Markets And Greed

"Greed" is seldom defined. Virtually everyone would prefer to get a higher price for what he sells and pay a lower price for what he buys. Would you pay a dollar for a newspaper that was available for fifty cents? Or offer to work for half of what an employer was willing to pay you? Would adding a string of zeros to prices or salaries change the principle or the definition of greed?

It is hard to see why it should. But, if everybody is greedy, then the word is virtually meaningless. If it refers to people who desire far more money than most others would aspire to, then the history of most great American fortunes-Ford, Rockefeller, Carnegie, etc.-suggests that the way to amass vast amounts of wealth is to figure out some way to provide goods and services at lower prices, not higher prices.

Back in the nineteenth century, Richard Sears was ferociously determined to overtake Montgomery Ward, the world's largest retailer at that time, and worked tirelessly for incredible hours toward that end, sometimes taking risks that bordered on the reckless. Sears sought out every way of cutting costs, so that he could undercut Ward's prices, and every way of attracting Customers away from all his rivals. He did all this, not because he did not have enough money to live on, but because he wanted more-and he wanted his company to be number one. If that is our definition of "greed," then he Was greedy. More important, in this case as in many others, it was precisely such greed that led to lower prices. That was how Sears overtook Montgomery Ward and replaced it as the leading retailer in the country at the beginning of the twentieth century. In later years, that is how Wal- Mart overtook Sears.

Those who condemn greed may espouse "non-economic values." But lofty talk about "non-economic values" too often amounts to very selfish attempts to have one's own values subsidized by others, obviously at the expense of those other people's values. A typical example of this appeared in a letter to Editor & Publisher magazine, written by a newspaper columnist who criticized "the annual profit requirements faced by newspapers" due to "the demands of faceless Wall Street financial analysts who seem, from where I sit, insensitive to the vagaries of newspaper journalism." Despite the rhetorical device of describing some parties to a transaction in less than human terms ("faceless Wall Street analysts"), they are all people and they all have their own interests, which must be mutually reconciled in one way or another, if those who supply the money that enables newspapers to operate are to be willing to continue to do so. Although people who work on Wall Street may control millions of dollars each, this is not all their own personal money by any means. Much of it comes from the savings, or the money paid into pension funds, by millions of other people, many of whom have very modest incomes.

If "the vagaries of newspaper journalism" make it difficult to earn as high a return on investments in newspapers or newspaper chains as might be earned elsewhere in the economy, why should workers whose pension funds will be needed to provide for their old age subsidize newspaper chains by accepting a lower rate of return on money invested in such corporations? Since many editors and columnists earn much more than some of the people whose payments into pension funds supply newspapers with the money to operate, it would seem especially strange to expect people with lower incomes to be subsidizing people with higher incomes-teachers and mechanics, for example, subsidizing editors and reporters.

Why should financial analysts, as the intermediaries handling pension funds and other investments from vast numbers of people, betray those people who have entrusted their savings to them by accepting less of a return from newspapers than what is available from other sectors of the economy?

If good journalism-however defined-results in lower rates of return on the money invested in newspaper chains, whatever special costs of newspaper publishing are responsible for this can be borne by any of a number of people who benefit from newspapers. Readers can pay higher prices, columnists, editors and reporters can accept lower salaries, advertisers can pay higher rates.

Why should the sacrifice be forced onto mechanics, nurses, teachers, etc., around the country whose personal savings and pension funds provide the money that newspaper chains acquire by selling corporate stocks and bonds?

Why should other sectors of the economy that are willing to pay more for the use of these funds be deprived of such resources for the sake of one particular sector?

The point here is not how to solve the problems of the newspaper industry. The point is to show how differently things look when considered from the standpoint of allocating scarce resources which have alternative uses.

This fundamental economic reality is obscured by emotional rhetoric that ignores the interests and values of many people by summarizing them via unsympathetic intermediaries such as "insensitive" financial analysts, while competing interests are expressed in idealistic terms, such as journalistic quality. Financial analysts may be as sensitive to the people they are serving as others are to the very different constituencies they represent.

Both in the private sector and in the government sector, there are always values that some people think worthy enough that other people should have to pay for them-but not that they should have to pay for them themselves. Nowhere is the weighing of some values against other values obscured more often by rhetoric than when discussing government policies. Taxing away what other people have earned, in order to finance one's own moral adventures via social programs, is often depicted as a humanitarian endeavor, while allowing others the same freedom and dignity as oneself, so that they can make their own choices with their own earnings, is considered to be pandering to "greed." Greed for power is no less dangerous than greed for money, and has shed far more blood in the process. Political authorities have often had "non-economic values" that were devastating to the general population.

Does a free market, as a mechanism for mutual accommodation, facilitate greed as it facilitates the fulfillment of people's other desires? It certainly does not prevent greed, though it does exact a quid pro quo-providing others with something that they want, in order to get them to part with their money. A more relevant question, however, is whether other economic systems, including those founded on altruistic and egalitarian principles, actually end up with less greed than an economic system that depends on prices to allocate scarce resources.

Although socialist systems, including the Communist variety, began as attempts to apply egalitarian principles, examples of sacrificing the well-being millions of people for the well-being of those with political power abounded in the Soviet Union and the Communist bloc in general. At the purely economic level, the ruling nomenklatura of the U S.S.R. had separate stores in which only they were eligible to make purchases, as well as other government-supported facilities to which they alone had access. These were of course the best stores, with the most abundant supplies of the commodities most in demand. In addition, the housing, medical care and other facilities open to Communist Party bosses was likewise the best. The rhetoric of equality-egalitarian terms like "comrade" and "people's democracy "-was no match for the reality of greed, especially when that greed could use the power of a totalitarian state, instead of having to supply others' desires in order to earn their money.

