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 –

1. 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
   1. The financial systems quest for never ending profits has created a lot of risk – leading to economic ruin when bubbles pop
   2. 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
2. 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
   1. 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
   2. 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

1. 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
   1. At this event – there were protestors – advocating against the horse racing industry – saying that it was cruel
   2. You might think that it is cruel – racing horses – if a horse breaks a leg – it often has to be put down
2. But in relation to horses – Think about how far we have come as a society –
   1. What did horses used to be used for? – they were an essential part of most every day activities –
      1. 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
      2. 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

1. 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
   1. For transportation – they could get your around quicker than walking – hence they save time – maximising utility
   2. 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

1. 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
   1. 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
   2. 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
  1. 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

1. But at every stage of innovation – horses got left behind – something more profitable came along
2. 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
   1. 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
3. But what happened to the horse population over the years – well it declined

3. So out of all of these innovations that have replaced horses – what did this lead to? Less horses –
   1. They are now used mainly in recreation – i.e. riding them for leisure or for sporting events – like the Melbourne cup
   2. 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?
      1. 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
      2. 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 –
   3. The real world is not black and white – there are pros and cons to everything –
      1. 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?
         1. Adopting a greyhound is much easier than adopting a horse
         2. Would they have the resources to do so? And would this lead to a better or worse life of these horses?
         3. In addition – would the worlds population of horses continue to decline
      2. 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?
         1. 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 –
            1. 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
         2. 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?

1. 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
   1. 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
   2. 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
   3. This system helps with population management as well –
      1. 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?
      2. 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 –
   4. 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
      1. We could all come up with how we want the world to work – in wishful thinking – but reality is harsh –
      2. 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
      3. 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
         1. 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
         2. 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
      4. 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
   5. 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
   6. 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
      1. 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?
      2. 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
   7. 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 –
   8. Don’t get me wrong – Being ethical should be applauded – but a lot of these polices should stop at home –
      1. You shouldn’t try and force morality on society – this is what dictators do – as everyone’s morality is different
      2. We are all different – what is moral for one person is immoral to another –
      3. 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
         1. 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
         2. Increasing immigration whilst at the some time they want to reduce the CO2 emissions per person

So in summary –

1. who’s morality do we work with? Yours, mine, PETA’s?
2. Following each will have an effect – and maybe not the best effect on society – or on the horse population
3. The answer is to follow incentives – which can often lead to optimal solutions
4. 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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