Can Mutually Beneficial Exchanges Be Exploitative?

The importance of context-keeping in libertarian thought

When two people not under duress enter into an exchange for goods or labor services, both must be expecting to benefit or the exchange would not occur. In any such exchange there necessarily exists a double inequality of value. Each trader gives up something to obtain what he or she prefers. Moreover, we have at least prima facie grounds for pronouncing the exchange legitimate since no compulsion is apparent.

This principle of sound economics (and moral theory) is unexceptionable. Indeed, we couldn't make sense of buying and selling were this not the case. Going further, if such were not the case, we could even say we have witnessed an sale (in the praxeological sense); it is something else, perhaps a game or a ritual. This is a matter of logic. The nature of a particular action is determined by the actors' intentions and understanding. What might look to an outsider like an exchange of money for goods or labor services may in fact be a move in a game in which the "money" isn't money at all, but merely pieces of metal. This point was well recognized by, among others, three important Austrians: Mises, Hayek, and Wittgenstein, as nicely brought out by Roderick T. Long in Wittgenstein, Austrian Economics, and the Logic of Action, chapter 3 (pdf).

Careful Application

We must take care, however, in applying the free-exchange principle. Knowing that parties enter into an exchange freely (that is, without being under duress) may be a necessary condition for our pronouncing it legitimate, but it is not a sufficient condition.

For example, you enter a post office and buy a first-class stamp for 45 cents. May we conclude that you prefer the services the stamp will buy to whatever else you might have spent the 45 cents on? If you were not ordered into the post office at gunpoint, I should think so.

Is the transaction therefore legitimate? I should think not—not entirely. Why not? Because your alternatives were artificially constricted by a system supported by violence.

The post office of course is a protected government monopoly. No one may compete with the state in the delivery of first-class mail. (Lysander Spooner and others tried and were stopped.)

Apparently it isn't enough to know that parties to a transaction entered it without duress. There are other criteria that a transaction must satisfy for it to be pronounced entirely legitimate.

Someone might object that transactions with the post office are not really free because someone who wants to mail a first-class letter has no choice but the post office. True enough. Still no one is forced to send a first-class letter. In that sense, no one is forced to do business with the U.S. Postal Service. One chooses to deal with the post office because under the (unjust) circumstances one prefers that option to its alternatives (which may only include not sending the letter at all). Thus one can still be said to be better off because of the transaction.

Privileged Firms

Extending this analysis to private companies with monopolistic government privileges should incite no controversy. If the U.S. government outlawed competition with Federal Express for overnight delivery, the situation would be essentially the same as with the post office. No one would be forced to do business with FedEx. Likewise if government erects explicit or implicit barriers to entry in an industry. Transactions with the protected oligopolistic firms would still be mutually beneficial.

Exchanges therefore with a coercive monopoly are mutually beneficial, though we should be reluctant to call them legitimate. Any coercive monopolist will set its price low enough to produce the desired revenue. No sane monopolist would set a price so high that it would exceed consumers' subjective estimate of the utility of the product. What would be the point? But that means every sale entails a buyer who believes he or she is better off engaging in the transaction despite the lack of alternative sellers.

Thus even with a monopoly, subjective marginal utility plays a role in governing price. As Kevin Carson notes, "[M]onopoly pricing targets the price to the highest amount the consumer is able to pay and still get enough utility to make the exchange worthwhile."

And yet we libertarians don't want to declare the exchanges fully legitimate, do we? The seller is a coercive monopoly or protected firm, after all. (This does not necessarily mean the seller is morally culpable for the situation, though he or she may be.)

Consumer Surplus

The great thing about competitive markets is not that marginal utility sets prices, but that rivalry among sellers drives prices below the level that approximates many people's marginal utility. This produces a consumer surplus. (How far below is governed by producers' subjective opportunity costs, including workers' preference for leisure.) We all have bought things at a price below that which we were prepared to pay. Ralph Hood put it nicely when discussing the falling price of electronic calculators: "[T]echnology allowed the price to drop. Competition made it drop." In a manner of speaking, competition socializes consumer surplus.

On the other hand, in the absence of competition a coercive monopolist is able to charge more than in a freed market, capturing some of the surplus that would have gone to consumers. That's a form of exploitation via government privilege. (Eugen Böhm-Bawerk saw the possibility of similar exploitation of workers by employers sheltered from competition.)

The counterintuitive conclusion, as Carson puts it, is this: "A person can be better off from an exchange, and still be exploited."

We should keep this in mind the next time we're tempted to defend a state of affairs in the corporate state or, say, sweatshops in an authoritarian third-world country. Before we say, "The exchange was voluntary and therefore both mutually beneficial and legitimate," we should make sure the larger context satisfies libertarian standards of legitimacy by asking this empirical question: Did government privilege play a significant role in creating the circumstances in which the exchange takes place?

Sheldon Richman is editor of The Freeman, where this article originally appeared.