What is a fair price?
Nov. 9th, 2015 09:49 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
jackI've a lot of unformed thoughts related to this topic recently. Likely there some existing theory of value I don't have the concepts for which would resolve it, anyone know?
Preamble: minimum price, maximum price, real-world price, and "fair" price
Suppose Alice does some work for Bob (making something, repairing something, helping with something). I'm going to start by considering the simplest case of "they agree what Bob will pay Alice, then she does it" and try to work towards what would actually happen if this was a repeated (eg. as a wage for ongoing employment, or as advertising goods/services for sale en mass). There are going to be a LOT of complications which overwhelm this basic idea coming shortly.
What price might they agree? I'm considering four relevant prices. Firstly, the minimum price Alice will accept, presumably the minimum that she expects to cover materials, any intangible benefits, and the minimum compensation for her time that will make it preferable to do this rather than something else. Second, the maximum price Bob will pay, presumably the benefit he expects to gain (in pleasure, or in saving spending money elsewhere, or making more money).
These may be very subjective and hard to quantify! I'm not saying they need to be fixed, or known, just that they're a way I find it useful to think about the question in principle. The third price, is the price actually agreed at in real life. Most of the time this will be between the minimum and the maximum, though there will be exceptions when people make mistakes. But the place in the range varies wildly depending on lots of messy real world factors, and a lot of theoretical and practical economics cover describing HOW it varies.
Both people will have limited knowledge of their own position and even more limited knowledge of the other person's, so will not always know what offer to make that might be accepted. There are significant transaction costs in reaching an agreement, eg. if one party strings the other along and then adds price at the last minute, or if Alice's main job is working for Bob, it will take her a lot of effort to get a different job which may or may not be better. If there are lots of Alices and only one Bob, or vice versa, the single party will almost automatically negotiate a more favourable price, as the multiple parties compete against each other. Is it more advantageous for Alice to mass-produce what she can offer and sell to as many Bobs as possible, or seek out the few Bobs to whom it's most valuable and sell it to them for more? Or both?
The "fair" price
Most people have some intuition what constitutes a "fair" price, although I'm not sure if there's a single best definition. Some people say that whatever people agree to is "fair". Most people would say that a deal that is massively one-sided, paying Alice the absolute minimum you can get away with -- even if it's better for her than doing nothing -- is unfair, if it means that she can barely eat, or that her work produces tens of millions of pounds of profit, of which she gets none.
People disagree about whether how unique Alice's offer is should affect what's a "fair" price. If she's got a talent most people lack, most people accept she deserves to earn more, but is that because she has a stronger bargaining position, or because the maximum price is higher so a fair point "somewhere between" is higher?
Supply and Demand
The idea of supply and demand, that if a market is at least somewhat liquid, it will reach a natural level is so embedded in a lot of discourse, it's easy to assume that's what's "fair". Many people naturally accept that if someone is the only person in the world who can do something, they get SOME benefit from doing that for people. Others say, no, everyone should put in the same EFFORT and get the same reward, and the benefits of natural talent, luck, etc, should be divvied up amongst all people equally. I suspect the best answer is toward the direction of "divide equally", but there are benefits to everyone in allowing people freedom to choose what benefits they want and what work they want to do for whom, and that implies _some_ amount of some people getting more (as long as everyone gets enough).
What did other people think? That supply and demand has something to do with a fair price? Or everything? Or nothing? Or not sure? Or you think something different after reading this?
Waste
Another implication, is that the COMBINED benefit to Alice and Bob is mostly determined by whether Alice does the work or not. The effort spent negotiating may be necessary to make things more fair, or may be perverted to make things less fair, but is a zero-sum game -- it's pure loss to humanity as a whole, Alice only engages in it to avoid being screwed over by Bob (or to screw Bob over) and vice versa.
Sometimes we're fortunate and the obvious best strategy for one party happens to be the best strategy for everyone, eg. something is useful to EVERYONE and there's no benefit to trying to negotiate individual deals, it's best to just sell it to as many people as possible as cheaply as possible and you'll make lots of profit and help lots of people.
Other times, the best strategy for one party generates almost no benefit at all: they have a monopoly over something, and it doesn't provide any benefit AT ALL over the alternatives, but network effect, or cost of switching, or corrupt legislation, etc, etc, prevent people switching away unless they can all do it at once.
You always need SOME willingness to negotiate, if you just accept whatever the other party offers, then everything in the world gets gobbled up by the greediest least scrupulous people. But not to get into ongoing bidding wars about it. It would be better for both parties if "fair" could be imposed from above, even imperfectly, although it's impractical, there would often be too much temptation to game the system.
What WOULD be a "fair" price?
