The \"Always Wear A Bikini\" Argument

Frequent Catallarchy reader and commenter Jeff Darcy hits on one of my pet peeves:

How, other than through government, would you ensure that [corporations] don’t get so large? I mean ensure, not just hope or assume that things will work out, because history has shown that such is not the rationally expected result without intervention.

The simple and obvious answer is the regulatory mechanism of market competition, an explaination of which can be found in any microeconomics textbook.

Of course, the simple and obvious response to this answer is that market competition does not always lead to ideal outcomes. True. But the mistake here is comparing market outcomes to a theoretical ideal rather than the next best alternative. What is the next best alternative - or at least the alternative offered by critics of market outcomes? Government.

So let us rephrase Jeff's question given this alternative regulatory mechanism. How, other than through a divine being, would you ensure that governments don't become too large, too unwieldy, or in other ways too undesirable? I mean ensure, not just hope or assume that things will work out, because history has shown that such is not the rationally expected result without divine intervention.

Or, as David Friedman put it:

An ideal objectivist society with a limited government is superior to an anarcho-capitalist society in precisely the same sense that an ideal socialist society is superior to a capitalist society. Socialism does better with perfect people than capitalism does with imperfect people; limited government does better with perfect people than anarcho-capitalism with imperfect. And it is better to wear a bikini with the sun shining than a raincoat when it is raining. That is no argument against carrying an umbrella.

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Jeff, tone down the

Jeff, tone down the persecution complex. You're being an ass.

Now, to the issue, I think a mutualist would look at the late 1800s, the era of supposed monopolies, and say there was significant government-business collusion. At the very least, the government worked with and subsidised the railroads in order to create a nationwide system. That nationwide system, which used anti-market condemnation and eminent domain policies, spread the cost of transportation over taxpayers instead of concentrating it on the railroad customers. This made it easy for Standard Oil and a lot of other trusts to develop nationwide production and delivery systems. If the railroads had the market discipline that a lot of other businesses would have had to endure, they wouldn't have been able to set up the same kind of network, and they wouldn't have been able to pass the costs of the networks to taxpayers instead of customers.

From a more traditional free-market perspective, I can easily point out that the trusts never got to be monopolists. In more mainstream economic thinking, trusts lower prices to drive everyone else out of the market, then raise their prices with glee. The 1800s saw a lot of the former but not much of the latter. In the specific case of Standard Oil, which I know the most about, prices in gasoline and kerosene plunged while Standard Oil held 90% market share. Interestingly enough, Standard Oil made a huge blunder by not investing in the Texas oil boom at the turn of the 20th century. It dropped from 90% of market share in the 1890s to 68% in 1907 and 64% in 1911, the year in which the Supreme Court ordered it to break up. Some monopoly.

- Josh

I have two questions: 1. How

I have two questions:

1. How does one know when a company or corporation has become "too large”

2. What intervention would be more efficient at creating businesses of the optimum size that market forces would be, and how?

It seems that without government enforced barriers to entry (not just licensing, but regulations that established companies don’t need to follow because they’re grandfathered, complicated taxes, minimum wage laws, zoning laws, equal opportunity laws, etc.) companies would be forced to be much more efficient and customized to consumer’s needs.

I admit that with some utilities or in geographically remote area it is possible that monopolies would develop in a free market system, which could remain unchallenged in a region, but this still seems like it would be a great improvement over the current state of affaires.

Incidentally, David Friedman

Incidentally, David Friedman analyses monopoly behavior with specific reference to Standard Oil in Price Theory.

I don't have time right now

I don't have time right now to respond in detail, but I'm not clear on how I distorted or misrepresented Jeff's position. Yes, we live in a mixed economy. That is obvious. What is the mix? Government and market. Jeff worries about what his side considers unregulated markets and what my side considers self-regulated markets. His solution is markets regulated by governments, as this provides assurance - and not just the hope or the assumption - that things will work out. But I object to this solution of interventionism, for reasons I laid out in the original post, in my "Turtles All The Way Down" post, and many places elsewhere. Governments may be able to provide the assurance Jeff desires - the assurance that markets will be regulated and intervened with - but this just pushes the problem one step backwards. We then must deal with the problem of regulating the regulator - the government - and no longer are we dealing with the regulatory mechanism of conventional market competition. Now we must deal with rationally ignorant voters, concentrated benefits going to special interests, dispersed costs spread among the rest of us, and all of the other public choice problems that governments entail. Whatever assurance we have that the market will be controlled, we have no assurance at all - only hope and assumption - that government will remain limited to what we want it to do. And as Jeff points out, just as history demonstrates whatever it is he thinks it demonstrates (I fully concede that the market regulatory function is highly imperfect), history also demonstrates the the government regulatory function is even worse. Keeping government limited to only what you want it to do is pie-in-the-sky utopianism of the worse kind - the kind we have ample evidence for. My side suffers from a lack of empirical evidence, which counts as a mark against it, but I would surely rather have a lack of empirical evidence for my position than a large presence of empirical evidence against my position.

