Transcript The (In)Justice of Exchange

Michael Munger
PPE Program
Duke University
Fleeming
Jenkin
 Economic freedom
fosters economic
growth & high income.
 High income fosters
political freedom.
Therefore: If you want political
freedom, start with economic freedom
Unless you already believe this, not
persuasive to many people
 Sometimes, perhaps just
“People aren’t bright enough to understand my
BRILLIANT argument!”
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But what is really the counterargument? Why
are people not persuaded of the importance of
economic freedom?
1. Nozick: Capitalist acts between consenting adults
2. Sir George Jessel: If there is one thing more than
another public policy requires it is that men of full age
and competent understanding shall have the utmost
liberty of contracting, & that their contracts when
entered into freely & voluntarily shall be held sacred
and shall be enforced by courts of justice. Therefore,
you have this paramount public policy to consider –
that you are not lightly to interfere with this freedom
of contract.
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A core argument for markets, then, is that
voluntary exchange makes both parties better off
The public policy implication is that the state
should take only minimal actions to regulate
voluntary exchange, and those actions should
foster such exchanges by reducing transactions
costs
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A theory of justice in market exchange.
Accepts the norms of market exchange,
including bargaining over price and the absence
of an obligation for charity
Erogatory--quality of acts that are esteemed,
praiseworthy, or morally "required." (An
"erogator" is someone pays out or gives away
more value than s/he receives: nice)
Super-erogatory--more than is morally required,
a self-sacrificing act of charity (heroic)
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Our claim is that super-erogatory acts are
never morally required in market exchange.
Neither are they proscribed. They are
something else entirely.
But are erogatory acts required in market
exchange? What would they be?
We specify a bargaining model based on 3 claims
1. If the bargaining setting satisfies certain criteria
of "fairness" (process considerations), then any
price negotiated is a just outcome. No erogatory
obligations, ever.
2. If bargaining is "unfair" then there may an
erogatory obligation to exchange.
3. If the bargaining setting is unfair enough, the
stronger party may be obliged to sell at his
opportunity cost, or value of outside option
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The Mancgere
The Itinerant Padre
The roots of the English word “monger,” a
common merchant or seller of items are quite
old. In Saxon writings of the 11th century,
described in Sharon Turner’s magisterial
three-volume History of the Anglo-Saxons
(1836), we find a very striking passage where
a merchant (mancgere) defends the “market
price” on moral grounds.
“I say that I am useful to the king, and to ealdormen, and to the rich,
and to all people. I ascend my ship with my merchandise, and sail
over the sea-like places, and sell my things, and buy dear things
which are not produced in this land, and I bring them to you here
with great danger over the sea; and sometimes I suffer shipwreck,
with the loss of all my things, scarcely escaping myself.”
“What things do you bring to us?”
“Skins, silks, costly gems, and gold; various garments, pigment, wine,
oil, ivory, and orichalcus, copper, and tin, silver, glass, & suchlike.”
“Will you sell your things here as you brought them here?”
“I will not, because what would my labour benenfit me? I will sell
them dearer here than I bought them there, that I may get some
profit, to feed me, my wife, and children.”
Itinerant Padre: Radford (Economica, 1945),
"Economics of a POW Camp"
“Very soon after capture people realized that it
was both undesirable and unnecessary, in view
of the limited size and the equality of supplies,
to give away or to accept gifts.... ‘Goodwill’
developed into trading as a more equitable
means of maximizing individual satisfaction.”
Itinerant Padre: Radford (Economica, 1945),
"Economics of a POW Camp"
“Stories circulated of a padre who started off
round the camp with a tin of cheese and five
cigarettes and returned to his bed with a
complete [Red Cross] parcel in addition to his
original cheese and cigarettes.”
North Carolina's Anti-Gouging Law in 1996
(General Statutes 75-36)
(a) It shall be a violation of G.S. 75-1.1 for any person to sell or
rent or offer to sell or rent at retail during a state of disaster,
in the area for which the state of disaster has been declared,
any merchandise or services which are consumed or used as a
direct result of an emergency or which are consumed or used
to preserve, protect, or sustain life, health, safety, or comfort
of persons or their property with the knowledge and intent to
charge a price that is unreasonably excessive under the
circumstances.
(Later amended to be even more restrictive, outlawing price
changes reflecting cost increases up the supply chain,
August 2006, SL2006-245, GS 75-38).
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They clapped. Appeared to be happy.
What is the objection?
Why do so many states have these laws?
If I wanted to offer ice for sale for $12 per bag
today, could I do it?
“The laws and conditions of the production of
wealth, partake of the character of physical truths.
There is nothing optional, or arbitrary in them... this
is not so with the distribution of wealth. That is a
matter of human institution solely.
The things once there, mankind, individually or
collectively, can do with them as they like.” (Mill,
Collected Works, 1965, emphasis mine).