Suggestions? One answer is a completely marxist economy, but even if you view that as "an economy where everything is fair", you need to know what "fair" is. Maybe it DOES depend on the value created (eg. two jobs might be equally morally valuable, but if one is more immediately valuable to the other person, it's paid more), but DOESN'T depend on how good your bargaining position is (but you might have to strengthen it in order to reach a fair offer, eg. by presenting a united front with other buyers/sellers to counteract a monopoly on the other side)?
I feel I left out the important examples, but I think I need to get this posted and get to bed... I will try to follow-up later if possible.
Preamble: minimum price, maximum price, real-world price, and "fair" price
Suppose Alice does some work for Bob (making something, repairing something, helping with something). I'm going to start by considering the simplest case of "they agree what Bob will pay Alice, then she does it" and try to work towards what would actually happen if this was a repeated (eg. as a wage for ongoing employment, or as advertising goods/services for sale en mass). There are going to be a LOT of complications which overwhelm this basic idea coming shortly.
What price might they agree? I'm considering four relevant prices. Firstly, the minimum price Alice will accept, presumably the minimum that she expects to cover materials, any intangible benefits, and the minimum compensation for her time that will make it preferable to do this rather than something else. Second, the maximum price Bob will pay, presumably the benefit he expects to gain (in pleasure, or in saving spending money elsewhere, or making more money).
These may be very subjective and hard to quantify! I'm not saying they need to be fixed, or known, just that they're a way I find it useful to think about the question in principle. The third price, is the price actually agreed at in real life. Most of the time this will be between the minimum and the maximum, though there will be exceptions when people make mistakes. But the place in the range varies wildly depending on lots of messy real world factors, and a lot of theoretical and practical economics cover describing HOW it varies.
Both people will have limited knowledge of their own position and even more limited knowledge of the other person's, so will not always know what offer to make that might be accepted. There are significant transaction costs in reaching an agreement, eg. if one party strings the other along and then adds price at the last minute, or if Alice's main job is working for Bob, it will take her a lot of effort to get a different job which may or may not be better. If there are lots of Alices and only one Bob, or vice versa, the single party will almost automatically negotiate a more favourable price, as the multiple parties compete against each other. Is it more advantageous for Alice to mass-produce what she can offer and sell to as many Bobs as possible, or seek out the few Bobs to whom it's most valuable and sell it to them for more? Or both?
The "fair" price
Most people have some intuition what constitutes a "fair" price, although I'm not sure if there's a single best definition. Some people say that whatever people agree to is "fair". Most people would say that a deal that is massively one-sided, paying Alice the absolute minimum you can get away with -- even if it's better for her than doing nothing -- is unfair, if it means that she can barely eat, or that her work produces tens of millions of pounds of profit, of which she gets none.
People disagree about whether how unique Alice's offer is should affect what's a "fair" price. If she's got a talent most people lack, most people accept she deserves to earn more, but is that because she has a stronger bargaining position, or because the maximum price is higher so a fair point "somewhere between" is higher?
Supply and Demand
The idea of supply and demand, that if a market is at least somewhat liquid, it will reach a natural level is so embedded in a lot of discourse, it's easy to assume that's what's "fair". Many people naturally accept that if someone is the only person in the world who can do something, they get SOME benefit from doing that for people. Others say, no, everyone should put in the same EFFORT and get the same reward, and the benefits of natural talent, luck, etc, should be divvied up amongst all people equally. I suspect the best answer is toward the direction of "divide equally", but there are benefits to everyone in allowing people freedom to choose what benefits they want and what work they want to do for whom, and that implies _some_ amount of some people getting more (as long as everyone gets enough).
What did other people think? That supply and demand has something to do with a fair price? Or everything? Or nothing? Or not sure? Or you think something different after reading this?
Waste
Another implication, is that the COMBINED benefit to Alice and Bob is mostly determined by whether Alice does the work or not. The effort spent negotiating may be necessary to make things more fair, or may be perverted to make things less fair, but is a zero-sum game -- it's pure loss to humanity as a whole, Alice only engages in it to avoid being screwed over by Bob (or to screw Bob over) and vice versa.
Sometimes we're fortunate and the obvious best strategy for one party happens to be the best strategy for everyone, eg. something is useful to EVERYONE and there's no benefit to trying to negotiate individual deals, it's best to just sell it to as many people as possible as cheaply as possible and you'll make lots of profit and help lots of people.
Other times, the best strategy for one party generates almost no benefit at all: they have a monopoly over something, and it doesn't provide any benefit AT ALL over the alternatives, but network effect, or cost of switching, or corrupt legislation, etc, etc, prevent people switching away unless they can all do it at once.
You always need SOME willingness to negotiate, if you just accept whatever the other party offers, then everything in the world gets gobbled up by the greediest least scrupulous people. But not to get into ongoing bidding wars about it. It would be better for both parties if "fair" could be imposed from above, even imperfectly, although it's impractical, there would often be too much temptation to game the system.
