Milton's World: Corporate Regulators or Government Regulators?
Today I was talking to my landlord about the work of Friedman, Sowell, and John Stossel (all individuals whose work he greatly admires). He was talking about "I, Pencil" (or his notion of it) and the way everyone in the world acting in their own self-interest gets a product (a pencil) from point A to point B, without any deliberate notion of all the potential steps that may occur from the time the wood is harvested until it becomes a pencil. There is no Prime Directive or government action forcing this collection of interactions. The lumberman sells his timber, the processor makes it into various lengths and intermediate products for their customers, those customers may use each individual product for their own purposes. One of the buyers is the manufacturer of pencils, and he simple sells them to the highest bidder, and off they go to whoever that may be at the time. His point with this story was that there needn't be any unnecessary "government intervention" for any of this to happen. The "system worked like a well-oiled machine on its own".
I pointed out that this story (I referred to it as "Milton's World", since he always calls Friedman by his first name) assumes many things. It assumes the current rules and laws informing actions are the 'right' ones for facilitating this. It also assumes some person or people can determine what these 'right' rules are. Who are these people? Why do we assume the rules we have now are the right ones?
It also assumes a lot about human behavior. People profit-maximize and are rational.
I used the example of the recent uptick in credit card surcharges observed by several of my friends on Facebook to work through these two assumptions with him. I'm no expert on credit-merchant relations, but I think these points are generalizable enough to be useful for pondering economic assumptions.
1. The current rules and laws informing actions are the 'right' ones
I used a real-world example to explain how I see "Milton's World" as deviating from the Real World. Credit surcharges are an additional fee that credit card companies charge merchants for use of their service. It's something from 1% to 3.5%. The Card companies generally made their own rules prohibiting merchants from charging customers the surcharge. If this were Milton's world as described in I, Pencil, this shouldn't be a problem, right? The merchants could just absorb the cost into their pricing. Or they wouldn't do business with the card companies that had the rules they didn't like, maybe eventually leading to change in policy (or lost profits for that company). Market forces would prevail!
Unfortunately, when a company as large as Visa implements these kinds of rules, it is incredibly difficult for individual merchants to refuse. If all the major players have the same rules, its impossible (this is why we see visa and mastercard accepted everywhere but often not AMEX, which has different fee structure). If it's not profitable for the merchant to concede, then they are out of the market.
So, we could say market forces are working. Merchants must do business with Visa and Mastercard because it's worth it to them. They avoid AMEX because it must not be. But why does Visa get to say how a merchant goes about charging for their goods or services? Is it acceptable for a giant agency like Visa to regulate how I do business? What makes this any different than "government" regulation? In fact, it seems even more insidious. Are we ok with this? Do we think this institutional structure is the right one? Why and who says?
2. People Profit-maximize and are Rational
As mentioned above, any surcharge should just be figured into the cost of the profit-maximizers production. Right? Well, that is where the real-world gets messy.
From MI AG: "Starting in 2013, merchants in Michigan could charge customers extra if they use a credit card. Called surcharges, retailers may—but are not required to—charge for processing a credit card transaction. How much a merchant may charge depends on the terms of the merchant’s agreement with its credit card processor. "
This was the direct result of a class-action lawsuit brought against Visa, Mastercard, and a number of Big Banks that prohibited merchants from imposing a credit surcharge on purchases. Weirdly, despite this happening in 2013, there seems to be an uptick in the number of merchants passing these surcharges on to consumers as an additional charge above the marked purchase price on their receipts of late (I have no idea how widespread this is-- It's something several individuals and I noticed in a few cities).
If these costs were already rationally priced-in, why the lawsuit? Merchants clearly have strong feelings about price-fixing and anti-trust laws (see above link). Federal law reflects this, though anti-trust laws have been chipped away at in recent years. Most anyone would agree that price fixing is wrong, but in this case it is the natural outcome of a profit-maximizing marketplace-- this is Milton's World. Do we like it? Are we more comfortable being told what to do by whoever has the most market power rather than our legal system?
The other question is why the uptick in surcharges now, after nearly a decade? There are a number of potential theories (including using the surcharge as a way to raise fees in this time of higher inflation while blaming the card companies), though I haven't read enough fine print nor collected enough data to say much more for now.
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