Morality, technology and impact on prices

The moral leanings of a society can be influential in determining at what price goods are sold.

LONDON:

There is a definite relationship between prices and morality. In theory, prices should be low and stable in an environment in which ethics-conscious economic agents interact and trade. Technology further assists in inducing moral behaviour in society in general, and in the marketplace in particular; but this has associated costs.

One (economic) definition of morality entails voluntary self-monitoring by economic agents. To illustrate the relationship between morality and prices, one may consider the example of a prevalent practice in the English countryside of selling vegetables from an un-manned table in front of the seller’s house. Buyers, who choose to purchase the vegetables, pay by dispensing the precise amount as listed into a box next to the vegetables. A similar practice can be observed in many Malaysian universities wherein bottles of mineral water are kept on un-manned racks in different departments, and students wishing to purchase bottled water do so by depositing a ringgit (the price of the bottle) in a moneybox attached to the rack. Such trades work because buyers do not cheat, that is, they do not take away items on sale without paying for them.

In comparison, within an environment characterised by moral hazard, sellers have to incur additional costs on monitoring and supervision by manning the stalls. Alternatively, sellers may use automated vending machines, which also have cost implications. This means that in a marketplace where traders exhibit a lower moral threshold (bribing, taking the opportunity to appropriate an item but not paying for it, etc), there are additional transaction costs which push prices up.

In a trade, it is difficult to ascertain the moral compass of a buyer; which imposes a cost on the seller. Transaction costs – in this particular case – are costs associated with removing the possibility of loss that one may suffer because of dealing with a transacting party whose moral credentials are unknown or questionable. Sellers, faced by such transaction costs, simply add the morality risk premium to prices they charge. One may call it a morality risk premium.

Such a premium is difficult to calculate given the abstract nature of morality. However, looking into more tangible outcomes such as corruption, one can hypothesise that in the absence of appropriate, affordable technology, immorality and moral hazards result in higher transaction costs and prices. Pakistan provides an appropriate case in point, and it would be interesting to find out empirically as to what possible effect corruption and other forms of moral hazard may have on prices in a country where corruption is perceived to be on the rise.

Intuitively, one may conclude that morality and prices are negatively related: that is, prices tend to be higher between economic agents with a lower moral code or standard. Thus, rampant corruption can at least partially be blamed for higher and rising prices in Pakistan. Other demand-pull and supply-push factors remain relevant to the determination of inflation in the country.

In countries with significant corruption, producers factor in the ‘corruption proportion’ (bribery, kickbacks and other hidden fees) when pricing the goods and services they produce. Furthermore, higher transaction costs – especially in the absence of technology and other forms of protection like insurance – also play a role in determination of prices.

In such an environment, higher prices are not only a private sector phenomenon. They also apply to production of goods and services in the public sector. Governments targeting to reduce illegal practices are now employing technology to reduce their incidence. For example, technology has played a definite role in bringing down a lot of malpractices in the issuance of driving licences, collection of speeding fines, passports and many other such services. However, this has also resulted in increases of prices of these services. A portion of the higher prices are certainly due to the higher costs of the technology used in the production of such services. Religion may be a cheaper substitute for inducing morality, but it appears as if the religious authority has also lost effectiveness in Pakistan.

The writer is an economist and PhD from Cambridge University.

Published in The Express Tribune, May 14^th, 2012.