And this is why capitalism is necessary.
We detached this subthread from https://news.ycombinator.com/item?id=14565772 and marked it off-topic.
The term "free market" originally meant "competitive market", not "unregulated market".
An unregulated market does not remain a competitive market for long. Companies merge, then use their power to control other participants in the market. An unregulated market also suffers from fraud.
We still don't have a long-term good situation with a competitive market. An unusual event happened, breaking ULA's monopoly. We're currently depending on Elon Musk's odd personality and/or the fact that he has not yet gained a monopoly.
Its actually they idea of managed market that is way newer.
"When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters."
https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstigl...
Also, Smith is not correct on everything. He is reviewed because he had the right intuitions on most things.
Also, the paper you linked is literally by one of the left wing economist that exist today.
What a Marxist!
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”
The point is that they conspire as long as they want, they will not succeed. Smith understood that.
Also, Smith was quite a bit more sophisticated when it came to human behavior, see his other book "The Theory of Moral Sentiment".
No, actually, Smith understood that they regularly did succeed, and wrote directly in warning about that; from the conclusion to Chapter 11 of Book 1 of The Wealth of Nations:
“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
> any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined
He was afraid they would use the state to create laws in their benefit. Not that they could use market power to beat competition. Nothing in this paragraph indicates that he thinks markets by itself were centralized.
The AntiTrust law is an exact example of what Smith is talking about. Its a proposal that looks like it would help markets but actually its a tool for the weak competition to beat the stronger competition.
The point of having a market is to find the balance between economics of scale and limit of the firm. The reason why economist want markets in the first place, is because that's how we find if it is more effective to have a few large players, like Airplanes, or millions of small players like Restaurants or Hotels.
The Soviet Union built the biggest Truck factory ever (or at least at that time), but it did not produce cost efficient Trucks. Why? They clearly had economics of scale.
As for evidence, I would start with "The Theory of the Firm" witch founded a hole new branch of economics and from there you have 60 years of research. There is a hole branch of economics called 'Industrial Organisation'.
The simplest bit of evidence is that you can literally just count the amount of companies that exist. If Marx was right we should observe fewer and fewer companies in a predictable linear process.
> just like political systems that favor large parties (like the US system) will favor fewer parties.
The US system may favor large parties but it not inherently centralizing. There is no tendency to a monopoly party.
Maybe it worked before the invention of the corporation. You'd buy from an individual human. Fraud would mostly be obvious, and you could get a mob to beat the person if they were into fraud. Unlike corporations, which can merge into MegaCorp and then dictate prices, humans can't actually merge into MegaMan.
Nobody believes in Marx's economic model, but people cling to prediction. Now it just no longer has any theory behind it. Its just a believe people had.
If its such a huge problem, please provide me with evidence. If the prediction was true we would constantly see monopoly and monopoly prices. We sometimes see monopoly, but almost never monopoly pricing.
There is actually ton's of research on mergers. Most researcher don't believe there will be merger after merger until their is only one super company.
If Marx predictions were true, why did non of it happen in the last 200 years.
They also understood that politics often has no interest in fixing the market, as they had a actual model of political economy.
Yet. There are probably trans-humanists out there that'd go for that (not me). ;)
I am a capitalist and I believe in regulated markets. After all a game of football can only be fair if it has equitable rules and both sides are held to them.
This is why it's a hard problem. Regulation creates another route for corruption, but is also the only way to keep corruption in check. We still haven't figured out an objective set of rules to avoid corruption, monopolies, and unfree markets.
All that is required is the desire to provide a useful service for the least consumption of resources or energy, rather than operating entirely on the making of profit.
SpaceX is a launch company that happens to make money.
ULA is a money making enterprise that happens to launch rockets.
Yeah, that's what we call free market capitalism.
For now, I'm finding the phrase "competitive markets" more attractive.
Despite the fact that about no free market exists in practice?
If this is such a huge problem please give me some examples where a company established a monopoly AND actually raised prices for consumer higher.
The people who brought Anti-Trust against Standard Oil were competitors. In fact, the hole history of Anti-Trust is basically the history of weak and failing business to bring in the government against their more dynamic competition.
Butcher were at the forefront of that, Anti-Trust was a way to defeat the evil refrigerated train and centralised slaughterhouses who were making monopolies. You know the kind of monopolies were you massively lower prices for consumers.
I'm not as familiar with AT&T but I'm pretty sure there is a significant government involvement and providing it with monopoly power.
You are kind of proving my point. People all believe capitalism leads to monopoly, but its almost impossible to find a good case. I do think that there are some cases, but the general theory that free markets always lead to monopoly is totally false. Even when markets create monopolies most of the time these monopolies can't (or want) do monopoly prices.
