Tuesday, July 22, 2008

Fear Vs. Greed

In my recent repost There Is No System, I did not make the concept specific to free markets. I spoke with a friend at work today who believes that the oil companies are in bed with the automakers, that there are only a few corporations which control everything, and that there is a market system that can be manipulated by these nefarious entities.

Well wouldn't they just love to. It is best to think of most players in the market as amoral agents. Not that they are all amoral, but that this method provides the best overall predictive value. If they could manipulate the market, they most certainly would try. Groups succeed at having undue influence for awhile because they control a prized resource or process, but this is short-lived.

These large corporations are wrestling with the same large, ungainly mass of rubber bands that we are, trying to get a good grip to move things their own way. They're bigger, they can do a lot more, but no entity is large enough to move the whole market more than a little. You have to leverage the advantage you find, and leveraging means vulnerability and risk.

We use the nice words risk and benefit to describe actions in the market, but if you want to describe it starkly, it's fear versus greed. In the checks and balances of the market, fear is the great limiter of greed. This is why federal bailouts, government corruption, and sweetheart deals are so bad for us. They eliminate the fear and so allow greed to run unchecked.

Nice, well-meaning people get taken advantage of at times, but for the really spectacular falls, keep your eye on the greedy. This is how casinos make their money. The folks with limited greed can only be taken for so much of a ride, because the they don't have an intoxicant causing them to underestimate the fear.

It gets more complicated, certainly. In some professions, taking no risks whatsoever is itself a risky strategy - adapt or disappear. But for shorthand understanding of why InBev buys Anheuser-Busch or GM is slow off the mark making electric cars, analysing it in terms of fear versus greed will take you a long way.

Taking it one step further, it applies to foreign affairs as well. Countries take risks to obtain more benefit: fear versus greed. Refusing to play only grants more power to the other players, by removing the check of fear on the greedy.

There is a great exception to this last, which I leave to your own analyses.


David Foster said...

"the oil companies are in bed with the automakers"...I assume he means that these industries are conspiring to prevent the introduction of non-oil-based transportation technologies.

Precedents for this would include...The way in which IBM was able to prevent the introduction of the PC and, earlier, the minicomputer, thereby protecting their very high profit margins and forcing us to continue to do all our computing on mainframes. Also, the way U.S. Steel and Bethlehem Steel drove the efficient "mini-mill" companies like Nucor our of business. And we mustn't forget the sneaky steam locomotive manufacturers who prevented the introduction of diesels, which is why coal smoke pervades the area around railroad lines.

All in an alternate reality, of course.

I'm reminded of C P Snow's comment about "people who are both cynical and unworldly, which is one of my least favorite combinations."

Assistant Village Idiot said...

You can drop by with such good examples - and CP Snow quotes - anytime.