How High a Price Is “Exploitation”?

The Talmud’s answer foreshadows Costco’s

Kirkland Signature plastic food wrap is one of the iconic Costco items. In a normal household, a roll lasts for a very long time.

One of the first things I do every morning is study a page of Talmud. The “page” is actually two sides of a traditional printed text. In a contemporary published edition, with the Aramaic and an English translation and explanatory notes and commentary, the “page” can run to ten actual pages or so. I started in January 2020 (at the urging of my friend Dominic Green, a contributor to the opinion pages of the Wall Street Journal who has been helping a bit with The Editors, including coming up with the name), and am on track, along with hundreds of thousands of other Jews, to finish the cycle of Daf Yomi, or page-a-day, study in June of 2027, which is 2 Sivan 5787 on the Hebrew calendar.

This week, part of the Talmud’s commentary is on Leviticus 25:14, “If you sell to your colleague an item that is sold, or acquire from your colleague’s hand, you shall not exploit his brother.” The Talmud has a debate about how high a price above an item’s value constitutes exploitation. As is frequently the case in the Talmud, there are a range of answers offered, ranging from one-sixth higher, to one-third higher, to no-limit-at-all so long as the buyer is another merchant. (The one-third answer comes with an extended return period to allow a buyer time to show the item to others who might be more sophisticated assessors. As an enforcement mechanism against rip-offs, there are plenty of worse possible approaches.) The consensus settles in around the answer that selling an item for a price more than one sixth higher than its value amounts to “exploitation.”  In percentage terms, that’s a 16.66 percent markup.

The free-market capitalist in me raised my eyebrows skeptically at that. My college economics class taught me about supply and demand and the idea that it’s okay—not just okay, but almost essential to a well-functioning market that avoids shortages—to charge pretty much any price that a customer will voluntarily pay, the market-clearing, profit-maximizing price. Yet the Babylonian Jewish sages of the years 300 to 600 disapproved of profit margins higher than 16.66 percent?

I closed the Talmud and moved on to one of the next parts of my morning routine, the Wall Street Journal. “Costco Finance Chief Ends 39-Year Run,” was the headline over a news article and figures showing Costco’s robustly growing annual revenue and past-12-months share price performance. According to the Journal article, “The company has an internal cap on the markups it will take on a product—15% for Kirkland Signature products and 14% for any others.”

The Journal quotes the outgoing CFO, Richard Galanti:

 “It keeps us honest,” he said of the company’s self-imposed cap on markups.

The 16.66 percent margin cap of the Babylonian Talmudic sages of the 6^th century and the 15 percent margin cap of the Costco founders and managers of the 1990s and 2020s are grouped in such a tightly close range that I found it a pretty remarkable coincidence.

What Costco has figured out, apparently, is that over the long term, a reputation for fair pricing will build customer loyalty and trust in a way that translates into a phenomenally successful business for the owners, too.

People who don’t understand capitalism well often think of unscrupulous sellers trying to rip off unsuspecting customers by “overcharging” them. That sometimes happens. And Costco, unlike most other retailers (but like Amazon Prime) also makes money from membership fees. Yet it’s worth noticing, too, that some of the greatest success stories in capitalism involve businesses that find their competitive advantage not in exploiting customers, but in earning a reputation for treating them well.

Sure, there’s a significant difference between government-imposed profitability caps or windfall taxes and a company or merchant that decides, for long-term business or religious reasons, voluntarily to set prices at a lower level than some customers would readily pay. But Costco’s practices, the opinion of the rabbis of the Talmud, and the verse in Leviticus itself all point to the idea that ethical behavior and economic success frequently can be not contradictory, but complementary.