Izabella Kaminska, Why Do You Think Arbitrage is a Bad Thing?
Once (or twice) upon a time, I lost a "real" office job. Scrambling to make ends meet, I offered to buy up the remaining contents of a great garage sale, only I didn't have much money. So I offered to take everything to a local flea market and split the proceeds on consignment, with the person holding the sale. When she agreed, my little "venture" quickly took off and within a month evolved further into booths full of books...from there a little bookstore, and then a larger bookstore. But before all that coordinated increase in value ever took place, one of my former co-workers passed by the original flea market booth, not long after I'd lost the coveted "real" job. She pulled her daughter a bit closer and looked at me apprehensively. While I don't remember that co-worker's exact words, the little girl forever got the impression I was doing something not quite worthy of respect: selling second hand goods out of a dusty stall! Such is the image of arbitrage, amongst some today.
As I recently told a friend, that incident took whatever remaining vestige of "political correctness" I might have had. Real life, apparently, is always supposed to be tidy and formalized...everyone living in their nice neat houses and clocking in at their reliable jobs every day, paying their taxes, making the same wages...oh wait, everyone doesn't really live that way. Water doesn't flow uphill either. It flows downhill...except when you see and hear water in a waterfall, it is sometimes beautiful. "Equal" and predictable lives, however, tend to be a stagnant pool, in which water flows nowhere and after a while people aren't even thrilled about drinking out of the same lake day after day. With the waterfall, everyone gets to drink fresh water from the constant flow. Coordinated arbitrage of one form or another is the flow. Individuals seeking greater value in activity with one another...why is that discouraged now? Plus, because there are so few free recognized markets in knowledge and skills use, we have millions of people sitting at home alone, wondering what they are supposed to be doing with the rest of their lives.
But arbitrage has become a "bad" thing, according to some dreamers of future monetary realities. Tyler Cowen at Marginal Revolution (May 3, 2013) detailed some points from an Isabella Kaminska article in the FT, and in point 7, there it was: the hoped for "end of arbitrage". Now if one relies strictly on a limited definition, say, purchase of securities in one market and sale in another, perhaps that might not seem really significant, off base though it may be. But we're not just talking about a money market situation. Such market fluctuations are but one manifestation of how people find ways to add value to something which previously had less recognizable value. Great discoveries and innovations are the result of knowledge and resources that have been arbitraged to a greater use. When we say there is little value in such processes, what is there to stop us from saying we should just be happy with our own particular valuation point and never aspire to anything higher. The end of arbitrage - in other words - would be the end of our own efforts to improve our lot and that of others.
When money printing starts to become arbitrary, i.e. not well connected to actual wealth and production flows, negative interest rates are one possible result, as in the present. But more importantly, it becomes even more difficult to assign true, attributable valuations to human skills activities. Perhaps that is why some would just as soon throw up their hands and say, "Why even worry about it. We'll just print the money that society sees fit and take it from there". However, "fairness" does not magically arise just because everyone is tired of trying to make sense out of monetary flows. What happens instead is the usual struggles between the power elite, and the occasional last ditch effort to tend to ever increasing problems at the margin. And even though some money might supposedly, eventually, be printed to hire everyone, or at least give people a way to survive without a job (so the arguments go), everyone remains caught up in more pressing issues until one day the margins have finally spun out of control. When that happens, the "default" positions no one really wanted, start to happen anyway, for nothing more satisfactory was ever debated. Lots of people still think such distasteful "solutions" won't ever happen, but the people who proffer them are just waiting for the margins to start falling into the pit.
What sort of default "solutions"? For one, eBay auctions of people as an example (Yes you know where you've heard about this). While such auctions might even "work" to a degree, they would result in a permanent devaluation of tremendous skill potential, which would also further polarize society even more. Plus there is always the danger of government added "set" income getting absorbed so quickly by real estate interests (which we are always more prone to, without the measure of NGDPLT), that any designated income "floor" would need readjustment time and again. While people remain unemployed now, at least many of them still have hope that somehow, this present sorry post recessionary state of affairs will eventually turn around. Before polarizing default strategies are adopted, let's at least discuss true incremental ownership possibilities and work integration strategies for the marginalized: strategies which would still allow those who strive a way to get ahead, without the drastic polarization of last ditch efforts. People need to be able to be arbitrage skills potential through their own efforts, instead of having someone else constantly determining a default value. If we are willing to spend enough time thinking about these things, we also gain the ability to keep personal challenge as a realistic part of our lives, and link our aspiration to the aspirations of others in the process.