Those dangerous devices called trade and money

In my last post I discussed how trade and money are useful solutions to the problem of cooperating with strangers, people with whom we have not had the chance to build enough reciprocal trust to expect reciprocity if needed in the future. However this also means that, whenever you are trading or paying for something, you are putting the other party in the category of strangers. And that is ok when the other party really is a stranger, but it is sad to apply the same method in circles where trust should be strong enough.

Today I would like to review the risks associated to these practices, intrinsic risks that can affect us if we are not aware of them. Like any other tool, there are better and worse way to use them. In the some way that a knife can help us cook delicious dishes, the very same knife can hurt us or someone else if handled in a different way. The pervasive nature of trade and money and the interconnectedness of modern life also means that, if we focus too much in the advantages that they provide, we might be causing harm somewhere else possibly even unbeknownst to us.

Photo: Steve Rhodes

Let me start by reviewing trade, which has some obvious weak points that our society already tries to solve with varying degrees of success. The first great risk in trade is the potential for deception: since the transaction is formally finished once it happens, it is in principle the task of the involved parties to ensure that they know what they are getting out of the exchange. However, since the parties are strangers that will likely never meet again, the incentives to overstate the value of the wares we offer are very high. That is why most countries these days have trade laws that require merchant to properly identify the product they sell, including details about the quantity and, for perishable products, the expected date of expiry.

A second weakness of trade is that, in its purest form, it has no moral compass: if two people are willing to exchange wares nobody should care about how these wares came into their possession, what the other party is going to use them for or even if they should be allowed to trade those wares. That is why we also have laws against products of dubious origin, like those forbidding the sale of moonshine or stolen goods, or those regulating the trade in dangerous goods such as weapons or certain chemical substances,  that could very easily be used to cause great harm. The same principle applies to exchanges that damage human dignity, such as prostitution, human trafficking or even sale of organs. Today there is general consensus on the ownership over other people, but there are still differences of opinion about pre-birth adoption (is that the sale of a baby?) or surrogacy (could that be considered as renting a person?).

As you can see, there are a lot of intricacies in the exchange of goods, and modern legislation has tried to tackle them, but even with these measures it is better to keep a weary eye on the matter in case other ills show up, because the things get even more complicated when we take money into the equation. I will focus today on three properties of money that make it very useful as a societal device, but also pose their own set of challenges: money if fungible, it is durable and it is compounding. Let me elaborate on the risk that these properties entail.

The term fungible refers to the fact that two coins or two bills are perfectly interchangeable as long as they have the same face value. One dollar is a one dollar and one euro is one euro, regardless of how it came into your possession. Similarly a twenty-dollar bill is totally equivalent to twenty one-dollar bills, with the only caveat of the space they take in your pocket. The risk that this brings about is that money, by virtue of the equivalence of value, defines its own flavor of justice: if you have the money to buy something, there is (in principle) no need for additional considerations as to whether you should get the object you covet. 

When the provision of goods and services is not transactional, but based on relationships of trust, the provider (and even the society) can have a say on whether the object or service shall be provided, but this disappears the moment money is involved. One prime example of this effect was reported by Uri Gneezy and Aldo Rustichini about Israeli kindergartens which, faced with lateness on the side of the parents to pick their kids, decided to introduce a fine (effectively allowing the parents to "buy" the lateness), which actually led to even more lateness; while the caretakers stayed late as a "favor" to late parents, it was clear that they should not take advantage of it, but once they were paid the dynamic changed.

The equivalence of money is particularly tricky when the goods are limited: by pure market logic, someone with enough money should be allowed to buy, for instance, twenty tickets to the ComicCon and later on sell it to desperate fans for a premium. Some providers have been trying to introduce limitations in this respect, but it is not an easy feat. Because money has no "conscience" or social commitment, the seller has every right to sell at the highest price they can achieve, even if that means that any other consideration goes out of the window. That is how we frequently see families who are trying to buy their first house being outbid by large property owners who can afford paying higher prices with the knowledge that they will eventually recoup the extra cost by means of the rental fees they receive.

The second tricky aspect of money is that it never expires, which means that it can be amassed and stored without limit. No one in his right mind will accept one million orange, because storing them is a nightmare, they will decay pretty soon, and selling them or transporting them is not trivial either. But with money the situation is different: you can save the money for as long as you want, which folds back to the previous argument that making more money always makes sense. And, contrary to many moral traditions, that makes greed an acceptable personality trait.

The final dark trait of money it its compounding effect, the fact that having money makes it easier to make more money. When the old adage goes that "it takes money to make money" it is spot on: in combination with it persistence, someone how owns "spare" money always has the chance to hold it or to invest it. In that sense, fluctuations in the market are indeed opportunities... but only for those who have the money. Buying low and selling high is something that anyone can do, as long as they do not need to cash in their investment to pay for essentials. It is also true that investments have a tendency to flop occasionally, so it is just reasonable that they are only undertaken with expendable income because otherwise you might find having literally nothing for dinner tonight. Once again, it is in my view a bit askew that those who already have more money than they need have the better chances of getting even richer. That is why under "normal" circumstances, capital earnings should be heavily taxed. But we are living very strange days, when reasonable attitudes are not normal anymore and money, useful as it can be when properly regulated, has a hard-earn bad reputation as cause for a lot of pain across society. Have a nice weekend.