When should we get to choose the price?

Imagine two groups of people. Let's called them Group A and Group B.

All the people in Group A get together and decide that they are going to agree on what they think their efforts are worth for what they do a living.

All the people in Group B get together and decide that they are going to agree on what they think their efforts are worth for what they do a living.

These two groups both appear to have performed the same process to reach a decision and yet what Group A did was completely legal while what Group B did was completely illegal. Can you tell the difference? No? Before you go there, neither group makes a living doing anything illegal. So what could possibly be the difference between them?

Group A is made up of people who are all employees of a company (or several companies) and have decided to unionize. When they get together to decide what they think their efforts are worth, it's called collective bargaining.

Group B is made up of executives of various companies. When they get together to decide what they think their efforts are worth, it's called price fixing.

Why is one legal and the other not? Let's examine that. Both groups understand that there is power in numbers. By agreeing as a group to the price of their efforts, they have more power. They are cooperating with rather than competing against each other. The result of this is that the consumer of their efforts (the person or entity paying them for their work) is denied the ability to get the best possible deal by finding out who values their efforts the least. They can't find the individuals that are in the sweet spot, that near-perfect blend of skills and required compensation.

In the case of Group A, it's the employer who loses this ability. Ultimately what they pay members of Group A gets standardized. Of course the quality of the everyone's work is not the same. Some do better work than others and yet, for the most part, all get paid the same or at least on the same scale. Yes, someone who is a real slacker may not get promoted to the next pay level but individuality is absolutely sacrificed for interests of the group. In a way, everyone also suffers as a result.

In the case of Group B, it's the customer that loses the ability to get the best deal.

Let's assume for a moment that price fixing was not illegal. Would competition go away because many companies might choose to get together with their competitors and agree on fixed pricing, basically agreeing not to compete? In most cases, it's not likely they would or that it would last if they did. Why? Because in the end, most want to maximize profits. You don't do that by agreeing not to compete. Instead, profits tend to stagnate. Such an agreement also suggests that there's room in the market for another competitor who will ultimately arrive if the market forces are allowed to work. And when that competitor comes on the scene, the others will no doubt have become fat and lazy. They will be easier to compete with because they have gotten out of the habit of competing.

What about Group A? Can't their consumer (the employer) simply go elsewhere to get a better deal? They can if they are willing to hire people from outside Group A who will bargain independently for their efforts allowing the employer to get the best deal. Of course the more in-demand the skills of the people in Group A are, the more they can demand in compensation from their employer. This is the market working: supply and demand. Does it feel good to have skills that are not in great demand? No. Does it feel good to bargain with your employer about your compensation? Most people would say no. It also does not feel good to set prices for your products or services only to find that the market doesn't value them as much as you do. Some find their businesses simply won't make money as a result. But again, this is the market at work. Supply and demand sets the price of things.

Now there are times when only a few companies or even a single company seem to be able to produce a popular product or service and as a result, they charge more and thus make more money. However, these are rare and don't often last long. Profit attracts competition like bees to flowers. The same is true of high-paying jobs. The job market is (for the most part) just that: a market. We all enter that market with different skills, opportunities and ability to get the most from that market but that's a blog post for another day.

Objectively speaking, collective bargaining and price fixing are two forms of the same thing. They both are designed to limit the options of the consumer in order to get a higher price that a normally functioning market would not allow. However, we don't always make laws based on objective logic and reason. Emotionally, most voters can relate to Group A more than Group B because most voters are members of Group A rather than Group B. The reality though is that the people in Group B are just that: people. They are trying to make a living and often have a lot at stake.

What most people don't seem to realize is that the overwhelming majority of the employed (at least in the US) are employed by small businesses. These are companies started by individuals at great personal risk considering that the average business fails in the first year and those that survive mostly fail in 5 years. So if you've started a business and made it more than 5 years, you are truly the exception to the rule. Congratulations. The market is unfortunately littered with the corpses of failed businesses. That's just economic evolution for you. When one fails, the employees can typically get new jobs quickly if their skills are in any kind of demand. The employer on the other hand, has often lost most or all that they had. They are in deep trouble. However, that's the risk and they knew it the day they opened their doors.

If we are going to be consistent, we should decide which is OK, that groups can agree upon pricing or they can't. I personally don't care for people agreeing on pricing because it creates a somewhat artificial island in the market. However, I also trust the market to correct for this on its own eventually if it's important enough. Yes there are those with influence that can use the law to tip the market in their favor. That's a real problem and it's why we need to get the big money out of politics. However, that's also true when we pass laws that restrict the market in nonsensical ways.

Having said that, markets are not perfect because they are populated with imperfect people like you and me. As a result, they tend to be short-sighted. That's why some oversight is really needed. Unfortunately that same short-sightedness prevents us both from knowing when to just let the market figure it out and when that's to our collective detriment.

There was also a time when the scales were absolutely tipped in favor of big businesses. People didn't have easy access to as many potential employers and it was more difficult for small companies to reach potential customers. However, times have changed as they always do. Companies can't take advantage of their position with employees as much as they might of in the past. It's too easy for many to find new jobs and word spreads quite fast these days. When a big company does something stupid, we all hear about it faster than you can say, "retweet."

In the ideal world, we would each know which companies were run by honest people and which were not. We would steer clear of the dishonest and they would suffer learn as a result. We don't live in that ideal world but if you shoot for the stars, you just might land in the trees. I encourage each of you to be even more honest and expect honesty from those with whom you work and from who you purchase.

If we leave anything to the next generation, it should be a world that is more honest and rational than the one we were given. There are few problems that can't be solved when honest, rational, objectivity is applied.