Making Free Markets Work: Tell No Lies
In the October 29, 2009 New York Times, financial commentator Floyd Norris offers up a solution to excessive executive compensation and the bubbles that plague our free enterprise system. In his article, ”To Rein In Pay, Rein In Wall St”, he suggests that Wall Street profits need to be dampened through regulatory intervention that increases transparency, limits risk, and breaks up “to big to fail” institutions, to make them more competitive. His analysis of Wall Street money churning is excellent, but is his tangled web of regulations a auseful approach?
WILLIAM OF OCKHAM (1280 - 1349)
The wisdom called Occam’s Razor asserts the principle that, all things being equal, the simplest theory or solution to a problem should be favored. If we really do believe that market demand is driven by consumers seeking the “best” return for their dollar, and that competing for the customer’s dollar will drive companies to compete with one another to create product and service that customers desire, then we should abide by that theory. We should remove the obstacles and let the market fundamentals work.
How can we do this?
King's X?
The solution is as simple as Occam’s Razor itself. There need be one and only one rule in conducting transactions. TELL NO LIES!
All we need to do is require that every purveyor disclose, to the best of their ability, all of the details about the product or service they deliver in exchange for the customer’s dollar. If we make deception by inclusion or omission a crime, the consumer will be able to rationally compare and choose between products and services. Let the best supplier win!
For example, require that automakers disclose vehicle specs, safety data, environmental impact, failure records over time, customer satisfaction data over time, AND actual cost of production, marketing, distribution, and sales. If the customer has a question that is not on the disclosure list, then require the seller to answer honestly or find the answer or confess ignorance.
If an automaker feels that this data places him at a competitive disadvantage, then let him change the product so that the data will be more advantageous.
Complete honesty and transparency underly the fundamental thesis of free market fundamentals. Competition for consumer dollars only works if the customer has the information needed to choose. Only with complete and transparent information can the customer compare products and serivces in order to decide just how much extra to pay based on the value he or she assigns. In the automaker example, the price the customer is willing to pay under these conditions will contain the profit to be realized and distributed among the automotive supply chain players.
When it comes to financial investemnt, sellers should be required to fully disclose the statistical data that quantifies the risk of an investment. This is no different than disclosing the data that is readily available for various games of chance played at gambling casinos around the world. If a Wall Street investment wizard feels an investment risk is to complex to quantify, he or she must simply say, ”I H A V E N O I D E A”.
Adam Smith and the "Invisible Hand"
In other words, let free market work!
Does this sound naive? Won’t people fudge the truth anyway, you say?
Sometimes sellers will lie. They will make false claims or claim a truth for which there is no evidence. But when they do this, the truth will come out at some point down the line. Their crimes of irresponsibility will be detected and punishment and compensation will be extracted. They can either do better, or pay the price for their deception and ignorance.
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If you conclude that “tell no lies” cannot work, then there is a fundamental problem with Adman Smith’s theory of the market’s “invisible hand” that is guided by rational self-interest.
Yes, but when is a lie a lie? There is wide cultural disagreement about this and a large gray area even within our own culture. For example in Thailand, a culture with which I am quite familiar, people will say things to each other that are not strictly true, but not out of some intention to mislead so much as to follow a cultural norm of being polite. It is considered impolite to be too direct and tell people things that will upset them. Thus a Thai may shade the truth (lie) rather than be direct. A Thai will rarely say “no” for example. It is considered impolite and the importance being polite trumps the importance of being strictly truthful.
In our culture commercial truths tend to be on a continuum. A seller wants to point out all the positive features of his product or service. Let’s say research studies produce varying results after a study of auto mileage capability. In one study Car A gets the best mileage, but not in another. Can the seller of Car A declare truthfully, “Research has shown that Car A gets better mileage than Car B”? This kind of truth is different from saying Car A has better mileage when no research supports the claim (there is no basis for saying A is better). And, that statement is a different kind of statement than saying A is better than B when, in fact, B is better than A by every measure.
You make perfect sense. Therefore, since rational decisions require transparency of information IF it is to produce a greater good, you conclude that Adam Smith’s “invisible hand” cannot work as advertised. There can be no rhyme or reason, no “greater good”, to outcomes, whether Individual and cumulative, that are based in misleading or spurious information (e.g. lies).
I’m not sure what Smith was getting at and am not an expert on his work. So your statement that follows the Smith reference is confusing to me. Not sure what you’re getting at.