Economics Questions

Re: Flaws of Free-Market Capitalism

Rodolphe Topffer — Wed, 17 Oct 2012 03:02:16 GMT

The biggest "flaws" I have ever heard concerning free market capitalism are : natural monopolies, financial fraud and crises.

Crises : I think I could recommend Huerta de Soto's book (especially chapter 5 & 6).

Financial fraud : interventionists regularly speak about the Enron fraud, but the real cause lies in fact in the prohibition of insider trading.

Natural monopolies : Mises (H.A.) and Rothbard (M.E.S.) make some very good points in their respective book, but I have the feeling that it can not be used against non-austrians in a debate. This will be a complete waste of time; they will throw on your face "stop playing with words" if you say for example "there is no such thing as monopoly price". My belief is based on what I have read on the US and french forums and blogs (although anecdote is not proof - I could be wrong for this very reason).

Here is then my own attempt to attack the theory of natural monopoly in a free market.

It would be to consider the response of prices of factors of production when a large firm reduces its supply of consumer goods in order to increase prices. If this happens, its own demand for factors of production, necessary for the production of consumer goods, will decrease. Eventually, the prices of factors of production would decline, providing an opportunity for competing firms which can now reduce their production costs. They are thus able to lower their prices and challenge the monopoly (in a cut-throat competition). Even imagining an unrealistic scenario where the monopoly substitutes for the competitors to the purchase, on a regular basis for preventing the prices from falling, of all the factors of production in excess, the accumulation of those ‘idle’ productive resources is a great loss because such amount exceeds what he needs to replace his existing capital goods. It would be far more advantageous to increase its production to capture a larger market share, which will tend to diminish the prices anyway, especially when in fact an increase in production will reduce the average cost of production, making a big-scale production more profitable.

I would be interested to know what you think about this stuff (I mean, my criticism of the natural monopoly).

Re: Flaws of Free-Market Capitalism

gotlucky — Wed, 30 May 2012 05:23:10 GMT

Neodoxy:

Alright.

I'm not saying that I can know definitively under which situations which industries will be natural monopolies, that's not what I'm trying to do. I can show which industries are predisposed towards natural monopoly and where competition would be more difficult. Once again, I'm trying to show that the market will not always yield the best results it could and some of the mechanisms that would get in the way, that's the extent of my thesis.

By definition, the free market yields the best results. That does not mean that we cannot have our own biases in regards to what we think it should be. But the free market is everyone demonstrating what their preferences are. You can say that the best results would be to tax everyone and fund NASA, but that would just be a personal opinion. Competition does improve the state of affairs, but at any given point in time, the free market is most optimal. This does not mean it can't improve. Just that that particular snapshot would be most optimal for that particular point in time.

Re: Flaws of Free-Market Capitalism

gotlucky — Wed, 30 May 2012 05:18:45 GMT

Neodoxy:

You are the one going on about "the real world". I don't see what paying pretty women to walk down the street has to do with "the real world" and why we would be talking about it when constructing policy. It does not matter.

It is a case of applying your logic to another case. The woman is a model. She is paid for her beauty. She gives her services away for free just by walking down the street. Applying the same logic you used in regards to the beekeeper, this is a market innefficiency.

Neodoxy:

You aren't displaying an understanding of the argument in the first place, I'm saying that these are conditions under which the free market could fail.

No, I understood it just fine. If you go way back to the beginning of our conversation, I said that I was under the impression that natural monopolies did not exist in the free market. You corrected this notion when you responded about high start up costs but low production costs, and then we both determined that this is something that occurs on a localized level. The conversation moved onward when you started in with an example about a bridge that should be a natural monopoly, because if there were competition, then there would be extra bridges when only one were needed, and therefore there would be a waste of resources.

I did not think that your thought experiment was particularly good, for all of the reasons that I have already listed. So it seems that you are not displaying an understanding of the argument we have been having. Because if you did, you would have realized that my problem was no longer with the idea of localized natural monopolies. My problem was with your examples. They do not get to the principle of the matter. I could say that the sole doctor for 30 people on an island has a monopoly on (knowledgeable) medicine, but what does this say about the real world? When is there ever 1 doctor? How would this say anything about the world, other than the fact that if we construct a scenario where there is one doctor, then there is one doctor? If there is one bridge, then there is one bridge. Okay, but so what? In the real world, the only way of knowing the optimal amount of bridges is to see what the result is on a free market. If it's one bridge, then that is the optimal number. But you are saying that you know better, that there should only be one. Anything extra is a market failure. I'm saying that you do not know better.

That has been the argument for the majority of our discussion. And yes, I have seen that you say you are an anarchist, and you don't want the government to intervene. And I believe you. But that does not change the fact that you are claiming to know the optimal number of bridges.

Neodoxy:

Why is it that building materials matter? Competition and a bunch of easily isolable variables are much more likely to have an influence

Materials go into cost in a number of different ways. Do we use wood, stone, concrete or steel? This all goes into competitors' decisions. So materials matter very much. This is my point. You cannot know the optimal whatever from your armchair.