Even in a democratic country like India, the era of massive government controls over the economy-lasting for nearly half a century, from independence in 1947 to the beginning of the last decade of the twentieth century was an era of massive corruption of both high officials and innumerable petty bureaucrats, whose permissions were necessary to do virtually all of the ordinary things that people do at will in a free market economy. Pervasive bribery was only part of that cost. The inefficiencies created by intrusive bureaucratic controls have been estimated to have cost the economy vast amounts of lost production that would have made the average Indians' income hundreds of dollars a year higher. In one of the poorest countries in the world, where malnutrition was a serious problem for many, such a loss meant far more than whether the average American's annual income was a few hundred dollars more or less.

Greed can flourish under very different economic systems. The only real question is: What are its actual consequences under these systems? Where the desire for a fortune can be satisfied by finding ways to lower prices and thereby expand the market for one's output, that is very different from a system where that same desire is more readily fulfilled by imposing political power. In other words, greed is not the product of one particular economic system, but something that all economic, political, and social systems have to cope with in one way or another.

People who deplore greed often show a disdain for wealth. Although a disdain for wealth is often admired, only those who already have a certain amount of wealth can afford to disdain any further pursuit of it. Wealth means options and who would want fewer options? More important, from the standpoint of society as a whole, wealth is the only thing that can prevent poverty. Yet many people who claim to be concerned about poverty show remarkably little interest in how wealth is generated or which policies make it harder or easier to create more.

One of the special variations on the theme of greed is that some businesses are guilty of "charging all that the traffic will bear." Often such statements are made, not simply as a moral condemnation, but as a causal explanation of prices that are considered to be "too high" for one reason or another. If widgets have been selling for five dollars apiece for some time and suddenly the price rises to eight dollars, then the explanation that is offered may be that the widget manufacturers are now charging all that the traffic will bear.

As a causal explanation, this immediately raises a question: Why were they not charging all that the traffic would bear before? Chances are that they were. It is just that the traffic would not bear more than five dollars before and will now bear eight. Therefore what needs to be understood is a causal explanation of what has changed, if widget manufacturers were charging all that the traffic would bear both times.

It is not just businesses that charge all that the traffic will bear. The very people who are making this accusation would seldom agree to work for half of their present salaries-or even three-quarters of their present salaries.

They are charging what the traffic will bear for their work. And if someone else offers to pay them twice what they are currently earning, it is very unlikely that they will continue working for their current employer, unless that employer matches the offer.

Strictly speaking, a business is unlikely to charge literally all that the traffic will bear. If General Motors is selling a certain automobile for $25,000, it could probably still sell some to real devotees of that particular car if they doubled the price to $50,000. But, although the traffic would bear a price of $50,000, sales would probably be so reduced that GM would not make as much money as they would by charging $25,000. However, we can take the expression "charging what the traffic will bear" as meaning simply maximizing total profits. What we really need to understand are the implications of saying that higher prices are due to profit maximizing. We also need to understand the consequences of trying to stop it.

During the California electricity crisis of 2000-2001, for example, as the wholesale price of electricity suddenly shot up far above what they had been, Some electricity generating companies were accused of charging whatever the traffic would bear. Why would the traffic bear higher electricity prices in 2000 and 2001 than before? Not surprisingly, it had to do with supply and demand.

, As the price of the fuels used to generate electricity rose, so did the cost of generating a given amount of electricity. Whereas the price of natural gas delivered to electric utilities in California was only $2.70 per million British thermal units (BTUs) in 1998-1999, by the summer of 2000 the price had nearly doubled to $5.00 per million BTUs. This was part of a nationwide increase in natural gas prices, as a result of a cold winter after several mild winters, thereby causing more natural gas to be used for heating than in the previous years. In the meantime, the international oil cartel raised the price of petroleum, which is also used to generate electricity. Moreover, this all happened while a west coast drought reduced the amount of water passing over hydroelectric dams, thereby generating less electricity than usual.

Meanwhile, on the demand side, Pacific coast winters were colder than usual and summers were hotter than usual in California and Nevada. This meant that more electricity was being used for heating in the winter and for cooling in the summer. In short, there was a reduction in the quantity of electricity available at a given cost and an increase in the quantity of electricity demanded at existing prices. A price rise under these conditions is hardly surprising.

Unfortunately, most members of the general public were unaware of these factors behind the suddenly rising prices, and so were resentful and became receptive to those who blamed the price increases on power companies' charging what the traffic would bear. If this were just a philosophical issue, it would have no economic implications. But when the political consequences included price "caps" placed on electricity sold to western states, that in turn led to economic consequences.

When there was more electricity demanded than supplied at government controlled prices in the western states, power generators had a choice of where to sell their output, just as a landlord has a choice of which of the surplus applicants to rent his apartments to under rent control. Not surprisingly, they sold their electricity to states not covered by the price controls. In other words, California and other western states received less electricity than they would have received if the electricity-generating companies had been allowed to charge what the traffic would bear.

Had the price controls been nationwide, then California would no doubt have received a larger share of the electricity being generated in other states.

However, it is doubtful whether the total amount of electricity generated nationwide would have remained unchanged. More likely, less electricity would have been produced nationwide when its price was held down artificially nationwide, and more shortages and blackouts would have occurred across the country, instead of only in California and Nevada.

Electricity is only an example. The same principle applies much more widely. To say that the traffic will bear a higher price is to say that the quantity demanded-of electricity, widgets, cameras, or whatever-exceeds the quantity supplied at the current price. Price controls under these conditions virtually guarantee that the shortage will not be corrected. Focusing on the seller's "greed" neither explains what caused the shortage nor offers any way of ending it.

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