I quotes this article in my last post, but there is another great point that it makes:
When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.
As I write this entry, the DJIA is inching up on news of housing sales. The market has not been doing so well for the better part of a year. The government has reacted dramatically bailing out several companies and enacting the wider reaching bailout plan. Moreover, the Fed is now offering loans to numerous private corporations. The Democrats and the Fed want Congress to pass another stimulus plan.
I think that the above quote is extremely interesting. There is no fundamental right to a positive return on investments. That is the nature of risk. The government response to economic indicators reveals that people feel entitled to profit on their investments. Interesting in an atmosphere where greed is seen as a vice.
Economic indicators represent value and expectations. Prices go up and down. Rising prices create value for current stockholders. Falling prices create value for short-sellers and represent an opportunity for future stockholders. In fact, as I’ve said before, a substantial decline in the market causes a transfer of wealth from our parents’ generation to our own. The market is valuing companies that our parents have invested in significantly less, but their money has already gone to purchasing capital and investing in the company. Some of the money may be lost arbitrarily, but the companies are now much cheaper for us to buy stakes in.
There is a social benefit to a growing economy, but the discretion of individual decision-makers in the economy means that growth is not guaranteed. The only thing we have to guide our daily decision-making is prices. Government intervention distorts prices in an effort to create value for current shareholders. This distortion also mires future decision-making. Not only that, but more often than not it lowers value. We’ve seen this for the past few weeks. The government has done a lot, but the market is not responding.
So what should we do?
If there is a social benefit to growth, there is certainly a social cost to recession and depression? There are cases of incomplete information where the market fails. Market failure is different than a down day for the Dow. Market failure is the inability of prices to account for the social cost of pollution that harm a diffuse group (also known as an externality).
We should make sure that institutions are set up that facilitate the transmission and clarity of information. This way people can make their down decisions. In this world, we have to accept that their is no right to profit, but over time assets will correctly value themselves in a way that facilitates firms to make decisions that maximize their profits and minimize their costs.
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spencerb
Great entry. I’ll have to do some reading regarding DIJA (never heard of it). The more I read spencerb.net, the more I’m learning about economics
. Maybe you should be learning electrical engineering from Up for Grabs…
Housing is an interesting topic right now. For instance, when I graduate, do I hurry myself to get into a deflated housing market? What better time to buy than now?
On the other hand, mortgages are expensive. If I wait a year and put some money in savings for a down payment, maybe this will have a much greater return. Sorry, a bit off topic.
“I have never known much good done by those who affected to trade for the public good.” -Mr. Adam Smith
Interesting entry.
First: “Interesting in an atmosphere where greed is seen as a vice.” It is a great relief to see that our perspectives coincide here. Just as government intervention distorts prices, social whims reinforced through TIME (hmmmm) turn to culture which turns to a distortion of fair value of… values. Greed is not something that should immediately be considered a “bad thing”, though it certainly can be. Farther along this train of thought, I think it becomes important to adopt the word selfishness instead of greed – as greed can certainly become a “bad thing”, whereas there are far fewer circumstances where selfishness becomes “bad”. I think those quotation marks are entirely necessary too.
Second: I like the overall point your article makes. I really think it has to do, again, with time – the one finite resource we can’t hoard like oil or gold or jools (Oh shit Tolkienized!!!eleventyone – I started reading the trilogy again). Sure the market might correct itself, but (and I think I have to make a distinction between a market failing and a market recessing or crashing; I’m not sure as my knowledge is not as extensive as yours) a recessed market, if it’s impact is deep enough and reverberates for a long enough period of time, would slow the growth and progress of a generation.
People, as much as they like to talk about altruism, even to the extent of caring for their children, are primarily concerned with the economic factors surrounding their lifetime. To most people, and I’m sure people have thought about it, living through another “Great Depression” would be absolutely horrible. I shudder to think we’ve become so materialistic that fear of such a depression, when brought out from the shadow, is as great as the fear of Nuclear War.
Sorry, but real quick I’d like to clear up the distinction between greed and selfishness, as I think it is important.
To me, selfishness is defined as acting in the interest of securing what makes you happy. What makes a person happy is variable. So, in the pursuits of life, when a decision has to be made, the selfish person defers to what will grant him the most happiness, more often than not disregarding the impact on others.
Greed, on the other hand, speaks to me as more of a desire in excess of what will make you happy. Rather than defining what makes you happy, it is a condition some humans possess that has a less defined objective. It simply exists, with no end.
Okay, Derek and Jon and I are going to Pioneer Park. I’ll be back to finish my second piece on EVE and to write more about other stuff.
P.S. – All this economic shit is making me think about school and going back. You bastard :p
Haha! I’ll try and keep the economic analysis going then!
I think the selfishness/greed distinction is important and something that pure economics can’t capture. One of the foundations of our economic system starting with Adam Smith is the belief that people acting in their self-interest will produce an optimal outcome. In other words, if everyone is selfish, then everything will work out. The problem is that the world isn’t that simple and all considerations are not economic in nature. Therefore, political, social, and moral questions may not be satisfactorily answered by people acting selfishly. Political systems, especially, seem prone to selfish factors that produce a less than optimal outcome.
I would agree with your definition of greed. The last part especially, the element that seems to set greed apart from selfishness is the endlessness. Your self-interest ends at a certain point (like it or not). Greed pushes your interests outside of their natural bounds. True, this isn’t always a bad thing, but certainly can be. I think that whether it is good or bad is culturally determined and highly sensitive to circumstances.
Lastly, the consideration of time is interesting as well. What happens when people become accustomed to a certain way of acting. I think it is certainly fair to say that behavior will affect sentiments about the economy and investing. I think culture also changes are attitude and response toward certain events. One question in particular that interests me is what time-frame the average person considers in their decision-making calculus? This is a question of particular importance when considering the implications of public policy. If people don’t value the future (including unborn generations), they are unlikely to enact policies where the costs are high in the present and the benefits are diffuse over time. A classic example of this is procrastination on environmental policies. Also, another great example is the national debt.
For a quick point of clarification, just think about market failure as social cost or externalities.. Classic examples in economics are a factory polluting up river of a housing community or building a stadium.