merchant How dare he charge such outrageously high prices for such shoddy merchandise? The store is filthy, the service horrible and the guarantee is worthless. The installment buying will keep you in debt to them for the rest of your life. The customers of these leeches are among the poorest, the most financially naive to be found anywhere. The only remedy is to prohibit the high prices, low quality products, the devious installment plans, and the general exploitation of poor people. Such is the view of a majority of those who have spoken out on the ghetto merchant problem.

0:46And indeed it has a certain plausibility. After all, ghetto merchants are mainly rich and white, and their customers are mainly poor minority group members. Merchandise sold in ghetto shops is often more expensive than that sold in other areas, and of inferior quality. However, the proposed solution to compel ghetto merchants to follow the practices of non-ghetto neighborhoods will not work. Rather, such compulsion will hurt the people it is designed to help, the poor. It is easy to argue that if you prohibit something that is bad, something good will follow. It is simple, but not always true, and it is clearly untrue in the case of the ghetto merchant and his business practices.

1:37This facile argument blithely ignores the causes of the problem, why prices are really higher in the ghetto. Although at first glance it might appear that prices are higher in luxury neighborhoods As in the ghetto, this is due to the fact that stores in the ghettos and the luxury neighborhoods do not really sell the same goods. The quality of the merchandise sold is lower in the ghetto. This holds even in the case of seemingly identical merchandise. A bottle of Heinz ketchup, for example, might be priced higher in the luxury neighborhood, But the product being sold there is the ketchup, plus the decor of the store, delivery and other services, and the convenience of shopping close to home, or at all hours of the day and night.

2:29These amenities are either lacking altogether in the ghetto shop, or are present in a lesser form. When they are taken into account, it is clear that the ghetto consumer gets less for his is money than the consumer in a luxury neighborhood. This must be true because the price charged by the ghetto merchant reflects hidden operating expenses which the non-ghetto merchant does not have to contend with. In the ghetto, there are higher rates of theft and crime of all types. There is more damage by fire and greater chance of damage from riots. All this increases the insurance premiums that the merchant must pay, and it increases the necessary expenditures on burglar alarms, locks and gates, guard dogs, private policemen, etc. Given that the costs of doing business are higher in the ghetto, the prices charged there must be greater. If they were not, ghetto merchants would earn a smaller profit than and those outside the ghetto and they would abandon the area for greener pastures.

3:38What keeps prices in the ghetto high is not the greed of the ghetto merchant. All merchants inside the ghetto and out are greedy. What keeps the prices in the ghetto high are the high costs of doing business in these areas. In fact, there is a constant tendency for profits in different fields of endeavor to to become equalized, or to come to equilibrium, given the expected variation in the profit risk and other non-pecuniary advantages or disadvantages. And the situation of ghetto merchants exemplifies this tendency. When profits in area A are higher than those in area B, merchants are drawn from B to A.

4:25When as a result only a few merchants are left in area B, competition there decreases and profits rise. And as more and more merchants arrive in area A, competition increases and profits fall. Thus, even if at some point ghetto merchants realized greater profits than others, they could not continue to earn greater profits for long. If there were more profits to be made in the ghetto, merchants would be drawn there, and the resulting competition would tend to drive profits down to equilibrium. And in response to the lessened competition outside the ghetto, profits there would rise to equilibrium.

5:11The Ghetto Merchant as Benefactor The question of non-pecuniary advantages and disadvantages have not yet been dealt with, But they exist, and all the non-pecuniary advantages are on the side of the merchant located outside the ghetto. The ghetto merchant, apart from the risk he faces to life and property, must bear in addition the scorn of an outraged public who are angry and resentful at him for, among other things, selling shoddy merchandise at high prices. Because of the indignities suffered by the ghetto merchant, the equilibrium profit rate will be higher in the ghetto than outside. In other words, profits will remain stable at a point at which ghetto merchants earn a greater profit than other merchants, but not so much greater that it tempts other merchants to enter the ghetto.

