What’s a Fair Price? Or: You’re Not Underpaid!

(Note: Of course I don’t know whether you in particular are underpaid. But a lot fewer people are underpaid than think they are.)

Many people have an intuitive idea of “fair prices”, which leads to various interesting and potentially harmful conclusions. E.g., some are led to think that they themselves are underpaid relative to the fair price for their labor, and thus to harbor resentment toward their employer, society in general, or the “overpaid” people in their vicinity.

Others conclude that the government needs to subsidize certain occupations since they are otherwise underpaid. Others think that they personally have to boycott businesses that underpay their workers. Some think the government should fix prices to avoid under-payment, as in the minimum wage law, or to avoid over-payment, as in price gouging laws.

But what the heck is this notion of “the fair price”? I understand the normative content – it’s a price that is intrinsically morally required, such that it’s wrong to offer less than it if you’re a buyer, or to demand more than it if you’re a seller. (This implies a unique permissible price. But perhaps proponents would substitute the notion of a fair price range.) But what descriptive facts could make something a fair or unfair price? I suspect that most have no thought-out answer to this.

Here are some ideas:

1. “The mutually-agreed-upon price is the fair price.”

In most cases, if you find a price unfair, you wouldn’t agree to it, so if someone does agree, that’s evidence that they find it fair, which is evidence that it is fair. Furthermore, even if it wasn’t fair to begin with, the agreement makes it morally privileged, since the two people both have the right to decide on what terms they conduct an exchange. (Assuming this exchange isn’t immoral for some other reason – e.g., maybe there’s no fair price for assassination.)

But almost none of the people who talk about fair prices would like this; they think a huge range of voluntary transactions involve unfair prices.

2. “The fair price is the competitive price.”

This isn’t the same as #1. The idea of #2 is that you can get unfair prices if there is a monopoly, cartel, or similar failure of competitive pricing. Example: You’re stuck in a blizzard and need your car towed. Due to an unfortunate sequence of events, only one towing company is operating at this moment. The driver wants $1000 to tow your car. The normal price, which obtains when the towing companies have to compete with each other, is $75. The $1000 price seems unfairly high.

What’s the logic behind this? Under normal competition, the market price approximates to the most efficient price (the price that maximizes the sum of producer and consumer surplus). It’s also the price that equals both the marginal benefit for buyers and the marginal cost for sellers. That’s all from standard price theory. If you don’t know standard price theory, read this: http://www.owl232.net/papers/economics.pdf, and don’t have any opinions about “fair prices” until you have.

However, this theory again would be rejected by most fairness advocates, who seem to think a wide range of even competitive market prices are unfair. So let’s try to get at what might be behind their intuitions.

3. “Wages should reflect how praiseworthy a person is.”

Good people should get paid a lot; bad people, less. The market doesn’t give this result, so it’s unfair. E.g., professional athletes are morally no better than teachers, yet they get paid many times more money.

What I think is wrong with this is that it ignores where money comes from. If your pay was manna being distributed by God, then sure, God should give it to the morally good people. In our world, though, your income comes from other people. The other people start out with money that belongs to them and that they have no obligation to give to you. Your being morally virtuous doesn’t make them obligated to just give you their money. I assume this as obvious; if you disagree, ask yourself how often you have given someone money just for being virtuous.

These other people then give money to you in exchange for your doing something that they want. There’s nothing unfair about that; indeed, that’s kind of the opposite of unfairness.

Sometimes, that results in someone who is not particularly virtuous getting a lot of money because that person happens to be doing something that a lot of people want (or a few people want very badly). Other, perfectly nice people might get much less money, because they are satisfying fewer other people’s desires. I see no basis for claiming anything in this is “unfair”, once we grasp the point that no one was obligated to give away money just because someone else is virtuous.

4. “Prices should reflect quantity of labor.”

A variant on the virtue theory is the labor theory – that you should get paid in proportion to “how hard” you worked, perhaps including how unpleasant and onerous your job is. (If you want, you can stipulate that it has to be working in a socially useful job.)

I think this is wrong for the same reason: money comes from other people. No one is obligated to give you their money just because you did something difficult. It’s perfectly fine and reasonable for people to pay for things that they want, and to pay more for things that they want more. How hard you work is not going to just always happen to line up with how much you’re satisfying other people’s desires. What if you worked super-hard, sweating all day every day for a year, and all you produced was a single, ugly sock? No one is morally obligated to now give you $100,000 for that sock. Given how much it is worth to other people, it would be completely unreasonable of you to expect more than a few dollars.

