The idea that there is a just price at which an economic exchange should take place is a feature of classical philosophy and Christian and Islamic thought. But with the rise of modern economic theory and the increased reliance on markets for most human exchanges, the idea has faded from prominence. Today, as a result, the concept of a just price can seem puzzling. If two people in a fair and free market agreed to exchange their goods in a certain ratio, who is anyone else to complain about what they did and declare that that ratio was somehow “unjust”?
For example, the libertarian economist Murray Rothbard has criticized the idea of a just price (different from the market price) on those grounds: “Economics, by tracing the ordered pattern of the voluntary exchange process, has made it clear that the only possible objective criterion for the just price is the market price.”
What I want to suggest here is a way of understanding the idea of a just price that has no difficulty coexisting with modern price theory. (After I arrived at this understanding, my subsequent research showed me that I was not the first to do so. For example, see this paper by Pietro Maffettone, which contains references to earlier developments of this idea. Nevertheless, since this compatibility is not widely known, I hope my essay can do its bit to make it more so.)
Carl Menger, one of the founders of the marginalist revolution in economics, argues against this Aristotelian just-price tradition as follows:
the… error of regarding the quantities of goods in an exchange as equivalents. The result was incalculable damage to our science since writers in the field of price theory lost themselves in attempts to solve the problem of discovering the causes of an alleged equality between two quantities of goods.
And Menger attributes this error to Aristotle in particular, when he writes “The error of regarding the quantities of goods in exchange as equivalents was made as early as Aristotle.”
If Menger has properly understood Aristotle, then he is correct that the philosopher was mistaken. As I explained in Economics for Real People:
If two people exchange when they consider the value of what they are getting to be equal to the value of what they are giving up, there is no reason that they shouldn’t simply reverse the trade a moment later. If you sell your house for $200,000, then you valued $200,000 more highly than you did your house. Conversely, the buyer valued your house more highly than he did $200,000. Otherwise (ignoring transaction costs), there is no reason that, as soon as the exchange is made, you wouldn’t immediately take the house back and give up the $200,000. In fact, if the exchange took place at a point of equal valuation, there is no reason you and the other party shouldn’t swap the house back and forth any number of times.
However, let us pause for a moment and consider how exactly Aristotle defines a just price. He Aristotle develops the concept by proposing a reciprocity between a shoemaker and a farmer: “Let the farmer be α, his food γ, the shoemaker β, the work of his that is being equalized, δ; if it were not possible to have reciprocity in this way, then there would be no community.” Aquinas develops this further, positing that a transaction “should equally benefit both parties, so should be based on an equality of material exchange.”
I suggest a closer look at Aristotle’s text suggests that he meant something quite different than what Menger thought he meant. The key passage supporting my belief is the following: “To achieve proportional reciprocal giving, α must conjoin with δ and β with γ, and so, in the simplest sense, the equation must work out along the diagonal as α + δ = β + γ.”
Perhaps this image will elucidate his point.
I think this passage makes it clear that Aristotle is not claiming that the produce bought and the shoes used to buy it must be equal in value. Instead, the claim is that the satisfaction or utility the farmer gets from the shoes must in some sense be equal to that which the shoemaker gets from the produce.
What could this equality be, and how could we go about determining when we are close to it? Here, we will introduce the idea from economic theory of a bargaining range. Most transactions in any economy do not occur at a point where all of the gains from trade have nearly vanished. Most of the time, a seller can get a price somewhat higher than the absolute lowest price he would sell for. (That lowest price he would sell for is called the seller’s reservation price.) On the other side of the transaction, a buyer will often pay somewhat less than the absolute highest price he would pay for a good. (And that highest price is called the buyer’s reservation price.) The gap in between those two prices is the bargaining range; it is the area in which deals are made and negotiations occur.
Anyone who has sold and bought houses is familiar with this bargaining range. You might accept $250,000 for your house, a potential buyer might pay $300,000, you bargain for a while, and wind up agreeing on a price somewhere in between.
