Every time an individual chooses to buy a product from someone else they must disagree on the value of the items being transacted in order to agree on the price. For definition, price is the commitment one is willing to give to earn something. This does not need to be limited to money, but could also be time, resources, work, etc. Value, on the other hand, is the regard that something is held to deserve; the importance, worth, or usefulness of something. When two people voluntarily choose to transact they must agree upon a price, and inversely disagree on the value. For example, if one party buys a bag of oranges from another party for $5, this means that one party values the oranges more than the $5, while the other party values the $5 more than the oranges, but both agree that in order to transact the price is $5.
It is only because of this disagreement between the two parties that a price can be mutually agreed upon for the exchange to take place. The reason a transaction is achieved is because the purchasing party values the product more than the money they are spending to purchase that product, while the selling party values the money more than the product they are selling.
God informs us in the Quran that the requirement for any transaction is that it is mutually accepting to both parties. Therefore, if no one is being forced into their position, and thus not being exploited, then the transaction should be deemed lawful.
[4:29] O you who believe, do not consume each others’ properties illicitly— only mutually acceptable transactions are permitted. You shall not kill yourselves. GOD is Merciful towards you.
يَاأَيُّهَا الَّذِينَ آمَنُوا لَا تَأْكُلُوا أَمْوَالَكُمْ بَيْنَكُمْ بِالْبَاطِلِ إِلَّا أَنْ تَكُونَ تِجَارَةً عَنْ تَرَاضٍ مِنْكُمْ وَلَا تَقْتُلُوا أَنْفُسَكُمْ إِنَّ اللَّهَ كَانَ بِكُمْ رَحِيمًا
Mutually acceptable transactions are the foundation for a market to form. A market is the most efficient ways for parties to trade in order to maximize value for all the participants. A great example of this point was carried out in an episode of Planet Money with an experiment they conducted on a group of ten 7th-graders. In this experiment each student was randomly given a piece of candy and asked on a scale of 0-to-10 how much they liked the candy. When the scores were tallied the final score of satisfaction among the ten students was 50, making the average score per student a 5. Then the experimenters gave the students the option to trade with one another. Afterwards the students were again asked to score their satisfaction and this time that aggregate score for the students went from 50 to 83, raising the average satisfaction for each student from a 5 to 8.3. This simple experiment shows that when market forces are allowed to take effect people are able to maximize satisfaction by trading what they value less for what they value more.
The only reason this experiment had the outcomes it did is because each participant had their own desired brand of candy that they preferred. It is because of these differences in values that each person had toward the respective candy they had compared to the candy they wanted that allowed a market to form. But is it possible that despite the overall average satisfaction of group being higher, after the trading was allowed, that some participants were going to be happier with their outcomes than others? Does this mean that the system was not fair? If we were to hypothetically judge the success of this experiment by fairness alone, one may argue that the only way absolute fairness can be achieved is if all participants valued their candy the exact same, as this would be unachievable due to people’s differences in preferences then the fairest approach would be to take away the candy from all participants. Put in this light it seems absurd, but often times this is what is done when people are overly consumed with fairness as opposed to overall satisfaction and well being.
Friedrich August von Hayek wrote in his book The Fatal Conceit: The Errors of Socialism that: “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” To demonstrate this point he used the example of the impossibility of central planning to ever be able to adequately determine the most efficient allocation and pricing of basic goods.
Take the example of a gallon of milk. What information would a central planner need in order to decide the appropriate price for a gallon of milk? In order to determine this one would need to know not only the cost to produce the milk at any given time, but the amount a consumer is willing to pay for the milk. But to know the answer to these two questions there are a whole host of other questions one would need to determine. For instance, how much should the all the various workers who are involved in the production of milk each be paid for their efforts: the truck drivers, the farmers, the laborers, the suppliers, logistics coordinators, technicians, etc. But in addition to this, milk can also be utilized for other purposes that would also have to be determined. For instance, how much milk should be allocated for other purposes aside from direct consumption like for ice cream, cheese, butter, etc. In order to determine these allocations all the same multitude of questions need to be considered as it is for the gallon of milk. Then in addition, one would need to know all the multitude of decisions each individual takes into consideration before they decide how much they value milk. Such as, how much money they have to purchase milk, how much they like milk, how much they need milk, any other financial obligations they may have the supersedes their funds for milk, etc.
Very quickly we see that something as simple as determining the appropriate price and allocation for milk becomes an impossible task for a central planner. Yet, we see there is a simple solution that is exponentially more efficient than central planning and also capable of adapting much faster to changes in supply and demand which can be achieved by establishing a market where each of the market participants can each independently agree upon a price. When each person in the entire supply chain can decide for themselves the price by which they are willing to participate in a transaction be it from the truck driver, to the farmer, to the consumer then they can each independently settle upon a price that they mutually agree to.
