Munger's project aims to identify why it is that some seemingly voluntary transactions are seen as morally repugnant by most people, and are either socially disapproved of or outright outlawed. So for example, say that Frank is very poor and desperately wants to provide for his family. Tom is very rich and is loosing eyesight in both his eyes. His doctor believes they can pull off a revolutionary new surgery and transplant a healthy eye into him, but they need the eye of a live, healthy person who matches Tom's blood type and DNA well. Frank is a match and is willing to give up an eye in return for a million dollars.
Now, there are a few people who lean heavily in the rationalistic direction who would say this sounds like a great idea because it makes most people better off, but most people would react to this with revulsion, and it is in fact illegal to do this kind of thing in the US.
The interesting thing is that voluntarily donating an organ (so long as giving it up isn't considered too big a detriment to you) is considered morally admirable, and is legal. So, for instance, there was a case a year or two ago in our parish where one young woman in the parish donated a kidney to another parishioner who needed a transplant.
Munger's argument is that in the Frank and Tom example, the transaction may seem voluntary but it's not really voluntary because of the disparity in means between Tom and Frank. Transactions that are really, truly voluntary (euvoluntary) are, he argues, always just, at least, in and of themselves as transactions. This is leaving aside the question of whether the thing one seeks to procure is something which you should have or not -- say weapons grade plutonium.
The reason why we're comfortable with someone donating a kidney but not with someone selling a kidney is that in the case of selling the kidney we assume that someone may be doing the act out of desperate need for money rather than a true desire to help. Thus, we approve of the donation of the kidney because it is clear that it's motivated out of a sincere desire to help the other, but we deprecate the selling of a kidney because we fear that someone is being taken advantage of.
To distinguish between euvoluntary and non-euvoluntary transactions, Munger suggests that we'd look at the BATNA or Best Alternative to a Negotiated Agreement.
The example that he gives is as followed (rewritten because the transcription is a little hard to follow, sounding too much like conversation): Say you walk into the grocery store and you see that they're selling bottles of water for $1000. This is totally outrageous, but there's another store right across the street selling water bottles for $0.99, so rather than getting upset you walk across the street and buy water for a dollar. The $1000 price may be stupid, but it isn't seen a really wrong because your alternative to paying that $1000 price is just a five minute walk and a good laugh.
Now, say you've been lost in the desert for two days and you're on the point of dying of thirst. Someone drives up in a Jeep and you ask him if he has a bottle of water. "Sure," he says, "But it'll cost you $1000." When you hesitate, he starts to drive away, leaving you to die. So you agree to give him $1000 for his water.
I think most people would agree that this was an incredibly unjust thing to do, and the reason, Munger argues, is because there's a huge disparity in BATNAs between the two parties in the exchange. If the guy in the Jeep doesn't make the sale, he just drives on and is none the worse. If I don't buy, I die. Thus, the transaction is seen as unjust because it's not really free -- no more so that if he put a gun to my head and demanded a thousand dollars -- even though both parties are, on the face of it, better off because of the transaction. (You don't die of thirst and the guy in the Jeep has $1000.)
Now, I'm not entirely sure whether this is a moral intuition that we have (we certainly treat it as one) or if it's just a matter of social conditioning: we as Americans don't like things which we see as unequal or unfree. But it becomes an important question because through this moral sense we sometimes avoid transactions which could arguably benefit both parties a lot -- usually the "unfree" one far more than the better off one. Russ Roberts provides some interesting anecdotes later in the interview:
[These are from the show transcript, so forgive the conversational tone.]This is pretty much exactly the kind of thought process which often causes people to impose regulations (say relating to third world manufacturing, or to child labor) which end up hurting the people they seek to help. No question, it's appalling that people should be working away for fourteen hours a day sewing undershirts for only $2 a day, or that twelve year old kids are working in factories, but often these "sweatshop" and "child labor" conditions have waiting lists, because the alternatives for those seeking work are picking over garbage heaps or being sucked into prostitution at age 12 rather than factory work.
[O]ne of the students in the class told me a story I found fascinating and that relates to what we've been talking about. She had been visiting in Nepal, and she had clothes that needed cleaning; and she found out she could hire a washer woman to do your clothes for you. No washing machine or laundromats where she was. So, she went to hire someone and the wage was so appallingly low--let's say it was ten cents an hour--she was so horrified that she decided not to hire this woman. It would be exploitative.
I said: You've exploited her by not exploiting her. Maybe she'll only find something much worse. Maybe she'll take it voluntarily, not euvoluntarily. She was looking for work. Maybe she had a hungry child or needed money for medical care; she was desperate enough to work for ten cents and hour; and the student refused to engage in this transaction allegedly because she cared about the woman. As an economist this is very difficult to understand. The more I thought about it, the more I understood it.
