Tag Archives: markets

Greed and Envy

Posted on by
Reply

Caution: long post….

Greed is wanting more than we have, not because we need more, but simply because we’re dissatisfied with what we have.

While Dante defined envy as “a desire to deprive other men of theirs,” modern usage stems from another meaning: a painful, even resentful, knowledge that someone else has something that we lack, and we want it, too.

But “Greed is good,” Gordon Gecko said, and he wasn’t far wrong.  More accurately, we should never underestimate the power of greed to do good in the world.  Envy is a part of this, in a way; it’s another aspect of greed: it can give a focus to what it is we want that’s more than what we have: sometimes we want that specific thing that he has, if only because he has it already.  Adam Smith understood this; these are his invisible hand.

To greatly oversimplify things, here’s how that invisible hand works.

A man wants something he doesn’t have; he may not be entirely clear on what it is, but he can describe his shortfall at least to some extent.  Another man offers to develop and then make a widget which he says will generally satisfy the first man’s shortfall.  He’ll then sell it to the first man if he will pay for the labor, materials, and a little extra for a profit.  The two agree on the terms of the transaction, and in short order, one man has a widget he didn’t have before, and the other man has some money he didn’t have before.

Another man sees the first man’s widget and tells the second man he wants one like that.  A conversation occurs, and in short order the third man has a widget, too, and the second man has a bit more money.

Soon a fourth man approaches the second and says that if the second will make a bunch of widgets, the fourth man will buy them all and resell them elsewhere.  Now lots of people have widgets, the widget maker has much more money, and a seller is making money.

A fifth man comes along and says this to all those who’ve bought widgets: “All your widgets look alike.  I have a fine selection of gee-gaws that you each can add to your widget to make it a truly unique possession, which no one else has.”  And others see the gussied up widgets and want—and conclude transactions to obtain—widgets that are just like this man’s, or just like that man’s.

A sixth man says he can improve on the widget: he can make a Widget DeLuxe, or a wodget, either of which is better than even a gussied-up widget.  And so on.

All of those original players—buyers, developers, manufacturers, sellers—are better off for these free exchanges: each has, as a result of the exchanges, something of value to him that he didn’t have before, and he got it at a price he considered worth paying—whether in labor or in money—in order to get that thing.  On top of that, additional jobs were created—additional sellers; manufacturer helpers; after-market developers, manufacturers, and sellers—and these new job holders are all better off than they were before: they have jobs, now, and the wherewithal to buy widgets, if they wish.

In all of this economic growth, in all of this wealth increase, greed and envy played their roles in driving the system.  Every participant acted on his own self-interest, every participant did what he did to satisfy himself alone.  Yet as a result of the interactions of these individual self-interests, these individual greeds and envies, everyone in the system became better off.

It’s true that the wealth distribution was uneven.  In this simple scenario, the original widget maker seems to have the largest gain, and the sellers seem to have the next largest.  But even the meanest widget buyer is better off now than he was before, and he’s better off in a way that would have been impossible without this commerce: he has a widget he couldn’t even contemplate before because it didn’t exist before, and he has options for a better widget or a wodget, as well.

Notice a critical aspect here, though.  This system was a free market, within which participants to an exchange were able to come together and reach their agreements along parameters that were entirely agreeable to them, and to them alone.  No one was forced into an exchange he didn’t want, no one was barred from an exchange in which he wanted to participate, and each one was free to act solely on his own desires.

Greed and envy are two-edged swords, though, and they certainly can overwhelm a free market.  There is a role for government intervention, and it is to protect all of us from the plainly rapacious.  But that intervention must work to preserve free market mechanisms—the very mechanisms that channel our venalities and convert them to accidental strengths for our common good. This kind of government intervention must enforce contracts, and it must ensure transparency so that every participant can readily understand what it is he is getting—or selling—when he enters that market for his own selfish purposes.  But it must leave each participant free to act in his own self-interest.

When the market isn’t free, when the market is centrally controlled—even when the market is nominally free, but government intervenes too much—the capacity of commerce to turn greed and envy to our common betterment is overwhelmed.  When government intervention favors this or that selected group, for instance—one group didn’t get as wealthy as another, let’s say—then our greed and envy are simply channeled away from functional (if accidental) cooperation for the common good toward simple, resentful, isolated greed and envy: “Why do they get special treatment?  Why can’t I, too?”  Members of the other groups—whether government-designated groups or self-styled (now that government has set a precedent of special groups for special treatment)—stop working to gain the wherewithal to buy, they stop working to produce.  These groups insist, instead, that government intervene in their favor, too.  In short order, the market is no longer producing, and wealth and well-being deteriorate.