6:10The merchants outside the ghetto will not be attracted to the ghetto by this extra profit because it will be less than sufficient to compensate them for the extra indignities and risks they would suffer as ghetto merchants. The merchants who remain in the ghetto are those who are least put off by the indignities and risks involved. For them, the extra profit is enough compensation. In other words, there will be, and always is, a self-selection procedure whereby those Those with the greatest tolerance for the risks and indignities of the ghetto will be swayed by the extra profit to remain there. Those with the least tolerance will not be compensated by the extra profits and will head for greener, whiter fields.

7:02If the tolerance of the ghetto merchants decreases, the equilibrium profit rate will have to rise. If it does not rise, those among the ghetto merchants who have the least capacity to bear the indignities will leave. Competition will decrease, and the remaining merchants will be able to raise their prices and, hence, their profits. This rising profits will be just enough to compensate the remaining merchants in the face of their heightened sensitivities. The reason, then, that prices are not higher than they are in the ghetto is that these merchants have a great ability to bear the risks, scorn and abuse. In the light of this, the ghetto merchant who charges outrageously high prices can be considered a benefactor, for it is his ability to withstand the pressures placed upon him that keeps prices in the ghetto no higher than they are.

8:01Except for this ability, prices would be even higher. Another startling aspect should be considered. The villain, if anyone, is not the ghetto merchant whose tolerance for outrages keeps prices down. The villain is, rather, those who heap scorn and abuse upon him and revile him for charging high prices for shoddy merchandise. It is these nattering nabobs of negativism who are instrumental in keeping ghetto prices up. It is these grumblers, usually local politicians and community leaders seeking power and a political base, who raise the equilibrium profit differential necessary to keep merchants in the ghetto.

8:48If they were to cease their ill-advised condemnations, the non-pecuniary disadvantages of merchandising in the ghetto would diminish, along with the equilibrium price differential, and hence, ghetto prices. Paradoxical, though it may be, those who are most vociferous in their complaints about the high prices charged by ghetto merchants are actually responsible for keeping those prices higher than they would otherwise be. This analysis is not restricted to cases in which the ghetto community is Hispanic or black and the merchants are white, for the risks of theft, fire and damage by vandalism and riots would cause a black or Puerto Rican merchant to charge higher prices too, and the resulting abuse to which he would be subject would drive the prices even higher.

9:44If anything, the minority member merchant would have a more painful criticism to bear, the charge that he is a traitor to his ethnic group. The analysis then will become even more applicable when and if blacks and Puerto Ricans begin to replace whites as ghetto merchants. Restrictions can only be harmful. The effect of a law prohibiting the ghetto merchant from charging higher prices than those charged elsewhere can now be appreciated. It would simply drive merchants out of the ghetto. Higher costs of doing business with no opportunity to recoup them through higher prices means lower profits.

10:30No merchant would voluntarily remain in such a business situation. In fact, merchants will not remain in ghettos unless they can earn a higher profit than can be earned elsewhere to compensate them for the non-pecuniary disadvantages. If the prohibition was strictly enforced, virtually all the merchants would leave the ghetto and seek their fortunes elsewhere, with a minute fraction remaining. Customers would then be forced to queue up at whatever shops were available, thereby by reducing costs and increasing revenues to the point at which the merchants might be compensated for the higher costs of operating in the ghetto. But this would mean that residents of the ghetto would have to wait in line for long periods of time in order to make a purchase.

11:22And it is more than likely that customers would heap even greater abuse upon ghetto merchants for the even poorer service they would be receiving. Such crowds might even prove uncontrollable. In such a situation, the few remaining merchants would be forced to shut down. The citizens of the ghetto, the community leaders, pundits and commentators, would then blame the ghetto merchants for leaving the community. The departure of the ghetto merchants would cause pain and suffering on a truly monumental scale. Ghetto residents would be compelled to travel great distances to make purchases which were formerly made in their neighborhoods. They would pay slightly lower prices for goods of slightly higher quality, but these gains would be more than counteracted by the increased car fare and time lost in transit.

