Thursday, June 9, 2011

Bill, or Bob, and Markets

One of my readers mentioned that my name for our drug dealing marketeer kept shifting between Bill, or Bob. Forgive me, if you can. One of the great things about blogging is, when you hit the "publish" button, you're done. The advantage Bob has over Bill is simple; one less letter. And when the fingers are flying, cutting down on keyboard time has advantages.

They are small. You might even call them, "marginal."

The word, "marginal" is an important word. Not just for economists, but for scientists of any sort; engineers, electricians, automobile manufacturers, home builders. Marginal improvements are small improvements, that over time can mean the difference between economic success or failure. Sometimes, you might here business reporters talking about "margin calls." What they are reporting is, that the purchaser of some intangible asset, having purchased that asset with only a small part of that asset's worth, is being told that the time has come for the payment for that asset be made in full. It is true, that in some markets, intangible assets can be purchased with only a modest outlay from the purchaser, relying upon the broker or dealer to carry the asset transfer, as a loan. Kids do it every day, promising to cut the lawn in order to get a new pair of kicks. At some point, the kid has to cut the lawn. Or, in this case, lose the kicks.

The word, "margin," is an important word for economists, since most of economic theory attempts to relay information that occurs within markets, both for the investor, but also for the public policy purposes of economic regulation. This, I hope, won't have to be repeated; I believe in a minimum of market regulation by the government. I do not believe in excessive attempts at market regulation. I'm not a market libertarian, although I want you to understand that most efforts at market regulation, even though such efforts may have names that attempt to promise cures for the excesses of the markets, are nothing more than the creators of unintended market lags, the effects of which will, in my opinion, serve more to obscure the research and understanding of markets than effect positive changes that benefit the players, both buyers and sellers, of any market. This extends from simple relationships, like those of Billy and his dope, to JPMorganChase, and their current policies to allow for short-term credit extensions to individuals, through credit cards.

Margins are important. If I'm an automobile manufacturer, and I can manufacture a car for a lower price,yet offer a competitive automobile, with fit, finish and features of my competitor, at a lower price--a marginally lower price--I may not be able to succeed in converting all buyers of automobiles into purchasing my car, but if I'm marginally successful in converting some of those buyers to my competitively priced, marginally lower-cost, automobile, I've opened up the possibility for making greater profits than my competitor.

This is an important distinction.

A few posts ago, Billy, our hippie, drug-dealing marijuana peddler, faced a conundrum; whether to sell dope with a low production cost at a price higher than the commercially available stuff, or to incorporate the ideology of the Progressive Movement (Communist/Marxist theories) by sharing the fruits of his labours based upon the inputs costs of producing this mad weed. It is important to remember, that any time anyone offers you a solution based upon the principles of Social Justice, that you remember that this is a person who is attempting to substitute Marxist, Communist ideology with Capitalism. The Labour Theory of Value is a central tenet of Communism and Marxism. Do yourself a favour, and simply Google "labour theory of value." I'm not going to tell you that all the pages are clearly Marxist or Communist, you do your own research. Whenever you hear a labour union spokesman talk about "fairness," remember of what constitutes fairness from the viewpoint of the Communist or the Marxist.

Profitability is the report card of the capitalist. Getting someone else to pay for your existence is the report card of the socialist. Whether it's food, shelter, clothing or medical care, if you rely upon someone else to pay your bills, you're a socialist. If you rely upon yourself to pay your bills, you're a capitalist.

But Bill really wasn't a socialist when he started selling weed. He needed to make about a thousand bucks a month to cover the costs of his existence. He had it worked out, that if he sold a minimum number of lids, he could cover his cost of existence. And yet, he had access to really good weed, that was twice as good as the weed he bought from his connection. But, it was virtually costless, to him.

How to determine price?