To sum up, monopolies that

To sum up, monopolies that behave in ways harmful to consumers, i.e. by reducing the quantity of goods sold and driving up prices, are exceedingly rare in the free market (I can't think of any historical examples).

In order to behave in this way, a firm needs to be able to block other firms from entering the market. This is usually accomplished through government ownership and operation, licensing, or regulation. These industries are marked by complacency, poor quality, and high costs. Think post office.

Even a monopoly firm must be wary of potential market entrants in the free market and react to this possibility by offering good products at low prices. No free market firm can afford to behave like the post office.

Neoclassical economists'

Neoclassical economists' worries about monopolies and trusts forming on the free market are based on static models that fail to take into account the evolving nature of a competitive market place. The standard model tells us that a monopoly firm will seek to reduce the quantity of goods sold in the market place in order to raise its price.

In reality, even dominant firms have had to continue competing, innovating, and driving down costs in order to maintain their market share. The example of Standard Oil is telling.

Kerosene cost a dollar a gallon when John Rockefeller (the founder of Standard Oil) began selling kerosense in 1862. By the 1880's, it was a mere ten cents a gallon. Far from reducing the quantity of product sold in the market and jacking up prices, Rockefeller did the opposite through path breaking research and relentless cost cutting. Thanks to Rockefeller, millions of Americans could afford to light their homes.

Troubled by the waste that was left over after the kerosene refinery process, Rockefeller invented 300 products out of the waste.

Oil prices declined throughout the period of Rockefeller's dominance.

However, Standard Oil was unable to hold onto its position in a competitive marketplace. By the time the federal trust busters moved into prosecute Rockefeller, his market share had already fallen to 25% as a result of normal competition.

Thanks to Thomas Woods book, "The Politically Incorrect Guide to American History" for the info.

Jeff, I didn’t expect when

Jeff,

I didn’t expect when I started coming here that my comments would be met with widespread agreement. Given that this site was supposedly dedicated to putting a more mature face on libertarian beliefs, though, I did expect they’d be met with a certain level of intellectual honesty that precluded deliberate misrepresentation or selective observation and encouraged actual engagement on principles instead. I was wrong, and unlike some I can admit it.

You know, not everything is a "deliberate misrepresentation". Micha is directly addressing your comment from a post below. It is an "actual engagement on principles" - namely that while you may be unsatisfied with option X, option Y you suggest is not better, and likely worse. There is no dirty play. That's no "scarecrow"; it's a response that many of us find appealing. There was a time when I also thought, "The market fails because of A, B, and C. It's a good thing there's govt to prevent this outcome." Eventually I came to realize that the solution is worse than the problem, and that govt makes outcomes worse.

Yes, there is a market economy that has certain properties and outcomes. When govt intervenes, the economy does not disappear. Instead, the playing field becomes the *political* economy which has its own properties and ouctomes. Unlike the market economy, the political economy is based on winner-take-all dynamics and thus favors the rich and focused interests at the expense of the poor and dispersed interests. You may disagree; fine.

But, there is no conspiracy to evade. Not everyone is out to get you. We're a bunch of pretty laid back people here. We like to argue. We like it when people disagree with us. Many people who disagree with us like to hang out here because we're pretty chill. We can disagree without attributing all sorts of nefarious motives to each other.

Thea, I find female

Thea,

I find female libertarians have a charming practicality and politeness that is lacking in their male counterparts.

I wish there were more of you.

-S

Josh, I guess I shoulda said

Josh,

I guess I shoulda said Standard Oil's market share fell by 25% in my post, not to 25%, thanks for the correct info.

Jeff, Just one question...if

Jeff,
Just one question...if we need the government to keep monopolies from forming, who do I go to to break up the government monopoly on the sale of hard liquor in my state? If monopoly is bad, why exactly is it that I can only buy vodka from stores run by the North Carolina Alcoholic Beverage Control Board, and that's OK?

Someone in the previous

Someone in the previous thread brought up the Standard Oil example. How did government participate in the creation of the Standard Oil behemoth? Hardly at all. They became what they became primarily by controlling the supply a non-substitutable good, and the transportation thereof. The only government assistance involved was the protection of strong property rights...but that role of government seems to be just about the last one that libertarians want to give up. Therefore the same could happen today e.g. with government protection of intellectual-property rights leading to a monopoly on some essential pharmaceutical product. If there is a form of government that has consistently contributed to the growth of monopolies, it's the one you espouse. Standard Oil flourished under your system, and was broken up under the one you despise. That's simple fact. Twisting that into a claim that government is the source of monopolies requires mental gymnastics that rational and honest people do not attempt.