I. Euvoluntary exchange is always just
II. Exchange that is not euvoluntary is
nonetheless often welfare-enhancing.
Objections to exchange are generally
misplaced objections to disparities in the
pre-existing underlying distribution of
wealth and power, which exchange
actually mitigates.
(1) conventional
(2) conventional
ownership by both parties
capacity to transfer and
assign this ownership to the other party
(3) the absence of post-exchange regret,
for both parties, in the sense that both
receive value at least as great as was
anticipated at the time of the agreement
to exchange
4. Absence of uncompensated
externalities
5. neither party is coerced, in the sense of
being forced to exchange by threat
6. neither party is coerced in the
alternative sense of being harmed by
failing to exchange.
In the political world, “power” is measured by
the capacity of one person or a group to impose
his, or its, will on others through the threat of
violence. That is the sense of “coercion” in
number 5 above.
In the economic world, power in an
exchange relationship is measured by
the disparity in "outside options," or
BATNAs: the "best alternative to a
negotiated agreement."
This concept of the “Best Alternative to a Negotiated Agreement,” or
BATNA, comes from Roger Fisher and William L. Ury. Getting to Yes:
Negotiating Agreement Without Giving In (Boston, MA: Penguin Books,
1981).
Jane can sell or not sell; Bill can buy or not buy. But
if the BATNAs (outcome of failure to exchange) are
disparate or dire, the exchange is not euvoluntary.
Disparate:
1. U(BATNAJ) – U(BATNAB)≥(Threshold1)
Dire:
2. U(BATNAB) < (Threshold2)
Suppose I go to a grocery store to buy water, and
the price is $1,000 per bottle
I laugh and push my cart along. I’ll buy water
elsewhere, drink tap water, or many other
alternatives.
I’m almost indifferent between water at Kroger or
Food Lion for market price of $0.90, or even
Whole Foods for $3.00.
So, even though water is a necessity (I’ll die
without it!) I have choices. And, I have money,
and we all agree that I own that money and can
transfer it, and we all agree that each store
owns the water, and can transfer it. Finally, the
water is not poisonous, and tastes good, so I
won’t regret purchasing it, if I choose to do so.
So the exchange is euvoluntary.
Now, let’s suppose instead that I am far out in the desert, and am
dying of thirst. I’m rich, and I happen to have quite a bit of cash on
me, but I can’t drink that. A four wheel drive taco truck rolls over
the hill, and pulls up to me. I see that the sign advertises a special:
“3 tacos for $5! Drinks: $1,000. 3 drinks for only $2,500”
“¿qué te gustaría, gringo?”
I argue with the driver. “Have a heart, buddy! I
am dying of thirst!” He asks if I have enough
money to pay his price, and I admit that I do.
The driver shrugs, and says, “Up to you! Have
a nice day!” and starts to drive off.
I stop him, and buy 3 bottles of water for the
“special” price of $2,500.
Was the exchange euvoluntary?
EUVOLUNTARY OR NOT, EXCHANGE IS
JUST. Social Philosophy and Policy, 28
(2011): 192-211
Tried to problematize "voluntary"
exchange for public policy.
Distributed paper: what is moral? What
are the obligations of the individual?
The first objection [to the claim that exchange is voluntary]
is an argument from coercion. It points to the injustice that
can arise when people buy and sell things under conditions
of severe inequality or dire economic necessity. According to
this objection, market exchanges are not necessarily as
voluntary as market enthusiasts suggest. A peasant may
agree to sell his kidney or cornea in order to feed his starving
family, but his agreement is not truly voluntary. He is
coerced, in effect, by the necessities of his situation.
(What Money Shouldn’t Buy, http://www.iascculture.org/HHR_Archives/Commodification/5.2HSandel.pdf )
Locke, John. 1661 / 2004. Venditio. Locke:
Political Writings (ed. By David Wooton).
Hackett Publishing.
emptio et venditio: “buying and selling”
Questions:
1. What is the “just price?” Locke’s answer:
the market price is always just
2. But then, when would a moral person be
justified in making his own “market price”?
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For Locke, there must be many buyers and
sellers, and no one can (much) influence the
price.
If the buyer or seller has enough market power to
set the price, he must act as if he cannot.
BUT: This artificial or fictitious bargain can take
account of other factors, such as opportunity
cost. Brilliant argument, very modern and very
economistic.
A ship at sea that has an anchor to spare meets
another which has lost all her anchors. What here
shall be the just price that she shall sell her anchor
to the distressed ship? To this I answer the same
price that she would sell the same anchor to a ship
that was not in that distress. For that still is the
market rate for which one would part with anything
to anybody who was not in distress and absolute
want of it.
And in this case the master of the vessel must
make his estimate by the length of his voyage, the
season and seas he sails in, and so what risk he
shall run himself by parting with his [extra] anchor,
which all put together he would not part with it at
any rate, but if he would, he must then take no
more for it from a ship in distress than he would
from any other. (Locke, 1661/2005, Venditio, pp.