Neodoxy:

I'm not saying I can know the optimal number of bridges in any real world case. I shouldn't need to say this again. I'm not a statist, I don't think that I'm god

Then your hypothetical should reflect this. The problem with your scenario is that you are saying that the optimal number is 1 in your scenario. But in the real world, you just do not know what the optimal number is. You cannot know the optimal number in your scenario, unless the sole purpose is to demonstrate that there can be a natural monopoly. But this was what my beef was originally. I asked you for examples of natural monopolies, and you provided bridges as one of your examples. You cannot know what the optimal number of bridges is from your armchair! It's like cable companies, you cannot know what the optimal number of cable companies is in a community. Sure, you agree on that point, but there is no difference with bridges. You cannot know.

Neodoxy:

I can use the same argument against you. Prove to me that the optimal number of bridges are going to be produced. You can't so long as you destroy theoretical examples. The reason why bridges being monopolized and the only solution to this from a competitive standpoint would be that they are overproduced is entirely self-evident, you're trying to show that an infinite number of bridges opening up would not lead to a loss of efficiency, when this cannot be done through any but theoretical examples. If I pulled out a case study, then so what? It's really not relevant or worth talking about, as long as we can prove it can happen in theory and conditions for it are not far removed in the real world. You've already conceded the point that a monopoly price can exist

My goodness, the strawmen are coming out! First, by definition, whatever the free market produces is optimal. This is because that is what the community has shown through their very actions what they prefer. They have demonstrated that they prefer whatever number of bridges there are to whatever it could be. Second, I am not saying that an infinite number of bridges opening up would not lead to a loss of efficiency. I never claimed that. You were the one claiming that only one bridge was efficient. I am pointing out that you cannot know. In regards to monopoly pricing, I don't recall disagreeing with this. In fact, I just reread over our conversation, and I did not find any part of my posts to say that it wasn't the case. Perhaps you are confusing me with someone else.

Neodoxy:

That inherently wastes resources compared to if a competitive bridge just opened up, and what if it's not easy to compete?

Please don't crop my quotes if it changes the meaning. I said:

gotlucky:

A single bridge may be the optimal number for bridges in any given area. If that's the case, and we exclude a statist monopoly from the example, then that single bridge should have low costs, because otherwise other competitors enter the market. If it's not the optimal number, then competitors will enter the market.

In other words, if a single bridge is the optimal number etc etc etc. So, how is it possible that if the optimal number is 1, that it is wasting resources? As I said, don't crop if it changes the meaning. If the optimal number is 1, then it is not wasting resources, by definition.

Neodoxy:

Common sense fallacy or not, I thought it was self evident to everyone why it was the case. I would also like to point out I'm not saying that a traditional market cannot run roads, merely that it would do so at a monopoly price and therefore be suboptimal.

This is the problem. Autolykos and I have already demonstrated alternatives to monopolies taking over the world. It was a conversation you said that you didn't care to have. In fact, you said:

Neodoxy:

I more or less agree, but it's not worth arguing over and I don't care to discuss it further.

So now it seems you want to have this conversation. Well, then I suggest you scroll back and read what Autolykos and I wrote, and we can continue that particular conversation starting there.

Neodoxy:

Malls are different from roads because in cities where malls are likely to be located there's a lot of buildings around where stores can open up, so if there's too high a markup then competition will occur and drive these stores out. Mailing companies are different because it's easy for a new mailing company to just open up and start shipping, especially because people tend not be to fussy with normal parcels about who mails things. Anyone with a car can act as a delivery person as long as they gain people's trust which can be easily done through transparency, experience, and contract.

Thank you for providing an argument istead of handwaving. My response in regards to roads is way back on page 2.

Neodoxy:

I'm using optimal here to express what consumers, through their actions, express as a better state of affairs, and at any rate even if you say that I'm not being an economist here, then I'm merely passing normative judgments upon positive economic law as an observer. There is no problem with this as such, just as if a misanthrope hating the market economy would not be inherently wrong either. An understanding and appreciation for what is going on does not exclude having personal values or thoughts on the matter.

You are saying that you know better than the consumers. By definition, whatever a free market has is what the consumers want. Sure, we can all want private jets, but we are talking about what they want in regards to what they can purchase. You have expressed that you do not necessarily consider what the consumers to do to be optimal. But now you say otherwise. This is not consistent.

Neodoxy:

Why?

I would think this is obvious. If you cannot know if a company is a natural monopoly, then you should not be claiming that it is one.

Neodoxy:

You should stop making real world claims if you cannot know if something is not a natural monopoly

I see what you are attempting to do here, but it is not analogous to my statement. I am not making real world claims to anything, other than that I simply do not know what the optimal number of anything is. I hope you can see the difference.

Re: Flaws of Free-Market Capitalism

Neodoxy — Wed, 30 May 2012 03:25:15 GMT

"My problem was that you were then claiming that you could which industries and companies were natural monopolies. And maybe it might be possible to do that, but with the government granting monopoly status to these "natural monopolies", there really is no way to know."

Alright.

I'm not saying that I can know definitively under which situations which industries will be natural monopolies, that's not what I'm trying to do. I can show which industries are predisposed towards natural monopoly and where competition would be more difficult. Once again, I'm trying to show that the market will not always yield the best results it could and some of the mechanisms that would get in the way, that's the extent of my thesis.

Re: Flaws of Free-Market Capitalism

Neodoxy — Wed, 30 May 2012 03:21:39 GMT

"It is not my problem if your logic leads to conclusions you don't like. But you can't hand wave my counterargument away just because you don't like it."