The reason why I chose a market, like marijuana, is important for economists. The sale of marijuana isn't taxed, so tax policies don't affect the sale of marijuana. Marijuana is illegal, so there isn't an open market for the sale or purchase of marijuana. Marijuana sales reflect the conditions facing a market with limited entry, for, although anyone could choose to sell marijuana, most people would find either the risks of breaking the law daunting, or, find that violating the law untenable or unthinkable, so it would take a special type of entrepreneur to enter the market. The thieving, lying, progressive hippie. Parfait!

The advantages for economic examination are bountiful. Since it is an illegal activity, entry into the market is determined by a willingness to violate the law. For both buyer and seller. Imagine the market for wheat being limited by the constraints of the market for marijuana. Or, child prostitution. Wheat? Child prostitution? Uh, what?

Wheat, marijuana, child prostitution; all markets, with sellers and buyers. While we've been dealing with something as illegal as marijuana, we've ignored the truly horrible aspects of markets. Markets bring together buyers and sellers. For Bill, selling marijuana has been an avocation that allowed him to buzz with his friends while paying the freight. For the wheat rancher, learning how to cultivate his fields, working the land and earning a profit has been his primary concerns. For the purveyor of child prostitution, there must be these types of interests in common, too.

What interests do Bill, a wheat rancher and a supplier of child prostitutes have in common?


What differences exist in their respective markets?

Until recently, there really haven't been many similarities between the pusher, the rancher and the pimp. That seems to be changing.

Generally, we tend to think of wheat ranchers differently than we think of pushers and pimps. Wheat ranching tends to be a legal activity. A man owns or leases farmland, tills and plants, tends and harvests his crop.Wheat is a legal commodity that many plant, grow and harvest. Successful ranchers are pivotal in their communities; sponsoring 4-H events, attending church on Sundays, coaching their kids baseball teams.

We tend to view the pusher or the pimp with different lenses. The activities of the pusher and the pimp are illegal. The tend to devalue the value we put on human life. They attack the moral basis of our community, as they are threats to our children and attract elements to our community that we find less than desirable. Drug dealers and pimps are conduits for persons that threaten the public good. They are the "watering holes" that attract the morally depraved, the dishonest, and those that predate upon the common body. The civil body.

The wheat rancher drives a pick-up truck, picks up a six-pack of Hires for his crew, and takes his family boating on the weekend. The pusher hides his activities knowing that his customers must also hide their activities or risk detection and punishment. The pimp is simply disgusting. But, the same market conditions apply.

Billy is worried about social justice. The Labour Theory of Value. Of determining what an appropriate selling price for his really good stuff should be.

Not at all the problem for the purveyor of the child prostitute. Slavery is an inherent condition of the pimp. While the Progressive/Socialist/Communist is spending its time talking about the ownership of property is a crime against humanity, the pimp is a simple human-rights criminal. And so, we need to move away from the idea of what constitutes economic activity, to determining the purpose of economic activity.

What, simply is economic activity?

Grajillions of years ago--which is an order of magnitude longer than a Brazillian--Og found out that offering Oggette a pretty looking flower was endearing. Og's buddies were all about the clubbing and the hair-pulling into caves. Og found out that giving a flower to Oggette, while a transaction cost, was a successful price to be paid for Oggette's company. (If you know what I mean.)

Subsistence economics hadn't yet been discovered. Since, the only condition that was an available option was subsistence. There was no Hierarchy of Self-Actualization. You either lived, or didn't. But, at some point after Cain and Abel, it was discovered that one needn't kill in order to achieve that which one wished to achieve. This was a huge, evolutionary moment for Man. We no longer needed to rely upon coercion to succeed in obtaining that which was desirable. We could bargain for it. History is replete with instances where certain, conditioning bargaining chips might have been involved; rape, torture, invasion, domination and slavery, but the understanding that men could be motivated with the carrot as well as the stick was an understanding that would shape further generations, nations and cultures.

