Golden Arches of Fear

-- By JuanCoeymans - 27 Feb 2009

The instruction is clear: "No servant can serve two masters" (Gospel according to Lucas, 16:13). However, since the current semester began, I have been serving two masters. Every Tuesday and Thursday, after thinking about the intangible law and economics ideas of my Deals class, the harsh reality of Law and the Contemporary Society is expecting me at the next door.

You need a “cast-iron” stomach to digest such contradict approaches. In Deals world, the result of any bargaining process is a function of asymmetric information, consumer preferences, moral hazard, reservation prices, Coasian transaction costs, among other microeconomic explanations. In the Leff’s world, depression, self confidence, sense of belonging, loneliness, anxiety, greediness, are some of the key factors to explain why people make deals. Moreover, in Deals world, the indifference curves and budget constraints are useful devices to human decision making. In Leff and Arnold’s world, human “decision making” is almost a fairy tale.

My first impression was that these two worlds were absolutely irreconcilable. On the one hand, microeconomics models are accurate human behavior predictors if you assume (of course) the ceteris paribus condition. On the other, the “all the other things being equal” condition means that humans feelings, emotions, experiences and social relations do not play a role in the miraculous dimension in which demand crosses supply. In other words, we know that humans have complex sociological and psychological features, but we need to ignore them in order to construct a useful economic model. Otherwise, you cannot predict anything at all. Then, I started to think that the scope of Cohen’s transcendental nonsense was larger than just the legal problem.

Yet, a moment of epiphany in Deals class revealed me the truth: microeconomic explanations of human behavior do not work against the very nature of human beings. On the contrary, the latter is based on the former. The paradigmatic expression of this communion between them is one of the most frequent emotional responses of human beings: fear. Economists call it “uncertainty”. We can call it just fear.

This idea came to my mind by grace of McDonalds? Corporation. Or more exactly, when we were discussing a delightful paper called “Costs of Control: Source of Economics Rents for McDonalds? Franchisees” in Deals class. Therefore, let me use this particular example to show how fear plays a key role in the microeconomic explanation of reality.

According to the mentioned paper, the individuals that McDonalds? wants to have as franchisees must face liquidity constraints. For incentives purposes, in selecting its franchisees McDonalds? decided not to separate the management of the restaurant from its ownership. As well, the company established policies against passive investors and absentee owners, including partnerships, real estate developers and corporations. In words of McDonalds? corporate managers “People most likely to get interviews are those with 'ketchup in their veins'-a McDonalds? expression for outgoing, high-energy types who will devote their lives to the Golden Arches.”

This idea was complemented in class by my professors. They explained that liquidity constraint of candidates was a key factor of McDonalds? business plan. According to their explanation, if you do not face liquidity constrains (in other words, if you are relatively rich), the fear of losing the McDonalds? franchise disappear, even if you paid a relatively high upfront price for it. On the other hand, if you face “liquidity constrains” (which means, if you are relatively poor and bet a great amount of your capital in McDonalds? business), and you do not fulfill the franchise agreement (losing the franchise), you will not be able to “pay for your daughter’s tuition, pay for health care, mortgage, etc…and such future condition creates a lot of fear and pain”.

The incentive structure (or the threat) of McDonalds? is simple: they use fear and pain against people as the moving force for its corporate mission. A fear that is strong enough to give your life and blood to the Golden Arches.

However, the most surprising conclusion is not that of McDonalds? business plan, but the fact that these ideas were accurately described in the Mecca of the Law and Economics movement (Journal of Law and Economics), and ratified in Deals class by my “law and economics” professors. Neither the paper nor my professors used the ceteris paribus condition in order to get ride of the psychological and sociological complexities of human nature. Quite the opposite, they demonstrated that fear is a fundamental reason to explain how people behave in the world of utility maximization.

Fear is not only present in the McDonalds? corporate structure. Fear is an omnipresent emotion inherent to our ignorance about the future, about everything that seems uncertain and unknown. In these sense, the idea of monetary costs or loses is strongly linked to the concept of fear. When we think about the probability of experimenting loses (money, utility, wealth) we just fear. Our usual standards of live will be in jeopardy, our consumption patterns will be constrained by lower budgets, and therefore, the social role that has been assigned and previously played (for instance, a successful young lawyer) could be in danger. In my Deals professor’s words, “such future condition creates a lot of fear and pain”.

The economic approach suggests that public and private structures should be designed to provide private incentives toward maximization of social wealth. As well, economists claim that private action will be aligned with the social interest, only if private agents internalize the total cost of their actions. What is suggested in such idea? That maximization of social welfare could be only reached if we efficiently allocate fear throughout the economy. Thus, the efficient allocation of resources depends in our capacity to threat people with a future of pain.

I am aware that this idea might sounds awful, but works. It works for McDonalds? and also works for me: since I realized that economics are secretly married with human nature, on Tuesday and Thursday I only serve one master.

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