1998-10-20 - Re: Another question about free-markets… (fwd)

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From: tzeruch@ceddec.com
To: Jim Choate <ravage@EINSTEIN.ssz.com>
Message Hash: d227df844f6526784e7040cdc527d4ab524619d26d938fa6e6e8e94e1a2caced
Message ID: <98Oct19.235259edt.42143@brickwall.ceddec.com>
Reply To: <199810051237.HAA03149@einstein.ssz.com>
UTC Datetime: 1998-10-20 04:42:50 UTC
Raw Date: Tue, 20 Oct 1998 12:42:50 +0800

Raw message

From: tzeruch@ceddec.com
Date: Tue, 20 Oct 1998 12:42:50 +0800
To: Jim Choate <ravage@EINSTEIN.ssz.com>
Subject: Re: Another question about free-markets... (fwd)
In-Reply-To: <199810051237.HAA03149@einstein.ssz.com>
Message-ID: <98Oct19.235259edt.42143@brickwall.ceddec.com>
MIME-Version: 1.0
Content-Type: text/plain

On Mon, 5 Oct 1998, Jim Choate wrote:

> > > If this includes lying, denying consumers information, etc.
> > > what harm is done, they have fulfilled their responsibility
> > > to their shareholders (potentialy quite lucratively)=20
> > 
> > While there is a sucker born every minute, the strategy you
> > describe is for the most part unlikely to be profitable.
> Then you should begin to check your daily news, example after example is
> presented. (currently illegal) cell phone cloning, excessive rate levels,
> sub-standard construction practices, etc.

Most of these are due to regulation.  If you assume the Secret Service
will bear the cost of enforcing anti-cloning laws, you will not spend the
money to make your phones unclonable even if the technology exists.

Excessive rate levels are a misnomer.  The only way you can succeed in
charging above market prices is if there is a law to bar entry.

sub-standard construction is also a misnomer - if you paid for standard X,
you simply don't pay until the construction is up to that standard.  If
you are talking about government projects, you introduce some distortion,
e.g. where they demand to pay below-market prices.  Further, if you don't
want to pay for certification of the quality, you can't call it
"substandard" because you aren't paying to have a standard enforced.

> Not only can it happen it deos. Given that such abuse is possible in a
> regulated market there is no reason not to deduce it will happen in a free
> market economy as well. If it happens the business enjoys an increased profit
> if for no other reason than their costs are reduced. Since there is no
> regulation or other oversight the consumer will be denied this information
> preventing fair competition. Since a companies strategic leaders have no
> duty other than maximizing profit they will impliment such strategies. Hence
> the free-market reduces to an opportunistic anarchy.

Hardly.  If you are saying consumers are stupid, you are probably right,
and their ignorance may be rational, since it would be expensive to
certify everything you encounter in one day.  But it does not mean that
business would enjoy any increased profit.  Consumers would simply bid
down the price where companies would compete on who could supply
substandard dreck most efficiently.

Nor would they really be denied information.  Some people subscribe to
consumer reports, some don't.  If you buy a noname blackbox, it is your
choice.  If you buy something that is rated as being good you may pay
more, but would get extra value (and consumer reports makes money by
coming as close as possible to unbiased testing in the main).

And you assume that men are islands and don't talk or communicate. 
Imagine two restaraunts.  If people get food poisoning every week or so at
one, people will learn not to go there, and it will fold as people go to
the second.  Reputation (economists include it in the term "good will")
does have an economic benefit.  And it does not require government to
regulate.  If fact government is usually the worst in determining quality
- the USDA uses sniffing and appearance instead of microbiology for a very
long time (until an e. coli outbreak).  But they certify all infected meat
as grade-A if the inspector is in a good mood.  And good meat will lose
points if the inspector is in a bad mood.  But because of the USDA, no
private concern can compete to certify healthy food (and one reason I have
cut meat consumption - what the government allows or is incapable of
catching can kill me in very unpleasant ways).

Consumers will only be denied infomation pertaining to quality if they
insist on not paying for it.  And "free" information from the government
in the form of certification or regulation is worth what you pay for it.

Underwriters lab certified things for insurance companies.  A similar
organization could insure healthy food (by publishing their standards and
charging for either inspection or results).

> This leads to one and only one conclusion, in a free-market there is no such
> thing as 'fair trade' without a third party being involved. This runs
> contrary to the definition of a free market on two counts (at least) and
> therefore the free market theory (as applied to human business, not Vulcan)
> is a circular argument based on faulty principles and a lack of
> understanding of human psychology (ie assumptions such as rational
> purchases).

You simply may not like human psychology, but that does not make the free
market any less just.  In fact, most "problems" like insurance derive from
human psychology.  People want to beleive lies.  Or want to remain
ignorant.  And don't want to take responsibility for their own actions. 
The market is completely fair and just - which are also virtues.  It is
not merciful or kind, but that is NOT its function. 

I can buy (or sell) at a given price, or I can choose not to.  The offered
price may not be a good value, but I will need to invest additional time
and money to determine that, and that is a secondary choice, but it is
still fair.  If a stock is selling at $50 on the NYSE, nothing stops you
from buying it from me at $250.  This would be unwise but not unfair.  Nor
would it require any third party.  If you know I take advantage of
ignorance, you will not deal with me without informing yourself first.
You may rationally decide not to check if I sell near market prices if
it is typical that most people do.  But you will acquire the information
of my business practice with the purchase.  You may also rationally get a
second bid.  No one witholds information.  But no one forces information
upon you.  You have only to act rationally at whatever level you decide.

In my earlier post, I mentioned that I think stocks are in a bubble - i.e.
overvalued by 70%.  Which if any government agency is saying this?  Are
these fair prices?  You think so if you bought in when they were only
overvalued by 50%.  But how does the government prevent people from
bidding up the price of stocks, or beanie babies?  I think they are called
crazes or manias for good reason.  When it collapses they will call on the
government, but all the information will have been there in black and
white all along.  But they would rather belive in a pleasant illusion
than cold reality.  And you can't make any regulation that will change
that.  Illusions also have prices.  And people will gladly pay them.  This
is unwise (A fool and his money are soon parted), but not unfair (wisdom
has riches in her left hand and long life in her right).

The market enforces a foolishness tax which no government can repeal.