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 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)