What is the next best alternative - or at least the alternative offered by critics of market outcomes? Government.

To be a little more precise, and considerably less misrepresentative, some government. Allowing government to be involved in the market doesn't imply letting them have total control over it, which is what the "government as the alternative" scarecrow is usually meant to imply. Here in reality, we're stuck with hybrid systems whether we like it or not. As the definer of rights, including all legal and property rights, government is inextricably involved with the economy. Hayek wrote quite eloquently about that in Road to Serfdom; I suggest reading it. The question, then, is not whether the government should be involved in the economy, but how. What "rules of the game" should they define and enforce, rewarding which behaviors? Minimalist government favors certain groups just as minimalist policing or minimalist refereeing do, and in no case of the three would it be the groups that from a moral perspective deserve such favor. When people suggest a little government regulation as an alternative to "market magic" they are rarely suggesting that the pendulum should swing all the way to the other extreme.

I didn't expect when I started coming here that my comments would be met with widespread agreement. Given that this site was supposedly dedicated to putting a more mature face on libertarian beliefs, though, I did expect they'd be met with a certain level of intellectual honesty that precluded deliberate misrepresentation or selective observation and encouraged actual engagement on principles instead. I was wrong, and unlike some I can admit it.

I think one can make a

I think one can make a compelling case that corporatios can only grow as large as they are with the help of the government. I submit that the heavy burden of regulation plus the political power afforded organized corporations makes it economically efficient for some corporations to grow larger where they otherwise wouldn't in the absence of regulations and political influence.

How ironic if a market anarchy turns out to be the anti-corporation socialist's wet dream.

Capitalism, Socialism, and

Capitalism, Socialism, and Imperfect People
As a finance professor, I am almost always in favor of free and competitive markets. However, when I discuss this with a non-economist, they often make an argument of the type, "but what about this market failure/inequity/problem?"

I think there's also a

I think there's also a useful mutualist argument (from the only mutualist alive, Kevin) that much of the regulatory state serves too smooth and disperse regulatory, pollution, and transition costs for large corporations. Trying to get large in a truly free market in the absence of all those little smooth-overs would be much more difficult and expensive.

I don't know whether that would be good or bad, or even whether he's right or wrong, but there you go.

- Josh

Gee, I'd say that the answer

Gee, I'd say that the answer to the government question is the same as the answer to the business question - government excesses can only be effectively controlled by the regulatory mechanism of market competition -- in this case, competition between competing governments! Do I win? :) Too bad noone understands that, and we have instead a bunch of territorial monopolies... :wall:

The question also assumes

The question also assumes that a corporation's getting "too large" is ipso facto a bad thing. I don't buy this. And if by "history has shown" he means "the history of 19th C. trusts has shown", then you ought to point him to (among other things) the bits in _Machinery of Freedom_ which argue that that history doesn't show what he thinks it shows at all; or for a denser scholarly treatment, there's Armentano's antitrust book whose title escapes me now.

Nevertheless it is certainly true that government as now constituted stacks the deck in favor of large corporations. One way it does this is by putting obstacles in the way of individuals starting their own businesses, i.e. barriers to entry. I was recently reminded of this when doing my 2004 tax returns, which involved calculating deductions for my wife's home-based freelance work. Not only is this stuff really complicated in an absolute sense (and known for increasing one's risk of an audit), the relative level of effort required per dollar of business income to figure this stuff out is *way* bigger for a one-person operation than for a large corporation.

Not to mention that "progressive" income taxation disadvantages independent businesspeople, since for any given long-term average annual income, your average rate of income tax is higher the more volatile your income is from year to year.

So if you have a steady job with a large corporation your taxes are relatively low and simple; the more you strike out on your own, the higher and more complicated they get. This goes double, of course, for other sorts of regulatory compliance-- heaven help you if you want to expand your one-person operation by actually *employing* someone!

Honestly, I heart you

Honestly, I heart you friggin' people.

_the relative level of

_the relative level of effort required per dollar of business income to figure this stuff out is way bigger for a one-person operation than for a large corporation_

Isn't this true of nearly anything that both entities would do? _Every_ expense (whether calculated in terms of actually dollars or in sweat) will be greater relative to business income for a one-person start-up than it will be for a large company, no? That part of the argument, while true, strikes me as relatively weak.