Wednesday, 26 November, 2008

It works - for whom?

Every text or podcast on basic economics maintains that the market works because people are selfish. A fund manager will not take stupid risks and will lookout for customers’ interests because that’s what gets paid for, and if he fails his customers he’ll find himself without a job. The manufacturer will give you a fail deal, otherwise his competitors would. Those who are rude to customers will lose business because customers will tell.

Sounds logical. But so do all platitudes.

Yet how many platitudes apply to the daily lives and decisions of ordinary people? Think about the money manager. Who are his customer? You and me with our tiny investments? Or his fellow money managers who can pour millions into each other’s funds at the press of a button? And even if push comes to shove and our friend finds himself without a job, doesn’t he have a wonderful golden parachute to ensure a comfortable landing? In fact, wasn’t the golden parachute put in so that he may not worry about his personal future while taking risks? What is his personal downside? Is it in any way comparable to the (relative) losses of lay investors?

Think of a parallel. A general of a democracy’s army will probably never use his troops as cannon fodder. Why? Because of his values, of course, but also because such a thing will be criminal under a democracy. Can he assume that his opposite number will be just as careful? Not if the enemy is a dictatorship.

Look at politics. It’s supposed to be highly competitive; most probably, it is. The midnight orgies of political rivals is likely to be a figment of the disgusted public grasping for some logic (They must have formed a cartel, or they can’t screw me so badly). Yet, by all accounts, quality doesn’t improve, in either governance or legislation. Most agree that it declines all the time. Can an invisible master mind of the marketplace for votes have decided the optimal quality level, as the invisible hand guides all good capitalists to create a good earth?

Or are the troubles and tribulations nothing but kinks that will get ironed out in the long run, after we little worms are dead and gone? Why do we swallow the economics 101 day in and day out? Because we are helpless? Because we are afraid? Because if we don’t we’ll have to grow beards, take up Kalashnikovs and head for the jungles? Or because we never had it so good? Had it not been for our invisible gods we’d all be pulling rocks under slave-drivers’ whips?

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