445–6; emphasis added).
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There is a problem with the analysis. It
ignores "non-worseness."
An example: Russ Roberts and the Chilean
Housekeeper
Suppose that, in order for the stronger party to act morally,
the weaker party must actually be harmed in some material
sense. This possibility is accounted for by the “nonworseness” principle, described by Zwolinski (2008)
interpreting Wertheimer (1996). Zwolinski describes nonworseness this way:
“In cases where A has a right not to transact with B, and
where transacting with B is not worse for B than not
transacting with B at all, then it cannot be seriously wrong for
A to engage in this transaction, even if its terms are judged to
be unfair by some external standard.” (p. 357).
What if the maximum price you (weaker ship) would
pay for a SECOND anchor is less than I (stronger
ship) would reasonably accept?
Then no bargain, because surplus is negative.
But then your material misery is purchased at the
cost of my moral smugness. There is a surplus,
because you would pay more for a FIRST anchor
than I would require to sell a SECOND anchor.
So, trapped in a paradox. I am not required to give
away the anchor, but can charge the value of a
second anchor far out at sea (still quite valuable).
Could sell, because value of buying first anchor to
you exceeds cost of selling second anchor from
me.
But MY moral qualms require that I create a fictitious
bargain where you have a “better” position:
suppose you have an anchor, and are considering
buying a second anchor.
Locke did not recognize non-worseness. In his
analysis, A's moral obligations rule out a
transaction that would have benefitted B. Yet A is
also not obliged to give B the anchor.
Consequently, the concern that bargaining is unfair
to B rules out an exchange very valuable to B. This
is a greater injustice than the unfair exchange would
have been.
Fairness a property of process
Justice a property of outcome
Any plausible theory of just market exchange must
balance two conflicting moral considerations:
euvoluntariness (true voluntariness) and Pareto efficiency.
Voluntariness requires that neither party is coerced into
exchange by threat of violence or other form of direct
harm. Euvoluntariness imposes the additional
requirement that neither party is coerced by the lack of
a decent alternative to a negotiated agreement.
Pareto efficiency, on the other hand, requires that
voluntary, mutually beneficial exchanges should always
be allowed, even if they are not euvoluntary. P.O. takes
the status quo BATNAs as given, and exogenous.
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Euvoluntary exchange is both fair and just,
and should not be interfered with by either
the state or moral considerations. Bargaining
is unrestricted.
Non-euvoluntary exchange is always unfair,
and violates a central moral intuition about
exploitation. Is it unjust? Have to consider
non-worseness.
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If the person making a moral choice, and the
person paying the material consequences are
identical, then punishing non-euvoluntary
exchange might be justified (ice-buyers were
denied ice, but saw evil-doers punished. They
clapped!)
But if the person who is concerned about his
morality is different from the person bearing
the material consequences, there is a problem.
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Economic freedom
An obligation to exchange
Markets may be unfair, but more just than
alternatives
A justification for market price
Why? Toby often said James Buchanan told
him to cultivate a "healthy disregard for
boundaries."
The theory is operationalized through a “fictitious
negotiation,” using a formal model of
bargaining.
The model assumes that two parties have values
for the exchange, and outside options (BATNAs)
The fictitious negotiation model is parametric. The
free parameter is the observer’s revulsion toward the
imbalance in bargaining power, which is captured by
the disparity threshold. Rather than being a constant,
the disparity threshold is a decreasing function of the
direness of the weaker party’s outside option, but the
particular shape of the function varies from observer
to observer.
Briefly, the fictitious negotiation model is as
follows:
1. Neither party is morally obliged to suffer harm
by an act of market exchange. (Voluntary, nonsupererogatory exchange)
(Charity is allowed, but is outside the logic of the
exchange model, a la Radford)
2. The negotiation will be fair and exchange will
be euvoluntary if and only if the disparity
between the parties’ outside options does not
exceed a certain threshold (eqn #12, p. 11). The
magnitude of the disparity threshold depends
on the relative abjectness of the weaker party
(argument 1). Further, the direr the weaker
party’s outside option, in absolute terms
(argument 2), the lower the disparity threshold.
3. If the negotiation is fair, all non-supererogatory
outcomes are just. A non-supererogatory
outcome is either a mutually beneficial
agreement or the disagreement outcome, in
which the parties get their respective outside
options (BATNA).
4. If the negotiation is unfair, the stronger party must
devise a fictitious negotiation, in which the weaker
party has an improved BATNA. The BATNA must
be improved until 1 of 2 things happens:
(a) The disparity in BATNAs is reduced until it is no
longer unfair. This does not require a zero disparity;
only that it equals the disparity threshold.
(b) The surplus of the fictitious negotiation is reduced
to O. This can happen because the surplus of any
negotiation decreases as the parties’ outside
options improve. (Non-worseness)