When I tell this story to my students, one of the reactions is always: She should have paid her more. Then you ask the question: How much more? American minimum wage? American living wage? And if you offered her $10 an hour instead of ten cents an hour, what would her reaction be? Would she be thrilled? Offended? Where would the line form when the word got out that you were paying 100 times the going rate. There'd be a giant rent-seeking contest. How would you deal with that. I put myself in my student's shoes and tried to think about why you could come to that conclusion and feel good about it. It's the disparity in betnas. This is a student who was going to come back to American life, earn an extraordinarily large income by Third World standards and perhaps even a decent income by Western standards, and certainly compared to this woman. The gap between their wellbeing was so large over a lifetime that this was simply an unimaginable transaction. It's as if that transaction is inherently exploitative, not because of the features of the transaction, but because of the disparity in betnas. Because both people clearly could be made better off? Why wouldn't you joyfully engage in this transaction? She couldn't do it. The punchline to the story is that she did her own laundry, threw out her shoulder, and ended up hiring the woman anyway eventually.
The personal experience that I had like this was I was once house sitting for someone while I was in Santiago, Chile, working at a think tank there the summer between years in graduate school. And it turned out that with the house there was a cook. So, I came home the first day I was house sitting and I put my feet up on the coffee table to read the newspaper, and a woman comes out of the kitchen and asks me in Spanish what I'd like for dinner. And I said: What do you mean? And she informed me she was the cook and was going to make whatever I wanted. And I was extremely uncomfortable with this; I said: Well, make whatever you feel like. And she was extremely uncomfortable.
So we eventually came to some conclusion about what she was going to cook, and she's in the kitchen cooking and I'm in the living room reading and I realize this is making me very uncomfortable. This woman is cooking for me who I'm only implicitly paying. She was being paid, but only a small amount. I went into the kitchen to chat with her, which totally violated the social norms; she was very uncomfortable. We proceeded to have an awkward conversation in very bad Spanish. I asked what music she liked; she liked Frank Sinatra and Julio Iglesias. I came to like Frank Sinatra.
[Munger] It's painful to hear this.
[Roberts] The next part was the more interesting part. I thought, sports is something people have in common; I asked her what her favorite football, soccer team. She rooted for Colo Colo, which is what the poor people in Santiago rooted for.
[Munger] You could see that coming.
[Roberts] And of course, all my friends rooted for Universidad de Chile. And I have to mention--what I loved about soccer in Chile, when my friends told me that was their favorite team I asked how it was tied to the University of Chile. They said: Well, there isn't one. I said: What do you mean? They said: They just use the name of the school. I thought how nice, because in America we pretend that the people with the name of that team are associated with the school--in fact, they are kind of like employees, unpaid employees in college. But here they actually totally sever the connection. The Duke University basketball team could be, like, the Celtics. But anyway, I realized again the disparity in our lifetime situations was just inherently uncomfortable. I did not like this woman cooking for me.
[Munger]You felt you were exploiting her somehow.
[Roberts] Right, and I was trying to soften that by chatting with her. As if that was going to help. Oh good, he came in to chat with me--
[Munger]--is he going to grab me?
[Roberts] Not just that. I don't think that was the worry. First, I violated the social norm that I'm trying to make conversation with her, and two, my conversation is not very good; all it does is enhance the feeling that I'm the Universidad de Chile fan and she's the Colo Colo fan. It was a total failure. I would have much preferred that she would not cook for me. I didn't want her there. I didn't want her to do that.
[Munger] Maybe even to the extent of if they had offered, you wouldn't have fired her, but if you said--maybe they'll give her a sabbatical, we'll give her the month off. And they wouldn't have paid her.
[Roberts] I would have said: Great!
[Munger] My question is: how much would you have paid to avoid having to deal with that, with that sense of exploitation?
[Roberts] The answer is some. Maybe even up to the point of saying: Lay her off for a month.
[Munger] Even though you wish her no ill.
[Roberts] Correct. It was an uncomfortable experience. It gave me an insight into my student, when I thought back on it. I think it's really no more complicated than that--just having such a big disparity in life situation. And in particular, if some of my life situation is contingent on the consummation of this contract. That explains why all of these different transactions are illegal, why all of these different situations we feel bad about if not formally illegal. Maybe it's not a transaction, but a sort of social relationship.
To the extent that we often leave people in even worse conditions for fear that engaging in business with them would be exploitive, it seems like the effort to understand why we make these moral intuitions (and how valid they are) is important. I'm not sure that Munger has really got much further than describing the phenomenon, but it seems an interesting and important first step.