Your Lying Eyes

Dedicated to uncovering the truth that stands naked before your lying eyes.

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15 October 2010

The Paperless Society

Ah, the lure of the paperless society. I'm an absolute klutz with paperwork as well as a disorganized mess physically, so I tend to embrace the paperless world our new technology affords us - but I have also seen its dark side. In a dispute, a paperless transaction is great if you've got the advantage - but how often are we holding the cards?

And paperlessness is hardly a popular quality - a number of years ago I noticed the astonishing practice of people in the office printing out emails, three-hole punching them and filing them in binders - WTF!? Well, with all our vaunted search technology, that paper copy will often be found more effectively than its electronic counterpart, I must admit.

But in the aggregate, paper is expensive and agonizingly slow as it has to be physically moved around as its provenance moves. And so it has come to pass that our stodgiest institutions - those most readily associated with laborious and persnickety devotion to paperwork, signature, and physical records - have been the quickest to embrace the paperless paradigm. I'm referring to banks, who have pretty much abandoned all their once formidable stodginess.

And now it turns out that banks' aggressive entry into the paperless world is merely just another example of their abandonment of due diligence generally. Sufficient capital? - bah, just some quaint concept from the 30's. Borrower's credit worthiness? - out-dated, narrow-minded notion from our racial dark-ages. Can't engage in non-banking business activities? - We have Risk Management departments! Actual deeds and notes filed with county recorders? - Nonsense, we can manage that amongst ourselves electronically.

Now of course who cares if it's Bank A that comes to foreclose vs. Bank B - no one really, if Bank A or Bank B don't care. But what if you've been paying Bank A but Bank B comes to foreclose - and has all the electronic records to prove they're the owner - and so does Bank A? Or Bank A forecloses and then Bank B also comes around to foreclose? Isn't it nice to know the county clerk holds the actual records on paper in a locked file cabinet? It's just another mess the banks have caused in their rush to reap profits where they shouldn't have.

The privilege of owning and running a bank is a sacred trust that society should bestow with great caution, as banking has the potential to destroy modern society's most precious endowment - its money. Banks should be governed sternly under very strict rules - and enforcement must be swift and uncompromising. There are no "technical" violations in banking - there are "violations" pure and simple.

07 October 2010

The Free Market Doesn't Always Work

So far, at least, the free-market has proven itself to be the most effective economic system known to industrial society - most effective in the sense of being able to deliver the most material benefit to the most people. And the reason for that is no secret - market-determined pricing is able to communicate the relative preferences of buyers and the scarcity of supply better than any other approach yet devised while the profit-motive provides the best long-term incentive for people to produce things.

But the market doesn't always work. One such situation is where the fixed costs of production exceed any possible profit generating capability of marginal-cost pricing. Normally, such a situation is not a problem as it simply means that the good (or service) won't be produced. But where that good is considered necessary by society, then the only way to produce that good is via a non-market mechanism. The typical way these needs are satisfied is via a publicly-granted and tightly-regulated monopoly business enterprise (such as an electric or water utility), though sometimes the public itself produces the good or provides the service.

Another exception to free-market exceptionalism is fractional-reserve banking. Sure, banks do compete against each other, but because they have been endowed with a sacred trust (the ability to create money) they must be tightly regulated so that they don't grossly violate this trust (which could lead to civil disturbance). Our recent financial disaster can be traced to abuses of this sacred trust (excessive leverage, reckless lending).

A third type of problem area for markets - though it's not really a flaw in markets themselves - is where society has made judgments on the value of certain goods such that the use of prices and profit-motive are considered immoral measures of worth. The most obvious example in our recent public debates is health care - we'd rather people not be forced to make critical health decisions based on price nor do we want the delivery of health services to be primarily based on profit potential - though in America market forces are still predominant. But education is a more traditional example of a market curtailed by the intrinsic value society places on its product, as public schools have for over a century dominated primary and secondary education. Even the post-secondary market is dominated by non-profits, and is in general a grossly-distorted market (though not necessarily distorted in favor of the consumer).

Markets, as efficient as they are in communicating value, are not good at communicating critical information about a transaction when that information cannot possibly be known until the transaction in question has become irreversible. When this inadequacy threatens public safety, society must step in to fill the breach. The most common mechanism is licensing - thus we license doctors since it's too late to find out that the doctor is incompetent once he provides his service. We do the same with plumbers and electricians so that you don't have to wait for your home or business to fall apart or burn to the ground before finding out that they had no idea what they were doing.

And finally, society places a great deal of value on the quality of life where people live. As a result, very stringent limits are placed on markets via local zoning laws which aim to keep businesses separated from residential neighborhoods as well as to segregate businesses by type of business performed. Land-use regulations as well as old-fashioned nuisance torts keep business activities in check beyond already strict zoning, as well.

In all the above, the actual approach society takes to remedy the market's shortcomings may be done well or poorly; it may lead to corruption or rent-seeking or other abuses; it may lead to gross inefficiencies or out-and-out injustices. But in no case - in spite of any drawbacks - would simply leaving it to the market be acceptable to the society at-large.

The above are basically some musings of mine that I find convenient to think-aloud, as it were, on the blog. It's a reminder also that strict libertarianism is an alien, non-traditional ideology that America's founders, for example, would not have recognized. And also how Republicans and Tea-Partiers can overreach in reacting to the anti-business policies of the Democrats.