Bart Wilson  

Reclaiming Fairness as a Precept of Commerce

Who Treats You Worse?... Henderson on Fama, Shiller, an...

Fairness isn't an end commonly associated with markets. If anything, our empathetic instincts often lead us to view the outcomes of competition in the marketplace as unfair. But fairness as it relates to markets wasn't always such a hazy concept. Fairness was once, perhaps originally, a precept of commerce.

In 1755 Samuel Johnson published "A Dictionary of the English Language," the most commonly used and respected English dictionary for 150 years until the Oxford English Dictionary came along. While his etymologies are considered to be notoriously bad, his meticulous examples of the many nuanced meanings of words are quite well respected, and it is with these that I distinguish the mid 18th century meaning of fairness and unfair from our everyday modern sense and use. Johnson's second definition of fairness (the first is beauty and elegance of form) is "honesty, candour, and ingenuity [ingenuousness]," as in, "There may be somewhat of wisdom, but little of goodness or fairness in this conduct" (Atterbury's Sermons, Preface). His definition of unfair has a similar but negative ring: "disingenuous, subdolous [literally translated from Latin as 'slightly/under deceit'], and not honest."

In experimental economics, the ultimatum game is considered to be the canonical experiment to demonstrate that "fairness" matters in game theory. One person, the proposer, offers to split $10 between himself and another person, the responder. The responder can either accept the split, and both go home with their respective windfalls. Or, the responder can reject the offer and both leave with nothing. When one considers the ultimatum game, we can see that the 18th century concepts of fairness and unfair don't seem to fit. If a proposer offered $1 to the responder, the exclamation "That's unfair" would not mean "That's not honest" or "That's deceitful." Everyone knows the rules of the game beforehand, so there's no deception on the part of the proposer.

Johnson's illustration of the meaning of unfair is even more enlightening. He cites Jonathan Swift's correspondence to his good friend Alexander Pope in 1737: "[Y]ou come like an unfair merchant, to charge me with being in your debt." Interesting. Johnson's best context for the use of unfair involves merchants. How is a merchant unfair? By unscrupulously padding the scales or fraudulently describing the contents or efficacy of his wares.

There are two take-home points from these observations on the use of the words fairness and unfair in the 18th century. First, fairness and unfair involve the conduct of the person in question, the means by which people go about doing what they do. At the deli in my grocery store I can't detect, visually or by holding in my hand, whether a pile of shaved ham is 16 oz or 14.5 oz, so I'm happy with what I see whether or not the clerk is actually cheating me. What would tick me off is discovering that the merchant altered the scale by 1.5 oz in his favor.

In contrast, the modern sense of fairness and unfair focuses on whether or not the ends are beyond proper according to the standards of some like-minded individuals. When we as a proposer in the ultimatum game consider the circumstances of the responder, we imagine what it would be like for ourselves to receive a low offer and that imagining is what pricks our modern sense of fairness. What makes the proposer so special in this experiment? The happenstance of sitting in the right seat in the laboratory?

Secondly, notice how the 18th century sense of fairness is not as fuzzy of a concept as it is today. People aren't kind of honest or sort of deceitful. Either they have crossed a line with their behavior or they have not; as with a hit in baseball, our conduct is either within the wide bounds of fair play or it's foul, the original antonym of fair. We say that somebody is honest when he could have not been honest and instead chose to curb his conduct. As a social species we order how we go about our daily lives with general abstract rules of conduct, and an intricate part of perpetuating these customs is having minds adapted for detecting violations of these rules of conduct.

When our focus on fairness shifts from the process by which things happen to the outcomes of processes themselves, that's when things get hazy. Focusing on the outcome means we have to imagine the process by which we get to this point, and different subsidiary perceptions of a process are invitations for disagreements. Is proposing a $7/$3 split fair? Kind of. Maybe. To the responder and a first time experimental participant, maybe not: Picking the proposer seat was dumb luck and from past experience we have learned that windfalls from dumb luck ought to be shared equally. To the proposer who regularly participates in experiments, sometimes you get the good seat and the good payoff, and sometimes you don't. This time as the proposer he got the good seat and he's taking more than half. Not all but one dollar, just seven of them.

Fairness as an evaluator of outcomes is thus prone to perceptual disagreements on what is the right thing to do. In the case of the ultimatum game that means both people may end up with nothing. It also means that fairness of outcomes isn't very helpful for understanding what people will do in an ultimatum game. If $5/$5 is fair with one set of procedures, is it fair when the proposer has earned the right to decide the split? Maybe $7/$3 now is. But do both the proposer and responder share that positive assessment of the outcome? Who knows?

Fairness as an abstract rule of honesty, however, is useful because it involves a negative test. Sure, there can be be disagreements on what constitutes a deceitful act, but the range of unforeseeable applications and of possible consensus goes way up as a negative test of actions. I don't know all the ways that are possible to pass off other forms of meat as beef, but when a grocery store says that it is selling 100% ground beef, by the precept of fairness I and everyone else who buys that meat can expect that we are indeed buying 100% beef and not beef with a little bit of horse, even if we can't taste the difference. Fairness as a precept of commerce demarcates the line separating fair means from foul; either you are misleading by false appearance or statement or you are not.

COMMENTS (4 to date)
Larry writes:

I delight in asking readers of various econoblogs how they define "fair", particularly in the context of income (in)equality. I note that thinkers including Marx, Rawls, Friedman and Rand offer such definitions.

The responses I get generally state their "fair" outcome and omit to give a rationale. I'd be interested in comments here, too.

In our time, fairness seems somehow to relate to justice, as in "Golden Rule"-style ethical beliefs This is then extended to less personal realms where there is no specific individual bad actor, but things are unfair just the same.

Hazel Meade writes:

Actually, many arguments for free markets are deeply founded in fairness principles.

For instance, it's unfair for the government to pick winners and losers. It's unfair for some people to be able to use political influence to gain an advantage in the market.

It's unfair for people who have earned their money fairly, to have it taken by force and given to someone who has not earned it.

It's ALL about fairness. The problem is we've got a whole group of people that equate "fairness" to "equal distribution", when actually "fairness" can mean all sorts of different things.

Libertarians subscribe to "rule fairness" which is that the rules regulating the markets must be the same for everyone and must be equally enforced. Obviously, vast amounts of our tax and regulatory structure right now are deeply UNfair according to that principle.

Arthur_500 writes:

I always marveled at the parable from the Bible in which workers are hired throughout the day. Each set of workers is hired for the same pay. None of the earlier workers knew that others would be hired later or what they had been offered. They gladly accepted the proposed wages and went to work.
However, at the end of the day they grumbled about what they were paid in relation to what later hires were paid. The discussion is that they were happy with those terms when they were hired so why complain now.
Is this unfair?
If I accept a 1/9 split of that $10 game and am happy it is fair. If I don't accept that split we can either both go home or re-negotiate and both go home happy. However, any result is fair since we both have the same opportunity to be happy with the outcome.

Bob Lince writes:

A reputable casino succeeds by, among other things, offering scrupulously honest games of chance, the payout odds of which are unfair.

The games are honest in that the dice are not "loaded," the wheel is not "fixed."

The odds are unfair in that the expected value of the game to the two parties (the house and the player) are not equal.

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