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The Value of Haggling

I read a post about whether or not to haggle over on Brave New Traveler. The article implores you to look at the bigger picture view. They come to the conclusion that you shouldn’t bargain too hard with the locals because you’re really rich and they’re not. I’ll give you a couple more reasons not to haggle too hard and then tell you why I usually haggle my ass off.

The article talks mainly about costs relative to the locals’ income, but how about relative to your income? If you go home empty handed, you’ll feel like you lost out. Think of how much your trip cost you, versus how much you’re arguing over. It’s not worth it. And think of how much you make per hour back home. Odds are it’s several times the amount you’re haggling over. Besides, what would you pay to not regret walking away from a cool item once you get back? I’d wager you’d pay more than you’re arguing about, but less than the price to go back there and buy it this time.

But then consider the local economy as the real big picture view. If you don’t haggle down to a reasonable local price, you drive up the price due to resource scarcity. Yes, that may be a small effect akin to the impact of one person’s vote in an election, but the aggregate effect can hurt. You can also contribute to inflation, thus reducing the buying power of non-merchants who don’t have a ready stream of inflated income. Then there is the effect of high prices on the local job market. If the tourist merchants make a lot of money, the others will not be far behind them in setting up shop, creating a flood of merchants and reducing the size of the work force to do other essential tasks.

I met Jeppe Jungersen on a plane after he was involved in shooting Makibefo – an adaptation of the Shakespeare play – in Madagascar. He said the crew had to very carefully manage the economic risks before, during and after shooting. The balance they had to strike was to get enough people to act in their movie without stopping people from fishing or creating income inequalities among the villagers. The crew hired a local from another area to act as a language, cultural and economic translator. They about paid the same for all actors and extras as the locals would make from a day’s work fishing. Incidentally, that also meant that the actors weren’t just in it for the money, but were there because they really wanted to be.

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The Invisible Hand in a Global Economy

In The Wealth of Nations, Adam Smith introduced the concept of The Invisible Hand. Buchholtz puts it this way: “…market competition leads a self-interested person to wake up in the morning, look outside at the earth and produce from its raw materials, not what he wants, but what others want. Not in the quantities he prefers, but in the quantities his neighbors prefer. Not at the price he dreams of charging, but at a price reflecting how much his neighbors value what he has done.” In other words, this self-interest drives creation of something of benefit to someone else – and to society in general!

The Invisible Hand, in a sentence, states that “The market place will not support a business that does not proffer a good or service that is more valuable than the sum of its raw materials.” In other words, if it costs you $50 to make a table but nobody will buy it for more than that, you go out of business and the resources are used by someone else. This is actually a preservation of scarce resources in a more efficient way than any central planning committee could manage!

That’s a policy that is more relevant in our times than “from each according to his means, to each according to his need.” For right now, many of us are living beyond our means and we are all in need of something. In our global economy, as our society of consumers grows and diversifies, we increasingly cede control of these resources from our local economies to the global one. So others are making resource allocation decisions for materials we may want for ourselves.

Not only that, we have a problem with the residue of the production of things. Pollution is the residue. The problem with pollution is that it does not function according to the Invisible Hand. For the person who buys the good that led to the pollution, the individual cost he pays is low compared to the value he receives. But for the person who hasn’t acquired that product, the pollution is only harmful. The cost is infinitely high. This is called the tragedy of the commons.

The true cost of producing a good, therefore, is the cost of producing it without negatively impacting ANY parties who receive no benefit. In other words, the only by-products or side effects which exist must be directly proportional to the amount of value received. One way to assure this is to force companies to produce zero pollution, with the by-product being a higher cost to the consumer.

I read somewhere that making a H2 actually causes less pollution than making a Prius. For a second I’d like to forget about whether that’s a fact or not and just suppose it is true – I’m trying to make a point. The consumer would have a choice between two vehicles which reflect the true costs of production. What about the gas you might ask. How about a gas tax which is used to fund carbon sinks around the country? Again, it’s about reflecting the true costs in the price.

Why haven’t more environmentalists adopted Smith as their champion? A law based on his work might well require a manufacturer to produce zero pollution that couldn’t be safely locked away somewhere. It would be in the same spirit as anti-trust legislation: protect the market forces and let them regulate. And it would be very simple to enforce, too. I can see a time when it would be unthinkable for a country NOT to have these laws in place.