Friday, April 20, 2012

Just prices, elephants and kings



Well I'm not going to get medieval on your rear ends. Yep just price is the old scholastic idea that there is a fair or ethical price that can be charged for a commodity, and beyond that the producer is obtaining unfair earnings. It was the basis for the attacks on usury. David Friedman (1987), in the old New Palgrave (the one edited by Eatwell, Milgate and Newman) argued that the dominant view suggested that the just price was "the price which allowed the producer to maintain his proper place in society."

I wouldn't expect The Economist to come on the side of ethics in market relations, but that's what they have done. The Economist already has a fair price for YPF (see here), the oil company that was partially nationalized by the government of Argentina.
"Argentina could presumably mollify Spain by paying a fair price for YPF—which would most likely be half of the $15 billion or so the company was worth before the Argentine government began harassing it."
Fairness is a strange argument to use in favor of Repsol (the Spanish firm that owned most of YPF). They bought it for $13 billion in 1999, made $15.7 billion in in dividends over the whole period, plus $6.2 billions for the selling of part of the assets. So they made approximately $8.9 billions. And the fair or just price would be another $7.5 billion according to The Economist.

Of course, this price is not connected to the value of the assets, or how well the firm was managed, which says how much it can produce (output in 2011 was at 61% of the 1999 level). It must be a way for Spain to maintain its proper place in the world. Or at least the King, who is apparently incapable of maintaining his elephant hunting hobby. God save the King, then.

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