12:17We know this because these options are always open to ghetto inhabitants. Since local people patronize neighborhood stores presently, they must feel they do better closer to home. The ghetto dwellers could not even make deals with one another by which some would do the shopping for the rest. This would implicitly convert some of them to ghetto merchants, and the same choice would be open to these new ghetto merchants as were available to the old ones. There is no reason to suppose that they would be oblivious to the financial incentives which would sweep the old ones out of the ghetto. The only reasonable way for ghetto dwellers to handle this unruly situation would be to form a shopping collective, with members helping one another in the arduous task of shopping.

13:10But to do this would be to revert to a way of life in which food gathering becomes a very time-consuming activity. Instead of developing skills as producers and pulling themselves out of poverty, ghetto dwellers would be reduced to working on collectivist schemes made necessary by the disappearance of the ghetto merchants. The proof that this is an inefficient alternative is that it is not presently used in the face of competition from the ghetto merchant. If this came to pass, the progressive forces of city planning would undoubtedly come forth Both with an alternative solution of letting the government take over by nationalizing the ghetto merchant business.

13:56The logic here defies analysis. For since it is clear that government intervention would create the chaos by prohibiting price differentials in the ghetto in the first place, how can the solution lie in still more government intervention? The first problem with the suggested solution is that it is immoral. It involves forcing everyone to pay for a nationalized food industry whether or not they wish to. It also curtails the freedom of citizens by prohibiting them from entering this industry. The second problem is pragmatic. Based on the evidence available, such a solution would be unworkable. Up to the present time, all government involvement in the economy has been marked by inefficiency, venality and corruption, and the evidence suggests that this is not merely accidental.

14:54The inefficiency is easy to explain and rather widely understood. A government enterprise can be expected to be inefficient because it is immune to the selective process of the marketplace. In the market, the entrepreneurs who are most able to satisfy consumer desires reap the greatest profits. Obversely, the entrepreneurs who are least efficient, who provide the fewest satisfactions to consumers, suffer losses. They tend, therefore, to drop out of the market and make it possible for those most adept at consumer satisfaction to grow and expand. This continual process of the selection of the fittest ensures the efficiency of entrepreneurs.

15:42Since the government is immune to it, it fails to regulate governmental economic activity. The venality and corruption of the government is, if anything, even easier to see. What is difficult, however, is to realize that corruption is a necessary part of governmental operation of business. This is more difficult to comprehend because of our basic assumption about the motivations of those who enter government. We readily concede that people enter business in order to gain money, prestige or power. These are basic human drives. But when it comes to government, we lose contact with this basic insight. We feel that those who enter government service are above the fray, they are neutral and objective.

16:33We may acknowledge that some government officials are venal, corrupt and profit-seeking, but these are considered exceptions to the rule. The basic motive of those in government is, we insist, selfless service to others. It is time to challenge this erroneous concept. Individuals who enter government are no different from any other group. They are heir to all the temptations that flesh is heir to. We know we can assume self-seeking on the part of businessmen, unionists and others. It can be assumed just as clearly to be operative in government officials. Not in some of them, but in all of them. It is hardly necessary to point out the significance of all the government failures in the food area.

17:24Agricultural subsidies, tariffs, minimum prices, maximum prices and the don't grow on this and Land Policies. Clearly, these programs are not merely inefficient attempts to provide for the public wheel, although they are that. But the giveaways to big business farmers and the payments for not growing food are also thinly disguised attempts on the part of government bureaucrats to bilk the public. If the government became the merchant of the ghetto, The situation would be far worse than that under private ghetto merchants. Both groups are seeking profits. The only difference is that one has the power to compel us to obey, the other does not.

18:11The government can compel our patronage. Private merchants can only compete for it.