What WOULD be a "fair" price?
Suggestions? One answer is a completely marxist economy, but even if you view that as "an economy where everything is fair", you need to know what "fair" is. Maybe it DOES depend on the value created (eg. two jobs might be equally morally valuable, but if one is more immediately valuable to the other person, it's paid more), but DOESN'T depend on how good your bargaining position is (but you might have to strengthen it in order to reach a fair offer, eg. by presenting a united front with other buyers/sellers to counteract a monopoly on the other side)?
I feel I left out the important examples, but I think I need to get this posted and get to bed... I will try to follow-up later if possible.
no subject
Date: 2015-11-10 01:43 am (UTC)Tentatively, I'd say the most useful definition of a "fair" price would be the price settled upon by a "fair" market. A fair market is one with an adequate supply of both buyers and sellers, none of which are behaving monopolistically or anti-competitively.
In such a market, a seller can't pretend they think their work is worth more than the current price, because a buyer can call their bluff by buying the same work from a different seller. Similarly, buyers can't bluff the price downwards.
One difficulty is that a fair market is a very fragile thing, maybe even an unachievable ideal. But it at least helps to see the ways in which a market is unfair, if looking for the ways in which a price is unfair.
Another difficulty is that the fair price rewards results not effort. If I can produce twice as many grommets an hour as you, I earn twice as much. That's equality of opportunity through and through, where we actually need that tempered by some equality of outcome. But I'm not sure it's "fair" to make the grommet buyer pay more — that needs to be handled separately by redistributive taxation.
From where I'm sitting, a whole bunch of things including minimum wages, trades unions, working time directives, NHS agency-staff price caps, etc. are bodges to deal with imperfections in both the free market and the welfare state. Could the free market and welfare state be made less broken? Seems likely. Could we find better bodges? Probably.
Of course, sometimes the reason it's hard to find a fair price for something is because it's not a thing we should be trying to set a price for at all…
no subject
Date: 2015-11-10 02:20 pm (UTC)I think that's an excellent place to start, and much fairer than a market plagues by monopolies etc, and I agree that there are things which are bodges because those are the best current way of achieving some worthwhile goal, and there used to be a LOT more bodges (I think?) and hopefully we can also move towards fulfilling those same goals in a less bodge-y way in future.
However, what I was considering is whether supply and demand should be figured into a "fair" value at all. You can have a market without a complete monopoly, but if there's still many fewer sellers than buyers or vice versa, I think that often produces similar asymmetries. One prominent example would be valuable labour with a low barrier-to-entry. If there's no collusion between people doing labour perceived as "unskilled", anyone employing it is likely to be able to negotiate down to "just above subsistence". If there were a national union of unskilled labour, it would have tremendous bargaining power and those jobs might be overpaid compared to other jobs. Presumably somewhere between is a "fair" price -- but where, how do you determine where between the extremes a fair middle ground lies...?
no subject
Date: 2015-11-10 04:40 pm (UTC)It's pretty clear to me that, once there's scarcity people will argue about who should profit from that scarcity, in what measure.
Personally, I lean towards the Robustness Principle, "be conservative in what you do, be liberal in what you accept from others". Markets would work better if people were generous in the prices they offered and more tolerant in the ones they accepted.
I offer that from an engineering perspective, but I'll note in passing that it's also a Christian one. (-8
no subject
Date: 2015-11-10 09:46 am (UTC)My suspicion is that the task of trying to pin down the fair price may be doomed. As in, we may have several different methods for producing "fair prices", which generate different answers, and different ones get activated in response to different prompts. In Kahnemann et al. terms, "fair prices" come from System 1, and so all of the framing effects and so forth apply.
The other name to drop here is Schelling; at various points he talks about negotiations, and often says that some intermediate stage of reaching a price may be to come up with some elaborate formula, which is followed by ditching the price the formula gives and relying on something simple and perceptually salient (like splitting the difference)... often one that gives a price in the neighbourhood of the "complicated formula" price.
"Traditional" commerce; this is something you read about from anthropologists or people who like to draw upon anthropology. This often involves trading "like for like" or having traditional "fixed equivalents" with an exchange rate that doesn't vary. This is often contrasted with market pricing. I'm not sure where this fits in, but it suggests something.
no subject
Date: 2015-11-10 02:09 pm (UTC)Yes, I agree there's probably not a single correct answer -- people's intuition on what's "fair" incorporates many things, often contradictory because it's an intuition, not a single correct heuristic. But I would still like to figure out which things _contribute_ to that intuition, and when they may or may not be able to be incorporated into economic principles.
Interesting point on Schelling...
