Here’s the continuation of my response to some of (Blonde’s) comments on a recent post. She wrote:
Firstly, the definition of a monopoly is the exclusive possession or control of the supply or trade in a commodity or service. Thus any competition, no matter how limited, could be argued as a negation of the term.
First, be careful not to define your argument out of existence. There are no examples of businesses or governments that have such exclusive control over a commodity or service that there is literally no competition or substitute. You think there is? Fine. Name it, I’ll come up with a substitute product—a competitor, “no matter how limited”– and there goes any claim to monopoly.
Now, in real life, that would leave us little to talk about. Again, when people discuss monopolies, they are talking about firms with at least one competitor (however weak) that produce a product with at least some substitutes (however imperfect), but still have a lot of price control (a.k.a. “monopoly power”).
There will always be natural monopolies, even with government regulation, but I can’t think of an example where there exists absolute monopolies under government regulation, at least in a comparative sense (government regulation vs. lack there of).
As I explained in part one, governments often make it easier to gain monopoly power. Robert Fulton had a monopoly on all steamboat traffic in New York– a monopoly granted by the state (it was the subject of a historic Supreme Court decision). AT&T had a legal monopoly on most types of phone service for roughly a century. My dad’s full of stories about the high-tech phone services that were blocked from the market for years because they would’ve interfered with AT&T’s monopoly. The railroad industry of the robber baron era received massive land grants and cash subsidies, which often allowed the bigger railroads to consolidate monopoly power. Monopoly power is more likely to be created by government regulation than by the lack of government regulation.
You can’t think of an example of “absolute monopoly” under government regulation? I can’t think of an example of anything close to an absolute monopoly without government regulation.
Free markets work much like natural selection, and it tends to maximize profits of the powerful while extinguishing competition.
Firms intend to maximize profits and intend to extinguish competition, whether it’s in a free market or not. However, the tendency in free markets is to whittle away what economists call “economic profits.” When actual or potential competitors see excess profits, they tend to swim towards the profits like sharks to blood. The existence of and potential for competition make it very difficult to maintain economic profits in the long run.
But, you might say, what about industries that naturally aren’t competitive? Well, if the market is unregulated, or not too heavily regulated, someone, somewhere usually finds a way to compete for those profits. Somebody will develop something that serves as a substitute. They aren’t going to just sit there and let Uncle Moneybags rake in the cash unchallenged.
These are tendencies. You may be able to find some exceptions, but the tendencies of freer markets are toward efficiencies that more regulated markets have great difficulties achieving.
I’m not educated enough on the topic to declare an outright no-capitalism approach, but I think unregulated capitalism does not work. Unregulated capitalism depends on the concept that people are rational with regard to money management and purchasing. But this doesn’t happen, people are emotional and irrational with regard to economics and it’s in part why the market crashed in 2008. It’s why people don’t save. It’s why we need economic regulation for capitalism to function at its highest capacity. Simply put, people don’t correctly calculate value and self-interest and entire markets fail to as well.
I… I don’t know where to begin. Since you made vague assertions (and since it’s getting late), I’ll respond in kind:
I contend that regulation was more of a factor in causing the 2008 crash than deregulation was, partly because there was virtually no deregulation. I can accept the argument that poor regulation led to the crash, I refuse to accept the argument that a decline in the amount of regulation did.
The idea that economic regulation can make up for people’s mistakes is an incredibly vain one, hence the title of Hayek’s The Fatal Conceit. Keep in mind that the term “market” is a metaphor for countless buyers and sellers engaging in hundreds of millions of transactions a day. Do you know better than all of them combined? Do you trust yourself to vote for someone who knows better than all of them combined? Do you trust them, once elected, to design just the right regulation to correct the mistakes all the little people make?
Markets tend to do a remarkable job of regulating themselves– if they’re allowed to do so. Markets are far better at calculating value and determining self-interest than government regulators are– if they’re allowed to do so. Markets work when people and firms are allowed to reap the rewards of their success and suffer their losses. Unfortunately, firms and governments have historically pushed for regulations that prevent firms and people from suffering their losses, which means the market isn’t being allowed to work its magic.
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I have to leave it there tonight. The brain is fried and requires sleep. Must edit tomorrow.
It may be that I have misunderstood your argument. If so I apologize and humbly await correction or elucidation. It may be that you know what you’re trying to say, but your argument suffers from not having been taught microeconomics by a particular teacher with a barbaric yet soft persona. Ask your friends; you missed out. I recommend signing up for a micro class at your local university and making sure your prof isn’t a total yutz.
I tip my hat off to you good sir. Well done. Well done.
I can’t speak for other Universities, but for any students planning on, or currently attending UNF, there are 3 economic professors that definitly qualify as not being “total yutzes”. Take them.
