As All England Club strives once more to foil ticket touts, the professional economist views the idea of the “just price” with patronising and detached amusement. But is he right?
In the last two weeks, most people’s attention has been focused on whether Tim Henman could finally succeed at Wimbledon. For business economists, however, the interesting events were outside the Centre Court. The All England Club took out injunctions to clear ticket touts from the streets of Wimbledon.
Ticket touting is one of the issues which sharply divide economists from the rest of the world. Touts have a bad reputation. The tout is the archetypal middleman. The ticket he sells is – if you are lucky – the same as the ticket he buys. He adds no value; he profits from being in the right place at the right time. And even if Henman is there, most people feel that Centre Court tickets ought not to be sold for £1000. Prices should be fair. Matthew Parris writes of his aunt ‘who votes Conservative, takes the Daily Telegraph and regards socialism as the work of the devil’ but for whom ‘a fair price is what will secure a reasonable profit after paying employees a decent wage.’ (Times, 21 December 1992)
The professional economist views all this with patronising and detached amusement. Being in the right place at the right time is one of the most valuable services in the market economy. He views the concept of the just price with ridicule. Aristotle and Thomas Aquinas may have approved it, but today they would fail their preliminary examinations in any good university. In the Thatcherite years The Economist magazine would regularly deliver a defence of touts. “Burly policemen set upon groups of entrepreneurs; the crime of these young businessmen was to sell tickets for the well-known tournament at more than the price dictated by their monopoly supplier.” (1988) “Scalpers are fighters for justice” (1991).
And I owe the Parris quotation to Sir Samuel Brittan, for whom the absurdity of Parris’ aunt’s views needs no elaboration. ‘I have made a few soundings of my own among business journalists, who might be expected to have a higher degree of sophistication. But even here I find great resistance”.
Now the free market position has obvious force. I have a ticket for Wimbledon but, because I am poor and not very interested in tennis, would prefer £1000; you would willingly part with £1000 to be there on finals day. It is difficult to see why the police should devote time and energy to preventing this mutually beneficial exchange. We would not retain laws against burglary if people wanted to be burgled. The tout who brings us together is doing a service to you, me and economic efficiency.
That is what I used to think, which is how I got through my economics exams: but now I am not so sure. Doubts first began to creep in during the property market recession early in the decade. We tried to let an office. The agent advised us to put it on the market at £27 per square foot. He told us it would be hard to rent. He was right. After a couple of months, no-one had come to see it.
We walked into his office with the condescending smirk that is the badge of the professional economist. We believed in the laws of supply and demand, and if we could not let our property it was because the price was too high. We told him to reduce it to £22 per square foot. He shook his head, but we insisted.
Again, he was right. No-one came to see our building, and eventually we accepted the agent’s advice and put the rent up again. Finally, a prospective tenant arrived and liked the building. We gave him a suitable rent-free period and other sweeteners and his company moved in. I am sure they prospered, even if they paid too much.
As I reflected on what had happened, I understood that the agent’s claim that £27 per square foot was a fair rent for the property was not the economic absurdity I had thought. Properties are complicated and idiosyncratic. Even elaborate descriptions tell you much less than you need to know. When we quoted a price, we were not just trying to bargain, we were saying that this was a £27 per square foot property.
And when we offered it at £22 per square foot, prospective takers did not think they were getting a bargain. Nor should they: economists would have told them that bargains are few and far between in an efficient market. They thought there was something wrong with our premises which was not revealed in the particulars. By cutting the price we had made our offer less attractive, not more. And the best strategy was the one the agent advised – waiting for someone for whom our property was exactly right.
And that is why the property market works as it does. Prices do not rise enough to clear the market in booms, or fall enough to clear it in slumps. There are shortages and gluts as well as fluctuations in prices. Price adjustments often take the form of douceurs rather than variations in the headline rent. And estate agents quite properly hold to a concept of intrinsic value which is distinct from market price.
And the same is true in the employment market. If someone calls you and offers to work for 20% less than the going wage, you are less, not more, likely to give them an interview. You suspect there is something they are not telling you. And that is sufficient to explain why wages, like rents, don’t necessarily adjust across the economic cycle to eliminate unemployment.
Concepts of fair and just prices, far from being badges of economic illiteracy, are important to making free markets work. Aristotle, Aquinas and our estate agent knew something that professional economist don’t.