Knowing the impossibility of the task why would any society ever opt in for central planning of their markets? The reason for this typically always boils down to one single argument that most everyone is incredibly sensitive to: fairness. People who argue for the state, as a central planner, to set market prices always make the argument that the prices are not fair, and require state intervention to even the playing field. This shortsightedness always has unintended consequences, as inevitably there are market participants who will be negatively impacted by such decisions. So in the aim to be more fair, these decisions inevitably leaves most the people involved worst off.
While today people for the most part are not arguing for the government to set the price of a gallon of milk, they are for other market facets which are just as destructive. Take the example of a minimum wage. The argument typically made for a minimum wage is that workers deserve a basic threshold of compensation for their work so they can afford the cost of living in a society. Sounds noble and fair, but what is the reality in the market? When the government sets a minimum price for hour of work all that happens are work that is below that threshold seeps into black markets and people who cannot provide the quality of work at that price point are priced out of the market. For instance, let’s say I want someone to hire a nanny and can only afford to pay someone $10/hour. If the minimum wage is set to $15 then I will just have to forego employing someone for this position. Similarly if there is a person who wants to be a nanny, but lacks the experience and therefore the ability to compete against other nannies who can charge $15/hour that person will be incapable of entering the employment market as their skills are below the artificial threshold set by the minimum wage law.
Or take another example of pharmaceutical drug prices. Governments make the case that they need to set the prices for drugs, because it is unfair for individuals not to be able to afford such life saving treatments. But if the government is going to set the acceptable price for a drug that exceeds the cost for the pharmaceutical company to develop that drug, then these drugs will just not be created as the market opportunity could not be justified for development.
As a last example consider rent control, where the city determines the appropriate amount a property owner can charge rent from tenants. Again the argument is that it is unfair for tenants to pay too much for housing and therefore the government needs to step in to create fairness in the market, but what is the downside of such decisions. It is a proven fact that cities that institute rent control see a decline in low income housing as it does not make sense for property owners to fund housing that cost more to maintain than they can get from rent. We see an increase in luxury housing that are not affected by rent control, and we see many properties go vacant or are poorly maintained because the cost of maintaining the property is greater than what the property owner can make under such conditions.
Notice that in all three outcomes the “fair” solution was achieved by eliminating the people’s freedom to make a choice. Such that, for people who cannot justify an employer paying them a minimum wage to not have a job, for live saving drugs that are too expensive to not be created, or for developers to not create more low income housing for people in need. This is no different than the candy experiment and deciding in order for the outcome to be fair we will just take the candy away from all participants. This is not only unfair, but leaves everyone worst off.
The reality is that we each may put a different value on different things in life, and as long as no one is being exploited and people are free to choose then any form of government intervention will only leave people in worst condition than before they got involved.
Today people often point to the delta in wealth as a sign that this free market has gone too far and it is time for the government to intervene to bring fairness back into society. Typically the poster children for this are the richest people in the world who made their wealth lawfully: Jeff Bezos who is now valued at $200b, and individuals like Elon Musk, Bill Gates, and Warren Buffet who have net worths at around $100b. The question is two-fold:
- 1. did these individuals acquire their wealth through nefarious means?
- 2. Is there wealth to the detriment of other people in society?
Regarding the first question, I don’t think there is much debate that the means by which these individuals achieved their wealth was done through legitimate means. They did not obtain their wealth through rent seeking, government graft, or pillaging from others. Instead they created business that generated millions of happy customers while expanding the economic pie for millions who have built their businesses on top of these other platforms.
So to the second question, is their wealth to a detriment to others. One of the inevitable outcomes of societies where individuals have been able to accrue incredible amounts of wealth, through legitimate means, is that this creates an even wider gap between the rich and poor in such societies. In the August 24th, 2020 episode of Context, entitled “All Things Being Equal,” historian Brad Harris took a look at this question of wealth inequality in society and it’s implications by drawing inspiration from Walter Scheidel’s book, The Great Leveler: Violence and the History of Inequality. In the episode he explored the history of wealth inequality and discussed that societies that inevitably attempt to cure this disparity leave the society far worse off.
What becomes apparent from this analysis is that: (1) societies where individuals were able to be the wealthiest through fair market practices always correlated with those societies thriving the most. (2) The societies that have historically have the lowest disparity between the rich and poor tend to always be societies where everyone is equally poor. This again confirms that the the “fair” solution inevitably leads people less satisfied and worst off by eliminating people to be able to better their situation.
To cite another Planet Money episode that aired on January 20, 2012, entitled “The Secret Document That Transformed China” we see that prior to China moving away from communism toward capitalism most everyone in China was equally poor, starving, and helpless, but after individuals were allowed to trade and mutually transact we saw hundreds of millions of people in China be lifted out of poverty. Now China has some of the wealthiest people in the world which thus increased their gap between the rich and the poor, but despite this economically its people as a whole are exponentially better off now than they were before.
