Ebay® and Auctions: Capitalism 101

Ebay and live auctions are helpful in thinking about free-market economic principles and as a way to judge a politician’s hyperbole. Ebay is a functioning free-market. Auctions are useful in explaining the effect on your wealth of a government expanding the money supply, either by printing and spending, or through deficit spending via borrowing. 

The rare example of the capitalistic ethic at work in the world today is ebay. First, ebay’s laws are clear. Its “court” system functions very well. People who sell and buy on its site are rated with dynamic regularity for their “character” as evidenced by their obedience to the laws of ebay, common courtesy, and the satisfaction of both buyers and sellers in consummating the sale. Any sale gone awry has a clear process for adjudication. Each party to a transaction has the opportunity (most participants consider it a personal obligation) to publicly rate the other party in aspects of the exchange—the quality of merchandise, veracity of the description, timeliness of payment and shipping, the shipping charges, and so forth. Sellers and buyers have a “reputation” that follows them from transaction to transaction. You do not buy from or sell to someone without checking their ebay rating--caveat emptor has never been easier. Those with excellent ratings are rewarded, those who are a problem, drop away or are “debayed,” and not allowed to participate on the site.

Now, like the real market, ebay is not perfect because the participants are not perfect. You can not possibly make rules “perfect” without encumbering the transactions and adding costs to doing business.  

Ebay's buying and selling market is the world. Listing an item for sale is simple. Present it honestly in photo and text. You may or may not choose to have a reserve price. You can make the sale a “Buy It Now” (BIN) at your stated price, or choose among several other options.

Purchasing is also straight forward. You can bid on items, or buy an item straight out if it's a BIN. The item’s shipping information is part of its description. 

Free-markets are known for their efficiency in allocating scarce resources to their most valuable use. Markets allocate through the price mechanism. The more fluid a price, the more up-to-date information that price contains. Ebay does all of that and more. Socialism of all stripes fails primarily because it has no market-driven price mechanism to allocate resources in an economical way. All forms of totalitarianism try to control people via their economic livelihood—by taking over (communism) or tightly controlling (national socialism or Nazism) the productive capacity of its citizens. 

Free markets function, as does ebay, because individual choice and valuation are given relaxed rein. Notice I did not say “free” rein. There are rules, known and upheld, and these are rules of law, not “of individuals.” Ebay participants do not care if you are Amish, atheist, or ambidextrous, blue, green, pink, straight, gay, 18 or 88. Follow its rules and you are a prized member of the community.

Auctions are instructive too, in that, as a closed “system” you can easily see the effect of certain changes. Imagine you at an auction of delightful items you wish to bid on. Everyone comes to the auction house with an amount of money they can reasonably spend to acquire items. Now suppose one person is a counterfeiter. The bidding starts and as items come up, the counterfeiter bids up the price of every item as others bid against him. Two things might happen: The other bidders might win, but always at a higher price than before the counterfeiter started bidding. Or, no one else's’ money  is sufficient to acquire objects. The counterfeiter's increase in the system’s money has made the “price level” of the system go up. It has de-valued the money of the other bidders.

This, on a more consequential level, is what happens in a nation when a government starts printing and spending money. More dollars, or Euros, or rupees start chasing a more slowly expanding supply of goods and services. The wealth people have saved that is denominated in their nation’s currency begins to erode. The value of currency substitutes as stores of value begin to appreciate. Gold, platinum, and silver begin to sparkle anew as wealth seeks security. 

In a free market, as in a marriage, character matters. In ebay character matters. Do you live up to your word? Do you follow through? Do you follow the rules you agreed to follow? Is there a process of grievance (court system) that is just and trusted by all parties?

In free markets a stable store of value (money) matters. Can a people’s money be simply printed by legal (government) or illegal (non-government) counterfeiters? Or is that store of value based on something more tangible than ink and paper? Is it convertible into a tangible asset? The beauty of the gold standard that we abandoned, was that it was a fiscal restraint on our government. When we had silver in our coins, that was also restraint on our government. If the counterfeiter at the auction could only pay with gold or silver, he would have been out of luck. Precious metals are precious precisely because they are hard to come by.

So next time a politician sings the siren-song of spending money government does not have, and talks monetary expansion (printing or borrowing from China), think auction or ebay. Would you go to an auction under those theories? Would the pol’s prescription fly on ebay?