The ethics of voluntary economic transactions

Can voluntary transactions raise ethical questions? Yes, they can!

It has just gone midnight and you are walking home from the station, down a dark and deserted street. Suddenly, a figure jumps in front of you from the shadows, wielding a knife under your face, threatening to use it, unless you hand over your wallet and your phone. What to decide? Even aside from the emotions involved, which might give you tunnel vision — your only concern survival at all cost — the economic case for complying with the demands of the robber seems compelling. Your safety is worth more than your smartphone and the contents of your wallet.

Nonetheless, the mugger’s proposal does not imply a voluntary transaction, and that makes it ethically highly questionable. But are voluntary transactions always ethically OK?

Discounted job offer

This question occurred to me as I came across an article suggesting that many people facing redundancy at work would accept a pay cut of 25% to keep their job. It refers to a paper by two economists, Steven Davis of the university of Chicago and Pawel Krolikowski of the Federal Reserve Bank of Cleveland, Sticky Wages on the Layoff Margin. They find that there is almost no negotiation about wage and benefits when layoffs present themselves, despite the fact that 60% of unemployment insurance recipients would agree to keep their job for a 5% wage reduction, more than half would accept a cut of 10%, and nearly a third would be willing to sacrifice a quarter of their salary if that meant they’d remain in their job.

This finding is not as surprising as it seems. In a voluntary economic transaction, the seller (in this case, the employee) will have a minimum acceptable amount (or Willingness To Accept — WTA), while the buyer (the employer) has a maximum amount they’re prepared to offer (or Willingness To Pay — WTP). Through negotiation, both parties will try to get a better deal than those extremes: as long as the WTA is less than the WTP, any amount between the two produces a win-win, with an agreement that is better than the worst case for both. In practice, it will be rare for one participant to be pushed to their extreme, i.e., for the amount to be exactly either the seller’s WTA or the buyer’s WTP. In other circumstances, therefore, both would typically be prepared to do a deal at an amount that is closer to their limit.

A flea market offers a good illustration. A seller may have a vague — and not necessarily realistic — idea of what they might get for an old coffee table, a set of Princess Diana memorial coffee mugs, or a 1970s dolls’ house. When a random passer-by spots a possible bargain, seller or prospective buyer will open the proceedings with either a bid or an asking price, and after a bit of toing and froing it will become clear whether there is a middle ground that makes either party happy enough to conclude the transaction. Neither will have known upfront what that amount would be, and almost certainly, the buyer might have been willing to pay more, and the seller might have been prepared to let it go for less.

So it is with what people are paid for their work. An employee would almost certainly have accepted the job for a little less money, and likewise, the employer would have offered a little more if needed. The agreed salary — or more generally, price — in such a transaction is not in any way more correct, or indeed fair, than any other amount within the range demarcated by the respective WTA and WTP.

What the workers in the survey did is reveal their WTA for doing the job (or at least an amount that is closer to their genuine WTA than their present wages). If, at that new level, agreement can be reached, there is nothing ethically suspect, is there?

Bring on the textbook

Well, maybe not quite. Imagine that you could read people’s thoughts. As a seller, you could discover a buyer’s WTP or, as a buyer, find out the seller’s WTA. Knowing their limit, you could push them right up to it. Unlike the transaction itself, which does (just) remain a win-win affair, this move would be strictly zero-sum. What you would gain — in comparison to whatever a less extreme agreed transaction price would otherwise have been — they would lose. There are no two ways about it: you are taking from them.

Is pushing people to the edge necessarily wrong? Picture this: you are running low on fuel on the motorway because you forgot to fill up before your journey, or simply because you’ve been driving for so long that you’ve used up a full tank. Motorway service areas take advantage of their location and charge higher prices because it is more convenient to fill up there, than to get off at the next junction in search of cheaper fuel, and it avoids the risk of running dry. However, the circumstances that might necessitate the purchase of expensive fuel are not imposed by them, but follow from the drivers’ choices. It would be hard to argue that there is anything unethical about these prices.

The textbook my colleague and I use in our course Ethical, Evidence-Based Decision Making might offer some guidance. It describes a couple of concepts to evaluate the morality of decisions and actions, notably the Principle of Right Desire — “We ought to desire what is really good for us and nothing else” — and Respect for Persons. The latter rests on three basic criteria: what are the consequences for others, what are the relevant obligations and are they honoured, and does the decision or action accord with the relevant moral ideals.

The circumstances and the motives of the employer are critical in our analysis. Let’s consider a first specific case, in which the employer has a genuine need for cutting wage costs to ensure the organization remains viable, and gives the employee notice. As in the cited study, the worker offers to take a 25% pay cut. If the employer agrees, the first principle is met: the arrangement is good for the employee — admittedly not as good as the (untenable) status quo, but better than the alternative. Is she or he also treated with respect? The specific consequences for the employee are certainly positive compared to them being out on the street (and their desire, to remain employed at a reduced pay, is met). An employer also has a moral obligation to treat the workers fairly and take good care of them — and that criterion, too, seems to be met. Finally, does the employer act in accordance with the relevant moral ideals? Provided the process is conducted with integrity and honesty, and the new offer is, in the circumstances, fair, this would be another tick in the box.

In a different scenario, the employer decides to threaten the staff with redundancy, thus putting pressure on them to accept a significant pay cut. Even if there is a genuine case for cutting wage costs, the tactic is ethically questionable. For consequentialist reasons, the Principle of Right Desire might well be met in the same way as in the earlier setting (the employees keep their job and an income), but the Respect for Persons principle is a different affair. The direct consequence would be a financial transfer, under duress, from the employee (part of their salary) to the employer — not cool. An employer has an obligation to be honest and open towards the employee, which is not quite the case here — also not cool. Finally, it is not hard to see that several moral ideals are violated here — integrity, fairness, justice really get short shrift, with abuse of power thrown in for good measure.

Superficially identical economic transactions, but with very different ethics, showing we should be very careful not to be too quick to pass moral judgement on other people’s decisions and behaviour, if we have little or no insight in the circumstances and the motives of the people concerned. This where biases and prejudices might distort our judgement, from What You See Is All There Is and social desirability bias to motivated reasoning and confirmation bias.

Many economic transactions have an ethical dimension. But we can only properly evaluate those ethics if we look beyond the obvious. If we don’t, and jump to conclusions, are we really acting ethically ourselves?

Originally published at http://koenfucius.wordpress.com on September 1, 2023.

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