Billy understood this when Mikey offered him his life in exchange for a participatory franchise in the selling of his weed. You understand it when you pay your confiscatory taxes in the face of imprisonment. I guess the world hasn't changed all that much since the time that Ogg offered Oggette the flower. (Had she declined, it would have been club to the head, and being dragged off to the cave.)

That pricing works as an advantage over clubbing is a marginal shift in behaviour. People tend to return to markets where price is the only concern. People rarely return to markets that are established by clubbing. I remember reading Freud's "Civilization and Its Discontents" years ago. I think, somewhere in his introduction, his relating something close to what it is that I'm trying to describe for you now; that there is a moment in a man's life when he realizes that the way within which he comports himself is as much a description of who he is as could be defined by any other description. From Ogg, to Billy, to Mikey to you and I, we're all subject to certain forces that help us to determine the value of the services we choose to provide, as we are to those we wish to acquire. The differences may be small, and hence, described as marginal. But changes, however small, are discernible, and as much as they are discernible, are measurable. These changes are often referred to as discrete changes, or shifts. That is, however small these changes may be, there may be sufficient reason to say that the condition or state that was held previously is significantly different, although the changes may be marginal or discrete, from the states or conditions that held, previously.

The bulk of this post was an attempt to draw the reader into understanding that certain changes in the way a reader views things around him can change. Some of these changes can be quite jarring, such as moving from the activities of a wheat rancher, to the activities of the person involved in child prostitution. Yet, change is what the economist values. It is these changes that economist refer to when describing an economic activity's marginal change. Whether it is the marginal change in demand, the marginal change in supply, of the marginal propensity to consume, the economist is interested in testing whether or not these marginal changes occur as a result of internal values, or as the result of external forces. When describing these differences, we view these as either endogenous or exogenous variables. While it would be hard to suggest that the efforts of the hippie weed seller, or the wheat rancher are on a moral par with the pimp of children, these activities occur for the same reasons; profitability.

Moral equivalence is often attached to economic activity. Some people view profitability as an erroneous pursuit, for those engaged in private enterprise. That is to say, if one conducts an enterprise so as to gain a profit, that the morality of that profit is on par with the man who would subject others to slavery. The wheat rancher is just as much a moral villain as is the trafficker in child slavery, since the motives of both are related to the pursuit of profit. One of the questions one needs to ask is, was the offer of the flower from Ogg to Oggette the moral equivalent of child slavery? Both were economic actions, both were seeking outcomes based upon transactions, and both had preconceived notions of outcomes that were beneficial to the various actors.

Are transactions moral events? Or, merely economic events? Are economic events issues of morality? Or, are actions unto themselves worthy of moral description, or simple economic description?


Max said...

Heh! All current evidence points to Og as hanging around the cave; the women appear to have been the risk-takers in prehistory. Actually, that should come as no surprise: when, say, gazelle are released from their enclosures, the male always brings up the rear.

As I've mentioned before, their perspective seems to involve letting the younger and dumber females absorb any risk. The guys are going to hang back until they're sure everything's cool.

The same approach appears to have applied to our prehistoric ancestors.

Did Og hand a flower to Ogette - or vice-versa? Certainly, a transaction occurred. Moral, or economic?

I'm guessing economic.

Ten Mile Island said...

"...the male always brings up the rear."

Max, you don't know this, but I was a horseman at an earlier time, and one of the things we know is that the whip should be light. It is the impulse to dart after feeling the whip that needs to be induced. Horses have a reflex to stimulus that mimics the nip of a predator. They run faster. Combine that with a flying lead change, and a horse can operate a lot more efficiently. So, the male bringing up the rear leads me to view this as an act of chivalry, rather than an act of competition. That is, the male, being better able to avoid the nips of the predator, actually allow themselves to be the prime targets of a predator's attack, no?

It doesn't do much for your thesis, but then it's settled science, innit?

As to your Ogg/Oggette transaction, the question would be easier to answer if the flower were edible.

Yet, both transactions would have occurred under the definition of an economic transaction.