Also think about it like this. There are very few cases where government somehow helped to break a monopoly bought I could easily point you to lots and lots of cases where government created monopolies. Overall governments involvement in the idea to regulate competition in markets is a absolute failure that has only lead to lots of corruption.
Aren't nearly all markets regulated by Governments thanks to stuff like Laws? Like "don't murder your competitors workforce", "honor contracts", "don't poison the air", "don't lie about foods ingredients", "don't operate cell jammer to boost your wired cable business", "make sure people can learn about medicines side effects" and so on. To me all of that seems to be on a scale and arguing what point on that we should target is fine. But I can't take those arguing for one of its ends seriously. As for the "no regulation", I can't imagine a working system like that. In such a case humans would probably voluntarily form communities with rules®ulations that would probably look the same as communities/countries that currently exist. I'm not saying we already hit the sweet spot on the scale. And even once we do we'll probably only ever recognize it in retrospect.
> free markets always lead to monopoly is totally false
That seems to be a very simplified/unfavorable view on that argument. I'd say unregulated markets incentivize preventing competition. Far too often even by pushing for bad regulation. Preventing competition seems more easily possible in cases of huge power imbalances, something unregulated capitalism seems to boost. The only way to confine these effects seems to be putting in place good regulation actually securing competition. And yes, we'll have to keep arguing about the "good vs bad" for each and every law. That's why I really don't get "there should be no law"-guys.
In general you are of course right. However in economics we usually use 'regulation' as a short hand for laws that are not general laws but more specific.
In this discussion we were talking specifically about the regulation of competition. Specifically the believe that market automatically centralize and that the government is the only way to stop this.
I'm not trying to make a statement about anything else.
> That seems to be a very simplified/unfavorable view on that argument. I'd say unregulated markets incentivize preventing competition.
I'm not sure what it means to 'prevent competition' in a free market? How would a company go about doing that? Buying all the places the competition wants to buy? Or what are you talking about.
The problem is that you think to prevent this you put into place 'good regulations'. The reality however it that its exactly these regulation that companies will then use to actually prevent competition. Preventing competition is only successful if the government is carrying the cost.
> And yes, we'll have to keep arguing about the "good vs bad" for each and every law. That's why I really don't get "there should be no law"-guys.
Again, I'm not against law. Not at all. I absolutely love the Common Law. Contracts and property rights enforcement are essential functions of governments in a capitalist system. What I object to is destructive top down regulations that companies can use and manipulate to their benefit.
Anti-Trust regulation is one such top down regulation. It has most of the time been used to restrict completion and go after efficient business in the of the losers of the competition. It the exact kind of thing that is so problematic with this top-down management approach. Companies no longer compete in the market for costumers but rather fight zero sum battles in court of to influence the regulatory agency.
You develop a portfolio of goods. For example, every medical tool a hospital would ever need. Over time, you develop economies of scale.
Now you go to your client hospitals and say "hey, I'll give you a 10% discount if you sign this agreement to buy all your tools from us, and none from our competitors".
Now you have successfully locked out anyone who can't provide an equivalent entire range of products. Someone comes up with a better/cheaper scalpel? Nope, can't compete, because if they bought the scalpel, the prices of everything else they buy would rise.
What you describe just moves competition to a different level. Instead of competing on individual items you compete on a broader model of how to supply somebody if they need many goods. There are many different models possible (and many that we see in the real world) and these different models compete as much or more then competition for any individual items.
Considering competition in your example, why should anybody sign a long run contract with these people if their are better offers for the majority of products or other companies who have a similar model. People are not stupid, they understand the potential of abuse when they sign such a contract and they will only do so if they benefit.
If it is better to buy individually or from some company that bundles goods is always a important question for any business. How to make such compromises is what managers go to school for. Business that do such evaluation well will be more successful (as will the company who they selected).
> Over time, you develop economies of scale.
Basically you assumed away the hardest problem. How will they reach this massive scale for all these products? You basically said 'assume the problem is solved' and then 'see its not actually a problem'.
There are tons of games companies play with bundling unbundling and a million other models that are in use in markets today. Not one of these model actually leads to significant centralisation if both parties are free to conduct business by switching to different models.
Prices will not be significantly over equilibrium for a long time whatever models companies try to use.
Competition is about hole systems of relations superiority over other system of relations. That how we find efficient large scale solutions, this is how Capitalism is able to find ways to improve efficiency even in already optimised system of production. Consider how many different ways there are for franchising, no one model has succeeded yet.
Actually... usually by the time these contracts come back to bite companies, the entire staff responsible for them has usually been replaced. People are terrible at figuring out what the world will look like even 5, 10 years down the line, and doubly so when they're being pressured to save money by any means possible.
If you're going to say that over timescales of 20, 50, 100 years, things eventually work out - sure. In the meantime, we get to sit in a variety of local maximas, like the one I suggested, or significantly more complex ones, and people are the worse off for it.
