An interesting piece by James Kwak about how his economics students tackled a problem supposedly about fairness in business practice:

Today in class, the professor posed the first question from the paper:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”

In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50…

More fundamentally, the 1986 paper shows that Econ 101 is diametrically opposed to human beings’ intuitive sense of fairness. Yet public policy largely follows the dictates of Econ 101. Is that a good thing?

The argument that this is unfair relies on the notion that by bumping up the price the salesman gets a gain at the ‘cost’ of poorer people who either have their meagre money eroded much more quickly or stay snowed in because they can’t afford a new shovel.

Isn’t this a trivial proposition?

Fairness for whom and when and how?

First, some businesses make their money over the year by running seasonal price adjustments, so that in some periods prices have to be lower as demand is low, whereas in other periods prices are higher because people really want that product then. If the business did not make a good profit when it had the chance to do so (and thereby compensate itself for leaner months), it might go bust and workers would lose jobs. Not much fairness there.

Plus this example misses dynamic effects. People will see this trader trying to cash in at their expense. Even if they have to pay up now, they may make a point of not buying from him/her again later if they have a chance. So fairness smooths itself out over time.

Or someone out there fuming over the high cost of shovels may sit down and invent a new, cheaper way of getting rid of snow. Huge fairness and utility gains for everyone are possible in due course.

In other words, a banal ‘intuitive sense of fairness’ based on a static situation and ignoring dynamic effects is really misleading when it comes to looking at such things.

Which is why any centralised attempt to dump standardised lumpen fairness on people usually backfires, on a massive scale.

As Cuba at last is realising, by laying off hundreds of thousands of state ‘workers’.

Hurrah.