W. Thomas Coppedge
Dr. Louis A. Woods
Dr. Paul M. Mason
@Scott: If you want to understand the terminology they use on in the national news, you’re probably better off with macro. Some find macro theory more interesting because it’s more debatable. I did my thesiseses in macro (optimum currency area theory).
However, micro is the foundation, and micro is far more provable (though there’s still plenty to debate). It won’t necessarily change your mind about any issues, but a really good micro class is more likely to change the way you look at the world and think about things and stuff. Macro informative, micro transformative.
@(Blonde):
“I will concede to your superior knowledge of monopolies and admit defeat. And I do thank you for your polite response, you could have been much barbaric, I know. But then I wonder do you support an idea of an unregulated market, or rather, are you against adding additional regulations?”
I support regulations that are efficient and necessary, and oppose those that aren’t. By that rule, we and most countries would end up with far fewer regulations.
For instance, I think we need laws/regulations to protect private property rights and enforce contracts. We should regulate public goods (but I’m using the economic definition of “public good,” i.e., goods that are non-rivalrous and non-excludable).
“And what of the FED, which many people mistakenly believe is actually a part of our federal government, rather than being a mostly private organization ‘under the sway of New York bankers’? Should it be abolished entirely or should it be more heavily regulated and/or taken back under the wing of the government?”
People believe the Fed is actually a part of our federal government because… the Fed is actually a part of our federal government. True, there are private elements to it; for instance, the Fed has some private owners, but that’s partly because membership in the Fed is required for any nationally chartered bank. The Fed and the rest of the banking system are already very heavily regulated. It’s called “central banking” for a reason.
That said, I think we could stand to allow competing currencies (i.e., de-monopolize the currency). I tend to agree with Friedman that as long as there’s going to be a Fed, then it should essentially be a computer that slowly, steadily, and predictably increases the money supply. That regulation would probably be more efficient that those currently governing the Fed (though there are plenty of monetary economists who disagree).
“It seems difficult for me to grasp the concept that we as the most prominent capitalist economy in the world owe the world’s most prominent communist economy an entire quarter of our foreign debt.”
Why?
“I also did not mean to make the claim that government regulation could make up for the mistakes of said governments’ citizens; But is it equally naive to believe that it can, at the very least, help to lessen the effects of these mistakes? Or create a safety net for these mistakes?”
Good questions. First, “can” and “does” are different. Second, look up “moral hazard.” If there’s going to be a safety net, it should be extremely uncomfortable.
“I also wonder, because you do make perfect sense on the function of the market amp; the repercussions of market regulation, if there is a gap between functionality of economics and a more favorable system for people. Is the success of a free market and the benefits for people (not corporations, despite the SC) equatable or synonymous? Or are they two entirely separate things all together, as OWS would argue? Because it is becoming clearer to see why an unregulated market would be great for numbers, but I’m having trouble seeing that directly translate into a favorable humanistic perspective.”
The OWS folks make a vital and important point when they complain about the alliance of government and big business. Aside from that… I’ll be kind and change the subject. What do you consider “favorable” and “humanistic”?
@Irishman:
In a nutshell: if an economy is heavily state-run, it will operate less efficiently and grow slower than it would be otherwise. Other factors may lead to growth (discovery of new natural resources, importation of new technology, etc.), but not as much as there would be in a freer market, all else being equal.
China’s recent growth is generally understood to be due to liberalizing (i.e., de-communizing) some sectors of the economy; those are the sectors accounting for most of the growth.
“Just because I haven’t really looked at any where I else, Wikipedia points out that Belarus’ economy is ‘Soviet-style’ and mostly state-run. Despite this, it has the highest GDP of the CIS states, and is the richest country out of the CIS. As of 1991, it is also one of the most industrialized countries in the world. Do you think that Belarus will eventually hit a plateau and then fall, or do you think there’s a chance of success?”
Did Belarus already have a higher GDP than the other former Soviet states? Have they pulled further ahead, or have the other CIS countries caught up?
The more relevant question is, “Will Belarus grow more under ‘Soviet-style’ management than it would as a free market economy?” I say no.
(Blonde), the government gets all of the profits of the Fed (after a dividend payment to its member banks, many of which are legally required to join). The President and Senate pick the Board of Governors and its Chairman. That Board has to approve the selection of the regional bank presidents. The whole system is heavily regulated by the government, and you’re not allowed to create a competing currency. It does have private elements, as I acknowledged. But the laws surrounding it, the regulations it faces, the power it holds, and the leadership all make it safe to say that the Fed is a part, and yes, an agency of the federal government.
And if not, then for a non-agent of the government, Ben Bernanke looks pretty damn worried when he has to answer to Congress and the President.
Of course, they won’t claim to be an agency of the federal government when it’s legally/politically convenient. That’s to be expected– VP Cheney once claimed to be part of the legislative branch in order to dodge an executive order. I wouldn’t be surprised to know that the Post Office, Fannie Mae, Freddie Mac, and the FDIC had all tried the same ploy.
