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September 23, 2015


Classical economists such as David Ricardo and especially Adam Smith (“the father of modern economics”) wrote from a theoretical platform of “pure and perfect competition.” Such “standard theory” today is still dusted off for use though, in my opinion, only as a bygone measuring stick for the anomalies of today’s distorted market economies. Let’s reduce this to language easier to understand.

The classical economists rightly assumed that “pure and perfect competition” in the marketplace would eventually drive profits down to zero. For instance, if Corporations A, B and C are in same business of producing widgets for the market and their costs (including labor) are identical, then the only thing left to cut is their respective profit margins, and the corporation that cuts its profits more will sell more widgets than the corporations which don’t. Theoretically, unless the other corporations cut their prices or produce efficiencies in production (assembly lines, robots etc.) to match or exceed those of their competitors, they will go out of business in some sort of Darwinian “selection of the fittest” game.

This does not necessarily mean that the remaining corporation in the business of making widgets will enjoy an automatic monopoly pricing position and raise prices for its products too far; otherwise other widget-making corporations-to-be with what they may think are superior business models will get into the business and get back into the “driving down profits” mode once again. Some (though in a different context known as vulture capitalism as practiced by Mitt Romney) call this “creative destruction.” There is only one problem with all this: “pure and perfect competition” never existed and most certainly does not exist today given such gross tinkering with the economy by the political class on behalf of the rich.

As we shall see, that while the concept is a handy measuring notch on the economic ruler, it is a theory and not where real markets live, especially these days when the rich and corporate class goes running to politicians involved in amending the tax and bankruptcy codes to give such class a competitive advantage in the marketplace, an advantage having nothing to do with efficiency of production and the most advantageous allocation of their capital resources and only distorts how normal market economies work which in turn bring about inefficiencies in production and higher costs to consumers.

Joseph E. Stiglitz points out the foregoing in his latest book, The Great Divide, Unequal Societies and What We can do about Them: “As an economist, I understand the drive to get market power. Competitive markets are ruthless; it’s hard to survive. Still, standard theory has it that in competitive markets profits are driven down to zero – and that’s no fun for an entrepreneur – while in less competitive markets, there can be sustained profits.”

Thomas Piketty in his Capital in the Twenty-First Century points out: “In practice, the invisible hand does not exist, any more than ‘pure and perfect’ competition does, and the market is always embodied in specific institutions such as corporate hierarchies and compensation committees.”

Both diagnoses are correct, but what are we ordinary Americans going to do about today’s monopoly pricing and other anti-competitive practices in our so-called market economy such as that of the pharmaceutical industry in which the cost per crucial pill can rise overnight at a rate of thousands of a percent? What are we going to do about the enormous profits made by a blockbuster pill covered from competition by a fiercely-guarded patent when much of the basic research was provided by the government (you and me as both taxpayers and perhaps consumers)? Why are we allowing such companies whose patents are about to expire to “pay off” would-be generic pill manufacturers NOT to produce generic equivalents in order to keep the patent costs of such pills at a high level that you and I must pay in an anti-competitive market where the big pharmaceutical corporations are permitted to “buy off” their competition – at the expense of you and me? Where are our regulators, or have our bought-off politicians effectively amended the underlying statues for such regulations out of existence? Who protects the rest of us from such monopoly pricing under the guise of representing “the people?”

Why, in short, are we witnessing a spectacle in a pretended “free market” where those of the rich and corporate class (and not just pharmaceutical lobbyists) go to Congress and (with their “campaign contribution” checks in hand) literally buy anti-competitive packages specific to their sector of industry and commerce which result both in market inefficiencies and higher costs to the rest of us? Stiglitz wrote in his book above cited as follows: “What we have been observing – wage stagnation and rising inequality, even as wealth increases – does not reflect the workings of a normal market economy, but of what I call ‘eratz capitalism.’ The problem may not be with how markets should work, but with our political system, which has failed to ensure that markets are competitive, and has designed rules that sustain distorted markets in which corporations and the rich can (and unfortunately do) exploit everyone else.” There’s your answer – that is why we are witnessing such a spectacle.

Per Stiglitz, how about electing politicians who represent “the people” for a change? How about electing those who would vote to raise capital-gains and inheritance taxes from their present pittances, greater spending (or rather investment) in education and infrastructure, greater spending leading to rigorous enforcement of anti-trust laws, corporate-governance reforms that circumscribe executive pay (such as in Germany), and financial regulations that rein in banks’ ability to exploit the rest of society – all of which reforms would greatly reduce our wage and wealth inequality and increase our equality of opportunity. I would add to this list the specific need to reform the internal revenue and bankruptcy codes which presently allow, among other things, the ridiculous right of American multinational corporations to hold trillions of dollars in profits outside the U.S. taxable only when repatriated to our shores. We used to call that tax evasion, but the toadies in Congress have redefined this accounting technique of avoiding billions in taxes to be legal.  If you are still wondering why, check such toadies’ campaign lists (if available in this country rather than under some Swiss bank account number in Zurich).

If we do what we should by electing those who truly represent “the people,” perhaps we can return to the rapid and shared growth that characterized the middle-class societies of the mid-20th century (which I well remember with relish). Stiglitz posits that the main question confronting us today is not really about capitalism in the 21st century (the name of Piketty’s latest book). It is about democracy in the 21st century. He is right, but from a different angle so is Piketty.

As I have often blogged, democracy and capitalism the way the latter is practiced these days (with a political process not responsive to the wants and needs of the people but rather to those of the rich and corporate class) cannot co-exist in the long or perhaps even medium run. Our loss of social cohesion is at stake; the process leading to REAL REFORM is political, so elections matter – A LOT! VOTE!  GERALD  E

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