Profit and the Viability of Economies

פרשת ויחי: שִׁמְעוֹן וְלֵוִי אַחִים כְּלֵי חָמָס מְכֵרֹתֵיהֶם.

This article draws from Rav Shamshon Rafael Hirsch.

Two Hebrew words for profit, for gain, are Yitron, and Betza. Yitron means ‘expansion’. There is an expansion of goods, services, and value in the economy. Put into Pareto terms, it is possible that everyone can gain, or at the least, that no one loses. So, when Yitron occurs as the result of economic activity and ingenuity, it is a question of distribution of the gains.

Betza is substantively different. It is related to the word Petza which means ‘to wound’. Betza is the type of profit where one person gains at another person’s expense or ‘wounding’. In other words, there’s a ‘zero-sum game’ at play.

The argument is: To the extent that an economy is motivated, organized, and conducted, with reinforcement by legal and financial structures, to achieve Betza, as opposed to Yitron, it is headed for ‘end stage’ failure or collapse. I utilize the term ‘end-stage’ failure much the way the term is used with respect to heart failure or kidney failure. The heart or kidney can be ‘in failure’ and still function, albeit, at a much-diminished capacity, for a while, until… ’end stage’ occurs.

Examples of Yitron abound. Think of innovation and invention that lead to new products, services, or efficiencies. Alas, examples of Betza also abound. Whether or not the reader will agree that the following examples are good examples of Betza, I would suggest that the above-stated argument is still worthy of analysis and debate.

The more common examples are in situations (not every situation) where a seller (or manufacturer) takes advantage of information asymmetry to provide an inferior quality product marketed as a superior quality product. Transaction costs make it prohibitive for the buyer to ascertain the true quality. ‘Marketing’ can be quite convincing, even when patently or mostly false. We all know this from experience. Moreover, in the calculus of the seller, ‘marketing’ costs much less than ‘quality’, and the cost of being revealed is judged to be small.

The seller knows that the poor quality or inferiority will likely be discovered, but doesn’t care. He knows the transaction costs of the buyer recouping part of the payment price are too high to bother. (This is Chamas – legalized stealing). For more expensive items or projects, the seller knows he can wheedle his way out of going to court or having to pay back the buyer. He will have highly polished people on board who can successfully redefine ‘quality’ or show that the product technically met its contractually sculpted specifications, or that it was the buyer’s mistaken assumptions at fault. Alternatively, he will in a subtle but effective way bribe, co-opt, or blackmail the person complaining. Or he will do the same at a higher level of executives, who will then order the lower level complainers to S-h-u-t  U-p or else! The seller has many tools at his disposal to lower the cost of being exposed, which he assumes will happen.
The best sellers will even get the buyers to pay for the repairs or upgrades to the product or project (think: tunnel, tank, plane, you name it) at padded prices. Now that’s a good businessman! (Pardon, the cynicism here)

There is a Mishna in Bava Metzia 4:12 about mixing the wines and advertising superior wine or sifting the bran and cleaning only the top layer: (translation and Bartenura here.)

הַתַּגָּר נוֹטֵל מֵחָמֵשׁ גְּרָנוֹת וְנוֹתֵן לְתוֹךְ מְגוּרָה אַחַת. מֵחָמֵשׁ גִּתּוֹת, וְנוֹתֵן לְתוֹךְ פִּטָּם אֶחָד. וּבִלְבַד שֶׁלֹּא יְהֵא מִתְכַּוֵּן לְעָרֵב…

Of course, this model is predicated on the notion that there is little if any inherent value to integrity and honesty, except for its utility in gaining a profit. (Alas, there is an implicit editorial or, better, lament, here that ‘integrity’ and ‘honesty’ are gone from much of economic life. Oh, we see people claiming these qualities and even putting them onto their product names, but these are lower cost ploys….’marketing’.)

Banks are notorious for Betza. Many (possibly hundreds) of the popular Betza schemes fall under the rubric called ‘predatory lending’ which generates billions in fees (late fees and many hidden fees – that the targeted consumers aren’t keen enough to discern).  The Housing Bubble of the early 2000s may be an example where there was substantial Betza (even though there was some Yitron as well). Banks gave large mortgages to people who could according to the usual financial prudence and calculation could afford (or sustain) only small mortgages.

The reader may be able to think of other economic activity that follows the ‘zero-sum’ game plan or Betza.

I would like to conclude with the notion of Chamas, the Hebrew word which is often translated as robbery or violence. Rav Hirsch translates Chamas as legalized stealing. The sages of the Talmud provide support for this definition by saying that Chamas is stealing less than can be recovered in a court of law. At the time of Noah and The Flood, the world was full of legalized immorality and legalized stealing, Chamas. The decision to let The Flood occur was primarily because of all the Chamas that was the engine of economic activity in the time of Noah.

To this writer, when Betza and Chamas work together (and there is substantive overlap between the two, for sure) and reach some ‘critical mass’ in the economy, ‘failure’ follows. I do hope it’s not ‘end-stage’.

Segulos’ Opportunity Cost: Is There Any?

I wish to comment on the oft-heard claim selling or promoting segulah items is “manipulative”, because “there are people who end up impoverishing themselves due to desperate “investment” in such things.”

Unless it is halachically fraud (not my topic for the moment!), you can’t prove “opportunity cost”. How do you know they would have extra money left over if they hadn’t used it for this? You can’t know.

It’s like the claim if people weren’t wasting their time and energy on statistically ineffective politics, they could be making real changes in the world by Direct Action, or whatever. Says who? As best as I can tell, people like the illusion of politics. They don’t like changing things. And so one does not come at the expense of another.

Can you prove me wrong?

