The basics of euvoluntary exchange

Samuel Wilson’s prodigious and interesting output at Euvoluntary Exchange lead me to two articles by Michael Munger, the source of the blog’s name and focus. The first article “Euvoluntary or Not, Exchange is Just” is fascinating. Here is the main thesis:

All objections to the morality and justice of the uses of voluntary market exchange are mistaken. In fact, they are really objections to imbalances in the distribution of power and wealth. Euvoluntary exchanges always justified, and are always just. Further, even exchanges that are not euvoluntary are generally welfare improving, and they improve most of all the welfare of those least well off. Restrictions on exchange harm the poor and the weak.

For Munger, euvoluntary exchange is the name given to any any truly voluntary exchange that leaves both parties better off than before. To be truly voluntary or euvoluntary, the exchange requires:

  1. Conventional ownership of items, services, or currency by both parties,
  2. Conventional capacity to transfer and assign this ownership to the other party,
  3. The absence of regret, for both parties, after the exchange, in the sense that both receive value at least as great as was anticipated at the time of the agreement to exchange,
  4. Neither party is coerced, in the sense of being forced to exchange by threat, and
  5. Neither party is coerced in the alternative sense of being harmed by failing to exchange.

Munger explains the last requirement:

In the economic world, power in an exchange relationship is measured by the disparity in outcomes if no exchange is agreed upon. More simply, economic power is the disparity in welfare at the reversion points, or the best alternative to a negotiated agreement. Let’s call this the “BATNA” for short.

He then explores the idea with a common example:

Now, let’s suppose instead that I am far out in the desert, and am dying of thirst. I happen to have quite a bit of cash on me, but I can’t drink that. A four wheel drive taco truck rolls over the hill, and pulls up to me. I see that the sign advertises a special: “3 tacos for $5! Drinks: $1,000. 3 drinks for only $2,500”

I argue with the driver. “Have a heart, buddy! I am dying of thirst!” He asks if I have enough money to pay his price, and I admit that I do. The driver shrugs, and says, “Up to you! Have a nice day!” and starts to drive off.

I stop him, and buy 3 bottles of water for the “special” price of $2,500. Was the exchange euvoluntary?

It was not. The exchange violates part 5 of the definition, relative equality of BATNAs. My BATNA was death, from thirst. The driver was little affected by whether a deal was consummated (though he got a bit richer), while I was enormously affected. Even though in most important senses the exchange was voluntary (I could have said no), it was not euvoluntary. The precise definitional line between almost equal BATNAs (and therefore euvoluntary exchange) and unequal BATNAs (and therefore not euvoluntary exchange) may be hard to draw, but I hope the distinction is clear enough for analytic purposes.

After running through some examples, Munger explains the political significance of this line of thought, asking should we have anti-gouging laws?

If a trade is not euvoluntary, should it be outlawed? Those who would argue “yes” are confusing cause and effect, or so I am claiming. The disparity in conditions is a measure of need. Our emotional reaction is that the man in the desert should not have to pay \$1,000 for a bottle of water; the people of Raleigh should not have to pay \$11 for a bag of ice. So we pass laws saying that they will not be able to do so. And we make moral objections to capitalism, and to market exchange, based on a belief that we are protecting citizens. But the effect of these laws is to force people to accept the BATNA that we wanted to avoid in the first place!

Consequently, it is in those instances where market exchange is not euvoluntary that access to market exchange is most important. Anti-gouging laws, restrictions on organ sales, and other rules designed to suppress markets are based on the idea that the BATNA for the poor, the needy, and the desperate, is unacceptably low. But those laws then ensure that the unacceptable BATNA is the only possible outcome for those same people. Restrictions on market exchange reify and instantiate precisely the harms they purport to avoid. What is the basis for such confusion?

I can see a host of applications for this line of thinking, especially in Uber’s surge pricing and online privacy. More to come.

First published Dec 31, 2014