Monday, November 2, 2015
Just Price Theory: Not So Crazy After All?
When I first heard about the "pharmabro" guy who bought the rights to a drug and then immediately raised the price from $13.50 per pill to $750, I knew things would get interesting.
Because from one point of view: isn't that just capitalism? If supply and demand mean you can make a profit at that price, then isn't that the price you should set? But from another point of view, it's pretty outrageous. So I wondered: beyond saying "I hate you," what form would the outrage take?
Back in the day -- way way back in the day -- it might have been easy to explain the outrageousness, because you could simply say that the drug was overpriced relative to its actual value -- its "just price." In "just price theory," there is a price for a good that reflects the value of fairness: to charge $1,000 dollars for a bottle of water in a disaster zone would be unfair because, in some sense, the water isn't worth that much in reality. It's not a "just price."
To our modern ears this sounds weirdly metaphysical. And from the point of view of modern economics, it doesn't really make sense to talk about a "just price." Value is thought to be relative -- there is no value in reality, there are just facts about what people are willing to pay. That is to say: what something is worth is in the eye of the beholder. How could you say what something is "really" worth? You can't. The just price theory faded from view with modern notions of supply and demand.
To see how embedded rejection of the just price concept is, consider examples from this article about how human behavior diverges from what standard economic theory predicts. Here, authors Jolls, Thaler, and Sunstein express puzzlement about laws against price-gouging, usury, and ticket scalping. Why, they ask, would we choose to block mutually desired trades? They describe an experiment where they asked people: what if there were only one cabbage patch doll left, and the store decided to auction it off to the highest bidder? Three quarters of respondents said that would be unfair. But why would fairness be relevant?
Their answer to these questions appeals to the idea of "bounded self-interest." Bounded self-interest, like other forms of irrationality such as weakness of will and other anomalies, gets in the way of economically rational behavior. Bounded self-interest means we let norms like "fairness" influence our judgements for no good reason.
All of this to say: there's a lot of skepticism over the idea that fairness or justice has a respectable role to play in thinking about prices.
So I was very interested to see how often the issue with the drug price was taken to be just that: that the price increase wasn't fair and couldn't be justified given the particulars.
For example, this news story describes the fall out from the pharmabro's Reddit Ask Me Anything, in which a physician gained the applause of Reddit's masses by pressing him with questions about particulars. What improvements did the drug deliver over similar options? What changes had the company made to the drug to "warrant" the price increase?
"This I find is the main problem with your plan," the physician said. "That the solution is not worth $749."
Of course, it's open to anyone to just say that people in general don't understand economics, that their use of an intuitive "just price" theory shows they don't know was is going on. But I think this conclusion would be too quick.
What I think it shows, instead, is that a lot of people have in their minds and intuitive and value-based sense of how things are working when they're working in a relatively fair and just way, and that as long as the results of market activity track, in some vague way, those judgments, things are OK. And when those results spit out $1,000 for a bottle of water in a disaster zone, things are not OK.
There is resistance, I think, to lending credence to these intuitive and value-based judgments as telling us anything meaningful and important because they are vague, and because they rest on different kinds of considerations all mushed in together, and because they're hard to make precise.
As the Reddit discussion exemplifies, intuitive judgments about what's a fair price are probably based on a set of implicit and hazy beliefs about how much work and money the seller put into making a product, and how much money the seller is likely to make, and how much the people who need the product need it, and how much the people who need the product can pay. All of those judgments are relative to what other costs in society are and how money is working.
All of these are matters about which it's impossible to be precise. But just because these matters are often imprecise and multiple doesn't mean they're the wrong things to consider. Maybe judgments about just prices are complicated, pluralistic, intuitive, and imprecise. That doesn't make them wrong.
After all, the alternative, standard set up requires saying there's nothing wrong with selling $1,000 dollar bottles of water in a disaster zone and making a profit of $999 on each one, and that there's nothing wrong with a drug going from $1 dollar to $750 for no real reason.
And, in the end, isn't it better to have a messy and sensible idea than a precise and misguided one?