You are the one going on about "the real world". I don't see what paying pretty women to walk down the street has to do with "the real world" and why we would be talking about it when constructing policy. It does not matter.

"But in the real world, with infinite variables, you cannot make this relevant. Okay, so there exists the possibility of monopoly prices. You still cannot know the optimal number of bridges."

You aren't displaying an understanding of the argument in the first place, I'm saying that these are conditions under which the free market could fail.
Why is it that building materials matter? Competition and a bunch of easily isolable variables are much more likely to have an influence
I'm not saying I can know the optimal number of bridges in any real world case. I shouldn't need to say this again. I'm not a statist, I don't think that I'm god
I can use the same argument against you. Prove to me that the optimal number of bridges are going to be produced. You can't so long as you destroy theoretical examples. The reason why bridges being monopolized and the only solution to this from a competitive standpoint would be that they are overproduced is entirely self-evident, you're trying to show that an infinite number of bridges opening up would not lead to a loss of efficiency, when this cannot be done through any but theoretical examples. If I pulled out a case study, then so what? It's really not relevant or worth talking about, as long as we can prove it can happen in theory and conditions for it are not far removed in the real world. You've already conceded the point that a monopoly price can exist

"If that's the case, and we exclude a statist monopoly from the example, then that single bridge should have low costs, because otherwise other competitors enter the market."

That inherently wastes resources compared to if a competitive bridge just opened up, and what if it's not easy to compete?

"So, instead of handwaving away my argument through appeal to whatever (looks like the common sense fallacy here), you could show why you think it is actually different from roads."

Common sense fallacy or not, I thought it was self evident to everyone why it was the case. I would also like to point out I'm not saying that a traditional market cannot run roads, merely that it would do so at a monopoly price and therefore be suboptimal. Malls are different from roads because in cities where malls are likely to be located there's a lot of buildings around where stores can open up, so if there's too high a markup then competition will occur and drive these stores out. Mailing companies are different because it's easy for a new mailing company to just open up and start shipping, especially because people tend not be to fussy with normal parcels about who mails things. Anyone with a car can act as a delivery person as long as they gain people's trust which can be easily done through transparency, experience, and contract.

"You can claim that it is a market failure that the beekeeper is not getting paid for the polination, but you are making a value judgement here, something economists should not be doing as economists."

I'm using optimal here to express what consumers, through their actions, express as a better state of affairs, and at any rate even if you say that I'm not being an economist here, then I'm merely passing normative judgments upon positive economic law as an observer. There is no problem with this as such, just as if a misanthrope hating the market economy would not be inherently wrong either. An understanding and appreciation for what is going on does not exclude having personal values or thoughts on the matter.

"But you should stop making claims about what in the real world is a natural monopoly if you cannot know if it is a natural monopoly."

Why?
You should stop making real world claims if you cannot know if something is not a natural monopoly

Re: Flaws of Free-Market Capitalism

gotlucky — Wed, 30 May 2012 03:04:25 GMT

I would just like to state that I have nothing against thought experiments, and I use them quite a bit myself. However, you have to be careful about how you use them. If you want to prove that theoretically, one bridge could be the optimal number of bridges for a given area, and therefore there could be a monopoly price, then fine. My problem was that you were then claiming that you could which industries and companies were natural monopolies. And maybe it might be possible to do that, but with the government granting monopoly status to these "natural monopolies", there really is no way to know.

Re: Flaws of Free-Market Capitalism

NEPHiLiX — Wed, 30 May 2012 02:34:45 GMT

Just a quick couple of notes (not as important as the others so feel free to concentrate on the other responses).

Bees, Beekepers and Farmers: Most people who use this example only see it from the point of view of the beekeeper and the benefits that are accrued to the farmers as a result of their (the bees') pollination runs. The beekeeper demands payment for the positive externalty his bees provide on their search for nectar. The farmer says: "No, my crops were fine before you began your operation and I don't think the additional expense would do anything but soak up much less than what was added by your operation. So you don't like that your bees come over to my property and polinate without payment? Then I don't want your bees on my property. Keep them away from it". Then the beekeeper has a (possibly very expensive) choice to make (how to keep them netted in on his property). There are really two (and likely more) positive externalities in this case: (1) the beekeeper's bees have a much wider expanse of land to find nectar (provided by the beekeeper's neighbors) resulting in a better honey yield, (2) the beekeeper's neighbors enjoy more plentiful harvests (provided by a higher pollination rate), etc.

On the issue of defining a monopoly price, you defined it as:

A price at which output is restricted for a consistent period of time in order to maximize profit

But this defines in large part the production-guiding component of the price mechanism itself (except you could do without the "restricted for a consistent period of time" and just leave it at "always restricted"). Thus the scarce factors of production are guided in their employment all across the economic spectrum in order to first serve the lines of production that are valued most highly by consumers (offering the highest returns vs the producer's perceived best alternatives). Restriction of production is encouraged by the operation of this mechanism where the return ratio falls below a point where the employer of capital determines that capital employment elsewhere will likely command a greater return (than expanding production itself or the current line of production). So, using this definition, all market pricing is monopoly pricing, and it's all necessarily good.