How does this relate to the just price? In the above situation, there is a $50,000 gain from trade available. The concept of a just price being forwarded here suggests that this gain should be split equally. (And note that this fits perfectly with Aquinas’s statement above: a transaction “should equally benefit both parties equally.”)
Let us say that I’m selling a rocking chair at a flea market, and a buyer makes me an offer of $12. But I was prepared to accept as little as $8. So here, the just price is approximately $10.
Now, I might notice that the potential buyer is a mother, with three young kids in tow, who does not look to be particularly well off, judging by the state of her and her kids’ clothes. Once I see that, as an act of charity, I might say “No, $10 is too much: just give me $6.” That, of course, is morally praiseworthy. But it is going above and beyond the just price: everyone should be encouraged to perform acts of charity, but everyone has some limit as to how many such acts they can perform. We cannot expect everyone to engage in acts of charity in every interaction they have throughout their entire lives.
This understanding offers us an insight into the pricing situation of an area that has just suffered a natural catastrophe. Increased prices for vital goods in such an area are typically a matter of great contention. Consider a place that has just experienced a terrible hurricane. The people there are in dire need of drinkable water, food staples, materials for rebuilding their houses, and more.
In response, many suppliers send those goods to that area, while charging a higher price than they would in other places. This leads to complaints about “price gouging”: these businesses are taking advantage of people’s distress, it is claimed, to earn high profits. In fact, majority of US states have passed laws forbidding what they take to be exorbitant price increases after a disaster, typically by specifying some maximum permissible percentage increase.
In response, defenders of free markets often point out that is the higher price that, in fact, motivates suppliers to redirect goods to the disaster-stricken area. If we follow the suggestion here that the just price is roughly in the middle of the bargaining range, then we can acknowledge some truth in both of the above positions.
It is certainly not right to take undue advantage of people who are already suffering. At the same time, businesses exist to make a profit: they are not the Red Cross or Habitat for Humanity. The doctrine of just price suggests that the price should be set where both parties are happy with the deal. The victims of the disaster should understand that it is perfectly reasonable, and, in fact, their best chance of getting the goods they need, to pay a somewhat higher price than normal in the wake of a disaster. Businesses, on the other hand, should not try to squeeze every penny they can out of those victims. The basic idea would be captured in the phrase, “let’s split the difference.”
So, if a lumber company would be willing to supply plywood to the affected area at a minimum price of $1 per square foot, while those in the affected area would be willing to pay up to $2 per square foot, then we might say that the just price is roughly $1.50.
I keep saying “roughly” and “approximately” because this is not a concept that will yield exact numerical answers! We are engaged in moral reasoning, not in mathematical calculation. The basic idea is that both parties should walk away feeling that they have each gained roughly the same amount from the transaction.
Furthermore, my understanding of a just price in these situations does not therefore yield any pat answer as to what the authorities ought to do in such a case. The authorities might always be tempted to play the populist card, and legally require that no price increase is permissible when selling goods in the disaster area. But that approach lacks prudence: it will, with very high probability, reduce the quantity of needed goods sent into that area. The government might instead, as many states do, set some percentage limit on the amount a price may increase in the emergency zone. But given the difficulty that officials will always face in determining the actual reservation prices of the buyer and the seller, such an attempt encounters a serious knowledge problem in determining where to set that percentage.
In any case, I do not mean to recommend any particular policy in such situations. Rather, my primary aim has been to show that there is a perfectly sensible meaning we can give to the notion of a just price, and this meaning is entirely compatible with modern economic theory. But furthermore, whether there is a useful policy application of this concept or not, I believe it offers a moral guide for how one should behave within the bargaining range.
As I was writing this essay, I closed a real estate deal to buy some land in South Carolina. After the closing, I called the seller and told him “It’s been a pleasure doing business with you.” And he responded, “And it has been with you as well.”
While I can’t put an exact numerical value on what a just price is in every situation, I can state with confidence that this mutual feeling of equal benefit, much as Aquinas recommended, is the result of negotiating with such a concept in mind.
Image Credit: Fernando Amorsolo, “Marketplace during the Occupation” (1942)