Btw, notice how disastrous it would be if society accepted the labor theory of fair prices. The incentive would be to expend tons of labor, with no regard to how much value is produced.

5. “Prices should reflect value to others.”

Maybe a fair price is proportional to the value to others of the thing being sold, where that value could be measured by desire-satisfaction, pleasure produced, or something like that. If you work for a company, you should be paid according to how much you are contributing to the company.

Sounds pretty fair. This is also very close to #1 and #2. In a competitive market, your pay is approximately equal to the amount that you contribute. Most people don’t realize this, so they falsely think that they see all sorts of unfairness in the market.

Here is the explanation. Say you’re a profit-maximizing employer. If you have more workers, you can get more work done and hence take in more revenue. But there are diminishing returns: as you hire more workers, you’re going to be assigning them to less and less essential tasks. You also, sadly, have to pay these workers, and you pretty much have to pay them the going rate in your industry. So how many people should you hire?

You should hire workers up to the point where the value of the labor, to you, equals the wage you have to pay. If an hour of labor is producing more value than the wage, keep hiring. If an hour of labor is producing less value for you than the wage, lay some people off or cut back hours. The stable situation is where the marginal value of labor equals the wage.

What that means is that, if any given worker were to be paid more than they currently are, then the business as a whole would be better off without that worker. This, to me, indicates that each worker is being paid the most that he could reasonably ask. It would in fact be unfair for him to be paid any more, since that would essentially mean that he’s taking more from the organization than he’s giving, and that extra value must come from other people.

Qualifications: Those are of course approximate, theoretical predictions. People can make mistakes, so sometimes someone will get paid more or less than they contribute. Especially if a particular worker’s productivity is very different from other workers, and especially if it’s hard to know how productive each individual is.

Nevertheless, there is a general tendency for wages to approximate the marginal value of workers’ labor. Specific individuals can be under- or overpaid by the present standard, but it is very unlikely that workers across an entire industry would be underpaid overall, and extremely unlikely that workers in general are underpaid.

Again, that’s not because employers have an intrinsic sense of fairness; it’s because they are selfish. The maximally selfish thing to do is to pay everyone according to the value they produce. Selfishness in this case produces fairness.

6. “But it just seems unfair!”

My guess is that most people who complain of unfair prices, especially unfair wages, don’t have any clear idea of what the criterion of fairness is. They just look at someone who is getting “low pay”, feel sorry, and then intuitively react with “that’s unfair”. This is also influenced by looking at the managers and owners of a company and seeing them doing seemingly less-unpleasant jobs for much greater pay.

But this is really an extremely weak basis for belief. One can’t tell how much value someone is contributing to an organization just by looking at how unpleasant their job sounds to you and having an emotional reaction. Most people really have no idea how valuable a given person’s labor is, and no basis for claiming that it is somehow more valuable than the money the person is getting paid. In general, it isn’t. When you see a poor Walmart employee, it may seem that it would be nice if they could get paid more than they are. But it is completely plausible that, unfortunately, that person’s labor is not in fact worth any more.

Now, you might think that society should support the needy out of purely humanitarian, charitable impulses. Perhaps you think people have a right to a certain level of wellbeing. But even if that is so, that would be the responsibility of society as a whole, the government, or charity organizations. It’s not the responsibility of a person’s employer. They didn’t have to hire the person at all in the first place, and they only did so because they valued the work that the person would do. (Compare: Suppose you sell me a loaf of bread. I’m not now obligated to send your kids to school, just because I made the mistake of interacting with you in a way that benefitted you.)

7. If it’s so unfair, change your job.

Finally, by the way, if you think your job is underpaid, then quit. And if you really think that some other jobs are highly overpaid, then why don’t you go into one of them?

Maybe because you can’t do them? Or you would find them too unpleasant? Well, that’s why they get paid more.

Some people think that there’s a wide class of people, ‘the rich’, who are getting paid way more than their labor is worth, for doing trivial tasks that anyone could do. Think how bizarre it would be if the world worked like that. Why would other people be pointlessly giving them that money?

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In sum: Stop randomly claiming that people are “underpaid” or “unfairly paid” with no basis. Most people are not.