Re: Flaws of Free-Market Capitalism

gotlucky — Wed, 30 May 2012 02:02:01 GMT

Nedoxy:

I'm on the fence about exactly how I feel about reductio ad absurdum, the fact is that you can prettymuch destroy/make any theory unappealing with it. From this standpoint you could argue that when two people drive down opposite sides of the street and one's lights leave imprints upon the other's retinas, that this is an invasion of his privacy, and that small invasions of property could be punishable by death within an anarcho-capitalist society and this would be fine.

It is not true that you can "destroy" any theory with reductio ad absurdum. There are two purposes to reductio ad absurdum. The first is to follow the logic and show the logical contradiction. The second is to follow the logic and demonstrate where it leads. In you example here of two people driving and shining car lights at each other, this could be used to demonstrate flaws in Natural Right's theory. But I do not believe in Natural Rights, so all it does is demonstrate the problems of a theory that I do not hold.

Neodoxy:

I addressed this earlier, you can make really ridiculous arguments out of it, but focusing upon this is not really that relevant and detracts from the real point.

I completely disagree with this. Your logic leads to this conclusion. You have some different options here. One option is to show how your logic does not actually lead to this conclusion. A second option is to be okay with the conclusion and stick by it. A third option is to realize that your logic leads to absurd conclusions and either seek to refine it or abandon it. It is not my problem if your logic leads to conclusions you don't like. But you can't hand wave my counterargument away just because you don't like it.

Neodoxy:

It's a theoretical example, so we do. Once again, to "win" here, as it were, I don't have to prove that you can measure where a monopoly price is in the real world, I just have to prove that they can exist and that a free market won't correct them through traditional markets, you have to show why this cannot happen in order to show that this case of market failure does not actually exist. Also, the simple fact with the bridges example is that if people valued the bridges that much then the competative price would be approximately the same as the monopoly price.

Sure, you could construct an example where you live on an island of 30 people, and only one person has medical knowledge. Anyone who gets sick is stuck with his monopoly price. Meanwhile in the real world, bridges are far more complicated and to claim that one bridge is optimal when you simply do not know if that is the case is simply absurd. There are numerous factors that go into the optimal number of bridges, nevermind traffic and tourists, there are also materials, length, width, and location (among others). So okay, you can prove that in a community of 30 people with one doctor, there is a monopoly price for the doctor's services. But in the real world, with infinite variables, you cannot make this relevant. Okay, so there exists the possibility of monopoly prices. You still cannot know the optimal number of bridges.

Neodoxy:

See above. There's a reason why Austrians argue from theory first. At any rate, Gotlucky, do you seriously believe that a single bridge is likely to bring down its costs to the same low that competitive markets would or its costs of production, and if so why?

I'm not entirely sure I understand your question. I'll take a stab at it anyway. A single bridge may be the optimal number for bridges in any given area. If that's the case, and we exclude a statist monopoly from the example, then that single bridge should have low costs, because otherwise other competitors enter the market. If it's not the optimal number, then competitors will enter the market.

Neodoxy:

This isn't the same thing, a mail system can obviously be run through traditional market means, there's no special factors which would grant it a monopoly. Simply needing/using an economy of scale is not the same as what we're talking about.

A road system can obviously be run through traditional market means. See what I did there? There was a time when people did not believe that mail could be run through the market. So, instead of handwaving away my argument through appeal to whatever (looks like the common sense fallacy here), you could show why you think it is actually different from roads.

Neodoxy:

Gotlucky, I am an anarchist. I'm not arguing that government will provide better results in the real world, although in a statist's dream world it of course would, but I never said anywhere that market failure will result in government solution.

You mentioned Austrian Economics earlier, so here is an article about The Austrian Theory of Efficiency and the Role of Government. The problem with "market failure" is that someone has to make a subjective value judgement (redundancy is redundant) about the "market failure". You can claim that it is a market failure that the beekeeper is not getting paid for the polination, but you are making a value judgement here, something economists should not be doing as economists.

Neodoxy:

The logical consistency of the theory is all that matters. If this is true then market failure is 1. Possible and 2. There is no reason why it can't/won't occur on the free market. I'm not going to argue that something is/isn't a natural monopoly IRL because it's 1. Not worth it, I don't really care all that much about showing why the greatest system of productivity of all time has failures beyond a theoretical standpoint and 2. It's very hard to determine, especially with government around.

It's great if it's consistent. Wonderful. But it also has to be applicable to the real world. So it's great that you can demonstrate that there are natural monopolies in theory. But you should stop making claims about what in the real world is a natural monopoly if you cannot know if it is a natural monopoly. Furthermore, it also important to know how long a company might have monopoly status. Does it really matter if something is a monopoly for 6 months? If on the 7th, a competitor enters the market, was the first company a natural monopoly?

Neodoxy:

You did not properly address it. I consider this a fairly essential point as well.

No, I addressed it properly. The fact of the matter is that you have incomplete knowledge regarding the efficiency of the bridge. If you want to construct a scenario where there is a population of 30 and one bridge is all that is needed for their foot traffic, so be it. But back in the real world, most places rarely have one bridge, and where there is one bridge, provided there is no government monopoly, it is because it is not worth it to build two bridges.

As I have stated before, there are numerous factors that go into how many bridges there ought to be. Feel free to construct scenarios where you only need one bridge, but those are pretty useless scenarios insofar as the optimal number of bridges are concerned.

