Essays

Financial guru and blogger Andrew Tobias posted a link to a video on amimals. The similarity between the ecology of animals and the economics of markets struck me as interesting and I wrote this essay.

The video shows, in places, carnivores attacking herbivores, although they don't show the actual killing. A lot of people react negatively to nature "red in tooth and claw" but I've tried to explain to people what is actually occurring.

We watch the beautiful zebras and antelopes healthy and vibrant on the African plain and wince when they are killed. However, there is only so much forage for the herbivores to eat and without the carnivores their numbers will grow until they overgraze the landscape and collectively all of them begin to starve.

Every day for herbivores in this situation becomes a nightmare of hunger. Their weakened condition makes them vulnerable to diseases that their healthy immune systems would quickly vanquish, so they live day to day with both hunger and pain. Not just normal hunger and incidental pain, but starvation and agonizing pain day after day as their normal existence of life.

Few of the cute young will be born, even fewer survive. This is a simple unavoidable empirical fact that is avoided only because the carnivores select and kill a few of them so that there are no longer too many herbivores overgrazing the plain. The deaths of the herbivores tend to be among the old and infirm, releasing their forage for the young and healthy.

There is an important political correlative here. The marketplace is made up of suppliers and consumers. The reality confronting suppliers is that the volume of consumers they can attract determines their financial health. Fixed costs, distribution costs, and marketing costs take an enormous amount of the revenue that firms receive from consumers.

Their saving grace is volume: each firm has to develop enough volume to cover their fixed costs before they get anywhere, and then they have to pay for the distribution and marketing costs before they can incur a net gain. For many firms it is the fixed costs of location and machines that must first be paid for, then employees, then profits.

Again a simple empirical fact: there is only so much consumer spending available and therefore too many firms means too little volume for them to be financially healthy. The firms are just like the herbivores: without something to weed out the obsolete and inefficient firms they all will starve.

More importantly, obsolete and inefficient firms resort to cheating and exploitation in order to survive. In the process they take away volume from honest healthy firms, many of which are innovators still establishing their place in the market.

As a consequence, the existence of government regulation to put safety and enforcement into the market results in some firms failing but their volume goes to the honest and healthy firms.

The same thing occurs with minimum wage laws, when enforced: it is only the obsolete and inefficient firms that suffer because the volume they give up goes to the other firms in the market to make them more healthy. Similarly, volume is vastly increased in restaurants with government health inspections, far fewer people would eat at restaurants, particularly with widespread food poisoning that you don't see now because of regulation. Boom times occur in markets primarily because government regulation maintains the integrity of the market. Indeed bubbles occur when people lose sight of the risk because of successful government regulation.

In essence, this ecological volume loss is the condition of markets after a recession. The economic multiplier inflates the economy like a bubble during boom times, people spend a lot of money and the economy has a lot of volume. But when something causes that boom to bust, the economy loses jobs and people spend less and the economic multiplier is reduced. As a consequence, there is far less volume for the firms in the market and profits disappear.

Many firms have to leave the market because of the lack of volume, which sends their volume to other firms. The economy rejuvenates when enough firms leave the market to allow the remaining firms to be profitable. Once stabilized, profitable firms can expand again, hiring people to serve the increasing volume. The new hires increase their spending and the market sees a growing economic multiplier.

Government regulation is necessary for a healthy market to exist just as carnivores are necessary for healthy animals to exist. A healthy marketplace requires sufficient volume for each firm to allow them to cover costs, and the greater the volume for each firm the greater the profits for the firms. Which is also why we have antitrust laws to keep firms from conspiring to limit competition.

When you watch the carnivores kill the herbivores it may not be pretty but there would be no happy healthy herbivores without the carnivores. The situation is similar in the marketplace, taxes and regulations may result in some reduction in the number of businesses in an area, but it also likely makes the remaining businesses more financially healthy. In essence, like the animals, we have a choice between hurting a few in order to increase the health and happiness of the many.

Ironically, this sounds a lot like the greatest good for the greatest number, and if you google that phrase you see it referenced to Jeremy Bentham and the philosophy of Utilitariansim. Why ironic? Wikiquote begins its page on Jeremy Bentham thusly: “Jeremy Bentham (15 February 1748 – 6 June 1832) was a British gentleman, jurist, philosopher, and legal and social reformer. He is best known as an early advocate of utilitarianism and animal rights.” Animal rights!