Why are profit incentives needed for a well-functioning society as opposed to trying to legislate this as an intended outcome?

Welcome to Finance and Fury, the Furious Friday edition.

In this episode, I want to look at a core concept of economics – the need for monetisation/value of objects for them to exist – that is – that profits are a factor that help to maximise most outcomes in society

This comes back to the very concept of a free market versus socialism –

Profits or placing value on things is often pointed to as an evil of the free market – there are some merits to this – especially when looking specifically how the modern financial system is structured The financial systems quest for never ending profits has created a lot of risk – leading to economic ruin when bubbles pop This can often be conflated to include the profit drive of a sole trader, or someone who owns a small business – hence all drives for profit can be painted as selfish or evil However - in this episode I want to argue the opposite point – that profits or monetization is the very key to a functioning society – and often leads to the best and most ethical outcome – when compared to those taking equality of outcome as an ethical standing in modern society This focus will be mainly on the free market side – not the centrally planned side to the economy – such as banking/lending – or BIS economic policies But it will be focused on incentives – as profits or earning an income provide an incentive to humanity to strive for more

 

To start with – we will look at the recent PETA protests at the Melbourne Cup

For those outside of Australia – we have a major race every year – called the race that stops a nation – Happens on the first Tuesday of November every year – so this happened last week by the time this comes out At this event – there were protestors – advocating against the horse racing industry – saying that it was cruel You might think that it is cruel – racing horses – if a horse breaks a leg – it often has to be put down But in relation to horses - Think about how far we have come as a society – What did horses used to be used for? – they were an essential part of most every day activities - Transportation – they were used to get around – either for wealthy individuals – or for merchants for transportation of goods from village to village – could carry carts and many times the number of goods a person could Force multiplier in production/agriculture – they could be used to lift heavy items – in construction through pully systems or for ploughing a field – at a much quicker pace than what we are able to War – one of the major forgotten points in history – horses were a major tool in warfare – where if you didn’t have cavalry – and your opponent did – you were at a massive disadvantage Horses were essential – they helped to maximise utility – in other words – they helped the value maximisation that could occur – both at the individual or industry level – which increased economic output and the utility of society For transportation – they could get your around quicker than walking – hence they save time – maximising utility When used in industry or in agriculture – they could help to lift heavy items, work ploughs on the field – much better than what humans could do In war – they were a force multiplier – much better to have mobility on calvary for flanking, or charging to break an enemy, as well as inflicting casualties on the route – so they maximised the utility of the rulers in their probabilities of winning a battle in the medieval periods – the Mongols were the best example of this – able to conquer all the way into modern day Europe – around Prague on the back of a horse – didn’t matter if they were outnumbered – horses certainly maximised their utility – ironically provided one of the sources for their demise as well with the fermented (i.e. alcoholic) horse milk – but even in WW1 cavalry was still used but what happened? Industrialisation happened – by industrialists in the quest for profits – previously – being a horse breeder – or horse merchant was quite a profitable trade – demand and supply – there was often a massive demand for horses – whilst their supply was in limited supply – so they were often well cared for – a farmer could only normally afford one horse – hence they took great care of the animal However - Individuals over time came up with innovations to make horses obsolete from the activities that they used to provide additional value to the owner Transportation – James Watt help to industrialise the stream engine – used in trains for mass cross country transportation, Samuel Brown in 1823 helped to invent the first internal combustion engine, later redesigned by many – then provided on mass by Henry Fords Model T by the early 1900s. For industry – there have been many individuals and companies that have come up along the way – all enterprising individuals – in search for profits - to get us to where we are today No different to the horse breeders or merchants of the past – where they would increase the stock of horses in an effort to profit – hence they help to increase the supply of horses – helping the growth of economic output to occur – not just to them through profits – but those that could buy a horse to help them in their own efforts – transportation, farming, in industry, or even war – as conquest by rulers used to be a useful means of wealth accumulation But at every stage of innovation – horses got left behind – something more profitable came along Riding a horse into a row of soldiers, or riding on horseback to go from city to city might sound antiquated when compared to today’s standards – but it was for profit and through innovation that horses were no longer needed for these tasks So in a way – if you view it from PETAs point of view – innovation and the aims of profit maximisation helped to save many horses from dying in war - or going lame in the fields But what happened to the horse population over the years – well it declined So out of all of these innovations that have replaced horses – what did this lead to? Less horses – They are now used mainly in recreation – i.e. riding them for leisure or for sporting events – like the Melbourne cup The question is - what happens if racing events cease? – say protestors get their way – that horse racing events cease world wide – what happens to horses? Their populations go down – those horses that are now currently prized – in other words – valued to the tune of tens of thousands of dollars to many millions of dollars – no longer have this value attached to them If this value gets removed - then again, what happens to these animals? They are not likely to be cared for as well as they currently are - The real world is not black and white – there are pros and cons to everything – This is where only focusing on a pro can often lead to major cons – if the aim is to save the lives of horses – and the method is to ban horse racing – then are these PETA protestors going to buy these horses once they can no longer race? or at the very least take care of them on an ongoing basis? Adopting a greyhound is much easier than adopting a horse Would they have the resources to do so? And would this lead to a better or worse life of these horses? In addition – would the worlds population of horses continue to decline It is sad when a horse is put down – but again – life is not black and white – we see one horse put down each year in a row at the Melbourne cup – but would any of these horses have a life unless they were there to race? These horses have a pretty good life – and are well taken care of - here the argument can come in that humans are forcing horses to race – against their will – this is a point I have no idea on – We cannot communicate with a horse – to ask it what it would like to do – from my personal experiences with horses – they get a little antsy when they are confined and like to get out for a run – whether this is the same as being raced professionally – I have no idea – I cannot talk to horses – but they do get well cared for This is where due to horses having a monetary value attached to them for the most part – especially for racing horses – these racing horses sell for millions of dollars – the most expensive horse sold for around $100m AUD – or about $70m USD – is a little different for domestic horses – kept for pleasure