Thus, government intervention too easily suppresses the essential cooperative nature that is men and women acting in our own self-interest—including our own greed and envy—to arrive at exchanges voluntarily between those of us who want and those of us who have, or can produce, or can create.  Intervention cannot look to control the forces of the free market, to control by government fiat our greed and envy, without destroying that free market.

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary,” James Madison wrote.  But we’re not, and they don’t; we must limit government’s market interventions, as we must government’s power generally.  Greed and envy are part of our nature, but only a free market has the capability of channeling those base parts to our collective benefit.

Bank Fees on the Rise

Posted on by
4

Bank of America has announced that it’s going to raise, drastically, the monthly fees for debit card swipes made by its customers.  Why is this bad, though?  It’s certainly true that banking—and shopping—is going to get more expensive for all of us (Wells Fargo and JP Morgan Chase are expected to follow suit, and then the rest of the major banks, and the little banks, will do the same), but is this the real reason?

Big Government, via Dodd-Frank, is dictating limits on what banks can charge for debit card swipes and for a host of other fees.  Dodd-Frank uses the Federal Reserve Bank to cap debit card swipe fees, and the Fed has set this cap at a level that’s 50% of what the banks originally charged, at a cost to those banks of some $16 billion (based on 2009 revenues).  Those additional fee limits will cost still more revenue.  Yet these limits are set in the name of protecting the consumer—us.

Let’s look at the debit card fee limit for a bit.  We use our debit cards 16 times a month on average, for a $10 purchase each time, again on average, according to the Washington Post article at the link.  The merchants used to pay the banks some 4%-6% per debit swipe (depending on the merchant’s size and the size of the actual purchase—that’s the original 44 cent cap on the swipe fee).  Just doing some back of the envelope calculating, we’re buying $160 of goodies each month with our debit cards, and if Bank of America proves typical, we’re going to pay a $5 debit card use fee for that month.  That fee works out to a bit over 3% of our average monthly purchase.  The merchant is still paying 24 cents per transaction: 2.4% of the buy.  Debit card swipe costs now total, then, something like 5.4%.  There’s real change.

Here are some of the unintended consequences of Big Government looking out for the little folks.  In addition to the card swipe problem, for instance, Dodd-Frank makes it difficult for banks to charge for bounced checks—the customer has to agree to be charged beforehand (and there are those other fee caps).  The fees we pay generally will rise because, instead of banks charging those riskier customers higher fees, the Dodd-Frank limits force them to cover those high-risk costs by spreading them across all their customers—low-risk customers are now subsidizing those high-risk ones.

Small checking accounts, the kind held by consumers who aren’t so well off (and that’s a lot of us in this Obama economy) face higher fees to maintain those small balances.  How many of these consumers will be forced to turn to check cashing enterprises, or to prepaid credit cards (with their higher interest rates) and the like, because they cannot—or do not want to—pay the $60/year debit card “convenience” fee?

We’ll also pay more for our credit cards as the banks look to make up for their lost banking fee revenue where they can.  This means higher annual fees, higher interest rates on unpaid balances, and so on, on our credit cards.

Watch out for the results of this latest round of government price controls.  We saw their effectiveness when applied during the Nixon years: gasoline price caps, for instance, intended to fight inflation led to more inflation, gasoline shortages, and long lines at the pump.  We’re already seeing reduced availability of banking services: higher cost for our debit cards, reduced access to low cost checking accounts, harsher credit cards, and so on.

But there’s an additional problem to this government intervention, and it’s a moral one.  One of the most fundamental tenets of our social compact is that each of us is both free to transact our property—our labor, our goods, our money—with others for their property in any way we might mutually agree, and each of us is solely responsible for the outcomes of those transactions.  Government’s sole role under our social compact is to protect that freedom and responsibility.  Yet here we have government’s intervention utterly violating that tenet.  Big Government has determined that it cannot allow two men seeking to do business with each other in a free market to conduct that business unless Big Government is in the middle managing the relationship.  Banks (for instance) no longer can charge high risk customers higher fees: instead, they must, in order to make enough money to stay in business in this regulatory regime, spread those high risk costs across all of their customers.  On what basis should the rest of us be required to subsidize the riskiest?  On what basis does government transfer responsibility from parties to a transaction to others of us who are not involved?

“Bank of America is trying to find new ways to pad their profits by sticking it to their customers,” Senator Dick Durbin, Dem, IL claimed about that debit card fee adjustment.  This, though, is just a paraphrase of what our President has said: “I do think at a certain point you’ve made enough money.”  On what basis does government transfer responsibility from parties to a transaction to itself?

