The E-Trade Baby Blues

 | 

When I was in college I learned about a theory called “the cultural contradiction of capitalism,” which claims that capitalism calls upon the public to assume two conflicting personas. As producers, people must be rational and responsible; but as consumers, they need to be irrational, carefree, and gluttonous, so they will buy as much as possible.

I recently recalled this theory while watching one of the incredibly annoying “E-Trade baby” commercials on television. The E-Trade baby’s message is that investing is fun and easy and, by implication, even a toddler could handle it. Although I am an aspiring lawyer, I do have some degree of background on investment advising, and I consider this message absolutely irresponsible. Investing is difficult. To beat the averages and outperform the indexes (which is the only sensible goal for day-trader-type, individually managed investing accounts such as E-Trade sells), an investor needs brilliance, discipline, and a ton of luck.

Investing without understanding how to research stocks is like gambling your life savings at a casino. A rational strategy for saving for retirement would include buying index mutual funds and highly rated bonds with gold or gold-related stocks as a hedge against inflation. Picking individual stocks (even supposedly “safe” or large-cap stocks such as IBM or Microsoft) is too risky for someone investing retirement savings. It is mathematically impossible to predict future stock prices accurately enough to eliminate the risk that your portfolio will be wiped out by bad luck or short-term swings on precisely the day when you need to dip into your savings. Stock-picking is not suitable for any investor unless you spend several hours each day researching your stocks. But actively managed investing for mainstream America is what the E-Trade baby sells.

Many Americans learned the dangers of Wall Street investment when the recent recession ate their portfolios. And Wall Street is a symbol of capitalism for the American public; when retirement accounts go down, Main Street always blames Wall Street. This happened in 1929, when the stock market crash started the chain of events that led to the Great Depression and the New Deal. It happened recently when the so-called Great Recession instigated the Dodd-Frank Wall Street Reform Act.

My own opinion is that a fool and his money are soon parted. The American investing public believed that stock prices and real estate values could never go down, and that the principle of “more reward requires more risk” did not apply. The public got what it deserved. But although I blame the investors, it is undeniable that Wall Street, from Goldman Sachs to Jim Cramer to E-Trade, promoted itself as an easy, riskless way for mainstream families to make money and save for retirement. The investing public’s “irrational exuberance,” to quote Alan Greenspan, can only help Wall Street to make money. Vast fortunes are made by investment banks when stock market bubbles inflate. Wall Street is partially to blame.

What I am trying to get at here is that even though libertarians love capitalism, we do not have to love everything that results from the profit motive. My favorite movies are the original Star Wars trilogy. But George Lucas, desiring to milk as much money from his franchise as possible, has produced several re-edited versions, each more atrocious than the last, and also filmed the pathetic “prequels.” Similar stupidity was behind the decision to film “Harry Potter and the Deathly Hallows” as two separate movies instead of one, dooming the two movies to artistic ineptitude. Generally, whenever a novelist or movie studio produces something good that people like, sequel after sequel follow, for no other reason than to make easy money and feed off the brilliance of the original.

Even though libertarians love capitalism, we do not have to love everything that results from the profit motive.

From a different angle, consider the widespread use of “intro rates” to persuade people to buy cellphone or cable TV services or six-month intro rates on credit cards. Are consumers so stupid that they don’t plan more than six months ahead? Ads full of colorful sights and sounds and subliminal associations but empty of facts and information about why their product is superior are the rule on television, not the exception. The stupidity of the public makes advertising easier. It is easier to sell car insurance by building a brand image around a jingle or a cartoon character than to produce a product that can be objectively demonstrated through scientific testing to be better than its competitors. Ads paid for by businessmen are a huge part of what shapes American culture and the American media — which helps explain why American culture is so strongly slanted in favor of shallowness, stupidity, and irrationality (though this is not a complete explanation, but merely one piece of the puzzle). America is full of instances in which businessmen appeal to consumers not on the basis of reason and logic but through gimmicks and psychological manipulations. Judging by the widespread success of ads like the E-Trade baby, many members of the public make some horribly irrational choices, in their consumer goods no less than their political beliefs.

You can’t blame capitalism for the fact that people make bad choices. Consumer irrationality is not a valid excuse to strip people of their freedom to choose. Wall Street gives us a far higher standard of living than any of the Soviet states ever achieved, and capitalism is the only system with a proven track record of prosperity and progress.

Nevertheless, the moral of this story is that the profit motive has a dark side. I know that some would say that the desire to make easy money by appealing to irrationality is not actually in any businessman’s long-term rational self-interest. I completely agree. Yet it is natural for people to seek to make money as easily as possible, and we see what results. Instead of blindly insisting that the profit motive can do no wrong, we should take the more refined approach and recognize that the fault lies with the people themselves, not with freedom as an economic system.

So I support the profit motive — but supporting the profit motive does not mean supporting everything that results from the profit motive.




Share This

Comments

Visitor

A Galbraithian attack on advertising, in the pages of Liberty? Ok, whateverrrrrrrr...

Ads are attention-grabbers for products. They aren't necessarily everything a customer learns about a product. The author should read Jerry Kilpatrick and Tibor Machan.

CrackerBarrel

A late, good friend of mine used to say, "All analogies are invalid." Nevertheless …

Thinking about investment bubbles, their rises and collapses reminded me of traffic flow. When traffic is moderate to heavy, but below the point where the steady state is "stop and go, bumper to bumper," phenomena resembling shock waves begin to happen. A momentary slow-down by some driver combined with short following distances and slow driver reflexes results in drivers who are behind the first one applying their brakes successively later and harder than the ones in front. Eventually cars have to stop, but they soon start to move again, since there isn't a real obstruction to traffic flow on the whole. This wave of temporarily stopped traffic moves backwards through the lines of cars. It persists until traffic lightens up or becomes heavy enough to become "bumper to bumper."

There are several ways in which traffic shock waves and investment bubbles resemble each other. The heavy traffic on the road is like increasing demand for the "bubbling" commodity. Short following distances, insufficient driver attention and less than optimal reflexes are like the "investing is fun and easy" attitude, "irrational exuberance," and short-sightedness of casual investors. The shock wave is like the rise and collapse of the investment bubble. Losses suffered by the drivers are increased travel time, extra wear and tear on brakes, and lower gas mileage (since cars need to be accelerated back to speed when the wave passes).

The article says that to avoid investment bubbles, you need to pay attention to what's going on in the market and take other measures to protect yourself. Similarly, there are things that individual drivers can do to mitigate the shock waves. Pay attention to the flow of traffic ahead. Slow down a bit when brake lights go on five or six cars ahead. Most importantly, follow the "two second rule." When the car in front of you passes some landmark (say a crack in the pavement or a light pole) make sure that two seconds elapse before you pass that same landmark (this accounts for human reflex times). When enough drivers (it usually only takes a few) do this, they can make the shock wave disappear.

Crackerbarrel.

© Copyright 2013 Liberty Foundation. All rights reserved.



Opinions expressed in Liberty are those of the authors and not necessarily those of the Liberty Foundation.

All letters to the editor are assumed to be for publication unless otherwise indicated.