There is a myth that any negotiated agreement must be a fair one, or the parties would not have agreed to it. To this, I’d like to present a counterexample.Imagine you are at your job one day riding in the elevator. Your boss and his nephew are the only other people in the elevator. Your boss says to you, “Give my Nephew $100, or I’ll fire you.” Is this fair for him to do to you? Certainly not! Now, you may refuse and if he fires you sue him in court. But you may lose in court. After all, there are no witnesses besides your boss and his nephew. And your boss can cook up any number of pretexts to say why he fired you. So you may decide to pay the $100 rather than suffer the costs of a court battle, the risk of losing in court, and the hassle of finding another job. The point is that it is unfair of your boss to put you in this situation.
Now let’s add some negotiation. Instead of demanding you give his nephew $100 your boss lets you and the nephew negotiate. If you can reach agreement you and the nephew can exchange anything you want. If you cannot reach agreement you have to give the nephew $100. Do you think you will get a fair deal because you got to negotiate?
Well, if you offer the nephew anything worth less than $100 he will refuse and make you give him the $100. But maybe the nephew wants a stereo and you happen to have one that you don’t use anymore. He values it at $200 while you only value it at $50. So you sell the nephew the stereo for $100 and you wind up ahead $50 so that’s fair right? Wrong. The nephew knows the stereo is less valuable to you so if he demands you give him the stereo for free you might agree to it because it only costs you $50 instead of $100. So you negotiate and you wind up selling him the stereo for something between $0 and $100 depending on who is a better hard-nosed negotiator. Lets say it’s $25 for the sake of argument. So you’ve only lost $25. Less unfair than $100 right? Wrong.
Since the nephew values the stereo more than you that’s a trade that you two could have made anyway without your boss’ ultimatum. If you had negotiated without the influence of your boss you two would have agreed to trade the stereo for $125. Then you would have lost a $50 stereo and gained $125 cash. You would have been up $75. Instead, you are down $25, or $100 lower than you should be. Once again the $100 unfairness comes through.
This same situation occurs even if you can give the nephew something worth $100 that costs you nothing. Maybe you know a hot stock tip. If the nephew is a good negotiator he will demand the stock tip plus $50. So you are down $50, and without the threat from your boss you could have sold him the stock tip for $50 and been up $50. Once again you are $100 below where you should be, and it doesn’t matter what you and the nephew actually negotiate
The underlying principle in this situation is duress. You are unfairly in a state of duress, placed there by your boss. Negotiation does not eliminate your duress. It just allows more options for how you can be taken advantage of. Negotiation does not change the fairness of the situation surrounding the negotiation. The result of negotiation will be just as fair or unfair as the situation that results if no agreement is reached.
Here’s a more blunt example. You are kidnapped. The kidnappers threaten to kill you. You plead for your life. You offer ransom money. The kidnappers say no and kill you. The fact that you negotiated about ransom money does not make the situation fair.
It is never the case that an economic system is fair because of negotiation. The system may be fair or unfair, but negotiation is never the cause of that. Negotiation does not cause fairness, it merely reflects the fairness or unfairness of the surrounding situation. Creating a fair situation where all parties can say no deal without duress is a necessary precondition before fair negotiations can take place.