Finally, it’s a bit cheeky for Big Government to dictate to businessmen in the private economy how to handle their accounts, when Big Government has no understanding of the matter whatsoever when it comes to its own accounts.

Bad Moon Rising

Black Markets and Free Markets

Posted on by
2

Under the social compact theory of government (see, for instance, in no particular order, Locke, Rousseau, and Hobbes) men begin in a state of nature where each man is equally free to do what he will so long as that does not interfere with the freedom of another to pursue his interests.  Each man, also, whether in this state or not, has certain rights inherent in his existence (our Declaration of Independence acknowledges them as an inalienable endowment from our Creator); these include a sole ownership property in his own mind and body; from these, a sole ownership property in his labor; and from that, a sole ownership in the produce of his labor.  This Natural Man, though, in fact leads a quite, umm, Hobbesian existence: his life is short and brutish, the strong and greedy prey on the weak, and the Devil takes the hindmost. As a result, men band together in groups—form social compacts—in order to create more or less formal governments (and so the structure must exist only with the consent of those who will be governed by this new entity), whose sole purpose is to protect the members of a compact from each other and from depredations from outside.

Among the members’ attributes being protected (as part of protecting the members themselves) is that ownership of labor and of labor’s output.  This necessarily includes the right to engage in trade with others according to terms agreeable to those engaged in the trade.  Any interference with that trade is a violation of those men’s inalienable rights: government’s legitimate role here is limited to ensuring that trades occur only on terms those participants, of their own accord, accept.

But this only addresses the rights of men.  It also is man’s nature to be free and unbounded: in the present context, to engage only in transactions that are profitable to himself.  Adam Smith recognized this with his “invisible hand.”  That hand is nothing more than a man’s self-interest—his greed—in pursuing what he sees as beneficial to himself combining with another man’s self-interest—that other’s greed—to result in the production of a better outcome for both than either could have achieved individually.

Thus, one man works his field and produces a quantity of wheat, which he then trades for something of value with a baker.  The baker then bakes a loaf of bread, and he either has food for himself and his family, or he trades that loaf with a third man for something of value.  Meanwhile, the first man takes what he got in trade from the baker and uses it himself, or he trades with a fourth man….  This network of trades, by satisfying the separate greed of four individuals, makes all four men better off than any of them were individually, and it makes the four as a group better off than the sum of the four in a state of nature, where one, being stronger than the others, simply takes it all—and cannot get more bread, for instance, because he has driven the baker out of business, cannot even get more wheat for having forced the farmer into the same fate.

Legitimate governments preserve that system of free trade.  (As an aside, it’s important to note that all money does to this barter system of free trade system is facilitate its efficiency: money is only a store of value that is easier to transport, track, store, and so on than are the hard goods—or the labor—whose value is represented by sums of money.)  Illegitimate governments interfere with free trade, whether by design or by side effect of good intentions.  When governments tax trade, it reduces the amount of trade: taxes collected are funds not available to men to support their commerce, which leads to fewer goods available and so increases their costs to all.  When governments tax goods, it reduces the amount of money available to men to pursue their own ends, including their commerce, with the same results.  When governments say that only certain forms of commerce are allowable, or only certain goods can be exchanged, or specific parameters of exchange must be followed, they directly reduce the degree and flexibility of commerce—increasing the costs of commerce and of the goods exchanged.

What happens when these interferences become too onerous?  Men follow their nature and seek ways to step outside the sanctioned, “legal” system of commerce, and engage in their trade away from the eyes of that government—in a black market.  Indeed, one can see a measure of the legitimacy of a government by how extensive is a black market in that polity.  The greater the black market, the greater the interference by government in the legal market.

Yet, a black market is not wholly free, or efficient, either; it only represents men’s efforts to trade more freely than their (not so legitimate) government will allow.  The black market, with its added costs of concealment so as to avoid sanction, is costlier to its participants than is a truly free market, although its participants view it as better than their own legal market.  The black market, too, for being outside government protection, is much more Hobbesian than a legal, free market.

Those are passive failures of a black market; there is at least one active failure.  We can see this illustrated in the present Greek situation.  As governments attempt to raise revenue by taxing commercial activity, or any stage of it, black market activity, being outside the “legal” system, goes untaxed.  Without considering the legitimacy of closing the Greek budget deficit by raising taxes on its citizens, where is the effectiveness of such a move when the transactions, being outside the tax system, never were taxed and remain untaxed under the new, higher tax régime?