My Working Theory: More Pagan, More Poor

Economic Laws for the Real World

June 9, 2007

Why are Third-World countries poor, while those in the First World aren’t? (The phrase “third world” is a tad shaky, embracing as it seems to Taiwan, Thailand, and Mexico, and also Haiti and Zaire. We will use it for convenience.)

The standard explanation in the Third World is that the West, chiefly the United States, exploits them, buying their raw materials and selling them manufactured goods. Everything is someone else’s fault. The reasons I think are otherwise. The advanced nations will exploit anyone they can, but this hasn’t kept Japan, Singapore, Taiwan, Argentina, and many other countries from prospering.

Start with corruption. In many poor countries, virtually everything is for sale. You can bribe the cops to get out of a ticket or bribe them to beat up an enemy, bribe a general in the army to overlook illegal logging, bribe anybody to do anything. The result is that really the country barely has laws, which means that you can never be sure of your legal ground. Businesses need predictability.

Corruption exists in advanced countries, but there is less of it, and it tends to take organized form, as in campaign contributions, affirmative action, and seats of boards of directors after leaving office.

Suspected Economic Law: The easier it is to bribe a working-stiff cop, the poorer the country.

Sheer governmental inefficiency has much to do with it. When I was in Taiwan many years ago, when the country was first developing, I talked to an American businessman about Asia. Taiwan, he said, had Enterprise Zones, fenced regions with buildings and utilities in place. You signed one document, brought in your machinery, hired workers, and started production.

In Thailand, he said (it may no longer be true) you had to negotiate for months with the Interior Ministry to get land, then months with the Labor Ministry, then months, then months, meanwhile bribing everybody right and left. I’ve got the names of the ministries wrong, but you get the point.

Suspected Economic Law: Prosperity varies inversely with the time between beginning negotiations to open a factory and getting first product.

While inefficient government retards economic progress, it doesn’t follow that countries with inefficient governments will always be poor. Industry in the United States has been so productive that, although the government is worse than useless, the country can withstand it.

A serious obstacle to prosperity is Shanti-ness, a quality not widely recognized in econometrics but well known to experienced travelers. Shanti-ness is a curious mixture of just not giving a damn, lack of ambition, little interest in academics, and sometimes something that looks like lethargy.

You go into houses and never see books. A man will start a garage to repair cars for a living. He won’t think of expanding and owning a chain of garages. His family has enough to eat, so why do more? The young, though they could pursue school beyond some pre-high school level, don’t. They marry early instead of establishing themselves first. People can’t drive well. They live in the present, whereas people in rich countries have one foot in the future. An American thinks college, grad school, career. He is going somewhere, or trying to. He may not adhere to his plan, but he has one.

An element of Shanti-ness is a slack attitude toward maintenance. People who could easily afford nineteen cents for a brake-light bulb don’t. They throw trash in the streets. Potholes go unprepared for years.

Suspected Economic Law: National income is inversely proportional to the amount of trash in the streets.

Another aspect of Shanti-ness is an incapacity to attach importance to time. This comes in two flavors, wholesale and retail. At the wholesale level, an American thinks, “Oh my god, I’m thirty and haven’t made partner.” A Third-Worlder lacks any sense of urgency. He sees existence as a period through which one passes instead of an interval in which one does things.

At time’s retail level, Third-Worlder’s think that four o’clock means anywhere from five-thirty to not at all. It isn’t rudeness or inconsideration. If you do it to them, they won’t be offended. By contrast, an American reporter, say, knows that if his nine-o’clock interview happens at nine, the one at eleven will be possible, and the business lunch will come off on time, so that he can hit the computer by three and file at five. It works. Americans show up ten minutes early and wait. In the Third World, writing the same story would take three days instead of one.

Suspected Economic law: Per capita income correlates with the average number of minutes by which people miss appointments.

In the Third World there is a different attitude to commerce. An American businessman is likely to give a new client a good price, or at least the going price, in hopes of acquiring him as a regular customer. If in the Third World a European gets a haircut without asking the price, he will be charged eight dollars when the correct price is four dollars. He will never come back.

This is normal third-world economics—gouge the customer to the max without thought of the future. The practice is encouraged by the reliance on haggling in poor countries. I have sometimes wondered whether this doesn’t make tricking the customer more important than having a good product.

Suspected Economic Law: Countries that bargain have less money than those that don’t.

The what-me-care attitude can be, to an American, incomprehensible. You want a roof job that would cost several thousand dollars, a lot of money in many countries. The workmen promise to come the next day to give you an estimate. They don’t show. You call, and they say, well, my car broke. Next day, same thing. They got to your town but couldn’t find the house. And so on. So you go to Wal-Mart or Home Depot or some similar First-World enterprise and get the job done.

Another element of Shanti-ness is, depending on your politics, cultural or inherent, but unmistakable. Some populations just aren’t very bright, or at any rate don’t seem to be. Sub-Saharan Africa, though rich in resources, is pea-turkey poor and not improving. Arab countries, even when awash in oil money, do not establish First World societies that could survive without oil. In South America, the white countries, such as Chile and Argentina, could be in Europe. The highly Indian countries, as for example Bolivia and Peru, would be basket cases if they could afford the basket.

Suspected Economic Law: The more European or East Asian blood, the more money.

That’s Fred on economics. Lynch mobs may take a number.

From Fred Reed, here.

Stay Safe!

The Bagatz is releasing a couple of thousands of prisoners home because the jails are too crowded. Baruch Matir Assurim! I am torn, obviously. But the news reports that some of those released are dangerous pedophiles!

I just hope the fence around Kefar Shemaryahu (where just about all the Supreme Justices live) is nice and tall…