ATM fees have been in the news lately. Both San Francisco and Santa Monica acted to ban these fees, and movements are afoot in other locales to do the same. In a recent piece in Reason Magazine, economist Thomas W. Hazlett attempts to justify ATM fees by pointing out that the remote locations have costs for the banks, such as keeping them stocked with money.
As he puts it:
“Where the consumer really does choose straight up between the ATM transaction and the teller interface--at the bank’s own branch--the ATM operates for free (and, typically, more quickly and pleasantly). So the ‘ripoff’ is literally somewhere else--between a bank teller and a remote ATM location. But now the situation is complicated, not least of all by the fact that keeping ready cash in convenient remote locations is both costly to the bank and valuable to customers.”
However, the various costs associated with providing fast cash are surely irrelevant--not from the point of view of the banks, but from the point of view of public policy--and invoking them to justify fees only opens the door to calls to justify other prices in the same way.
Explaining prices is a fine way for economists to spend their time, and no doubt keeps them out of any amount of trouble. But justifying a producer’s right to charge a particular consumer price by invoking the costs involved is problematical.
It lends credence to the idea that the cost of consumer goods is set by the cost of producing them. In fact, it is the cost of the producer goods that is set by the (entrepreneur’s estimated future) cost of consumer goods.
Mises illustrates this by pointing out that Burgundy is not more expensive than Chianti because it is produced on more costly land, but the reverse: The land is more costly because producers have bid up its price, knowing that they can charge a high price for Burgundy. Imagine a builder coming to bid on some new construction you wish to undertake. Yes, he says, his price is much higher than that of his competitors--but this high price is justified, because his carpenters have very little experience, and therefore waste a lot of wood.
Hazlett would point out that he is not referring to historic costs as determining the price of the output, but opportunity costs, or what the owner could exchange for the resource in its next-best use. This is fine, except for point two:
Once defenders of the market agree to undertake such justifications, moreover, they are playing a losing game. We just might be able to do it with ATM fees, but what happens when we are presented with Michael Jordan’s salary? Does it “cost” him $19.9 million a year to produce his basketball output, justifying his salary of $20 million?
The neo-classical answer is yes--it is his opportunity cost that justifies his salary, in other words, Jordan’s opportunity cost in playing for the Bulls is what he could make playing for the Lakers.
But let’s look at opportunity costs more closely. Unless we can arrive at an objective statement of what someone’s opportunity costs are, we cannot use them to justify a price to a critic who feels it is “too high.” If we try to do so, we encounter many difficulties
Jordan may love living in a cold, windy city, in the proximity of meat-packing plants, near a large Polish population. While each of these could come into play in his decision, raising his opportunity cost for moving, even Jordan himself could not quantify them. His preferences represent an ordering, but as intensive qualities they cannot be measured.
As Mises says: “Profit and loss in this original sense are psychic phenomena and as such not open to measurement and a mode of expression which could convey to other people precise information regarding their intensity.”
Jordan may never have received any offers from any other team (a quite realistic scenario) before signing the contract. In this case, no one has any idea what the Lakers would pay him.
He might also be considering an acting career, in which he thinks he might be able to make $40 million a year, without sweating as much. Then again, he might fail miserably. This is the real situation of entrepreneurs considering a speculative venture, for instance, of a bank considering placing an ATM at an area hotel.
How do the profits from the ATM compare to those the bank might garner from a new advertising campaign? At best, the bank has an educated guess as to the answer. Far from being amenable to objective calculation, real businesses’ estimates of opportunity costs are often based on vaguely sensed premonitions of future market states. (E.g., “Joe, I think we’re gonna sell a lot of this stuff.”)
Finally, the notion of opportunity cost does not account for the possibility of entrepreneurial profit. By correctly adjusting the factors of production to anticipate consumers’ future desires, the entrepreneur hopes to make a profit above and beyond what he might make in some other venture.
The neoclassical models that attempt to quantify such phenomena are sterile. They are akin to predicting the future batting average of major league ballplayers with a model that abstracts out the batter himself, then formulates equations involving just the bat and the ball. Human choice and behavior is unpredictable.
In fact, we can estimate Jordan’s opportunity cost only because we already, on an a priori basis, know that market prices are “correct”--at least as correct as anyone is capable of determining them to be. For someone who doesn’t believe this, it is impossible to back into the correct market price from the opportunity cost. Essentially, we have arrived at the Socialist calculation problem. If it were possible to calculate opportunity costs in an objective fashion, then the government could set “correct” ATM fees--it would just calculate the opportunity cost, then mandate the fees to allow only a “reasonable” profit on top of them.
The hopelessness of a cost-based approach to justifying prices is illustrated by a recent story from my home state of Connecticut. Our Attorney General, Dick Blumenthal, who has never met a corporate target he wouldn’t like to attack or a camera he wouldn’t run over his mother to jump in front of, has boarded the anti-ATM-fee bandwagon. He claims ATM costs are only 27 cents a transaction, and are already covered by the customer’s bank fees. Faced with market opponents like him, attempts to justify a market price on the basis of costs will only lead to endless wrangling over what the costs “really” are.
The defenders of liberty would do better to side with Mises:
“It is no less vain to ponder on what prices ought to be. Everybody is pleased if the prices of things he wants to buy drop and the prices of the things he wants to sell rise… But one deludes oneself or practices deception if one calls such wishes and arbitrary value judgments the voice of objective truth. In human action nothing counts but the various individuals’ desires for the attainment of ends. With regard to the choice of these ends there is no question of truth; all that matters is value… Any price determined on a market is the necessary outgrowth of the interplay of the forces operating, that is, demand and supply. Whatever the market situation which generated this price may be, with regard to it the price is always adequate, genuine, and real.”