Re: Flaws of Free-Market Capitalism

Neodoxy — Wed, 30 May 2012 00:37:38 GMT

@Gotlucky

" Reductio ad absurdum is, in fact, a valid method of argument."

I'm on the fence about exactly how I feel about reductio ad absurdum, the fact is that you can prettymuch destroy/make any theory unappealing with it. From this standpoint you could argue that when two people drive down opposite sides of the street and one's lights leave imprints upon the other's retinas, that this is an invasion of his privacy, and that small invasions of property could be punishable by death within an anarcho-capitalist society and this would be fine.

"If we were to follow your logic, this would be a market inefficiency. Perhaps you are okay with that, in which case your opinions would be internally consistent."

I addressed this earlier, you can make really ridiculous arguments out of it, but focusing upon this is not really that relevant and detracts from the real point.

"It's the same with bridges. It's not just the number of bridges, but how long they are, where they are located, what they are constructed with, how wide they are, etc. Perhaps the first bridge is really well built and sturdy. Maybe the second one has only enough room for one lane, but it's enough to supplement the first bridge so as to reduce traffic congestion. We really just don't know. Maybe having more bridges is good for when tourists come to town, and during the off season they are superfluous. Again, we just don't know."

It's a theoretical example, so we do. Once again, to "win" here, as it were, I don't have to prove that you can measure where a monopoly price is in the real world, I just have to prove that they can exist and that a free market won't correct them through traditional markets, you have to show why this cannot happen in order to show that this case of market failure does not actually exist. Also, the simple fact with the bridges example is that if people valued the bridges that much then the competative price would be approximately the same as the monopoly price.

"You can't really say that one bridge is the optimal amount of bridges in your example. You don't even know how wide or long it is or what materials it is made out of. And I'm sure there are far more variables than those three."

See above. There's a reason why Austrians argue from theory first. At any rate, Gotlucky, do you seriously believe that a single bridge is likely to bring down its costs to the same low that competitive markets would or its costs of production, and if so why?

"The United States Postal Service is funded at wider dispersed costs. But we can see that the USPS is so inefficient that there are numerous competitors out there, and if it were legal to compete with regular mail, I'm sure that there would be more companies competing in that regard too!"

This isn't the same thing, a mail system can obviously be run through traditional market means, there's no special factors which would grant it a monopoly. Simply needing/using an economy of scale is not the same as what we're talking about.

"Anyway, the point is that widely dispersed costs does not mean that the government will do it better than a private solution."

Gotlucky, I am an anarchist. I'm not arguing that government will provide better results in the real world, although in a statist's dream world it of course would, but I never said anywhere that market failure will result in government solution.

"You are missing the point. You can't argue for something to be called a natural monopoly if you don't know if it is one. Maybe natural monopoly theory is logically consistent, and maybe it isn't."

The logical consistency of the theory is all that matters. If this is true then market failure is 1. Possible and 2. There is no reason why it can't/won't occur on the free market. I'm not going to argue that something is/isn't a natural monopoly IRL because it's 1. Not worth it, I don't really care all that much about showing why the greatest system of productivity of all time has failures beyond a theoretical standpoint and 2. It's very hard to determine, especially with government around.

"Answered this earlier in this post."

You did not properly address it. I consider this a fairly essential point as well.

Re: Flaws of Free-Market Capitalism

Neodoxy — Tue, 29 May 2012 20:39:05 GMT

Bleh, okay everybody, I got kind of overwhelmed by the number of responses here, so sorry for the lag in response, I'll try to make this as succinct as possible.

@Autolykos

"On the one hand, individuals don't always prefer less scarcity and lower prices."

Everyone wants the same good for a lower price. So long as money has any value to the acting individual in question then this is a praxeological statement

"I take measurement to be inherently quantitative."

Drop the word "measurement" next to qualitative then, and simply say we can make qualitative statements about the amount of utility in the economy, E.G, "greater than" or "less than"

"Private roads aren't seen as intuitive or natural in this day and age because roads are typically handled by governments. I strongly suspect that, in a world where private roads were ubiquitous, they would be seen as intuitive and natural."

Due to the spread out nature of the way that they are paid and the necessarily diffused benefits/costs, I'm going to have to disagree. Funding roads with traditional market means is never going to be as easy as it will with most markets which exist.

"For one thing, there are some surprisingly low-tech weapons (e.g. IEDs) that have proven to be highly effective against military forces using much more advanced technology (e.g. US and allied forces in Iraq). "

Nonetheless, a fully functioning military, and moreover a military which could fully repel a statist onslaught without much loss is going to cost a good deal of money, and it's going to be difficult, once again through traditional market means, to fund this.

"Again, "not many" is not the same as "none". The assertion that "no one person can affect the amount of defense provided" "

I concede the point, but nonetheless very few people can make a noticeable difference, which decreases the amount of funds which people will allocate to the matter.

"I would say that his detractors are just as dedicated, if not more so. They also happen to have more power on their side."

Meh, irrelevant to the overall discussion, but I'm just going to say that I've seen a lot more amateur "champions" of Ron Paul than I have people who have actively attacked him. Social and economic status will change this, of course.

""Production of roads" doesn't just mean "production of large roadways", does it? If you spent your entire yearly income, I think you could certainly make a noticeable difference in the production of local roadways."

