Saturday, May 03, 2014


Mr Weinreich, (Editor-in-Chief Research Magazine) visits Rob Arnot at Research Affiliates headquarters in NewPort Beach, California.
“And right at the get-go, my first big break comes as my eyes fall on a display case in the reception area housing an original two-volume first edition of Adam Smith’s 1776 classic work The Wealth of Nations.
One of the 238-year-old volumes is open to the page in which Smith states "the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry.”
Arnot tells Weinreich: “It’s not possible to get a BA in economics without reading Keynes,” he bemoans. “It’s entirely possible to get a Ph.D in economics without cracking open Adam Smith.”
The other volume of Smith’s classic on display in Research Affiliates’ reception area was open to what is one of the Scottish economist’s best known quotes:
“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”
Arnott wants to align his portfolios with the same invisible hand that brings prosperity out of the self-interested behavior of firms seeking to please customers and generate revenue.
Market participants, perhaps, lose track of that guiding hand by following the crowd rather than following the fundamentals.
Meanwhile, some market participants quite admire what Research Affiliates is doing, leading the potential problem of knock-offs.
But Arnott, who is careful to patent his firm’s ideas, considers such imitation “a gesture of respect” that prompts his own self-interested benevolence.
“It keeps us on our toes," he says. "We have to keep our products on the cutting edge. They have to be the best, and our service to clients has to be the best.”
The last two paragraphs reveal two things: Arnott confuses “self-interest” with “benevolence”, actually repudiated by Smith in the same paragraph hs quotes about the “butcher, brewer, and baker”.  It is not their “benevolence” that motivates them to sell their products (beef, beer, and bread) to clients but their regard to their “self-interest” ('self-love'). Likewise, Arnott would not last long in business exercising benevolence - he charges clients for his products and they bargain with him over the price he charges. If Arnot can charge any price he likes he will not sell much if he relies on the benevolence of potential clients.  Moreover, in competitive markets, rival suppliers could eventually undercut his prices.
The second thing is about sucessful price discrimination. Now Arnott has to persuade customers to pay his self-interested asking price and self interested customers have to persuade Arnott to supply them at prices consistent with their self-interests.  Smith called this “bargaining” in Wealth Of Nations” (WN Book 1.Chapter 2) and refers to higgle, haggling persuasion in his Theory of Moral Sentiments.  That does not mean that there is a single market price for Arnott’s and his rival’s products - there isn’t.  Each seller tries to differentiate their products from each other’s (check Arnott's marketing budget), at least in the mind of potential customers, in order to justify their high prices (of which the display of a 2-volume first edition of Wealth Of Nation at $70,000, is a part!)
Self-interested buyers and sellers do not usually, or for long, so dominate each others’ self-interests with their own that they can force the other to forgo their self-interests and accept either the seller’s self-interested price demand without quibbling or do without the product.  That way they would likely not ever come to a deal.
In effect what happens is that each self-interested buyer and seller mediates their self-interests enough to settle their transaction at a price and terms acceptable to both.   This happens billions of time a day all over market economies in negotiating practice.

See my book (sadly now out of print - after 5 editions, and my retirement, but widely available via Amazon, etc.):  Gavin Kennedy, “Everything is Negotiable!” (Random House), in which readers are advised in chapter 1 to “Never accept the first offer!


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