Thursday, January 15, 2009

Fair Price and Market Price

Picking up on yesterday's discussion, let's consider the difference between morality and the marketplace. What is the fair price for something?

When you go to, say, the Kelley Blue Book site, they will tell you what the fair market value for any given car is, by which they mean what most people in your area are paying for that vehicle. Why does the willingness of many to pay a certain amount mean that it is an appropriate price to pay? These people are trading cash for something and if the price was unfair to them, they would refuse, the line goes. That people choose to buy at this price demonstrates how much it is worth to them and thereby in general terms the value of the item.

This, of course, presupposes that those in the marketplace are rational and if that presupposition were true there would be no such thing as advertising as we know it. I may get ripped off, know I'm getting ripped off, but still be glad to have gotten whatever it is that I bought. The move "Well, then clearly it was worth that much to you," is purely tautological. I may be aware of my own irrationality, I can say that I just paid way too much for this, but that awareness does not then redefine the act as rational. Consider the meaningfulness of statements like, "That stock is grossly overvalued." It means the price most people are willing to pay is more than it is worth. The going price does not mean a reasonable price.

But we can layer onto rationality the question of morality. Even Adam Smith, the father of Capitalism, wrote his classic Theory of Sentiments to argue that enlightened self-interest which guides the invisible hand of the marketplace is insufficient for a good human life, one must also have what he termed "sympathy," what we call empathy. Human ethical behavior must smooth the rough workings of the marketplace. We see this after natural disasters when price gauging is a both a crime and a dastardly undertaken, that is, it is deemed wrong to sell something at market price.

How do you go about determining the fair price of something? The Dead tickets are overpriced, but that is done paternalistically to protect the community from itself. The first concert I ever paid $30 to see was the Rolling Stones. I had to swallow hard and said to myself, "Man, they better have fireworks to make it worth this much." Turns out they actually had fireworks.

We know when we buy something and walk away feeling ripped off and we know when we think we just got the bargain of the year. But we also know when we just paid a fair price for something. What is it that makes a price fair? Certainly one needs to consider the consumer as a person with a whole life and not just a target to be taken. But then one must also consider paying a fair wage to the workers who are responsible for it. Could these ever clash? Is it possible that, say, the fair price for food when we figure in sustainable agricultural practices and fair wages for farm workers would be higher than a fair price for working people who need to feed their families? Is the notion of a single fair price meaningful?