Total Posts:14|Showing Posts:1-14
Jump to topic:

Libertarians vs Fraud and Corruption

Sieben
Posts: 2,736
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 2:34:19 PM
Posted: 5 years ago
The orthodox libertarian view is that fraud and corruption are automatically punished on the free market because people will not patronize untrustworthy institutions. I think this is only half the story.

Bryan Caplan shows here that conditions of zero fraud are inherently unstable. http://econfaculty.gmu.edu... And in fact, there is no pure strategy for firms or consumers.

The TLDR of the paper is that conditions of zero fraud punish vigilant consumers, so consumers will naturally change their strategy to be passive. But conditions of zero vigilance punish honest firms, so firms will naturally change their strategy to be fraudulent.

In short, a society without fraud is unstable. I think there is an implicit demand for fraud. Consider the following example:

Assume Coke and Pepsi machines are both always honest, and so consumers aren't really paying attention. Then Coke decides to make it so that its machines eat 10% of everyone's quarters in an attempt to raise profits.

The standard libertarian line is that people will just switch to Pepsi because Pepsi is honest. I.e. that consumers will become vigilant. But why doesn't Pepsi just juke its customers too? Whichever option is most profitable depends on a lot of factors, but let's say Pepsi goes the 10% juke rate too. It puts Pepsi and Coke back on equal terms. What is their next move?

Coke can try and capture more customers from Pepsi either by lowing its juke rate, OR by lowing its up front price in an attempt to bait consumers into playing its game.

Since both companies can go this route, there is no lower limit on nominal price. Pepsi could charge 0.25 per drink but eat 80% of quarters. But most consumers probably aren't willing to play that game, so equilibrium will probably be something more reasonable.

Note: We never have to worry about the EXPECTED cost of drinks going up. Because both companies can adopt the same strategies costlessly, their expected profit is just whatever the discount rate is.

The conclusion is that fraud is not automatically bad. At worst, firms just have the same profit levels as before, and consumers are rolling the dice a little. But firms have an incentive to pick juke ratios/lower up front prices that match consumer's risk preferences, so fraud might actually be a positive by that right alone. This is also a stable solution, unlike the unstable no-fraud-ever advocated by orthodox libertarians.
Things that are so interesting:

http://www.debate.org...
http://www.debate.org...
Sieben
Posts: 2,736
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 2:46:21 PM
Posted: 5 years ago
I actually think the equilibrium juke rate is something like 2% on coke/pepsi machines. The cost of being vigilant is really low because people all have preferred machines they use over and over again, and will just switch if they get a juke.

(note regulations can't stop this because companies can just design their coin-slots poorly to have an expected rate of 2% failure)
Things that are so interesting:

http://www.debate.org...
http://www.debate.org...
PARADIGM_L0ST
Posts: 6,958
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 2:53:20 PM
Posted: 5 years ago
The conclusion is that fraud is not automatically bad. At worst, firms just have the same profit levels as before, and consumers are rolling the dice a little. But firms have an incentive to pick juke ratios/lower up front prices that match consumer's risk preferences, so fraud might actually be a positive by that right alone. This is also a stable solution, unlike the unstable no-fraud-ever advocated by orthodox libertarians.:

I don't really understand. Are you saying that you think fraud is acceptable if the exchange rate remains the same? I think rigging machines is an unethical way to bolster revenue. Consider the outcome if no one rigged their machines. Also, is it acceptable to do this Las Vegas casino's?
"Have you ever considered suicide? If not, please do." -- Mouthwash (to Inferno)
Sieben
Posts: 2,736
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 3:22:12 PM
Posted: 5 years ago
At 2/19/2011 2:53:20 PM, PARADIGM_L0ST wrote:
The conclusion is that fraud is not automatically bad. At worst, firms just have the same profit levels as before, and consumers are rolling the dice a little. But firms have an incentive to pick juke ratios/lower up front prices that match consumer's risk preferences, so fraud might actually be a positive by that right alone. This is also a stable solution, unlike the unstable no-fraud-ever advocated by orthodox libertarians.:

I don't really understand. Are you saying that you think fraud is acceptable if the exchange rate remains the same? I think rigging machines is an unethical way to bolster revenue.
I'm not arguing ethics. I'm saying the worst case scenario is that fraud doesn't matter economically.
Consider the outcome if no one rigged their machines.
1) Prices would be higher
2) It would be unstable because no consumers would be vigilant, thus opening the door for fraud.

Did you read the OP?
Things that are so interesting:

http://www.debate.org...
http://www.debate.org...
TheAtheistAllegiance
Posts: 1,251
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 4:04:33 PM
Posted: 5 years ago
This might be true if the economy consisted of only soda machines that explicitly screwed people out of money. Most fraud outside of this theoretical framework is much more complex and hard for the average consumer to detect, and even then, not all of the costs of fraud are placed directly on the consumer.

For instance, most mortgage fraud was laced with faulty security ratings and negative amortization loans. The former doesn't even directly affect the consumers who are taking loans out with Goldman Sachs, while the latter is very implicit and covered up with loads of legal jargon.

And to your other point, those security ratings were very economically damaging, as we all saw in 2008. Furthermore, the negative amortization loans are also highly damaging to the consumer whom likely invested thousands in the home purchased, only to have the principle payment go up.
Sieben
Posts: 2,736
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 4:09:52 PM
Posted: 5 years ago
At 2/19/2011 4:04:33 PM, TheAtheistAllegiance wrote:
This might be true if the economy consisted of only soda machines that explicitly screwed people out of money. Most fraud outside of this theoretical framework is much more complex and hard for the average consumer to detect, and even then, not all of the costs of fraud are placed directly on the consumer.

The point is that it doesn't even matter if consumers are vigilante...

For instance, most mortgage fraud was laced with faulty security ratings and negative amortization loans. The former doesn't even directly affect the consumers who are taking loans out with Goldman Sachs, while the latter is very implicit and covered up with loads of legal jargon.

Yes well if your plan is to give free money to the people who lose in the market, there won't be any systematic rationale.

And to your other point, those security ratings were very economically damaging, as we all saw in 2008. Furthermore, the negative amortization loans are also highly damaging to the consumer whom likely invested thousands in the home purchased, only to have the principle payment go up.

So basically you can't come up with a free market example of what you're talking about. You should be also be able to come up with a really simple illustration where it doesn't work, but you instead choose to focus on a ridiculously complex, politically loaded, financial crisis.

Please use coke/pepsi machines. Introduce "leveraging" if you wish.
Things that are so interesting:

http://www.debate.org...
http://www.debate.org...
Reasoning
Posts: 4,456
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 6:15:25 PM
Posted: 5 years ago
Brilliant.
"What we really ought to ask the liberal, before we even begin addressing his agenda, is this: In what kind of society would he be a conservative?" - Joseph Sobran
Sieben
Posts: 2,736
Add as Friend
Challenge to a Debate
Send a Message
2/19/2011 7:01:34 PM
Posted: 5 years ago
At 2/19/2011 6:21:40 PM, FREEDO wrote:
There is also a demand for violence.
Sure. What's your solution? Push the no-violence button? larf.
Things that are so interesting:

http://www.debate.org...
http://www.debate.org...
PARADIGM_L0ST
Posts: 6,958
Add as Friend
Challenge to a Debate
Send a Message
2/20/2011 8:54:04 AM
Posted: 5 years ago
I'm not arguing ethics. I'm saying the worst case scenario is that fraud doesn't matter economically.:

In all situations or just with the particular argument you made?

Consider the outcome if no one rigged their machines.
1) Prices would be higher
2) It would be unstable because no consumers would be vigilant, thus opening the door for fraud.

Did you read the OP?:

I did, but I'm failing to see how you arrived from A to B
"Have you ever considered suicide? If not, please do." -- Mouthwash (to Inferno)
Sieben
Posts: 2,736
Add as Friend
Challenge to a Debate
Send a Message
2/20/2011 9:02:11 AM
Posted: 5 years ago
At 2/20/2011 8:54:04 AM, PARADIGM_L0ST wrote:
In all situations or just with the particular argument you made?

When I argue ethics I'll be explicit. My relationship with the non-aggression principle is a little more nuanced than "why can't we just leave people alone!!".

Consider the outcome if no one rigged their machines.
1) Prices would be higher
2) It would be unstable because no consumers would be vigilant, thus opening the door for fraud.

I did, but I'm failing to see how you arrived from A to B

1) If the machines are rigged, but the expected cost of coke remains the same, the nominal price will be lower. Under non-rigged conditions, the nominal price will be higher because they can't obtain extra revenue from juking.

Example - charging 0.9 cents for a coke and juking 40% of quarters is the same expected price of just charging $1 for a coke, but the nominal price is 10 cents higher.

2) Vigilance costs something for consumers. They have to pay attention to firms and products. If all the firms are honest, then vigilant consumers will try to lower their costs by becoming passive consumers. But if there are no vigilant consumers, fraud becomes a viable strategy, and firms have an incentive to adopt it. So conditions of zero-fraud are unstable, but not necessarily destructive, because all firms can engage in the same fraud techniques competitively.
Things that are so interesting:

http://www.debate.org...
http://www.debate.org...
PARADIGM_L0ST
Posts: 6,958
Add as Friend
Challenge to a Debate
Send a Message
2/20/2011 9:10:05 AM
Posted: 5 years ago
At 2/20/2011 9:02:11 AM, Sieben wrote:
At 2/20/2011 8:54:04 AM, PARADIGM_L0ST wrote:
In all situations or just with the particular argument you made?

When I argue ethics I'll be explicit. My relationship with the non-aggression principle is a little more nuanced than "why can't we just leave people alone!!".:

What I want to know is whether or not you believe fraud in all situations has no negative impact -- that it all balances out like your Coke/Pepsi example suggests.

1) If the machines are rigged, but the expected cost of coke remains the same, the nominal price will be lower. Under non-rigged conditions, the nominal price will be higher because they can't obtain extra revenue from juking.

Example - charging 0.9 cents for a coke and juking 40% of quarters is the same expected price of just charging $1 for a coke, but the nominal price is 10 cents higher.

2) Vigilance costs something for consumers. They have to pay attention to firms and products. If all the firms are honest, then vigilant consumers will try to lower their costs by becoming passive consumers. But if there are no vigilant consumers, fraud becomes a viable strategy, and firms have an incentive to adopt it. So conditions of zero-fraud are unstable, but not necessarily destructive, because all firms can engage in the same fraud techniques competitively.:

So then could we therefore conclude that more juking would make make it even more stable?
"Have you ever considered suicide? If not, please do." -- Mouthwash (to Inferno)
Sieben
Posts: 2,736
Add as Friend
Challenge to a Debate
Send a Message
2/20/2011 9:20:30 AM
Posted: 5 years ago
At 2/20/2011 9:10:05 AM, PARADIGM_L0ST wrote:

What I want to know is whether or not you believe fraud in all situations has no negative impact -- that it all balances out like your Coke/Pepsi example suggests.

It might piss some people off... donno. But the expected economic effects are null. I suppose that the machines could, by random chance, persistently juke people, but Pepsi would have an incentive to avoid that.

So then could we therefore conclude that more juking would make make it even more stable?
No. There's a sweet spot that gets determined empirically. It depends on the costs/benefits of being vigilant and what people's risk preferences are. That's why I said in the second post that I think the juke rate is around 2%.

There's actually a free rider "problem" here too, because the vigilant consumers provide a check on firms that passive consumers benefit from too. That's another reason why *some* amount of fraud is the only stable solution - there have to be actual benefits to vigilance to incentivize some people to adopt the strategy.
Things that are so interesting:

http://www.debate.org...
http://www.debate.org...