Value Transference in the Private Sector

“Value Transference” is a term which is used(coined?) by Lion of the Blogosphere. The term can be best defined relative to the commonly used term value creation. While value creation means creating value, value transference is economic activity that involves no value creation, instead it is the transferring of value from one party to another. Economic activity can include aspects of both value transference and value creation. Automobiles are valuable, but it is value transference when a car salesman takes advantage of someone’s ignorance to sell him a car for a 1000$ more than what others buy it for.

Value here refers to economic value. Wikipedia has a good definition of economic value:

Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore “what is the maximum amount of money a specific actor is willing and able to pay for the good or service”?

Note that economic value is not the same as market price, nor is economic value the same thing as market value. If a consumer is willing to buy a good, it implies that the customer places a higher value on the good than the market price. The difference between the value to the consumer and the market price is called “consumer surplus”. It is easy to see situations where the actual value is considerably larger than the market price: purchase of drinking water is one example.(Wikipedia, 2015)

Obvious examples of value transference are outright theft and taxation. Companies in the private sector can also perform value transference if they use the government to restrict their competition. But it isn’t just through coercion that value transference can happen. Libertarian ideology is based on the notion that value transference cannot happen absent coercion. This is based on three assumptions they make, all of which are false:

1. That people are always rational.

2. That natural monopolies and oligopolies do not exist.

3. That those who manage corporations have the interests of the shareholders at heart.

An obvious example of value transference in the free market is gambling. Though some people do it merely as entertainment many do it due to an irrational urge to gamble. When they do this no value is created, it is simply transferred from the majority of gamblers to the House and a few lucky gamblers.

This is an obvious example that everyone except the most ardent libertarian ideologues should be able to see. But there are many more examples of value transference in the American economy, and in other Western economies. This value transference is a major contributor to economic inequality.

Lion of the Blogosphere has pointed out that for billionaires to create billions of dollars worth of value would require them to have almost superhuman abilities.(Lion, 2015) They would have to be able to create as much value as thousands of high IQ, well-educated people put together. You don’t become a billionaire by doing that. You become a billionaire by value transference. So if you want to know where there’s value transference, a good place to start would be those sectors of the economy where very wealthy people are produced.

Value Transference through Human Irrationality, Status Seeking and Ignorance

I previously mentioned gambling as an obvious example of human irrationality. This type of value transference operates by getting someone to pay more than they otherwise would for a product because they are irrational, ignorant, or seeking status. Here are some examples:

-Bottled Water.

-Some types of brand name food. Many studies have shown that people will state that a product tastes better if they believe that it costs more. Though we all know that some brand name foods really do taste better than the generics, most also know that in some you can’t taste a difference. You may even have tried this in an experiment yourself.

-High interest loans like payday loans.

-I previously mentioned the example of the car salesman as an example of value transference. The car salesman’s hope is that he can trick you into paying more money than necessary for a car. This behavior is blatant in the case of the car salesman but is also common elsewhere in the economy. If a company has a problem with their website and it doesn’t know what is wrong the problem could be very simple or very complicated. The programmer he hires to fix the problem will know. The mainstream economics term for this type of phenomenon is the principal-agent problem.

-Status seeking through purchases of overly expensive goods.(like Rolex watches or designer handbags)

Value Transference through Natural Monopolies and Oligopolies

Companies can perform value transference through having natural monopolies and oligopolies. Some libertarians maintain that these cannot exist, they are wrong of course. Electricity is a commonly cited example of a natural monopoly. It would be very inefficient for your house to have three sets of wires connected to three different power plants all competing with one another to offer you the lowest price. Luckily for the American consumer regulations prevent electric companies from abusing their position as natural monopolies. Other and less obvious types of natural monopolies and oligopolies are allowed to perform value transference on a massive scale. It’s no accident that these tend to exist in one of the newest industries, the tech industry.

A computer operating system is a natural oligopoly. Why? Because applications are typically customized to run on specific operating systems. So it is simply more efficient to have a few operating systems rather than dozens. Social networking is another natural oligopoly. If you want to join a social network you want to join one that lots of other people are on. Facebook is an good example of value transference, making billions off of content created entirely by others.

Professional sports teams are another sort of natural monopoly. With a few exceptions(like New York) your nearby city has only one professional baseball, basketball or football team.

Value Transference through the Corporate Structure

Industries perform value transference, so can individuals within industries. Workers can collect paychecks without doing much work or doing work which doesn’t create value for the company. Or they can collect compensation that far exceeds the amount of value they deliver to the company.

The high pay of CEOs is ridiculous(meaning deserving of ridicule). There is no way CEOs could be creating such a high amount of value. In theory, big corporations are owned by many different shareholders and the managers are supposed to manage the corporations in accordance with the shareholders’ interests. But as any libertarian can tell you, people are selfish. Management has very different interests than the shareholders, and charts like this are the result:

CEOpay

You also get nonsense like Mattel’s CEO receiving a $50 million severance package after two years of employment despite overseeing a stock price fall of 50 percent, costing shareholders 2.5$ billion.

Conclusion

The moral case for libertarianism is greatly weakened when you recognize value transference in the private sector. Libertarians say the government has no right to take their wealth because they created their wealth. But what if they didn’t “create” the wealth they have? What if a lot of it is wealth “created” by others and transferred to them?

This country was founded on a spirit of self reliance and liberty. But the founders understood that sometimes morality demanded restrictions on some types of economic activity. “Usury,” for example, was illegal according to state laws which set a maximum interest rate. The difference is that in the time of the founders economic activity mostly involved value creation. Today, value transference has gotten out of control. There ought to be a recognition among Americans that value transference exists and that government should have a role in restricting it.

When a car salesman tells you he is giving you a “good deal” on a car he just sold the last guy for 1000$ less, how is that not fraud? It should be treated as fraud. Payday loans serve no useful purpose and should be illegal. Government needs to step in and regulate natural monopolies and oligopolies just as it regulates utilities. And there should be a maximum wage and higher taxes on the ultra-wealthy, because, as I said before, no one can “create” ten billion dollars worth of wealth.

References:

Wikipedia(2015). Economic Value https://en.wikipedia.org/w/index.php?title=Value_(economics)&oldid=665343959

Lion(2015). About Becoming Rich, Lion of the Blogosphere https://lionoftheblogosphere.wordpress.com/2015/02/02/about-becoming-rich/

Bogle, John C(2008). Reflections on CEO Compensation, Academy of Management, p.21 https://upload.wikimedia.org/wikipedia/commons/5/5b/Comparing_CEO_Pay.png

Billitteri, Thomas J(2007). Curbing CEO Pay, Sage Publications  http://www.sagepub.com/sites/default/files/upm-binaries/31939_2.pdf

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2 Responses to Value Transference in the Private Sector

  1. Pingback: The False Liberal Narrative about U.S. Government Taxes and Spending | Jason Bayz

  2. Pingback: Varying the Cost of Capital | Jason Bayz

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