But the takeaway from this long scrivening is this: black markets, with all their shortcomings, are freer trade systems than the market allowed by the government that coughed up the black market.  Men will engage in free trade; it is our nature: the existence of black markets proves this.  From this we see that governments that interfere with our free trade, that interfere with our nature and with our inalienable rights, are moving toward illegitimacy, and one index of this illegitimacy is the extent of the black market in the polity.  The loss created by this illegitimacy, in purely economic terms (eliding the moral costs; that’s another post), can be found in the difference between the costs of a black market compared with a free market summed with the difference between the costs of the government-hindered market and a free market.

Equal Outcome and Equal Opportunity are Equally Moral?

Posted on by
1

Senator Marco Rubio (Rep, FL) spoke on the floor of the Senate last August; a recording of that speech was posted by Senator Rubio here: This Debate Will Continue.  I agree with almost all of his words, but there is one critical passage with which I must take issue, albeit at a late date.

Senator Rubio said (these words can be heard beginning at about the 5:20 mark of his roughly 10 minute recording),

One the one hand, there are those who believe that the job of government is to deliver economic justice, which basically means an economy where everyone does well or as well as possibly can be done.  There’s another group that believes in the concept of economic opportunity, where it’s not the government’s job to guarantee an outcome but to guarantee an opportunity to fulfill your dreams and your hopes.

One is not more moral than the other; there are two very different visions of the role of government in America.

Senator Rubio has fallen for the siren song of moral equivalency: one group’s belief is as valid as another’s on the sole basis that each group has a belief.  Yet these two positions—equal outcomes and equal opportunities—are not at all morally equivalent; one is plainly immoral from its inception.

John Locke, Jean-Jacques Rousseau, and many others, have shown that all men have an inalienable right, a right inherent in a person’s very existence, to an exclusive property in their bodies and minds, their labor, and the fruits of their labor.

Our Declaration of Independence acknowledges this in so many words,

[A]ll men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

John Adams pointed out, as he wrote Massachusetts’ 1780 Constitution, that “Happiness” is nothing more, or less, than this:

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

So, what does it mean that government will guarantee equal outcomes, or substantially equal outcomes, for all?  How can government guarantee this?  The only way this is possible is for government to give something to the less successful to bring them to the same level of outcome as the more successful.  Government, though, has nothing of its own; it must first acquire what it intends to give, and it can acquire only by taking from those enjoying greater success.  Yet this taking can only reduce that very success; government, of necessity, must circumscribe the success of one group in order to “improve” the lot of another.

This only saps the morality of both groups, though.  It teaches the less successful that they do not have to work as hard, they do not have to acquire skills to the same degree, as the more successful: they do not have to work to the fullest of their own potential.  Equal outcomes teach the less successful that they can rely, instead, on government to make up any shortfall.  Equal outcomes give those receiving a portion of the others’ success a measure of dominion over those others by asserting for the recipients that claim on those others’ property.

This outcome redistribution, by circumscribing the result of effort, also teaches the more successful: there is little point to effort; government will simply take much of what they have earned and give it away.  This deprecates success and thereby reduces incentives to work, to seek success.  This combination of one group not having to work hard and the other group not caring to work hard reduces the outcomes for all.

Equality of opportunity, though, guarantees to each member of our social compact that chance to work to our own maximum potential, free of the threat of government confiscation.  This ability to keep what we have earned, to dispose of the fruits of our labor in accordance with our individual imperatives, combined with the knowledge that we are responsible for our own futures, that none of us can claim a portion from another, combine to provide ample incentive to each of us to work hard and to live our lives to their fullest.

Further, that equality of opportunity is central to our morality: each of us is responsible for our own actions.  All of us must work to our own capabilities, not to the capabilities of others; all of us are morally obligated not to assert any claim on the produce of others.

Equal opportunity, not equal outcomes, gives each of us the fundamental equal right to fulfill our own potential without outside interference.  This equal opportunity is the grand implementation of our rights and liberties  that are acknowledged, and the fulfillment of our moral needs that are implied, in our Declaration of Independence.

In the end, the only way government can guarantee equal outcomes is to guarantee equal poverty.  This is a direct violation of our endowment of fundamental equality, it reduces all of us to government dependents, and it removes from us our morality—including our explicit Judeo-Christian teachings, which also are implied in the principles identified in our Declaration of Independence—and transfers that morality to government.

By guaranteeing equal opportunity, however, government leaves us true equality—our ability, each of us, to reach the fullness of our individual potentials.  The quality of life we gain from this, the confidence we gain from achieving our successes on the basis of our own hard work and our own struggles, reinforces the morality that we also now retain—to see, ourselves, to the least among us, rather than running from that responsibility into the comfort of government dependency.