Mises Daily

A
A
Home | Library | The Fairness of "Unequal" Exchange

The Fairness of "Unequal" Exchange

November 21, 2006

Tags Free MarketsPricesValue and Exchange

Market exchange is not based on the requirement that both parties appraise the goods about to be exchanged at equal value. Instead, market exchange is based on both parties benefiting from a two-way, unequal valuation of the goods to be exchanged.

An example from my youth: During my high school years in the early 1980's, I had purchased a double-live album of the rock group Rush for $15. Teenagers can be a fickle lot and I was no different. My musical tastes changed during my junior year and I morphed from a Rush fan into someone who felt that Fly By Night was simply noise — vulgar noise at that. Not only did I no longer listen to the album, I wanted to get rid of it since I felt that the album reduced the quality of my record collection.

Along comes a fellow student who was fast becoming an ardent Rush fan. We agreed to an exchange: I would trade my album for his $5. Fair enough. Right after the exchange, as I held the $5 and he held the album, the new Rush fan said something along the lines of, "I just ripped you off. I would have paid $10 for that album." I replied, "No, I just ripped you off since I was about to toss the album into the garbage anyway."

You see, we both had different valuations for the $5 and the album, which is why we traded. But carefully note the dialogue that occurred between us. To the outside observer, one of us may appear to have been "ripped off" due to a lack of knowledge of the other's true valuation and, hence, tricked in the exchange by an unfair negotiation. Depending on the observer's point of reference, he may have locked onto either my claim of profit or my fellow trader's claim of profit.

Or, and this is where things go wrong, one of us may have actually decided to act on the other's statement. I could have been offended by the knowledge of the Rush fan's true valuation of the album, or maybe I was influenced, pushed, or prodded by the observer who believed I got shafted in the exchanged. So, instead of accepting the exchange as agreed, I may have sought a third-party ruling on the fairness of the trade. What sounded good ex ante — before the trade — sounded like unfair negotiations ex post — after the trade. I should have received the $10 since it was a $15 album — I was truly "ripped off." Wasn't I?

I probably could have found the sympathetic ear of a government official who felt the tug of omniscience; someone believing in his own capacity to understand true value, someone believing that the state needs to protect those acting in non-coerced exchanges. My fellow trader would have been forced to hand over an additional $5 so that an arbitrated fair exchange occurred. But, why is that any more fair than the exchange we initially agree upon? Well, in fact, it isn't.

The actions of the sympathetic do not increase fairness, nor do they increase value. Their actions actually decrease wealth as such intrusions in the market leave participants without a guarantee of the final result of a non-coerced exchange. The rule of contract and common law is replaced by the rule of civil law and bureaucracy. As a result, people become less likely to exchange as the rules of the game change with the political winds.

The point: When an elected official or government bureaucrat interferes with a valid, non-coerced exchange, they may appear to be helping one individual when they are actually harming a foundation of modern society; free exchange of goods and services. They tend not to believe that their action can result in harm because power is almost always cloaked by the veil of omniscience.

During this political campaign season, letter writers to local newspapers have been congratulating a local congressman for his willingness to intervene on each writer's own behalf. What these letter writers forget is that the power to intervene is simply the power to use the hammer of government in order to force individuals and firms to act other than they would have normally chosen; to act outside of already signed contractual agreements. The hammer of government does not create fairness, as the hammer is anathema to the principals of Liberty that founded our country.

I'm not talking about contract or criminal laws being broken, I'm referring to a congressman using government to lean on individuals and companies that have broken no law. Simply because someone was unsatisfied with the result of a contract that they signed under no duress, they chose to get the local power broker to have the contract amended — if the "offending" individuals and firms know what's best for them, they agree to the amendments. The position to exert such pressure must be quite an aphrodisiac for power seekers.

The ability to influence, to put the pressure on someone, cuts both ways. This time it benefits you, the next time it hurts you. When a congressman implicitly uses the power of government to change contracts and events, he has moved from the realm of the citizen-statesman to that of the political don who controls Third World politics. He's the Soviet apparatchik trading his ability to threaten for a bottle of vodka, or a front-page story and supportive letter to the editor. Why depend on contracts and the court system when your congressman can get the job done.

Neither I nor the new Rush fan should have sought the intrusive power of government after our exchange. We agreed to the price and we both profited. Sure one of us could have negotiated a better price but our lack of a Trumpian sense for the art of the deal does not warrant government interference. We both profited from our unequal valuations of cash and music. Had we sought compensation due to a perceived excess profit obtained by our fellow trader, the end result would have been that he and I would not have continued engaging in mutual exchanges of goods or services. And, that would have been a loss to both of us, and society in general.

 


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute