Fair Price Determination

Price (of goods or service) is determined at the point where the demand curve meets the supply curve .  This was one of the first lesson of economics taught to us in junior college. They’d still be doing the same, I guess.

A separate note may be required to illustrate that this method of price determination has resulted in certain goods and services being priced obnoxiously high or obnoxiously low. It may also be argued that because of this, the social inequalities have widened further. Also, economic sustainability of certain professions has come under serious threat, irrespective of the fact that the services are life essentials. The income potential of many service providers, in absolute terms is  so low that it questions the sustainability a society where price is determined by this mechanism. But this is a separate subject in itself. We’re assuming its understanding for the purpose of this note.

Academically, it may be argued that these anomalies will get corrected over a period of time and such period shrinks as the information in the market tends towards perfection. But it is this intermittent period, which can create tension amongst the socio-economic classes of a society, which may lead to unrest and even civil wars.

The government plays the role of lubricator to avoid friction by taxing the ‘have’s’ and passing benefits to the ‘have not’s’ by way of welfare programmes and subsidies. The risk of civil unrest aside, certain members of the benefiting class of the society notice the apathy of the other class. Some of them take a charitable view of the situation and either engage in roles similar to the government or convince buyers to pay higher prices by appealing to the charitable nature of members in their own class. However, both the government and the charitable class work to heal the symptom (social inequality).

A cursory observation is sufficient to infer that these interventions by the government and non-government institutions haven’t healed the symptom. Not because the idea is incorrect. But the rate at which the inequality is increasing is far higher than the rate at which these institutions are able to bridge the gap. The net gap thus keeps widening.

The question to be explored is this: Is it possible to fix the method of price determination in such a way that the undesirable symptoms are avoided? The answer, after due deliberation, appears to be ‘No’. The current mechanism of price determination flows out of natural behaviour of human beings living in a society. Any intervention by government or non-government institutions to curb the undesirable symptoms of such behaviour has resulted in additional, perhaps bigger problems like corruption and systemic inefficiencies.  It might even be argued that these interventions, aimed at bridging the inequalities, themselves have contributed to the increased gap.

What does all this mean in the current context? If one goes by a a linear equation, it forecasts wider inequalities leading to social unrest, leading to disruption of the current economic mechanism. Across many countries & regions in the world, the social tension resulting from such power struggle is being witnessed and is also threatening life. But societies have never adhered to linear equations; and this fact is what keeps the hope alive. The hope is that some new variables will alter the equation.

Village Swaraj is the culmination of Mahatma Gandhi’s view on the subject. It outlines the working of an ideal society. Someone rightly commented that such a society, which has attained swaraj, i.e. swa+raj can only be created by individuals, who have attained control (raj)over their own individual selves (swa). From an economist’s perspective, what are the characteristics of such a person? Let us attempt to understand this. He is content with what he earns and owns. Greed does not urge him to earn more and fear does not persuade him to own more. He does not view his economic standing by comparing himself with fellow-members of the society. Someone with more or less economic prosperity is viewed as the manifestation of diversity amongst human beings.

If such individuals inhabit a society, the theory of village swaraj may be witnessed in practice. Ironically, such a society will not require the theory of village swaraj. It may turn out that description of what one observes in such a society coincides with the theory of village swaraj.

How would such a society determine price? It would be unacceptable in this society that a specialist surgeon charges Rs.10000 for a day’s work, while the farmer sells his labour Rs. 200 per day. However, to arrive at a fair price for every product and service is tough, almost an impossible job. How then will price be determined? Such a society will leave the responsibility of determining the price with the supplier. In case of multiple suppliers / service providers, they may collectively arrive at fair price. Buyers or service recipients will not question the pricing. In fact they will receive the service with gratitude and at the same time bless the service providers. There is no need for laws to ensure fairness.

Do such individuals exist? My guess is that most individuals are intrinsically such. But the ones who are most likely to realise such a society are the ones, who have the ability to swim against the tide.