This is true, and I admit I was committing hyperbole from this perspective. But the point still stands that few people have a real incentive to donate to these roadways.

"On the other hand, I personally think that "large" roadways (i.e. highways, I presume) would be run as for-profit businesses."

If they themselves are run for profit then you run into a monopoly price problem pretty quickly and we have to hope there are going to be mitigating circumstances that prevent too high a price.

"Right, which speaks to my point - there is no objective way to measure cost. That is, there is no such thing as a "true cost" for anything. Hence "Marginal Social Cost" can't be measured - it can only be imputed."

Externalities are vaguely objective in that they are what people would have paid if there would have been markets. I agree that in most cases there's no real way to calculate externalities, the only exceptions being in cases of externalities dealing with production where you can calculate the gain or loss contribution to production, or in cases of negative externalities where property is damaged.

"To determine whether purchasing power has increased or decreased, we'd have to measure purchasing power."

Just because something cannot be measured does not mean it does not exist. Once again, just because market failure exists doesn't mean that the government can solve it, or do so optimally.

Re: Flaws of Free-Market Capitalism

Autolykos — Mon, 21 May 2012 15:38:24 GMT

Sorry for taking so long to respond to you, Neodoxy.

Neodoxy:
We can tell by human action what individuals prefer, and if individuals did not prefer less scarcity and lower prices then I believe that this would come through in their actions and markets would arrange themselves into situations where consumers voluntarily paid higher prices. If this were the case then most modern market successes would be failures. At any rate, I'm not saying we can measure welfare in a quantitative sense, but we can in a qualitative sense, that is to say we know that firms which provide lower prices benefit a larger number of people than firms which charge higher prices. How much this has increased human welfare, however, is beyond human measuring.

On the one hand, individuals don't always prefer less scarcity and lower prices. On the other hand, the notion of "qualitative measurement" makes no sense to me, as I take measurement to be inherently quantitative. So I still don't see how the phrase "maximizing human welfare" can be taken in a non-quantitative sense. For something to be maximized, it must be measurable, which means it must be treated quantitatively.

Neodoxy:
That certainly is a possibility, as is (this is what I believe would be the optimal form of organization) a group of people coming together and supporting a non-profit community run road building organization. All I am saying here is that it is not as intuitive and natural for this to be built as it is for bob to open up a shop down the street to make make pretzels, and there are other cases, such as say, statues, where everyone might want X good but it is not paid for because there's no real way to pay for it. Although I have to say that once you get outside of roads and defense the collective goods become increasingly more "Boo Hoo" cases.

Private roads aren't seen as intuitive or natural in this day and age because roads are typically handled by governments. I strongly suspect that, in a world where private roads were ubiquitous, they would be seen as intuitive and natural.

Neodoxy:
You're right, that depends upon the size of the specific market for defense. Here we have sort of an odd case because in many ways it depends upon whether or not we're conceiving of defense within a void, because militaries are very expensive things to start up but after the fact they're actually surprisingly cheap to maintain. If we assume that modern weaponry is taken from the current statist society when the new stateless one is born, then in most cases defense could be noticeably influenced by the richest members of society. However, if the start up costs for the military were involved then these would likely be enormous. No one short of the top 10 richest people alive could influence a military budget the size of the United States, but there are tens of thousands who could influence Russia's (for the hell of it we'll assume that defense budget is what it would take to protect a large country with the greater efficiency but smaller economies of scale which would be inherent in multiple military organizations).

For one thing, there are some surprisingly low-tech weapons (e.g. IEDs) that have proven to be highly effective against military forces using much more advanced technology (e.g. US and allied forces in Iraq). For another, if any one (or more) of the top 10 richest people alive could influence amilitary budget the size of the United States', then the assertion that "no one person can affect the amount of defense provided" is certainly disproven even in today's highly statist world.

Neodoxy:
Buuuuuuut at any rate, there are not many people who could influence a multi billion dollar industry by giving even the totality of their income, and if war were to actually break out then the fact is that it's an extremely expensive affair. As soon as we reach the 100 billion dollar mark, even mega millionaires can only make some .X percent difference, and billionaires can only effect it by percentage points unless they sell off large amounts of their assets to pay for a single year of defense, and all this, of course, is assuming that these people believe that there is danger which needs to be defended against, or that if there is danger, that it can be stopped by the organization.

Again, "not many" is not the same as "none". The assertion that "no one person can affect the amount of defense provided" implies the latter, not the former.

Neodoxy:
Depends upon the individual and the industry. And there's no real way for any one individual, short of being a campaign manager, and there can only be so many of those, to make a noticeable influence upon a campaign... Hell if there was then Ron Paul would have easily snagged the nomination because of how dedicated his supporters are!

I would say that his detractors are just as dedicated, if not more so. They also happen to have more power on their side.

Neodoxy:
At any rate, the point is that I could not, even if I spent my entire yearly income, make a noticeable difference in the production of a large roadway because those are very expensive to produce. The big problem, of course, is that there's a lot of roads which would need to be produced in the stateless society. A fortunate break for the anti-statists, however, is that many roads in developed countries are already produced. Indeed I'd argue there's an obvious surplus of roads. And this means that these things need not be produced, only maintained, which is infinitely cheaper.