Something else I considered, lots of things are done with market distortions because there's no better way to do that, but they're still distortions. Eg. many people choose to pay a fair wage to anyone who does something for them even if they don't have to, and that's generally a good thing. But there's also a lot of "buy from X, because they have a family to feed" or "because they've been loyal to you in the past", etc, etc, which are good things compared to the alternative, but ideally those people's needs would be provided for ANYWAY, and separate from people choosing what to buy.
no subject
Date: 2015-11-10 02:21 pm (UTC)no subject
Date: 2015-11-10 02:24 pm (UTC)no subject
Date: 2015-11-10 03:26 pm (UTC)no subject
Date: 2015-11-10 03:32 pm (UTC)no subject
Date: 2015-11-10 12:46 pm (UTC)A fair trade is an exchange in which the value created is equitably distributed between the participants.
...So we come to definitions of 'value'.
Note the this is not *perceived* value: one or more participants could be mistaken about (say) the value of their time if they are trading for convenience: that may be a free trade, if a mistaken evaluation is honestly made is freely agreed; but it's not a fair trade and, in the monetised case, it's not a fair price.
Likewise, a deceived evaluation is never a fair trade; nor is it conventionally considered a 'free' trade, since freedom of choice has been deliberately negated by the lying party.
Those are the main negating cases of the 'value' measure of a fair trade.
Monetisation is useful because it's a common measure of value: one party is (say) measuring up the value in terms of retailing costs, another is assessing time and convenience. And the usefulness is expressed as reproducibility: you can test it with different customers, or different retailers, if there's a reasonably liquid market for the trade in question.
And even if there isn't a market to provide relative meadures of value, money is a useful measure in absolute terms: "I'm not paying forty dollars for *that*!"
From that point of view, a fair price might be subjective: and the agreed price (or the rejected one) is obviously subjective... But the terms of this discussion are that we believe a 'fair' distribution of value exists in objective terms, and that an objective (albeit highly personalised) monetary measurement of value can be observed or calculated by each participant.
I'm leaving out coercive distortions of freedom to trade - the factors that define monopolies, monopsonies, and negotiation under duress - this is a comment about the fair allocation of value.
no subject
Date: 2015-11-10 02:04 pm (UTC)A fair trade is an exchange in which the value created is equitably distributed between the participants.
However, I'm extremely interested in where you start your response. That's a good answer, one I should have had the courage to consider in my original post -- split the created value down the middle. That's often fair, for an individual trade. I was exactly trying to consider, "how SHOULD that value be divided?"
But is that "the" fair value? If I perform a life-saving surgery on someone, is it fair if I get half of everything they earn for the rest of their life? If I invent the transistor, do I get half of the benefits of the technological revolution?
And for that matter, does the value of a "free" trade reflect only the value of doing the trade at all, or the value of doing it with one particular other party rather than someone else? Both answers seem unfair -- if it's only the value of doing the trade at all, then something which is necessary but easy (eg. water) would be as valuable as life-saving surgery. If it includes the opportunity to bargain with different people, then we're right back to the position of supply and demand -- people who do valuable work with low barriers to entry get screwed by competition and paid at subsistence rates, unless regulations set a minimum wage or they band together to bargain as a national union (an effective monopoly). I agree, both those examples are extreme, but presumably there's no hard line between what's a fair trade and what's not in that case...
no subject
Date: 2015-11-10 03:00 pm (UTC)I'd guess most people's idea of "fair" in such circumstances is "cost, plus enough markup for everyone in the supply chain to make a decent living, where "decent" is commensurate with one's talent, education, experience and general standing in society".
Of course health care has oddities of it's own; many people don't like subjecting healthcare to market economics - taboo tradeoffs and all that.
no subject
Date: 2015-11-10 09:27 pm (UTC)Beyond that hint, there's no easy answers: just compelling cases for a role for some common endeavour - the state, say - in funding drug development.
The economic logic for pricing a lfe-saving intervention as 'everything you own' has been explored by Libertarians in science fiction, but not in any depth: Libertarians never imagine that they would need their spaceship salvaged with them in it, let alone something futuristic and outlandish like affordable treatment for a rare cancer...
...And there's no possibility that Libertarian might think it through and ask: what if *every* vital intervention has a market price of destitution? How would that economy evolve? Is my definition of 'free trade' ignoring coercion and imbalances of power? Where does *that* lead to?
The rational answer is that the same authority which makes the market possible - originally the Sultan who forbade swords in the souk, and now the elected government of courts and contract law and rules about monopolies - must sometimes intervene and *set* a price. Or establish a near-monopoly in the provision of vital interventions - which are not, after all, 'free' trades at all: there is no fair price for 'trade with me today or die', whether swords or cancer or decaying orbits are the terms of trade or not.
no subject
Date: 2015-11-10 11:00 pm (UTC)no subject
Date: 2015-11-11 08:56 am (UTC)