If something is successful for 5-10 years then maybe it was not a stupid policy.
Mistakes are a given in any human system, you might as well have cases where a company gives significant discounts to capture the hole market but then the end up losing money.
One cases has a price lower then equilibrium for a while, the other a higher. Both parts of the contract have a huge intensives to get it right and both gain by finding a good level.
I have never claimed the markets are perfect. They are not, the best you can do is an adaptive process that has good feedback.
Also when discussing anti-trust we need to actually show that it is likely that it would actually improve on the situation. You are no longer taking about simply regulation, you are basically talking about the need for a super intelligent third party that could recognize local maximas and fix them, that is quite frankly impossible. Anti-Trust bureaucracies were drowning in complexity of even proving that a clear cut monopoly was actually doing anything bad.
There are local maxima situation everywhere all the time. The market process constantly tries to move towards equilibrium and this is the only mechanism we know that is able to solve the coordination problem. In theory micro optimizations are possible but in practice there is absolutely no evidence that such micro optimizations from outside parties improve long term success, and there is lots of evidence that in many cases attempts at such regulation massively harmed people.
Look at the Post-WW2 India when Indish Economist trained in Britain came over with the new socialist ideas where you would have a market but regulated it so that you had the optimal amount of competition and to prevent monopoly. This was probably the most extreme attempted at doing this sort of thing on systematic bases. The result were slow growth and 100s of millions of people not moving out of poverty. The bureaucracy followed its own interest and instead of fixing local maxima they fixed their pocketbooks.
Companies manipulating regulators are an emergent behavior of the capitalist system. It is inevitable that as a company grows large it will seek to influence the government. This pure free market of yours is a platonic ideal; once implemented in the real world the market and the regulatory environment are a unified entity on which market forces pull.
In a capitalist society, there's no meaningful distinction between monopolies which granted through government regulation and those which come from the market. Historical AT&T is a market failure and a government failure simultaneously. Same with the current telecoms.
As for remedies, I'm agnostic. I could potentially be persuaded that less regulation is the appropriate response in each and every case. The second half of your statement, "the government is the only way to stop this", is not an accurate representation of my views, at least.
Where we divide is on the first half, "that markets automatically centralize". The two of us look at historical AT&T and from what I can tell you see exclusively government failure, not market failure -- market failure can never happen, by definition only government regulation can fail. Um, doesn't AT&T play a role? I feel like we're in a Marx Brothers movie and you're asking me, "Who are you gonna believe, me or your own eyes?"
True. My point here is that we need to not give power to regulators in the first place. Power that does not exist can not be captured.
I don't believe in some free market platonic ideal. I believe in a a system of property rights and a advocate system of law to defend these property rights. This system is not given to use by god but relies on a complex set of institution that nobody fully understands and constantly evolves. What I am trying to do is evolve it in a good direction.
Such a system based on the exchange of property rights within a legal system will lead to growth and prosperity because most of the time you have to provide something useful to others in order to get to your own goals. This is not always the case and there is tons of fraud and other problems but its the only way ever discovered for long run growth and prosperity.
Markets can produce results that are worse then one would expect, and certainty worse then general equilibrium models predict. However, I don't think there is anyway that in a market system a case like AT&T could still be such a huge issue after 100 years. Also, I think very often it is the case that market produce results that are not as good as people want, they turn to government and get something even worse.
I'm not an expert on the AT&T case, so I'm not qualified to talk on it, I take your point that the market failed to produce what we expected.
But, I think if you look historically, how many cases can you find where a market produced monopoly for a long period of time significantly hurt consumers. During most of that time the US had Anti-Trust law, so as a bonus question, how many cases can you find where US Anti-Trust law actually fixed the problem. On neither question you will find many examples.
If we flip around the question, how many cases can you find where government provided some sort of grant or regulation that guarantied monopoly or oligopoly? There are almost infinite examples of this.
Thank you for the thoughtful discussion. If you know the AT&T case well, please provide me with good sources, thank you.
There are tons of monopolies granted to telecommunications companies. Other forms of local infrastructure monopolies are also often granted.
There is literally huge list, history of economic is full of it. Its very hard to find real market monopoly that had high prices, but government enforcement of monopoly or cartel are common. You can go back to Britain when parliament established itself, one of their action was to take away the Kings privilege to sell monopolies. Granting of monopoly rights and enforcing cartels is a extremely common government activity.
Its annoying for individual fans of the fields but it can is also is very, very unlikely to actually lead to market centralisation in the Marxist sense. Specially if you are looking at long run dynamics.
> government created monopolies and cartels are all over the place.
When government officials are bought off, somebody has to do the buying.
That is false. Many progressives and other did id based on ideology and ignorance not because they were bought off.
Please explain to me how something like spacex, a private space startup started by individuals could exist in any system other than capitalism?