Part of our test in this world is to see what is it in life that we value and give priority to. A trade is always made when we are balancing priorities. While some people will spend this life only to chase the materials of this world like money and wealth, others will spend this life chasing righteous works for the Hereafter.
Choose Your Priorities Carefully This Life
[17:18] Anyone who chooses this fleeting life as his priority, we will rush to him what we decide to give him, then we commit him to Gehenna, where he suffers forever, despised and defeated.
[17:19] As for those who choose the Hereafter as their priority, and work righteousness, while believing, their efforts will be appreciated. [17:20] For each one of them we provide; we provide those and these from your Lord’s bounties. Your Lord’s bounties are inexhaustible. [17:21] Note how we preferred some people above others (in this life). The differences in the Hereafter are far greater and far more significant.
Notice that God is the One who chose to bless some people above others in wealth, status, looks, etc. more than others. This is part of God’s system by which He tests us, to see if we trust in God or not.
[43:32] Are they the ones who assign your Lord’s mercy? We have assigned their shares in this life, raising some of them above others in ranks, in order to let them serve one another. The mercy from your Lord is far better than any material they may hoard.
أَهُمْ يَقْسِمُونَ رَحْمَتَ رَبِّكَ نَحْنُ قَسَمْنَا بَيْنَهُمْ مَعِيشَتَهُمْ فِي الْحَيَاةِ الدُّنْيَا وَرَفَعْنَا بَعْضَهُمْ فَوْقَ بَعْضٍ دَرَجَاتٍ لِيَتَّخِذَ بَعْضُهُمْ بَعْضًا سُخْرِيًّا وَرَحْمَتُ رَبِّكَ خَيْرٌ مِمَّا يَجْمَعُونَ
Because of this, we should never be envious of what God has bestowed upon others, and instead realize that what God gave us is what is best for us. This does not mean that we do not strive to become wealthy and rich so we can do more righteous works, but that we leave the outcome of our efforts to God. A perfect example of this lesson and this balance can be seen in the verses about Qaroon.
[28:76] Qãroon (the slave driver) was one of Moses’ people who betrayed them and oppressed them. We gave him so many treasures that the keys thereof were almost too heavy for the strongest band. His people said to him, “Do not be so arrogant; GOD does not love those who are arrogant. [28:77] “Use the provisions bestowed upon you by GOD to seek the abode of the Hereafter, without neglecting your share in this world. Be charitable, as GOD has been charitable towards you. Do not keep on corrupting the earth. GOD does not love the corruptors.” [28:78] He said, “I attained all this because of my own cleverness.” Did he not realize that GOD had annihilated before him generations that were much stronger than he, and greater in number? The (annihilated) transgressors were not asked about their crimes. [28:79] One day, he came out to his people in full splendor. Those who preferred this worldly life said, “Oh, we wish that we possess what Qãroon has attained. Indeed, he is very fortunate.”
The Real Wealth
[28:80] As for those who were blessed with knowledge, they said, “Woe to you, GOD’s recompense is far better for those who believe and lead a righteous life.” None attains this except the steadfast. The
Tyrants’ Inevitable Fate
[28:81] We then caused the earth to swallow him and his mansion. No army could have helped him against GOD; he was not destined to be a winner. [28:82] Those who were envious of him the day before said, “Now we realize that GOD is the One who provides for whomever He chooses from among His servants, and withholds. If it were not for GOD’s grace towards us, He could have caused the earth to swallow us too. We now realize that the disbelievers never succeed.” The
[28:83] We reserve the abode of the Hereafter for those who do not seek exaltation on earth, nor corruption. The ultimate victory belongs to the righteous.
So next time you may feel frustrated or upset because others have more than you, just remember that all this is a reflection of what the person values. This reminds me of a joke where two economist are going for a walk and one of them sees a fully restored 1969 mustang for sale behind a showroom window and says to the other “I really want that car.” To which, the other economist replies, “no you don’t.”
The reality is that if the economist really wanted that car he would part ways with his money to have it, but thus since he is not willing to do that then therefore he doesn’t really want the car. This is the paradox of value vs. want. There are many things we want, but the question is do we agree upon the value for these things that we want. In a democracy we vote and thus get the government we deserve, while in a market we vote with our money to get what we want, and finally we vote with our time to determine how we want to spend our life. In each of these frames we are making a vote, and based on our priorities we will reap the benefits we deserve.
A great talk about this was made by former professor Clayton Christensen encompassed in his book “How to Measure Your Life.”
To bring this full circle, in order for people to trade two parties need to disagree on value in order that they can settle upon a price and thus establish the transaction. When an authority removes this option from individuals it not only leaves people worst off, but it also is attempting to go against the very system that God has set in place to test us in this world. Therefore, to abide by God’s system people in a society should be free to choose how they want to transact and thus be able to set their own value on the things in this world.