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As for the rest of your comment, I understand what you’re asking. Bear with me:
Who is the market?
What do you mean by exploitation?
Why do you think the environment would suffer from too little regulation? I assume that it would, but why do you think it would?
@5: I support patents and copyrights. However, I am muddling through an e-book that a former student sent me that argues against much of the current intellectual property legal structure, and may come to change my mind.
[re competing currencies] “Whoa! Wait a minute, wouldn’t that jack up transaction costs and thus be a pareto inefficient move?”
Maybe. Are you happy with your dollar bills? If not, what can you do about it?
“Food for thought from Weber: the State has a monopoly on violence.”
Not in any economic sense. There are too many substitutes for State-brand violence.
I disagree that those who benefit the most substantially from markets are only about 1% of the population. Markets do allow the filthy rich to because filthily-richier, but they also allow the poor to become richer. The rich get extra baubles, but the poor get extra sustenance and shelter. To play off your cliche, our 99% is the rest of the world’s 5%. The poor in market economies have little in common with the poor in non-market economies.
Aside from “shortchanging people in trade” (which is covered by anti-fraud laws that nobody would oppose, and in some cases by laws designed to ensure “symmetrical information,” which are debatable) and “taking out life insurance policies on their employees without their consent,” (which is specific and potentially actionable) your exploration paragraph reads like a largely emotional laundry list. Much of the “exploitation” you allude to cannot occur without the exploitat-ee’s consent.
By the way, you need to remove “wage slavery” from your vocabulary as soon as possible– otherwise, actual slaves will laugh at you. If you can walk away from your job or bank, you’re not enslaved. If your boss or bank holds power over you because you signed up for it, you’re not enslaved.
I should re-phrase that. You should remove “wage slavery” from the vocabulary you use when thinking and reasoning. However, it is emotionally and politically powerful, so keep it in your quiver if you ever need to win an election.
Re: environmental effects of too little regulation. I think that environmental regulation is probably the most justifiable kind– but that’s because markets and property rights are usually ill-defined when it comes to the environment. For instance, if you litter on my lawn, you have plainly and obviously violated my property rights, and I have recourse against you– or I can set a price for the right to leave garbage on my lawn. If a company dumps toxic waste on my lawn, they have plainly and obviously violated my property rights, and I have recourse against it– or I can set a price for the right to pollute my lawn. No problem.
Problems exist when nobody privately owns certain environmental goods (air, water) and when it would be very difficult to assign and enforce private ownership to those goods. Thus, markets for air and water aren’t as efficient as are markets for most goods and services. It’s harder to make polluters pay the market price for their pollution– hence cap-and-trade proposals, pollution taxes, etc. Most of what I’ve read favors Pigou taxes (as 5 mentioned) over cap-and-trade proposals, assuming property rights can’t be assigned or markets can’t be constructed in the first place.
I’m not telling you that whatever you’re thinking of doesn’t exist. I’m telling you that “exploitation” is an emotionally and politically charged term that you’re using to describe something that (A) you don’t like, but (B) may be mutually beneficial to buyer and seller, or business and customer, or boss and employee.
There probably are examples of what you’d call exploitation that I would agree should be restricted or entirely illegal. But there are also probably plenty of examples of what you’d call exploitation that I would call none of your concern, and that “exploiter” and “exploited” would call none of your concern. Come up with examples, and I will comment on them.
In the interest of examining the word “exploit” a bit more, do customers ever exploit businesses? Do workers ever exploit their bosses?
Brunette, I can think of two corporate examples which I would consider analogous to purchasing a life insurance policy on a person. I’m sure there are others.
1. Credit Default Swaps are basically bets that a corporation will not be able to pay back its debts. If the corporation defaults, you get paid. That’s basically saying you think the company is going to fail.
2. Shorting a corporation’s stock is also a bet that the company will do poorly, or even fail. Taking the example to the limit: Let’s say I short Company XYZ at, say, $5o/share. Then, XYZ goes bankrupt and the stock goes down to pennies a share. I just made a killing off that company’s “death.”
(Blonde), indulge me:
You own a business. It doesn’t matter what kind. Karl and Fred walk into your business and apply for two jobs that pay ten bucks an hour. You can assume whatever you want about the job, full- or part-time, benefits, whatever, but the jobs they are applying for are identical.
Fred and Karl are equally qualified. However, Fred faces some difficulties that Karl does not. Fred has “an inability to afford education for a better job or higher wages,” has “hundreds of thousands of dollars of medical bills to pay,” all on top of having to clothe, house and feed his family. Karl, on the other hand, has no children, has the time to go to school if he wishes, and has no medical concerns.
You hire both of them. Are you exploiting either of them? Is either a “wage slave”?