I occasionally hear–implicitly or otherwise–the complaint that if one party to a transaction benefits more than the other, unfair advantage has been taken of the party who receives a lesser benefit.
But why should we expect equivalent benefit on the part of both transactors? Voluntary exchange is predicated on both parties being better off, in their own estimations, as a result of the trade, otherwise the trade wouldn’t take place. Parity of consumer surplus is no part of that stipulation–after all, John can’t possibly know how much better off Jane considers herself, nor can Jane fully appreciate the value John places on the goods or services he’s received.
Moreover, the degree to which they each feel benefited by their transactions fluctuates according to circumstance. For instance, if Jane’s lost in the desert and is close to dying of thirst, she probably feels a bottle of water a tremendous boon, even at ten times the normal price, as it prolongs her life. By contrast, if John is fully hydrated and has water on hand, he’s unlikely to feel bettered by an exchange at such a (subjectively) steep price.
In the first case, Jane’s subjective surplus from the transaction is great. Ten dollars is worth much less to her than a full water bottle. In the second case, John perceives no such benefit, and hanging onto his money represents a far greater value than the water bottle would provide.
But, though John is clearly receiving fair treatment, isn’t Jane just being exploited in her dire circumstances?
We have a tendency to look at this only from the consumer’s point of view, but there are at least two parties in every exchange. In considering the same question from the point of view of producers, we should be able to get a better idea about whether a high price can reasonably be considered exploitative.
Are customers predatory for taking advantage of $3,000 discounts on Samsung televisions? Or might Samsung have older models that they want to get rid of–even at a steeply reduced benefit–to avoid eating their prior production as losses?
Is it myopic self-abuse for McDonald’s to give away free food? Or do they believe that by appealing to on-the-fence consumers they can increase revenue enough to offset the costs such a strategy will incur?
When it hosts clearance sales, is JC Penney being taken advantage of by Olympic-level deal-finders whose purses are so full of coupons that they never pay full price? Or was JC Penney simply desperate to put out new, and potentially better-selling, stock than the $50 slacks that Mom bought for me for $0.98, thanks to some clever couponing and a clearance sale?
Outside of an institution for the criminally insane, I doubt anyone would argue that consumers are exploiting these companies by waiting for discounted goods before granting them their patronage. It would be no different, morally, if such price-cutting schemes represented the last-ditch efforts of some Mom’s & Pop’s Shoppes™ to save itself from dissolution.
Whereas Jane and Mom’s & Pop’s Shoppes™ at least understand their respective gains from a given trade–even while failing to comprehend the other party’s–non-participants to such transactions can’t reasonably expect to understand the relative benefit received by either of them, much less both.
So, it’s weird to me that third parties tend to have such loud, vociferous, self-righteous opinions on the outcomes of voluntary exchanges. Individuals ought to be allowed to enter–or not enter–any exchange according to their own evaluations of their own benefit.
To conclude, a quote I like from a man I admire:
The great economist Frank Knight once stated simply: “An exchange is an exchange is an exchange; it is voluntary and mutually beneficial.” This is perhaps the first lesson most students learn in economics.
Pete Boettke
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