 

Thinking about another example – what has been the most successful strategy for the conservation of rare/endangered species?

The answer is - Hunting in game reserves – through the monetisation of these animals – creates incentives – and at the core concept of economics – it is all about incentives – humans do little without incentives Through the monetisation of protecting these animals – for others to hunt – it actually allows the reinvestment of funds – where the Profits go into the conservation Due to a monetary value being placed on these animals – people are incentivised to take care of them – protect them from illegal poachers – and help to increase their numbers This system helps with population management as well – There was the case with Cecil the lion – through the anthropomorphism – putting human traits into animals through Disney movies – people feel sorry for the lion being shot – but this lion in question was past breeding age – and was killing younger males – so if the question is to help maximise the population – is it not best that this animal that is nearing the end of its life – that killed two male cubs that would go on and help to increase the population – be removed from the population? It might sound harsh – but the meat from the lion went to feed the local African population – the money went back into the preservation of these animals - Again - It might sound callus or harsh – but it is reality – for policy to work – or for any decision to be made- it needs to be based around reality – just not hopeful or wishful thinking We could all come up with how we want the world to work – in wishful thinking – but reality is harsh – Hence – the free market often does come up with optimal solution – these are by no means perfect – but optimal is far from perfect – it is simply the best solution to hard problems If the government was to legislate that these animals are protected – by law – they are protected from being killed – does this mean that their populations would increase and that nobody would kill them? From observations – it doesn’t – poachers are operating outside of the law – hence they don’t care what the government says – their incentives are to kill the animal regardless – it is the same for anything that is made illegal by governments – if people want it – they can often get it through black markets Under this situation - The only way to protect these animals is have the government try to enforce these laws – however they often lack the flexibility and ability to do this – especially in a lot of African nations – so the poachers run rife and the policy is not enforceable But all of a sudden – if individuals or companies can monetize these animals – through having them on game reserves – for tourists to come and see and once these animals get too old to breed and become a danger to the other population of animals – they can sell a ticket for hunters – then the populations of these animals actually increase – through the incentives of those in charge of the game reserves to protect these animals as well as take care of the population management – i.e. taking out the non-breeding males who kill younger cubs due to territorial issues Is this moral – well many people will say that it isn’t – but does it work? As far as maximising the populations – well it technically does Might not like it – but the economics and incentives of these policies creates a situation where the free market can often provide the optimal solution – through incentives Trying to legislate these issues through a lens of morality can lead to a much worse outcome – say you ban horse racing, or you ban hunting – it leads to unintended outcomes There are always Orders of consequences – the first might sound great – that you ban horse racing – or hunting lions – mission accomplished – but the second order of consequences let alone the 10th may see the populations decline massively – so if the intent is to save these animals – well these bits of legislation would fail massively – as it would result in a declining population – but at least those who forced the issue could feel good about themselves, right? In my view - the Outcome surrounding a lot of these issues is more important than the positions of morality that a lot of these groups propose – as by making a policy based around a moral argument – this can lead to an immoral outcome – in other words less horses or animals – when compared to their positions of having these animals be set free – where they may actually face a worse death and their populations decline Decisions not based on morality can often lead to bad results – especially around equality – you have too look at outcomes from a lens of incentives – otherwise the intent can lead to worse outcomes – Don’t get me wrong - Being ethical should be applauded – but a lot of these polices should stop at home – You shouldn’t try and force morality on society – this is what dictators do – as everyone’s morality is different We are all different – what is moral for one person is immoral to another – The WEFs morality is to control all economic interactions – the UNs morality it to help reduce CO2 emissions – but the most effective method of this would be to reduce the worlds population They have the policy of global immigration from third would nations to first would nations – but under this the CO2 emissions PP would increase by 10 times per person – so they technically hold contradictory policies Increasing immigration whilst at the some time they want to reduce the CO2 emissions per person

 

So in summary -

who’s morality do we work with? Yours, mine, PETA’s? Following each will have an effect – and maybe not the best effect on society – or on the horse population The answer is to follow incentives – which can often lead to optimal solutions Or alternatively – if you are trying to enforce morality – try leading with incentives – this is not the same as disincentives – the government gets this confused – punishing people doesn’t work as well as allowing people to help maximise their own utility

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