"Production of roads" doesn't just mean "production of large roadways", does it? If you spent your entire yearly income, I think you could certainly make a noticeable difference in the production of local roadways. On the other hand, I personally think that "large" roadways (i.e. highways, I presume) would be run as for-profit businesses.

Neodoxy:
Kind of... You could argue that a mother who has a baby who becomes a doctor is a case of an externality, and that therefore we should fund more mothers to have babies or some derp argument like that, but there are more down-to-earth examples of an externality, like the fact that if I improve my house local home prices go up and so everyone's assets increase in market value, and yet they have not had to do anything. You can argue against externalities based upon their subjectivity, or from a reducto ad absurdum standpoint, but the fact is that there are cases where people do things, or don't do things that are harmful or beneficial respectively, which others value and would pay to/not to happen if there were a market on this, but where there is none in reality.

Strictly speaking, "harmful" and "beneficial" are themselves subjective. But if a person is willing to pay others to (not) do certain things, that's up to him. Of course, that doesn't mean the others will accept what he offers them.

However, I see the externality argument as implying that people necessarily owe others due to externalities. In the case of positive externalities, the beneficiaries owe the person who produced the externality. In the case of negative externalities, the person who produced the externality owes the victims. But what qualifies as an externality and what doesn't? One could define "externality" in such a way as to include all action within it. Just because people don't doesn't erase that possibility.

Neodoxy:
By most mainstream economists it's usually done by the market value of what is lost or by what people would have paid for for it to not happen.

Right, which speaks to my point - there is no objective way to measure cost. That is, there is no such thing as a "true cost" for anything. Hence "Marginal Social Cost" can't be measured - it can only be imputed.

Neodoxy:
Local area monopolies and name brand companies are the only monopolies which could really be maintained on a free market. Utilities and roads, should they be provided by independent private companies, are both examples of this. Mises does a good job of identifying them in the monopoly section of HA. The fact is that in a small town it's inefficient to have more than one water company functioning as it can probably only uphold a single economy of scale that provides anywhere near an efficient output. On a street block realistically only one road can be provided to these houses. It's also inefficient as hell to even conceive of things like competing bridges...

We can also tell a priori that the welfare of consumers would be maximized if these firms did not charge a monopoly price.

By that definition, I have a natural monopoly over my own body. What do you mean by "(in)efficient"?

Neodoxy:
Yes it does because value is subjective. But if we look at increasing people's purchasing power and their ability to buy things they desire then it's sure as hell not doing that.

To determine whether purchasing power has increased or decreased, we'd have to measure purchasing power. How exactly is that to be done? About one hundred years ago, the notion of a "price level" was created in an attempt to do this very thing. Apparently that was too difficult, and "mainstream" economists moved to the notion of "gross national/domestic product" instead.

Re: Flaws of Free-Market Capitalism

NonAntiAnarchist — Mon, 21 May 2012 06:12:33 GMT

Well, my reply wasn't too good. But both Z and gotlucky made great arguments.

Re: Flaws of Free-Market Capitalism

Neodoxy — Mon, 21 May 2012 05:29:49 GMT

"Shitty definition."

I'm not used to hearing definitions used by Ludwig Von Mises as being described as "Shitty" around here.

"Restricted compared to what? Your personal idealization of a preferable output? What's a "consistent period of time"? "

A price where little or no profit is recieved as that maximizes the utility of consumers. A consistent period of time is any long period of time in which firms do not come and compete with the firm.

"Why would you imply that maximizing profit is a bad thing?"

Because if profit seeking does nothing other than decrease the quality of consumers lives then it is negative. Profit seeking is positive only because in most instances, and if properly performed, is beneficial for everyone.

"Can you show me a scientific method by which you can identify a monopoly price? I betcha can't ;)"

That doesn't mean that it doesn't exist.

"And by what metric do you differentiate between these two types of monopolies? "

One provides superior services than it would under more competative conditions, one provides inferior services.

"Umm.. You haven't even proven why the situation isn't preferable beyond referencing your subjective opinion."

Then you can never prove any situation prefferable to any other. One's opinion is the only way that one can reference

"Btw, Z smoked you in the last response. This conversation should be over."

He didn't, and it's not. I have yet to see a reply that in any real way addressed the matters and did more than provide gross conflation and vague attacks at definitions so as to say "ah ha! Well because you can't do XYZ you can't prove that this happens in all cases", other than Gotlucky. He had a genuinely good reply that actually addressed the problems. It's really interesting how I get attacked the moment that I even propose the idea that the free market could have flaws...

Re: Flaws of Free-Market Capitalism

gotlucky — Mon, 21 May 2012 03:14:33 GMT

Neodoxy:

How is owning a person different from a piece of property? Isn't this a case of fair free-market ownership? Provide me with real arguments instead of going to reductio ad absurdum.

This in particular stood out to me. Reductio ad absurdum is, in fact, a valid method of argument. He is pointing out that if you were to be consistent, the pretty girl should be paid money just for walking around. If you really want, let's make her a model, so that she actually makes her living from having people look at her. Her walking around is her providing her normal service without charging anyone. If we were to follow your logic, this would be a market inefficiency. Perhaps you are okay with that, in which case your opinions would be internally consistent. But most people would probably think that it is a ridiculous notion to say that the model not being paid while walking around is inefficient.

