The debate about what constitutes a “fair” (or just) price is quite old. Classical market liberals typically classify fair prices as prices voluntarily agreed to by the parties to an exchange. That’s fine, but I wonder how useful the concept of “fair price” is.
First, it’s a little technical. Although price and cost are related, the price of something and its cost are not the same thing. The price of a thing is the most valuable choice that an individual must avoid when making consumption choices. Price is an expenditure of money.
For example, a gallon of milk costs $3.75. But the price of that milk is what the consumer gave up in order to obtain it (i.e., what the consumer would have done otherwise had he not driven to the store, gone to the dairy aisle, bought the milk, checked out, and driven home).
Costs, and subsequently prices, arise from the fact that we exist in a world of scarcity. That is, resources are limited and desires are virtually unlimited. These desires are often mutually exclusive, and available resources cannot satisfy all competing desires. Therefore, choices inevitably have to be made, and they come at a cost. And those costs refer to the prices at which the exchange occurs.
Because scarcity is a condition of existence, we can say that costs and prices are natural phenomena, despite their subjective nature. In other words, even if something exists in the human mind, it is caused by nature.
If cost and price are natural phenomena, will a “fair” price mean people will buy a lot? Is it fair that the Mississippi River flows through thousands and thousands of rivers, enriching the land around it, while still leaving us with a desert? Or does saltwater begin to flow up the Mississippi River during the dry season, threatening wildlife? These are also natural events and things, but we do not ascribe to them any sense of morality or “fairness.” Why do it for price?
Activities such as fraud and theft suggest that “fairness” may apply to prices. But again, I’m not sure that’s the proper usage of the word. When we condemn fraudsters and fraudsters, we are condemning the fraud, not the compensation. It is the disappointment that is unfair, not the price itself.
Price gouging laws like Louisiana’s often focus on fairness (or “reasonableness,” as Louisiana’s law describes it) when determining whether a price is inflating consumers. But that seems as pointless as complaining about some damage. Is it “appropriate” for the wind to tear off the roof of a building during a storm?
In short, I understand the urge to argue about a fair price. But I think the fact that prices are tied to the human mind tricks us into trying to put a moral spin on prices, when what we’re actually morally judging are the actions that brought them about.
By the way, this article is experimental. I would love to know how you, dear readers, react to my discussion here. Please share your thoughts in the comments.
[1] [Distinguishing between prices and costs is also an old concern—in his Wealth of Nations, Adam Smith dedicated Book 1, Chapters 5 (Of the Natural and Market Price of Commodities, or of their Price in Labour, and their Price in Money), 6 (Of the Component Parts of the Price of Commodities), and 7 (Of the Natural and Market Price of Commodities) to teasing out the differences between value, price, and cost. These are interesting, but written before the emergence of marginalism. – Ed. Janet Bufton.]
[2] Technically, the price will be what you spend on the exchange. We live in a money-based economy, so I’m assuming money here. But in a barter economy, for example, it could be another commodity.
[3] Costs are temporary and occur at the moment of choice (see James Buchanan, “Cost and Choice”, especially chapters 2-3, and South African Economic Journal, GF Thirlby, “The Ruler”, 14(4), 253-276). Therefore, costs exist in the mind of the chooser. They are subjective, not objective. The cost of action is always spiritual, but still a state of nature. The same goes for price evaluation. Relative prices influence choices, and the relevant relative prices are determined by the chooser.
