A recent episode of South Park got me thinking that Matt Stone and Trey Parker just may know basic economics. The episode attempts to explain the jewelry business. It depicts old people buying jewelry at ridiculous prices from a home shopping channel and then giving it as gifts to their children. The children immediately take the jewelry to pawn shops replete with “Cash for Gold” signs and sell the gift. The pawn shops then sell the jewelry to industrial smelters, who melt it into bullion and sell the precious metals to India, where the metals are turned into cheap jewelry. The process repeats ad infinitum.
I have absolutely no clue if this is an accurate portrayal of the jewelry business. But what the characters encounter is undeniably economics. For instance, one character is appalled when he discovers his grandfather is being duped by the home shopping network into buying poor jewelry for exorbitant prices. One immediately wonders why on earth anyone would consider this jewelry valuable. It is revealed the old folks value the jewelry as gifts to their children and grandchildren.
Obviously something is seriously wrong with this picture. It would be all too easy to accuse the shopping network of taking advantage of the grandparents. Today, one would expect a law, protests, or worse: a social media campaign to stop the injustice. But that is not the real solution. What is causing these exorbitant prices? It’s the demand the older people place on the jewelry. They demand it as gifts to their estranged progeny.
True, there may be some amount of skullduggery involved, but what is the real solution to the problem? Banning the sale would only force the old people to spend the money on other such things. Stan, the character with the problem, finds the real solution is a real relationship with his grandfather. He gives a heartfelt gift to his grandfather, who in turn looses the urge to buy loads of cheap jewelry to show his affection.
Also consider what the odious Cartman encounters. Cartman, being despicable, sees what the shopping network is doing, and begins to buy cheap jewelry from his classmates and selling it on his own network to old people. His business takes off and he goes in search of more cheap jewelry, eventually realizing the jewelry is made insanely cheap in India. While the episode shows how businesses are making a profit, another lesson can be added.
Imagine an entrepreneur really finds out some business venture is making large profits by taking advantage of people. Imagine he is as depraved as Cartman, and he enters the same line of business, what would happen? First, he would drive prices down to compete with the home network. As there is a large discrepancy in the cost and asking price, this would certainly happen. Second, the price of the cheap jewelry would go up as Cartman (and other businesspeople) increase the demand for cheap jewelry. As a result of this arbitrage, the profits the home shopping network makes would disappear.
It’s unclear if South Park was trying to make this point, but they certainly laid the ground work for it. Stan’s dilemma with his grandfather was a family issue with economic repercussions. Imagine the limitations of a government solution: a new law that would take ages to pass and get votes, and months more to implement and enforce. And after all that, Stan’s grandpa would still look for a cheap way to buy his grandson’s affections.
A better solution is the one provided by markets. Let entrepreneurs like Cartman (however disgusting) bid the price of jewelry sold to the old folks down and the cost of the jewelry from India up. This would eliminate the profits. It’s a chilling conclusion, but in their haste to take advantage of people the scumbags stop making windfall profits.
Worse, what if a potential government regulation made the market process slower, or destroyed it? Imagine the law used to stop selling cheap jewelry to old people outlawed any other companies to enter the market. This seems like a good idea, as the companies are taking advantage of people! But this would stop people like Cartman from arbitraging the profits away.
We can all agree taking advantage of old people is wrong. We can further agree passing government laws is time consuming and difficult. Hopefully, I’ve made the case that arbitrage is a powerful tool that decreases profits and eliminates the problem. Why on earth should we ever try to stop arbitrage, especially in cases as morally dubious as this?