Just Prices

 

Suppose you own a rare first edition book, and a dealer desperately wants to buy it from you. You would sell it for £250, but the dealer offers you £500, not knowing that you would have let it go for half the price. Have you acted immorally in accepting his offer? Most people would say no, and I think they’d probably be right. But what about in the case of Locke’s famous horse owner and traveller, where the horse owner would have sold his horse for £40 yesterday, but when meeting a breathless traveller the next day, uses the situation to his advantage and sells it for £50? Has the horse owner acted unjustly? What about if you encounter a man dying of thirst: is it unjust to sell him a bottle of water for £500? If he’s desperate and about to die, you can be pretty sure he values his life at more than £500, so in that context he’s probably getting a bargain, right? Yet understandably, almost no one thinks this is right. 

In economics, we believe the just price is the market price, based on the complex information signals generated by the busy marketplace of supply and demand. In other words, it is the actions of billons of local decisions across the world which determine the price of bananas, walking sticks, holidays and cars – there is no objective value in any good or service or job – the value is determined by billions of people's revealed preferences.

So how then do we square that with the notion of unjustly charging a desperately thirsty man £500 for a glass of water? Few would deny that’s wrong – we should be encouraged to give him some water for free. The upshot is, ethical judgements are not the same thing as just prices. Consequently, we are dealing with something rather like a sorites paradox-type of scale, where the nearer we remain at the individual consideration (like Locke’s horse owner and traveller), the more a price is subjected to strict ethical judgment, and the more we extend out to the wider economy in an information-generating nexus, the less a price is subjected to strict ethical judgment, because the more it has been shaped by lots of people through the mechanism of supply and demand. Excepting the terrible political policy of state price-fixing (rent controls, minimum wage laws, etc),the price of just about everything in a market economy is what it is because of the activities of billions of individuals over sustained periods of time - it resembles a democracy in that we've all voted for it to be that way.

This leads us to the labour theory of value. Adam Smith and David Ricardo posited views about the labour theory of value (LTV), which argues that the price of a good or service should be determined by the total amount of labour required to produce it. It’s a theory with little mileage, and whereas Smith and Ricardo never felt entirely comfortable with LTV as a broad-brush explanation for the price of labour, Karl Marx was fonder of it, using LVT (or variations of it) to bemoan what he saw as the powerful capitalist classes.

What gave LTV its redundancy notice was the more accurate notion of subjective theory of value, which states that the value of a good or service is not determined by the labour required to produce it, but by the value placed upon it by the consumer. A brick wall built around your garden is not valued by the labour required to build it - it’s the other way around - the labour required to build it is valuable precisely because the builder can produce something that the homeowner finds valuable.

If the anti-capitalist neo-Marxists were better informed, they would understand that far from being an exploitative force for bad, capitalism is a liberating and enriching way of enhancing people’s well-being and improving their standards of living. Labour and capital are what enable producers to provide things of value in society, and price them in line with supply and demand to allocate resources most efficiently. Prices of goods and services are information signals that convey subjective perceptions of value - and it is this information that tells us how much a thing is valued.

This is why we are always banging on about politicians’ inept and uneconomical interferences in the market - their activity so often impedes the highly complex process that most efficiently matches supply with demand at the optimal (or near optimal) prices. The optimal price of any good or service occurs when the most the consumer is willing to pay is equal to the least the supplier is willing to accept.