Neodoxy:

No. Make real arguments. At any rate that causes such intense displeasure to the individual that it could probably under no situation be worth it. Second of all that utility is exceedingly hard to measure, while those dealing with the market are usually more measurable, are still only vaguely possible to have any possible understanding of.

The point is that all utility is impossible to measure between individuals. You cannot know if the pain caused to the one guy outweighs the pleasure gained by the 20 hungry people being fed. It's the same with bridges. It's not just the number of bridges, but how long they are, where they are located, what they are constructed with, how wide they are, etc. Perhaps the first bridge is really well built and sturdy. Maybe the second one has only enough room for one lane, but it's enough to supplement the first bridge so as to reduce traffic congestion. We really just don't know. Maybe having more bridges is good for when tourists come to town, and during the off season they are superfluous. Again, we just don't know.

Neodoxy:

What part of this don't you guys get!? My examples, my rules! :P

Not around here! On a more serious note, the point of us making modifications to your examples is to demonstrate that they are incomplete examples. You could make up an example where you know absolutely all the variables and whatnot, so that you could know what should be done. But this is impossible in the real world, and that is what the calculation problem is. You can't really say that one bridge is the optimal amount of bridges in your example. You don't even know how wide or long it is or what materials it is made out of. And I'm sure there are far more variables than those three.

Okay, now I'm going to respond to your earlier response to me:

Neodoxy:

Kind of. It's not anywhere the killer argument they think it is but the fact is that it's much more direct, certain, and at wider dispersed costs than the favored alternative being discussed.

Well, NASA is funded at wider dispersed costs. The United States Postal Service is funded at wider dispersed costs. But we can see that the USPS is so inefficient that there are numerous competitors out there, and if it were legal to compete with regular mail, I'm sure that there would be more companies competing in that regard too! The problem of these widely dispersed costs is that the people who directly use the roads (for our example instead of the USPS) don't get to spend the money where they want! There are potholes in my town, and it's a nice town. It's actually known in the area for its ridiculously bad potholes. If people were responsible for their roads instead (for example), I bet there would not be as many potholes. Anyway, the point is that widely dispersed costs does not mean that the government will do it better than a private solution.

Nontheless. It's much more certain to take place if you have the mythical omniscient government that most statists believe in out providing these services and ensuring that it happens, and furthermore that was a single example.

Well, my solution was actually not that different from what the government does now. If you want to go to public school, you need to have certain vaccinations. People in this current system are not all getting vaccines. I wouldn't be surprised if this were rarer with a free market solution. Perhaps instead of not being able to go to schools, maybe malls (the horror!) would also require vaccines. Who knows?

This is still most likely inefficient because the beekeeper is indeed not being paid the full value of his labor, the equilibrium that most markets gravitate to as it's the best way to satisfy consumers.

The beekeeper is being paid full value for his labor. Nobody values the extra stuff enough to pay him for it. It's like when people give out free samples. Sure, no one is paying for the samples, but the business is doing this so that more people will buy the product. Are free samples also market inefficiencies? If so, I don't see how the phrase "market inefficiency" is a meaningful phrase. But, in regards to the beekeeper, just because he isn't being paid does not mean he should be.

And? This does not mean that there is anything wrong with the natural monopoly theory. You are not addressing the exact point here. What we are mainly discussing are areas of market inefficiency, suboptimal results, the main concern is not whether or not government can fix it. However, in once again the statist dream world, this would never happen because the community knows what is and what is not a natural monopoly and will deal with the mater accordingly because democracy.

You are missing the point. You can't argue for something to be called a natural monopoly if you don't know if it is one. Maybe natural monopoly theory is logically consistent, and maybe it isn't. But it makes no sense to call something a natural monopoly and then treat it like one if you cannot know if it is one. Furthermore, maybe there is a natural monopoly in an area for 5 years, and then on the 6th year, a competitor comes to town. What then? What if it were 5 months, and then the competitor came on the 6th month? When you start using government to control these "natural monopolies", you no longer are able to know if it would remain a natural monopoly.

I thought it was implied in my example that one bridge could carry over everyone in town without a great deal of traffic congestion. If the competitive price, or a price corresponding with the marginal cost of a car driving across the bridge was reached then one bridge would be able to carry everyone in town without a problem, or at least without enough problems to warrant the building of two bridges

Answered this earlier in this post.

If so then a new bridge would open up even if a bridge was operating competitively. This really isn't the example, you're just giving reasons why this state of affairs would be acceptable. Also, I propose the possibility that the prime candidate for the person who would produce the new bridge would indeed be the monopoly

Ditto to the above.

Re: Flaws of Free-Market Capitalism

NonAntiAnarchist — Mon, 21 May 2012 03:01:58 GMT

A price at which output is restricted for a consitent period of time in order to maximize profit

Shitty definition. Restricted compared to what? Your personal idealization of a preferable output? What's a "consistent period of time"? Why would you imply that maximizing profit is a bad thing? Can you show me a scientific method by which you can identify a monopoly price? I betcha can't ;)

This is why in some cases a monopoly can be better than a competative situation. But in some cases it isn't.

And by what metric do you differentiate between these two types of monopolies?

You should argue why this situation couldn't exist or is rare, not why "in some cases" X.

Umm.. You haven't even proven why the situation isn't preferable beyond referencing your subjective opinion.

Btw, Z smoked you in the last response. This conversation should be over.