You are buying from other consumers, not producers

If you want something, you usually buy from other potential buyers, not from the owner. Failure to understand this leads us to adopt wrong policies such as anti-gouging laws, rent controls and attempts to reduce inflation through price planning.

We have known this truth for centuries. A famous example, “Diocletian’s Edict Concerning the Sale Price of Goods,” apparently intended to lower prices simply by forcing sellers to ignore the fact that someone else wants to pay more than the buyer now in front of them. The economic rationale for the cause of this problem is clearly laid out by Eugen von Böhm-Bawerk in his widely cited (but largely illegible) book, The positive theory of capital.

It’s worth citing Böhm-Bawerk, to get the point:

The peasant, whom we will call A, needs a horse. His individual circumstances cause him to attach as much value to the possession of a horse as he does to the possession of £30. The neighbor, whom we will call B, has a horse a discount. If B’s ​​circumstances also consider the possession of a horse to be equal to or greater than £30, then, as we have seen, there can be no exchange between them.

Suppose, however, that B values ​​his horse much less, say £10…[E]Each of the contracting parties can make a huge profit through the stock exchange. For example, if a horse changes hands at £20, and A makes a profit of £10, and B gets £20 for an article worth only £10…

How high is this price? Concerning this it may be said with certainty: the price must in any case be less than £30, or else A would have no motive to go on with the exchange. and must be above £10 at all, otherwise there would be no interest in the exchange for B, perhaps even a loss. But the exact point between £10 and £30 at which the price will be fixed cannot be determined with certainty…

There is no difficulty in putting this succinctly into the form of a general proposition. In a segregated exchange—the exchange between a single buyer and a seller—the price is set somewhere between the subjective evaluation of the good by the buyer as a high, and the subjective evaluation by the seller as a lower bound.

Well, here it is. In many transactions that take place under reasonable conditions, there is no set price, but there is a tendency for the price to “move towards equilibrium”, because the resolution of the transaction will depend on special factors.

Of course, the aim of markets is to develop a division of labour, which creates increasing returns on a large scale as the scope of the market expands. A salesman in a production environment characterized by the division of labor will have only one tool to sell, but many, many copies of that tool. How is the price determined then? It is tempting to think that the idea of ​​an equilibrium price can now be applied.

But Böhm-Bawerk realized this next step, and solved the problem of how to set the price. And his analysis reveals a truth that I think is either completely forgotten or underappreciated. In fact, when someone buys something in a market environment, they are not buying from the producer. While that, Consumers buy from other potential consumers.

Consider Boehm-Bawerk’s discussion:

Let’s assume that [consumer] A1 finds a competitor we call A2 who is already on the field and [A2 values the horse at] £20. What will happen now? Each of the contestants wants to buy the horse, but only one, of course, can buy it… So each of them will try to persuade B to sell the horse to him, and the means of persuasion will be to bid a higher price… .

So long as the bids are less than £20, A2, operating on the motto ‘Make a little profit rather than no exchange’, will try to secure the purchase by increasing his bid, which, of course, A2, trying to work on the same principle, will counter by raising susceptible. But A2 cannot pass the £20 limit without being lost by the exchange. At this point his advantage dictates “no exchange is better than losing”, and he leaves room for that [A1].

A lot of people would argue that I shouldn’t be using something someone else would value more, but it’s ethically good to leave the rare item to others. In the case of consumer products, that means I leave some for the person behind me in line, or the person who comes over this afternoon and really needs that item. In this context, the laws against “price gouging” ignore Boehm-Bawerk’s vision in a harmful way. As I mentioned before, the problem with anti-manipulation laws is that we are encouraged to see product and product cost only in determining a fair price.

During the summer of 2020, there was a toilet paper shortage across the United States. In many states, anti-tamper laws have been used to prosecute sellers who charged “too much” for toilet paper. But think about it from the perspective of Bom Paverk. The higher prices were “offers” from people who hadn’t made it to the store yet, but wanted toilet paper. If I see a low price for toilet paper, that tells me no one else needs toilet paper, and I should fill my basket (this isn’t hypothetical; people have already bought dozens or even hundreds of rolls of toilet paper in states with anti-price gouging laws! )

But the price mechanism, if allowed to operate in situations of scarcity, allows other consumers to “outbid” against the person considering hoarding. If prices are allowed to rise and do their proper function, The current buyer is actually buying from potential future buyers. Other consumers who will arrive later today or tomorrow get a fair chance “to try to get the seller to sell [toilet paper] them.” It is better to give opportunity to others to bid on scarce goods, for better availability of product at a high price than empty shelves. Likewise, higher rents are better than no housing available.

The only way to do that, though, is to admit it Other consumers, not the seller, is responsible for the prices charged. Attempts to “manage” or “plan” prices do nothing to address the real problem of scarcity, and often make scarcity worse. Price controls are limitations on capacity other consumers To meet their needs, this is just wrong.

Michael Monger

Michael Monger

Michael Munger is Professor of Political Science, Economics, and Public Policy at Duke University and Senior Fellow at the American Institute for Economic Research.

His degrees are from Davidson College, Washington University in St. Louis, and Washington University.

Munger’s research interests include organization, political institutions, and political economy.

Get notifications of new articles from Michael Munger and AIER.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *